By Daniel Lyons

Last month, dealing with an unprecedented Arctic blast, regulators in Texas avoided a complete collapse of its electricity grid only by dramatically increasing energy prices and imposing rolling blackouts that left families without power for days, leaving at least 86 dead and potentially costing the state $55 billion.

This month marks the
one-year anniversary of another network shock: the COVID-19 lockdown, which
forced significant portions of the American economy to shift from real space to
cyberspace. This surge in internet traffic could have caused the
same crisis for broadband networks that the blizzard did for the Texas
electricity grid. But it didn’t. Here are some preliminary thoughts on how
differences in market structure may have contributed to this difference in
network resiliency.

First, some caveats: We do
not yet have a complete understanding of what drove the Texas blackout, and it
would be impossible to cover in a blog post. Texas is just beginning the postmortem
to understand why it faced an electricity shortage just when the state needed
it most. (The “Blackout Week” episodes of Robert Bryce’s always-excellent “Power Hungry” podcast offer an
excellent overview.) Moreover, while telecommunications and electricity are
both networked services, there are obviously profound differences between
megawatts and megabits that limit cross-industry comparisons. Nonetheless, a
high-level comparison of the two yields some interesting observations.

Deregulation
vs. managed competition

Following the blackout, the
Twitterati were quick to cast aspersions on Texas’s “deregulated” electricity
market. But this term is a misnomer. Like the local competition provisions of
the Telecommunications Act, what we call “deregulation” is better described as
“managed competition”: regulator-designed market structures to achieve certain
quasi-competitive outcomes. Across America, wholesale power markets are
coordinated by state-designed regional transmission organizations that control
high-voltage transmission lines to connect power plants to local utilities. In
Texas, this entity is the Electric Reliability Council of Texas (ERCOT), which
operates a market designed by the Texas Public Utility Commission in part to
promote political goals.

Two features of this market
design left Texas power generators unable to meet the crisis:

• Lack of backup capacity. The commission designed Texas to be an energy-only market. This means consumers pay only for power that is produced at any moment. This differs from capacity markets elsewhere in the country, which pay power plants to be ready to operate if and when needed. The benefit of energy-only markets is lower consumer prices; Texas electricity prices are often below the national average. The downside is that in the event of supply or demand shocks, there is less backup power to draw upon. When the cold snap hit, homes heated by electricity drove up demand for power, but supply fell, in part because natural gas–fired plants went offline, unable to get fuel that was also being diverted to home heating. ERCOT found itself without a reserve of backup power ready to fill the breach.

• Preferences for renewables. Related to this capacity shortage is Texas’s reliance on renewable power. Approximately 20 percent of Texas’s installed capacity comes from wind. Texas is also the sixth-largest producer of solar power in the country. These projects stem in part from nearly $36 billion in renewable energy subsidies. Renewable energy has strengths — it’s zero carbon and cheap once built since wind and sunlight are free. But unlike nuclear or fossil fuel generation, it is not dispatchable. ERCOT cannot order more sun or wind to fill a shortfall. During the power crisis, only 2 percent of Texas’s wind capacity was actually generating power, and solar was negligible. This means that $36 billion in politically channeled investment sat unused when Texas needed it most.

Broadband
resiliency

Unlike the Texas grid,
America’s broadband networks met the demand spike that came with the
coronavirus lockdown — in part because of the light-touch regulatory model
governing broadband. Freed from public utility regulations, network providers
invested billions of dollars in network capacity in recent years, giving them
the capacity that ERCOT lacked. (In Europe, where regulators actively seek
lower prices like the Texas Public Utility Commission, networks had less
capacity to absorb the spike in demand, leading to the embarrassing spectacle
of EU officials begging Netflix and YouTube to downgrade video quality to avoid breaking
European networks.)

Similarly, rather than
promoting one favored technology, American policy has taken a tech-neutral
approach to broadband buildout. When lockdowns began, this allowed Americans to
draw on diverse network architectures — wired and wireless, coaxial, fiber, and
even satellite — to meet their needs. This intermodal flexibility allowed
consumers to take full advantage of the installed broadband capacity to shift
their lives online, without leaving billions of dollars in installed capacity
unusable.

These crises highlight the
importance of network resiliency. Over the past two decades, broadband
providers have continually stayed ahead of our ever-growing appetite for
bandwidth, developing a culture of future proofing that promotes resiliency. By
comparison, our electricity grid has grown less resilient, as consumers in
Texas, California, and New England can attest. To regulators, the ability to
achieve politically expedient goals through managed competition is enticing —
but the hidden costs can be devastating in the long run.

The post Blackouts and broadband: A tale of two crises appeared first on American Enterprise Institute – AEI.