Paul Krugman: Et tu, Ted? Why electric deregulation failed in Texas

Nobody is ever fully prepared for natural disaster. When hurricanes, blizzards or tsunamis strike they always reveal weaknesses — failure to plan, failure to invest in precautions.

The disaster in Texas, however, was different. The collapse of the Texas power grid didn’t just reveal a few shortcomings. It showed that the entire philosophy behind the state’s energy policy is wrong. And it also showed that the state is run by people who will resort to blatant lies rather than admit their mistakes.

Texas isn’t the only state with a largely deregulated electricity market. It has, however, pushed deregulation further than anyone else. There is an upper limit on wholesale electricity prices, but it’s stratospherically high. And there is essentially no prudential regulation — no requirements that utilities maintain reserve capacity or invest in things like insulation to limit the effects of extreme weather.

The theory was that no such regulation was necessary because the magic of the market would take care of everything. After all, a surge in demand or a disruption of supply — both of which happened in the deep freeze — will lead to high prices and hence to big profits for any power supplier that manages to keep operating. So there should be incentives to invest in robust systems, precisely to take advantage of events like those Texas just experienced.

Texas energy policy was based on the idea that you can treat electricity like avocados. Do people remember the great avocado shortage of 2019? Surging demand and a bad crop in California led to spiking prices, but nobody called for a special inquest and new regulations on avocado producers.

In fact, some people see nothing wrong with what happened in Texas in the past week. William Hogan, the Harvard professor widely considered the architect of the Texas system, asserted that drastic price increases, while “not convenient,” were how the system was supposed to work.

But kilowatt-hours aren’t avocados, and there are at least three big reasons pretending that they are is a recipe for disaster.

First, electricity is essential to modern life in a way few other commodities can match. Having to go without avocado toast won’t kill you; having to go without electricity, especially when your house relies on it for heat, can.

And it’s extremely doubtful whether even the prospect of sky-high profits during a shortage offers energy suppliers enough incentive to take the huge human and economic costs of a protracted power outage into account.

Second, electricity is supplied by a system — and precautionary investment by one player in the system does no good if the other players fail to do the same. Even if the owner of a gas-fired power plant insulates and winterizes its turbines, it can’t function if the gas pipeline that supplies its fuel, or the wellhead that provides the gas, freeze up.

So does the free market ensure that the whole system works under stress? Probably not.

Last but not least, a system that depends on the incentives offered by extremely high prices in times of crisis isn’t workable, practically or politically.

At first, those Texans who didn’t lose power in the big freeze considered themselves lucky. But then the bills arrived — and some families found themselves being charged thousands of dollars for a few days of electricity.

Many families probably can’t afford to pay those bills, so we’re potentially looking at a wave of personal bankruptcies. And even those who don’t face ruin are, predictably, outraged.

Possibly the most revealing remark of the Texas crisis so far was a tweet by, of all people, Sen. Ted Cruz (R-Cancún), who fumed that “no power company should get a windfall because of a natural disaster” and called on “state and local regulators” to “prevent this injustice.”

The senator, not known for self-awareness, may not realize what he did there. But if even Ted Cruz — Ted Cruz! — believes that regulators should prevent power companies from reaping windfall profits in a disaster, that eliminates any private-sector financial incentive to prepare for such a disaster. And that, in turn, destroys the entire premise behind radical deregulation.

So will the Republicans who hold all of Texas’ statewide offices learn from this debacle and rethink their whole approach to energy policy? Of course not. Their immediate reaction was to falsely blame the crisis on wind power and lash out at advocates of a Green New Deal — even though something like a Green New Deal, that is, public investment in energy infrastructure, is exactly what Texas needs.

And one thing we’ve definitely learned over the past few months is that once politicians commit themselves to a Big Lie, whether it involves epidemiology, economics or election results, there’s no turning back.

But while the right-wing political-media complex can’t and won’t learn anything from the Texas power debacle, the rest of us can. We’ve just been offered a clear view of the dark (and cold) side of free-market fundamentalism. And that’s a lesson we shouldn’t forget.

Paul Krugman, winner of the Nobel Memorial Prize in Economic Science, is an Op-Ed columnist for The New York Times.