Having a grid operator makes a lot of sense according to one energy expert. That grid operator is an RTO – regional transmission organization. There’s a catch, though. “So far nobody has figured out how to do it the right way,” says Ed Hirs, an energy economics expert.
In my last column – Policymakers Have a Habit of Making Inefficient Markets – I noted what Ed says about the way this mechanism aimed at lower costs but can create more costs. Hirs points out that policymaker-created power markets routinely excludes something important – reality.
Real costs not included
RTOs can easily ignore the real cost of business. “The key problem with ERCOT [Texas RTO], and CAISO [California’s system], is the average price received by generators is less than the average total cost of providing the electricity. The generators are being squeezed by the grid operators who have prized low wholesale prices over reliability – but the consumers pay more than they would pay in regulated markets.”
Again, it is the guise of free enterprise that is alluring: “Two decades ago, the Texas legislature claimed to have deregulated the state’s electricity market. But in reality all they did was change how it was regulated and in a way that guaranteed a long-term decline in the stability of the grid,” says Hirs.
Need more evidence of ineffectiveness? Texas stalled changes in its energy system through its RTO framework. A report following a 2011 tragic freeze and outage (right) was essentially used by officials as a coffee coaster. “In both markets (California and Texas) the generators cannot earn a rate of return, so there is no incentive for investment. In a regulated market there is building and a return for the generator companies,” says Hirs.
A deadly freeze in 2011 and 2021. Deja Vu all over again.
Local, state control at risk
Importantly, with RTOs states turn over a vital economic activity to a new bureaucracy. The idea of local control is at risk. Maybe “local voice” is also appropriate.
That can get out of hand. The Texas RTO manages itself, “People in the RTO can write a blank check on the consumers’ wallets. Whatever they decide is pushed on consumers. Pure authority. The RTO board decides its own compensation.”
The framework to manage Southeast energy is in place now. State public service commissions already exist to protect consumers and make sure prices are fair. “The Texas PUC was co-opted by the RTO,” says Hirs.
In the end, policymakers can create an energy monster that runs wild. And did in Texas and California.
Words of advice
We have seen this play before and would do well to remember it. Says Hirs, “Legislators pass bills and think they have done their jobs. They move on. They really don’t care if it works or not. It is the cold calculus of elected officials.”
Our blog columns have pointed out that kind of practice with the implementation of South Carolina’s Baseload Review Act. It was a decent idea that was not managed.
Suggestion to policymakers from Hirs: “Strip away the blue-sky spin and the belief that ‘markets will lead us to the best solution’ to determine if it really will be better off with a regulated RTO market. Remember, ERCOT and its 1,800+ page rule book was ignored during the February crisis while hundreds died. Policymakers need to be certain of the terms of trade, that is, what are they getting in exchange for what they are giving up.”
So, the question is whether Carolina power – in all its facets: electrons, policy, and practice – will be co-opted in the race to give up state authority.
There is a lot to learn from Hirs. Policymakers, and voters, may do well to listen. For legislators, it could be a tough dialogue, but they ought to steel themselves to this pragmatic and professional viewpoint. Put ego aside. Listen instead of seeking soundbites.
Read columns by and about Ed Hirs at his website.