Tag: Enron

The Great Texas Blackout Revisited: Market Failure Not

Four years ago, Storm Uri caused Texas’s centrally planned wholesale electricity market (ERCOT) to buckle, vindicating warnings about the state’s wind/solar reliance. The mainstream media implicated natural gas instead, failing to explore the why behind the why. Rather than deregulation, Texas has chosen to add wind, solar, and batteries, while subsidizing natural gas plants to counter intermittency. This duplicated grid is now driving rates up in a state that could have relied on surplus natural gas instead.

From Master Resource

By Robert Bradley Jr.

Ed. Note: Four years ago, Storm Uri caused Texas’s centrally planned wholesale electricity market (ERCOT) to buckle, vindicating warnings about the state’s wind/solar reliance. The mainstream media implicated natural gas instead, failing to explore the why behind the why. Rather than deregulation, Texas has chosen to add wind, solar, and batteries, while subsidizing natural gas plants to counter intermittency. This duplicated grid is now driving rates up in a state that could have relied on surplus natural gas instead.

It was not so much the story of freak weather triggering a market failure writ large. It was a classic application of the political economy of government intervention: the seen and the unseen, expert/regulatory failure, and unintended consequences.

Don Lavoie, a preeminent thinker in the field of market-versus-government planning, once warned:

If the guiding agency is less knowledgeable than the system it is trying to guide—and even worse, if its actions necessarily result in further undesired consequences in the working of that system—then what is going on is not planning at all but, rather, blind interference by some agents with the plans of others.” [1]

Planned chaos, in other words.

The failure of governmental electricity in Texas humbled many electricity design experts (including technocrat Lynne Kiesling); the Public Utility Commission of Texas (PUCT); the Electric Reliability Council of Texas (ERCOT); and the Texas Legislature. Other players at a distance were the Federal Energy Regulatory Commission (FERC), North American Electric Reliability Corporation [né Council] (NERC); and National Association of Regulatory Utility Commissioners (NARUC).

Classical liberals can tie experience to theory to identify expert/regulatory failure. This should not be surprising given that electricity is the most regulated industry in the United States next to money & banking and the national-defense contracting.

Superficial View

The ‘mainstream’ view is that an “extreme tail event” caught the private-sector firms, most in natural gas, unprepared. The regulators, in the middle for the most part, did their job. I have challenged this interpretation in detail here and here. “Renewables, representing more than one-fourth of Texas’s generating capacity,” I argued, “all but disappeared at the peak.

But there is a very important second part of the story: the tax-break-driven pricing of wind severely compromised the economics of existing and new natural gas and coal plants.

But the rare event was not a market situation begging for market reform. It was a governmental situation where the inertia of intervention resulted in more intervention: continued wind/solar, battery storage, and even talk about demand-side responses (meter technology and incentives). The experts can solve this, in other words, with a lot of studies and planning.

Enron Analogy

This reminds me of the (superficial) Enron interpretation. Enron made bad investments, tried to cover them up, and lost the confidence of the market. They went bankrupt and ‘the market worked.’ Why the massive failure? Fish rot at the head, one book concluded. But why?

With Enron (as with the Blackout), I argue that something greater was at work. It was ‘contra-capitalism,’ the pursuit of the unearned, in the form of pervasive rent-seeking, strategic deceit (’philosophical fraud,’ short of prosecutable fraud), and imprudence that Adam Smith, Samuel Smiles, Ayn Rand, and Charles Koch, among others, have warned against.

For me, at least, getting to the ‘why behind the why’ to explain a ‘systemic failure’ like Enron opened up a lot of deep thinking that tested and expanded my theory. Capitalism was not to blame for Enron considering all the warnings from our side on bad commercial behaviors, and same for electricity in Texas in February 2021.

Reinterpreting the Backout

With Texas, the surface explanation of wind and solar all but disappearing at the peak is just the beginning. (‘This was expected by planners—can’t blame them.’)  It was a pervasive lack of weatherization among natural gas companies from the wellhead to the power plant. But why? Reliability is JOB 1 with electricity, and this job was outsourced to regulators working with a very (regulatory) weakened/fragmented industry. Coordination issues aplenty!

The ‘why behind the why’ gets to a lot of regulation and political/social pressure that brought the worst out of private sector parties. Think about the intended and unintended consequences of government forcing of wind power in particular. Wind’s intermittency and negative pricing (from the federal tax credit) ruined the economics of conventional power plants.

Regarding (mal)coordination, federal and state regulation has disaggregated the natural gas industry in three phases, and the same for electricity in three/four phases. There are no ‘electricity majors’ or ‘natural gas majors’ that are vertically and horizontally integrated (regulation forced the disaggregation of the industry). We needed Majors, in fact…. (The business strategy of integration (“oil majors”), by the way, was part of the answer to the “commons problem” of oil and gas production under the ‘rule of capture.’ another story.)

Electricity is different, they say. Need large control areas because of the nature of electrons. A ‘commons problem’ says Lynne Kiesling.  Okay, then who do you trust? Markets or experts/regulators? And no, there is no Hayekian/ central planning solution of private resources in the electricity ‘commons’.

The experts have been working hard on market design to find that right balance between reliability and price. Texas went virtually all price (thinking that peak pricing for several weeks of the year would compensate for not having ‘capacity payments’ for standing ready to meet peak demand). But the shortage during Storm Uri sent prices to astronomical levels, which now will result in a bunch of nonpayment, lawsuits, and probably socialistic cost-spreading among all customers. Total mess—and most all of the involved regulators have resigned and have court dates.

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On Facebook, Lynne had a revealing exchange with economist Steve Postrel:

Postrel: According to the data I’ve seen, ERCOT consistently plans for lower reserve margins than other grids. ERCOT now planning for 15-20%, but that’s still lower than surrounding grids.

Kiesling: Reserve margin: In contrast to your interpretation, I would argue that other RTOs (PJM in particular) have excessive reserve margins relative to supply requirements and relative to the ability of demand to respond to higher prices. Other RTOs (PJM in particular) are governed by generators, who clearly have an incentive to have higher than needed reserve margins. Again I say to you: what do you think the cost is of a reserve margin to achieve 100% reliability during a 1-in-20-year extreme tail event??????

Postrel: As I noted on your other post, the decision to just accept blackouts like these (in extreme freezes) as the cost of doing business cannot be ruled out as the optimal policy, given the cost of incremental reliability. Presumably, this would be a good subject for cost-benefit analysis with reference to the degree of public risk-aversion. But the “excess” reserves in other places, if adequate to mitigate the consequences currently being felt in Texas, don’t seem so burdensome as to be obviously superoptimal.

It is a huge planning issue: reliability vs. price. Experts (like Kiesling) must tell the regulators what to do. NO, we cannot let the market decide because it is a “commons problem.”  But I say: deregulate to let the electricity majors into the market … And short of this, at least understand the ‘coordination problem’ as an expert/regulatory failure, not market failure.

It is time for an entrepreneurial discovery process in a true market, not a contrived market under mandatory open access. Firms must be allowed to internalize the reliability function with their Grade A corporate guarantee. Lots of laws must be repealed, another story.

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[1] Don Lavoie, National Economic Planning: What is Left? (Cambridge: Ballinger Publishing Company, 1985), p. 95.  

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Appendix: Storm Uri Blackout Reinterpretation

My posts on the Great Texas Blackout:

Wind, Solar, and the Great Texas Blackout: Guilty as Charged

Renewables “Market-Failed” Natural Gas in Texas

Electricity Planning: Physical vs. Economic (an exchange with Eric Schubert)  

ERCOT “worked as planned” (architect Hogan gives no quarter)

Civil Society and Natural Gas during the Great Texas Blackout

For other posts:

“U.S. Winter Outlook: Cooler North, Warmer South” (NOAA’s prediction bust)

Numbers and the Great Texas Blackout (Bill Peacock: March 4, 2021 )

ERCOT: A Central Planning Government Agency

ERCOT: A Government Agency

Texas’ Renewable Fail: Remember Georgetown’s Green New Deal Too

Oklahoma’s Rolling Blackouts: Remembering Audrey McClendon’s War on Coal (Charlie Meadows: February 23, 2021)

Wind Subsidies Help Freeze Texans (Bill Peacock: February 18, 2021)

Texas Windpower: Will Negative Pricing Blow Out the Lights? (PTC vs. reliable new capacity) (Josiah Neeley: February 17, 2021)

Enron, NYT Declare Solar ‘Competitive’ (1994)

“Federal officials, aware that solar power breakthroughs have shined and faded almost as often as the sun, say the Enron project could introduce commercially competitive technology without expensive Government aid.” (- Allen Myerson, Solar Power, for Earthly Prices, New York Times, November 15, 1994)

From Master Resource

By Robert Bradley Jr.

“Federal officials, aware that solar power breakthroughs have shined and faded almost as often as the sun, say the Enron project could introduce commercially competitive technology without expensive Government aid.” (- Allen Myerson, Solar Power, for Earthly Prices, New York Times, November 15, 1994)

Thirty years ago, the ‘newspaper of record’ excitedly reported atop the business section that a breakthrough with solar energy had occurred with the business genius of the upstart energy company Enron. Formed in the mid-1980s, Enron had just entered into the solar business and was destined to revitalize–if not save–the U.S. wind industry just a few years later.

Good press continues to create an Enron-like illusion of the coming competitiveness and profitability of solar and wind energies for on-grid electricity. Basic energy physics explains why the sun’s (dilute, intermittent) flow cannot compete against the sun’s stored (dense) energy embedded in natural gas, coal, and oil. And why outsized tax breaks for wind and solar remain essential after decades of priming. The article follows:

——————-

The nation’s largest natural gas company is betting $150 million that it can succeed where the Government has so far failed: producing solar power at rates competitive with those of energy generated from oil, gas and coal.

The Enron Corporation plans to build a plant in the southern Nevada desert that would be the largest operation in the country making electricity directly from sunlight, producing enough to power a city of 100,000 people. It is expected to begin operating in late 1996.

Grand promises in the late 1970’s about the potential of virtually pollution-free, endlessly renewable energy sources like solar energy faded into an embarrassed hush. But several of the nation’s leading solar power experts say Enron’s optimistic goal is probably reachable.

The reason is that during the last decade, the cost of solar power generation has quietly declined by two-thirds. Far from depending on some wondrous breakthrough, the experts say, Enron can offer commercially competitive solar power by inexpensively mass-producing solar panels, and then employing thousands of them in the Nevada desert.

Even the most optimistic supporters of solar power have doubted that they would see commercially competitive production until the next century. The Worldwatch Institute, an environmental group in Washington, said earlier this year that solar cell electricity, now as low as 20 cents a kilowatt-hour, might reach 10 cents by 2000 and 4 cents by 2020.

Yet Enron is pledging to deliver the electricity at 5.5 cents a kilowatt- hour in about two years. That would beat the average cost of 5.8 cents currently paid by the Government for the electricity it uses. The national average retail price is 8 cents.

Several legal and political obstacles remain, and for competitive reasons Enron will describe its technology only in general terms. But solar energy researchers who had consulted with Enron were willing to elaborate on the available technology and the financial calculus.

Enron’s 100-megawatt plant would be more than a dozen times the size of any other that employs photovoltaic, or solar power, cells, which use the energy in sunlight to shake electrons loose from molecules of silicon or other substances. Size is key, according to Sigurd Wagner, a professor of electrical engineering at Princeton University.

“If a good group of people puts a plant of that scale in, it will have a real consequence on costs,” he said. “It’s not going to go down by just a little bit, but by a factor of two.”

To reduce the price further, the company is counting on available tax breaks and inexpensive financing.

As for whether Enron’s goals are realistic, Professor Wagner said, “They’re pushing it, but they’re not far off.”

The company, based in Houston, has already won preliminary backing from the Department of Energy, which tentatively plans to buy Enron’s solar power as long as the rate is truly competitive with the power from conventional sources.

“I’m confident we can make some commitment for a Federal entity to purchase or at least broker some purchase of solar power,” said William H. White, the Deputy Secretary of Energy.

Government officials say Enron’s success will encourage the spread of solar power generation here and abroad.

“If they can do this, they’re going to have lots of business,” said Tony Catalano, director of the Energy Department’s photovoltaic division. “This is going to be very competitive in the U.S. and lots of other places in the world.”

Enron has asked the Government to buy or guarantee a market for its power, with annual increases of 3 percent, for 30 years. It also depends on leasing Government land, receiving Federal tax benefits for renewable energy and financing construction with tax-free industrial development bonds.

Mr. White proposes having the department’s Western Area Power Administration, whose grid connects Hoover Dam and other projects with large public power authorities, buy the power generated by the solar plant. That power would only be available in daylight hours, which are also the hours of peak demand, especially for air-conditioning.

Previous efforts to promote solar power as a clean alternative to fossil fuels have foundered, despite the Government’s spending of hundreds of millions of dollars on solar research. Solar power has remained too expensive, while fossil fuel prices have declined.

While solar cells can economically provide the tiny charges needed by watches and pocket calculators, their larger applications are mostly in remote places beyond the reach of the world’s power grids.

Federal officials, aware that solar power breakthroughs have shined and faded almost as often as the sun, say the Enron project could introduce commercially competitive technology without expensive Government aid.

“This establishes the benchmark we want and restarts a stalled solar industry,’ said Robert H. Annan, the solar energy director in the Department of Energy.

In fact, the solar industry has already grown, with the shipments of solar cells up more than tenfold since 1980, as repeated technological advances have lowered their cost.

Even after Federal officials agree to buy solar power, they will have to formally solicit bids to see if anyone can beat Enron’s offer. Among more than 30 informal proposals so far, no one has.

Enron’s chief strategy officer, Robert C. Kelly, says that producing solar power follows from Enron’s generation of electricity from natural gas, a cleaner fuel than coal or oil. But Enron will not be running a charity. Asked how soon solar power could generate earnings, he said: “Now. We’re a very impatient company in terms of profits.”

Limited production of solar power cells at an adjacent factory, to be run by a partner whom Mr. Kelly would not identify, will keep the $150 million power plant from reaching its full capacity for about a decade.

The necessary technology is on display in Mr. Kelly’s office, where a square glass panel about the size of an art book, its surface shimmering with metallic greens, blues and violets, rests on a gleaming steel rack. He is cautious about saying anything more than that the panel was produced by another company and used what people in the business called a thin-film design.

Silicon has been the film of choice, but several companies are achieving much higher efficiencies, and lower costs, with other substances or more than one silicon layer. A partnership between Energy Conversion Devices Inc. of Troy, Mich., and the Canon electronics company of Japan plans to open the world’s largest thin-film solar cell plant in Newport News, Va., next year. Their cells will have two layers of silicon and one of germanium. The Enron and Canon ventures together would double the nation’s output of solar cells.

Zoltan J. Kiss, the founder of Energy Photovoltaics Inc. of Princeton, N.J., said he had been negotiating with Enron about the production of copper indium diselenide cells, which he said had triple the efficiency of single-layer silicon cells.

Enron, which has built one of the world’s largest gas-fired power plants in Britain, says it can also realize economies in the rest of the solar power plant’s design.

Paul Maycock, a leading solar energy consultant, said a few of the solar cell technologies he had evaluated for Enron could achieve the company’s goals, but only with sufficient production.

“Yes, it can be done,” he said. “It’s the dream we’ve all had: that someone would take the risk of building a very large factory.”

Enron and Greenpeace: An Exchange with Martin Porter

“Enron was the ‘greens’ favorite company, remember? Enron, in the words of a Greenpeace ex, was ‘the company most responsible for sparking off the greenhouse civil war in the hydrocarbon business.’”

From The Master Resource

By Robert Bradley Jr. 

“Enron was the ‘greens’ favorite company, remember? Enron, in the words of a Greenpeace ex, was ‘the company most responsible for sparking off the greenhouse civil war in the hydrocarbon business.’”

Greenpeace was a fan of “green” Enron in the old days. Today, a Greenpeace UK leader has been trying to debunk me, based on my prior association with Enron and Ken Lay. And it has backfired with him just like it backfired when Joe Romm of Climate Progress tried the same thing 15 years ago.

Here is our exchange. I report, you decide. My final comment follows.

Martin Porter: so, tell us what it was like working for one of the most corrupt companies in US history? Did you ever visit your old Enron boss in jail??!?

Porter: … Do you miss those Enron days Rob Bradley??!?

Bradley: Enron was the “greens” favorite company, remember? Enron, in the words of a Greenpeace ex, was “the company most responsible for sparking off the greenhouse civil war in the hydrocarbon business.” [Jeremy Leggett, The Carbon War (London: Penguin Books, 1999, p. 204)]. And the Kyoto memo:

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Bradley: Profitable opportunities will trump DEI emotionalism. Fossil fuels are for the masses, remember. Not the climate elite driving their Teslas.

Martin Porter: Says the guy who used to work for a crook

Bradley: Ken Lay? The beloved ‘green’ chairman of Enron? Remember: Enron’s first crime that set the tone for what followed was with a wind farm. But I repeat myself with an issue that backfires on you/Greenpeace.

Porter: why? Just because a bunch of crooks tried to make themselves look green it’s nothing to do with Greenpeace. The whole sorry story does ask questions on ‘green capitalism’ though.

Bradley: You forgot my quotation from Greenpeacer Jeremy Leggett. didn’t you. [“the company most responsible for sparking off the greenhouse civil war in the hydrocarbon business.” Jeremy Leggett, The Carbon War (London: Penguin Books, 1999, p. 204)].

Porter: hardly a ringing endorsement though, was it?

Bradley: Read his book for context. Leggett was surprised and elated! (The more homework you do, the more you might question the Climate Industrial Complex.)

Porter: I think we were all very pleased Enron was accepting climate science when most others in the oil industry weren’t, and it did help break up the united front of denial by the fossil fuel industry. Unfortunately it was all bullshit to cover massive fraud.

Bradley: Actually, internally, it was the other way around. The science behind climate alarmism was exposed as speculative. An executive on the renewables side even asked if the implication was that CO2 should be subsidized, not penalized, because of settled CO2 science. Please stop guessing … wrong.

Bradley: Yes, “Unfortunately it was all bullshit to cover massive fraud.” That’s politicized energy and a reason you should be as critical of the Climate Industrial Complex as you are of fossil fuels. You might even change your views!

Martin Porter: Well, we tried business without government control and the result was the Credit Crunch and Enron, but you were there for that so I don’t need to tell you.

Bradley: Just the opposite, sir. Government intervention created an Enron and fooled just about everyone. Enron: The Perils of Interventionism – Econlib

Final Comment

With thousands of connections on LinkedIn and free market conversations ongoing, at times I have to push back on ad hominem, one being my past association with Enron where I worked for 16 years. My Political Capitalism website anticipates and debunks this line of attack. No doubt many of my detractors have had to realize that ol’ Bad Enron was all “green” with climate alarm and big investments in wind and solar.

Enron Energy Services also was promising “Kyoto compliant” energy efficiency gains (10 percent reduced usage) in its long-term energy outsourcing contracts. It was a fraud based on ‘mark to model’ net present value accounting.

Enron was the epitome of fake ‘green’ energy. ‘Green’ energy today is Enron on a much larger scale. Not good for the anti-CO2, anti-industrialization worldview, after all.

A funny story in this regard concerns Enron CEO Jeff Skilling, who had to quell the concern of a newly hired coal executive that Enron was going to hide its coal push. “Mike,” Skilling assured, “we are a green energy company, but the green stands for money.” [1] And calculator-driven business ethics it is!

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[1] Bradley interview with Michael Beyer and George McClellan, Enron Corp., April 10, 2021. Quoted in Bradley, Capitalism at Work: Business, Government, and Energy (M&M Scrivener Press, 2009), p. 310.

Notes: 1998 Enron Meeting on Climate Change

Enron, in the words of a Greenpeace ex, was “the company most responsible for sparking off the greenhouse civil war in the hydrocarbon business.” [Jeremy Leggett, The Carbon War (London: Penguin Books, 1999, p. 204)]. And Enron did much to bolster, even save, the U.S. solar and wind industries.

From Master Resource

By Robert Bradley Jr.

“… why doesn’t a congressional subcommittee call these companies and a few more to tell us exactly what they are up to and what is going to happen to energy prices where parties have to buy credits for something that is not a pollutant?  After the meeting the company that has done the most to sell Kyoto should be awarded naming rights.”

I had a front row seat to many things energy and climate during my 16 years at Enron (1985–2001). At Political Capitalism, I described my Enron experience debating climate science and renewable policy (here).

Enron, in the words of a Greenpeace ex, was “the company most responsible for sparking off the greenhouse civil war in the hydrocarbon business.” [Jeremy Leggett, The Carbon War (London: Penguin Books, 1999, p. 204)]. And Enron did much to bolster, even save, the U.S. solar and wind industries.

I recently located a set of notes that I made of an Enron climate change meeting help June 24, 1998. I reproduce it for posterity.

Science
  • It is sad to note that Enron folks started learning about the science on June 24, 1998, several years after pursuing global warming policies
  • We had a two-hour meeting with Dr. Gerald North of Texas A&M University and myself
  • People now know that there are many scientific uncertainties and some good points in favor of the skeptics
  • At the close of the meeting, I made the point that the skeptics case is not “tobacco science.” No one demurred.

Policy
  • John Palmisano under the wing of Terry Thorn presides
  • Dick Forrester of the White House has asked Enron to submit an early crediting plan
  • Whole key is to get businesses to start investing in credits so that once they have built up an inventory, they will be “bought off” to support Kyoto
  • American Electric Power (AEP) is currently in the lead with over $5 million in the bank, and Enron and British Petroleum are in the hunt as well
  • Big problem: voluntary CO2 reduction programs are losing favor since companies are not sure about being able to generate credits if a program later starts
  • Al Gore has a crazy plan to solve Russia’s “hot air” problem by having the U.S. government buy their credits to then allocate to U.S. businesses who want to ‘pollute’. That is controversial, however, because the traders like Enron would be bypassed—no margins there
  • Enron—they have been arguing for years for mandated access to other people’s grids on the premise that lower rates would ensue—then in the dark of night they push Kyoto that will knock rates back up and more.
  • What about the bad credit problem?
  • Oregon has launched the nation’s first CO2 credit program with a rumored value up to $1 per ton.
  • Lots of interest in NOx trading to set up prototype for CO2 trading
  • Worries about certification and verification
  • Goal to have CO2 trading program up by 1999
  • British Petroleum has a staff of 11 working on international credit trading
  • Government programs where credits can be donated for a tax credit
  • Clandestine meetings with the White House and EPA to devise credit program.  Enron, already the world’s largest air permit trader with SO2, is going after CO2 damn the science

Final Comment

While Democrats and Republicans alike are saying a resounding NO to the Kyoto Protocol, Big Energy is paving the way for a backdoor implementation.  British Petroleum is the first out of the gate with a cadre of traders working on international CO2 buy/sell opportunities. 

Of course, BP CEO John Browne has studied the science and is acting in society’s best interest (sarcasm).  American Electric Power has accumulated a hoard of CO2 credits and is itching for the Kyoto gun to go off.  Enron is meeting with the EPA and the White House to set up the air permit rules. 

Here’s an idea: why doesn’t a congressional subcommittee call these companies and a few more to tell us exactly what they are up to and what is going to happen to energy prices where parties have to buy credits for something that is not a pollutant? After the meeting the company that has done the most to sell Kyoto should be awarded naming rights.