Jimmy Carter’s first act on entering the White House was to turn the thermostat down.
To 65° F.
The next day, January 21, 1977, Carter advised the American people to do the same:
Carter’s action was not uncontroversial. “It was freezing!” Rosalynn Carter said later.
In the movie Frequency, a freak aurora borealis allows the Dennis Quaid character to communicate with his father in the past over an old ham radio.
This summer, calls for electricity conservation from the Electric Reliability Council of Texas, ERCOT, felt like they were coming from a time-warped radio station channeling Jimmy Carter.
On Wednesday evening September 6, ERCOT issued an Energy Emergency Alert Level 2:
On the ERCOT color-code chart, EEA2 is Code Red:
Black appears to be reserved for the next level up. It rhymes with ‘blackout’.
Now, this was a very hot summer. 2023 was El Niño year.
El Niño releases a vast amount of heat energy stored in the Pacific every 3 or 5 years. It’s the sort of cyclic natural phenomenon that should get studied more by the IPCC, but gets dismissed because it doesn’t fit into the human-created CO₂ narrative.
In the 1970s, we could blame the energy crisis on Arab sheiks, Iranian mullahs, or some other foreigners.
For the grid problems this year, we have the option of blaming the weather. Or we can blame ourselves for letting our thinking get stuck in the past.
The Duck
This September, Texas had a duck problem.
If you make a chart of electricity demand during the day, it looks a like a duck:
Demand is high in the morning, when people get up; falls off; then rises again around the time they get home from work. This is not rocket science. Or ornithology.
Capacity is what can readily be turned into supply. Supply and demand for the grid over a week looks likes this:
Capacity needs to exceed demand, or the grid is in trouble. The difference is called the reserve margin.
In Texas, the problem came on the right-hand side of the duck. This graph is from CASIO, but it has the arrow in the correct place:
When the sun goes down, as it does earlier in September, solar panels stop putting out electricity.
Combine that with a fall-off in the wind — a touch of Dunkelflaute — on a hot day when everyone is running air conditioners, and you get September 6.
At 7:49 p.m. on September 6, ERCOT’s electricity was coming from:
0.3% from solar
7.3% from wind
1.2% from batteries
and 90.6% from natural gas, coal, and nuclear.
The evening of September 6 set a number of records for ERCOT:
Maximum Net Load, 70,731.7 MW, at 7:25 PM CDT
Maximum Natural Gas, 51,300.2 MW at 7:40 PM CDT
Maximum Power Storage (batteries), 2,172.4 MW at 7:20 PM CDT
It’s hard to measure how effective the voluntary conservation call was. For the record, I did my bit.
My particular utility has a ‘peak hours’ pricing plan; I pay a low rate most of the time. Between 2 p.m. and 7 p.m., the rate can range from moderate to absurdly high, depending on the weather. My little ecobee thermostat turns off the AC between 2 p.m. and 7 p.m., come rain, shine, or 105°.
This plan is not for the fainthearted, or those on oxygen concentrators. But Jimmy Carter would have been proud.
Is government the solution, the problem, or what exactly?
The gasoline shortages of the 1970s turn out not to have been caused by OPEC, but by a US federal policy that backfired badly.
It was a thoroughly bipartisan screw-up: Nixon put on the price controls, including a cap on the price of gas at the pump, in 1971.
The gas cap created artificial shortages of refined gasoline, as its effect worked its way down the supply chain to refiners and oil producers.
The OPEC oil embargo, which began on October 17, 1973, did not create a shortage of crude oil. Actual US imports for 1973 exceeded those of 1972. In 1974, they were higher still.
In 1980, after a miserable decade, a sizable majority of Americans voted for Ronald Reagan.
Reagan was a masterful presenter of the well-honed phrase. In his inauguration speech on January 20, 1981, he famously used the line: “Government is not the solution to our problem, government is the problem.”
It’s easy to dismiss Reagan’s one-liners as folksy, feel-good homilies. But that particular line encapsulates a large, intellectually respectable, and difficult-to-dispute theory of how markets work.
Austrian-British economist Friedrich Hayek in the 1930s tried to explain the failure of Soviet-style central planning.
In contemporary terminology, Hayek argued that markets are complex knowledge ecosystems.
The mysterious ‘wisdom’ of the market derives from it knowing things at micro levels inaccessible to government planners.
By the close of the 1970s, politicians from Margaret Thatcher to the Chinese Communist Party were singing variations on themes by Hayek.
As were politicians from both parties in the US. The Airline Deregulation Act was passed in 1978, under Carter. Trucking and long distance came next.
The Energy Policy Act of 1992 removed federal regulatory obstacles for states that wanted to try deregulating their power markets.
Two that did were California and Texas.
Politicians and lobbyists found it hard to resist giving the Invisible Hand a hand.
Or at least a nudge in their favorite direction. California politicians capped the retail price of electricity to make the deregulation project go down easier with the voters.
California’s initial market design was ready for flight test in 1996. It wobbled along for a few years, then crashed and burned spectacularly in 2001, nearly bankrupting the state.
When rules don’t work, they beget more rules. To fix those rules.
Only one market rule had no exception: any rule you write, somebody out there smarter than you, possibly working for Enron in Texas, will figure out how to game it.
Texas tried to learn from the California experience. It designed its market to be more free —no real price cap — and ‘energy only’.
Both re-regulated markets turned out mind-numbingly complicated. The rulebooks for both California’s and Texas’s free markets emerged strikingly reminiscent of the former Soviet Union’s GOSPLAN.
But fitting entirely inside one large state, the Texas grid was at least outside the purview of federal regulators.
If anyone was going to mess up their grid, Texans would do it themselves, thank you very much.
Federal subsidies for wind and solar didn’t cross the Texas mind as a threat. Subsidies are free money. Who needs protection from that?
A corollary of the Hayekian knowledge problem is that government intervention in a market, however well-intended, can produce unforeseen and unanticipated consequences.
The Duck meets supply and demand
For the moment, we’ll pretend ERCOT is an unfettered market.
Econ 101 says higher prices will reduce demand.
Real-time prices in ERCOT’s wholesale market jump up and down like a Texas jackrabbit. On September 6, they varied from $25 to $5,117 per megawatt hour.
Wholesale prices tend to be high during peak hours and when supplies are tight.
If retail customers were being charged wholesale, that would reduce demand.
Once upon a time, Texas did have a noble experiment in real-time pricing.
Houston-based startup Griddy charged its customers a $9.99 monthly service fee plus for their usage in kilowatt hours, billed at the instantaneous ERCOT wholesale price.
Most of the time, wholesale kilowatts were dirt cheap. Griddy’s monthly customer bills were low.
Griddy came to an ignominious end after winter storm Uri hit Texas in February 2021.
During the Uri emergency, Texas state officials decided they had to ‘do something’.
To discourage demand, they set the wholesale price of electricity to its statutory maximum of $9,000 per kilowatt hour, and kept it there for days on end.
Griddy customers started getting bills like this:
Griddy filed for bankruptcy on March 13, 2021.
Demand management
If real-time pricing is out, there are other ways to press a Duck. My utility’s peak hours plan is one.
In wonk-speak, this is called ‘demand management’.
Demand management for residential customers is low-hanging fruit in Texas. But the folks who designed the deregulated markets in the 1990s didn’t anticipated it. Their idea was to build a Chinese wall separating power generation from retail.
Old-fashioned utilities owned their own power plants and provided retail services. They love demand management. It allows them to kick the can of building new power plants down the road, at least for a few years.
The low-hanging fruit will probably be left rotting on the ground in Texas.
ERCOT, it’s important to say, just supervises the market. It’s not a utility.
But ERCOT does co-sponsor several types of demand management for industrial customers who use a lot of electricity, such as Bitcoin miners.
Bitcoin miners are a nomadic tribe. They feed wherever electricity is cheap. Or, preferably, subsidized. Evidence of past Bitcoin mining has been discovered in abandoned gold mines in Swiss valleys, and on Gibraltar.
Most recently, Bitcoin miners settled in Texas after being expelled from China in 2021.
During the summer heatwave, Bitcoin mining became a political hot potato. The miners were getting money from ERCOT. What market game was allowing that to happen?
Let’s start with arbitrage, which is defined as is buying and selling the same asset at different prices.
One bitcoin miner in the past joked on Twitter/X that his company was “An energy arbitrage operation disguised as a bitcoin mining company.”
Enron gave arbitrage in the electricity market a certain bad odor. It still carries a whiff. Arbitrage is legal, but is complicated and feels wrong to a lot of people.
Here’s how it worked this summer.
Bitcoin miner Riot Platforms buys bulk electricity cheap on long-term contracts.
In 2022, Riot told its investors its cost was 2.96 cents per kilowatt-hour. That compares with an average of 7.2 cents for other Texas business customers and 13.5 cents for residential customers.
When the ERCOT price goes north, say to $6,000 per megawatt hour, it makes sense for Riot to sell some of it contracted-for electricity back to ERCOT at the higher price.
Riot actually gets a credit, not cash, but the idea of it receiving $31.7 million in anything during the August heatwave generated much hot ire.
Ed Hirs, who teaches energy economics at the University of Houston, said, “Ironically, when people are paying the most for their power, or losing it altogether, the miners are making money selling energy back to Texans at rates 100 times what they paid.”
The Bitcoin miners defend themselves by using the analogy of an airline that has overbooked a flight. The airline offers cash to passengers who agree to take a later one.
Technically, what Riot has by virtue of its long-term contract is an option to buy power for 2.96 cents. ERCOT buying it extinguishes the option. Physical kilowatts are not exactly changing hands. It’s something of a paper transaction.
It’s easy to say just ban arbitrage, but then you’d also be banning batteries. The economic point of battery storage is time-arbitrage: store power when it’s cheap, sell it back when its high.
Bitcoin miners can get a different stream of payments from ERCOT by signing up for a voluntary program, the Responsive Reserve Service, that pays them if they are willing to let ERCOT power them down in an emergency.
A creepy detail is that this request doesn’t come in a polite phone call, but by computer.
The miners get paid for making the pledge and setting up their equipment to take the robo-shutdown call, if it comes.
It’s unclear how many of the robot-calls have actually taken place. Most large users of electricity were well aware of the weather and ERCOT’s grid status, and turned themselves down voluntarily in advance.
ERCOT likens this program to paying for insurance. In an emergency, it might keep grid to alive.
Most free-market types don’t have a philosophical problems with demand management that is voluntary.
With this summer’s power shortages, the line at what’s voluntary started to waver a bit. Some Libertarian-types speculated that ‘they’ might be coming for your pool pump or air conditioner next. In the name of grid reliability.
Legally, Bitcoin miners are like any other customer. What they do with the electricity they buy is their own business. Politicians don’t get to weigh in on the social desirability of electricity use.
Yet.
The upshot is that Texas is now ‘registering’ Bitcoin miners and other large electricity users, sort of as if they were sex offenders.
With internet-connected smart thermostats, remotely turning off people’s air conditioners is technically possible.
An industry group, the Texas Industrial Energy Consumers (TIEC), felt compelled to make an interesting comment in a hearing this year:
residential air conditioning poses the single largest reliability challenge from the load side, but ERCOT has no authority to tell homeowners what type of air conditioning units to buy, or what the temperature settings must be in their homes.
Jimmy Carter used to put Post-it notes on the thermostats saying ‘Do Not Touch’. We’ve come a long way since then.
The baby elephant in the room
Texans are used to asking themselves the question, “How did we get in this mess?”
Not all of the messing with their grid originated in Austin.
The subsidies for wind and solar have been coming from Washington, D.C.
For years.
Texas has a lot of wind and sunshine, so some diversity of supply was reasonable and desirable.
But Econ 101 tells us that if you subsidize something long enough, you end up with a lot of it.
The dose makes the poison.
In a subtle, slow-but-sure process, subsidized renewables have been driving everything else off the grid.
In 2023, the ERCOT grid crossed a Rubicon of sorts. It was the first year in which some quantum of renewable generation absolutely had to be on the grid at all times.
The subsidies for wind and solar were well-intended. The theory was that CO₂ needed to be reduced to hold off climate change.
We can be charitable and call the damage to the grid an unintended consequence. Although for the activists who hate fossil fuels, that was the intention.
The effect subsidized renewables have had on the grid have played out a little like chronic lead poisoning, the sort that comes from putting drinking water through old pipes. The build-up can go on for years. Then it finally begins to manifest palpable debilities.
Texas has actually seen it coming for for a long time. In 2012, Donna Nelson, then chair of the Texas Public Utilities Commission, warned:
Federal incentives for renewable energy... have distorted the competitive wholesale market in ERCOT. Wind has been supported by a federal production tax credit that provides $22 per MWH of energy generated by a wind resource. With this substantial incentive, wind resources can actually bid negative prices into the market and still make a profit. We’ve seen a number of days with a negative clearing price in the west zone of ERCOT where most of the wind resources are installed....The market distortions caused by renewable energy incentives are one of the primary causes I believe of our current resource adequacy issue... [T]his distortion makes it difficult for other generation types to recover their cost and discourages investment in new generation.
The Duck speaks
The Duck also speaks, or quacks, on this issue.
Solar enthusiasts in California rejoiced earlier this year when the EIA announced its Duck Curve has gotten deeper. Here’s the graphic:
What the solar faithful miss are the consequences of the heavy black line touching or going below zero.
At those times of day, the supply from solar exceeds demand. Any additional electricity has to be thrown away or sold at a ‘negative price’.
In English, selling at a negative price means paying someone to take it.
The mind-bending nonsense of the ‘negawatt’, by the way, dates back to the 1970s.
In more old-school thinking, negative prices are a clear market signal — of overproduction.
In the trade-and-tariff world, selling below cost is called dumping. Persistent dumping is predatory: it drives the competition out of the market.
Texas has a lot more solar in the pipeline. But more solar won’t help the Duck.
Batteries
Batteries can whittle away at the Duck’s shoulder after the sun sets, and Texas has a lot more battery storage coming.
But there’s a big question of how much batteries can do, and at what cost.
On September 6th, renewables generation dropped from 11.9GW to 6.9GW in 30 minutes — 5 GW, or the equivalent of 5 large power plants. Batteries added 2 GW at 7:30 but had discharged down to 0.86 GW by 7:50 p.m.
Battery projects heavily rely on subsidies, both federal and state. The revenue from time arbitrage is not enough.
It’s worth an aside that another favorite of the renewables lobby, more transmission, may also have unintended consequences.
Better transmission could better transmit the negative price disease from its natural reservoirs in West and South Texas, where the wind is, to the rest of the state.
Stepping up the gas?
The last large gas-fired power plant in Texas was built in 2017, by Chicago-based Exelon.
ERCOT’s data shows natural gas generation is maxed out and basically flat for years:
Only one new natural gas plant is on a drawing board in Texas. This is a small 190-megawatt, high-efficiency peak-power plant being built in Caldwell County by the Lower Colorado River Authority (LCRA). It’s expected to be operational in 2025.
In 2021 after Uri, Texas made a fundamental change in its ‘energy only’ market design by adding ‘capacity payments’. The idea was generators would be paid to have capacity available in case it’s needed at times of peak demand.
Opinion varies. Some view capacity payments as a handout to the generators that will raise rates too much. They incentivize companies not so much to build new generation, as to keep older, more inefficient plants on the grid.
I think capacity payments treat the symptom, not the disease. The original ‘energy only’ market incentives no longer work as planned in the negative-price era.
Texas legislators, who probably paid someone to take Econ 101 for them, would like to increase natural gas generation is a good idea. But the state of Texas is going to have to bankroll a chunk of it. Senate Bill 6, passed in April, set up an un-funded $7.2 billion low-interest loan fund to help finance new natural gas plants.
The actual money to fund the fund has to be approved by Texas voters on November 7, 2023.
I don’t know if the stars will align for passage of Proposition 7, but the sun and moon might. On October 14, a full-on solar eclipse will pass over Texas:
I read the stars over Texas differently
I see September 6 as a portent, a foretaste, of a coming era of energy austerity that will make the 1970s look like happy days.
Winter is coming. Not this year, and maybe not next year. But blackouts caused by relying too much on weather-dependant renewables are as certain as their poor physics and the fact that the wind changes.
The energy transition was like deciding to swim across a lake.
We’ve gotten halfway across and realized we’re not make it to the other side.
We learned a lesson in the 1970s. The market is telling us we have enough wind and solar. It’s time to pay attention to it.
About the image: Jimmy Carter’s rooftop panels, which looked like something he might have picked out of the Whole Earth Catalog, were for heating water, which was piped down to the ground floor of the West Wing. They were built by a Hungarian emigre, George Szego, whose company, InterTechnology/Solar, operated out of a converted Safeway store in Warrenton, Virginia.
“A generation from now,” Jimmy Carter told reporters on the White House roof, “this solar heater can either be a curiosity, a museum piece, an example of a road not taken—or it can be a small part of one of the greatest and most exciting adventures ever undertaken by the American people: harnessing the power of the sun.”
The panels are now museum pieces. A few are on display at the Jimmy Carter Library in Atlanta. Others are in the Smithsonian.