The Mess in Texas

US
Power lines after winter weather caused electricity blackouts in Houston, Texas, February 17, 2021
(Go Nakamura/Reuters)

Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: Texas powers down, debt and more debt, government gets in the way of COVID testing, government gets in the way of food, and government gets in the way of windows. To sign up for the Capital Note, follow this link.

Lessons from Texas
My first reaction on hearing about the energy meltdown in Texas was to sympathize with those who are currently without power, and to hope that it is restored (without interruption) very soon. My second was to ask what the hell went wrong?

A quick glance at the press throws up more suspects than a particularly bloody ride on the Orient Express. Among the suggested culprits (beyond the weather) are wind energy, just about every other type of energy, climate change (bravely defying jeers of “global warming,” eh?), underinvestment, the wrong sort of investment, well, you get the picture.

So far, the best starting point (that I have seen) for trying to understand what went wrong is this article by Jinjoo Lee for the Wall Street Journal.

In his view, the answer is “actually quite simple: Texas isn’t used to the cold.”

And that is true enough.

From another Journal article (this one by Russell Gold):

Texas experienced winter rolling blackouts in February 2011 and January 2014, although these lasted for a much shorter amount of time. In those emergencies, several coal and natural gas units tripped offline due to extreme cold conditions. Plants reported frozen equipment and natural-gas restrictions, according to a report on the 2014 incident.

Ercot’s head of system operations, Dan Woodfin, said this week’s ongoing “weather event is really unprecedented.” He added that Texas hasn’t seen this combination of Arctic temperatures and wind chills since the 1940s.

Ercot? The Electric Reliability Council of Texas, which manages the flow of electric power to more than 26 million Texas customers, a total representing about 90 percent of the state’s electric load.

It is largely independent from the rest of the national system:

ERCOT is a membership-based 501(c)(4) nonprofit corporation, governed by a board of directors and subject to oversight by the Public Utility Commission of Texas and the Texas Legislature. Its members include consumers, cooperatives, generators, power marketers, retail electric providers, investor-owned electric utilities, transmission and distribution providers and municipally owned electric utilities.

Even if we accept that, looked at historically, the current freeze is unusual, should we now expect that climate change will mean that today’s abnormal becomes standard fare?

Late in 2020, Bob Berwyn wrote this for Inside Climate News (“Pulitzer Prize-winning, nonpartisan reporting on the biggest crisis facing our planet”):

A 2018 study in Nature looked at the link between Arctic warming and those extremes by comparing air pressure and temperature patterns with a winter severity index from a climate measurement network that stretched from the Pacific Northwest across the northern United States to Maine and down to Georgia.

The authors said their research showed that, from 1990 to 2016, severe winter weather became more frequent in the Eastern United States “when the Arctic warming trend is greatest and extends into the upper troposphere and lower stratosphere.”

“In general we do see the tendency that, when the Arctic is very warm, you’re displacing the cold air that is usually over the Arctic to somewhere else,” said co-author Jennifer Francis, a climate researcher with the Woodwell Climate Research Center. “As the Arctic warms faster we expect to see this more.”

On the other hand, Berwyn (who was writing before the current storm) also includes commentary that would suggest that a degree of caution is called for when drawing a specific connection been whatever is happening in the Arctic and deep freezes in unexpected corners of the U.S. Whatever your views on climate change (as I generally note in the middle of pieces such as this, I am a lukewarmer) the whole article is well worth reading. The Arctic effect is also discussed in Bloomberg Green here.

I couldn’t help noting this from Berwyn’s article:

Nobody is arguing that Arctic warming has no effect, said University of Exeter climate scientist James Screen, who has worked on several studies focusing on how the linkage manifests in different regions. But the climate models don’t show the connection as strongly recorded observations, and it’s important to remember that, overall, the entire planet is warming.

The reality, in my view, is that while the underlying basis of a belief in climate change — greenhouse gases and all that — is scientifically sound, the models used to predict the extent and nature of that change should be treated with the degree of skepticism appropriate to any attempt to model a complex system (and the climate — in flux since we’ve had a climate — is about as complicated a system as there is). I also suspect that forecasts of a catastrophic outcome tie in rather too comfortably with religious tradition (apocalypticism has been with us for a very long time) and, for that matter, the political needs of those who are always on the lookout for ways to control human behavior.

Another aspect of being my sort of lukewarmer concerns the approach to be taken toward a risk that is, models or no models, essentially unquantifiable. This uncertainty and humanity’s own experience suggest that we should put a priority on preparing to adapt to climate change, rather than on attempting to control an unknown in ways that may do more damage than the possible ill that they are meant, not so very convincingly, to prevent. Such preparations ought, in particular, to involve increasing resilience in areas where there is already vulnerability regardless of whatever the weather, as opposed to the climate, may throw at us. To take two examples: It is a bad idea to encourage new building in flood plains and it is a good idea to toughen the defenses of low-lying coastal cities.

That brings me to the question of Texas’s increasing reliance on wind energy. Early reports suggested that much of Ercot’s problems could be put down to the fact that many of the state’s wind turbines had frozen up.

There was this, for example, from the Austin American-Statesman:

Nearly half of Texas’ installed wind power generation capacity has been offline because of frozen wind turbines in West Texas, according to Texas grid operators.

Wind farms across the state generate up to a combined 25,100 megawatts of energy. But unusually moist winter conditions in West Texas brought on by the weekend’s freezing rain and historically low temperatures have iced many of those wind turbines to a halt.

As of Sunday morning, those iced turbines comprise 12,000 megawatts of Texas’ installed wind generation capacity, although those West Texas turbines don’t typically spin to their full generation capacity this time of year.

So, are the turbines to blame?

Back to the Journal’s Lee:

Texas counts on wind to meet only 10% of its winter capacity [For the whole of 2020, wind energy accounted for 23 percent of Texas’s electricity supplies], according to the state’s grid manager. Natural gas and coal make up the lion’s share, comprising 82%. Sure, some wind turbines glitched under cold weather conditions, but so did natural gas- and coal-fired power. That is partly because water intake facilities froze for these generators, just as they did in the last extreme winter seen in February 2011. At least some natural gas had to be redirected for heating rather than power, adding to the supply shortage.

Fair enough, but note two similar qualifiers in those articles (my emphasis added).

From the Austin American-Statesman: “Although those West Texas turbines don’t typically spin to their full generation capacity [at] this time of year.”

From the Wall Street Journal: “Texas counts on wind to meet only 10% of its winter capacity.”

Low expectations, but wind power in Texas actually appears to have done better than anticipated on Monday, at least.

For 2020 as a whole, the Journal’s Gold reported:

Natural-gas-fired power plants generated 40% of Texas’s electricity in 2020, according to Ercot, the largest single source. Wind turbines were second at 23% [about three times where it stood in 2010], followed by coal at 18% and nuclear at 11%.

In recent years, coal has been declining on the Texas grid, and renewable sources such as wind and solar have been increasing.

Contrasting the annual data with the winter pattern might suggest that, at the margin, wind power is not an ideal power source, at least seen from the perspective of those who expect that climate change may lead to a more regular recurrence of what are currently seen as extreme winter conditions.

But how big should that margin be?

The Journal’s Lee again:

While other regional markets are designed to reward power plants for being on standby in case of unexpected demand peaks, Texas’s approach is fairly market-driven. [Put another way, generators are only paid for what they sell] That has meant the state historically has had a smaller cushion of electricity when demand has peaked, but this is no longer a problem.

Reserve margins—excess electricity generation capacity over demand—were dangerously low in 2018 and 2019 but bounced to 10.6% in 2020 and are expected to hit 15.5% in 2021. They clearly aren’t to blame in this winter storm’s failure: Winter peak demand hit a record 69,150 megawatts over the weekend, but up to 34,000 megawatts of supply were taken offline. Texas had no problem meeting a higher summer peak demand, which was 7% higher last year than this winter event.

That backs up the argument that (despite some criticism that it had enough warning to have done more ahead of this crisis) what Ercot is facing now is the perfect storm. But this does not deal with the underlying question. If the system needs to be made more resilient because of the danger of extreme cold (previously Texas had focused only on the need to deal with extreme heat) shouldn’t the dollars (which could be very large amounts indeed) be spent on toughening the delivery systems for types of energy that (traditionally) work well the whole year round, even if that means reducing investment in forms of energy supply that are typically less dependable in extreme conditions?

That was a rhetorical question. In Texas, however, (it can be different elsewhere), the incentives, for now, are not there. On the contrary (via Bloomberg Green):

Ercot’s authority is somewhat limited. In 2011, the last time freezing weather caused rolling outages, it released best practices for power generators to follow, but it couldn’t require anything, said Adrian Shelley, Texas office director of Public Citizen, an advocacy group.

Federal energy regulators also issued a 357-page report that recommended generators winterize their equipment, including insulating pipes.

“The financial incentive isn’t there to harden that infrastructure,” he added. “From a generator perspective, the only incentive is to bring energy to market as cheaply as possible.”

And so, the infrastructure has not been hardened, with the disastrous consequences that we see now.

During a must-read thread on Twitter, Representative Dan Crenshaw (R., Texas), pointed out that “every natural gas plant stayed online. The “downed” plants were due to scheduled maintenance,” However:

ERCOT planned on 67GW from natural gas/coal, but could only get 43GW of it online. We didn’t run out of natural gas, but we lost the ability to get it transported. Pipelines in Texas don’t use cold insulation – so they froze . . .

Incentives matter. In the eastern U.S., by contrast:

Grid operators run capacity markets that act like insurance policies. Generators are paid to guarantee that their supplies will be available on the most extreme hot and cold days. If they don’t show up, they face stiff penalties. Texas has instead left it up to prevailing prices and industry.

Which led to the following results:

Power prices spiked on several days to the price cap in Texas — a staggering $9,000 a megawatt-hour.

A 100-megawatt wind farm in the state that might have normally made almost $40,000 over a two-day period in February could reap more than $9.5 million on Monday and Tuesday alone, Nicholas Steckler, a power-markets analyst at BloombergNEF, said. On Monday, electricity sales likely totaled $10 billion, according to Wood Mackenzie.

On the other hand, the ability to extract such a profit in an event like this might, at least in the future, encourage some to do more to winterize, but, as a hope that relies on the inaction of others, that is hardly an ideal way in which to proceed.

Unfortunately, as a nation, thanks to the climate warriors, we appear to be moving in a direction that makes our energy supply more, rather than less, vulnerable.

Thus, to take one small example, this from a Wall Street Journal editorial:

About half of Texans rely on electric pumps for heating, which liberals want to mandate everywhere. But the pumps use a lot of power in frigid weather. So while wind turbines were freezing, demand for power was surging.

Meanwhile, the writer of this report (also from Bloomberg Green) acknowledges the problems that wind turbines face when confronted by the combination of sub-zero temperatures and humid air.

Here’s an extract:

The ice also creates an hazardous environment for the maintenance workers, with tons of ice stuck on the turbine that can fall down at any time, or smaller lumps of ice flung from the tip of moving wings at 300 kilometers per hour. For added protection [Sweden’s] Skelleftea Kraft maintenance workers ride on armored vehicles when visiting wind sites in the winter.

Good times!

The turbines can be partially winterized (for example, by adding a thin layer of carbon fiber to the blades), but:

Investment in anti-icing technologies is often not justified for warmer climates as the systems can have a negative impact on turbine efficiency and is expensive, according to Aaron Barr, principal wind energy consultant at Wood Mackenzie Ltd. The average age of the fleet in Texas is also more than eight years old, meaning they were built when technologies were not yet widely available, he said.

And the problems can, for example, extend to other parts of the wind turbine, such as the batteries and gearbox, although these can be dealt with heating systems.

None of this is to say that we should abandon investigating the possibilities offered by renewable energy (although I’ll admit to being considerably more skeptical about wind than solar), but, as discussed in more detail in the latest Capital Letter, we seem to have things the wrong way round. Spending on renewables research is eminently sensible (the advance in anti-icing technology is just one small example), but it is hard to avoid thinking that a good portion of the billions now going into the mass installation of renewables is being spent prematurely. The bulk of resources now should be going into improving climate resilience, whether of our existing energy supplies or, as mentioned above, more widely.

And yes, expanding our exposure to greenhouse-gas-free nuclear energy would be a useful part of a prudent climate strategy designed to avoid the massive economic damage that will be the inevitable side effect of the approach that much of the West is currently taking. It is an approach characterized by pointless asceticism, technological fantasy, and an absence of any reasonable cost–benefit analysis. Above all, for whatever reason, it takes little or no account of the fact that the richer we become, the greater our capacity to deal with whatever the climate will have in store for us.

If we stick with it, there will be many more Texases, and it will be no consolation that we will know for sure who to blame.

Around the Web
What could go wrong?

Reuters:

The COVID pandemic has added $24 trillion to the global debt mountain over the last year a new study has shown, leaving it at a record $281 trillion and the worldwide debt-to-GDP ratio at over 355%.

The Institute of International Finance’s global debt monitor estimated government support programmes had accounted for half of the rise, while global firms, banks and households added $5.4 trillion, 3.9 trillion and $2.6 trillion respectively.

It has meant that debt as a ratio of world economic output known as gross domestic product surged by 35 percentage points to over 355% of GDP.

That upswing is well beyond the rise seen during the global financial crisis, when 2008 and 2009 saw 10 percentage points and 15 percentage points respective debt-to-GDP jumps.

There is also little sign of a near-term stablisation.

“I’m from the Government, and I’m here to help” (No. 1)

The Grumpy Economist:

Wouldn’t it be nice if there were a $5 test that works in minutes, and can find asymptomatic people who might transmit Covid? Imagine how many schools, businesses, restaurants, weddings, churches, and so forth could safely open with such a thing. Imagine how much the reproduction rate of the virus could be crushed.

There is! And it’s sitting on shelves, one of the biggest casualties of the US federal monopoly on this simplest of all consumer goods. From detailed Wall Street Journal coverage:

“Antigen testing is one of the most powerful tools we have to hasten control to normalcy,” said Richard Pescatore, associate state medical director at the Delaware Department of Health and Social Services . . .

The tests can quickly help determine whether someone is infectious. The tests detect cases by searching for pieces of proteins from the virus. They deliver results in minutes.

Among the first rapid antigen tests cleared by regulators was the BinaxNOW, which is made by Abbott Laboratories, costs $5 and doesn’t require any equipment.”

Costs $5 to the federal government. Imagine if Abbott could send it to you via Amazon or ship it in bulk to Wal Mart. Alas, rather than simply sell the tests on the open market, the federal government is the monopoly buyer, shipped them to states, and they sit on shelves . . .

“I’m from the Government, and I’m here to help” (No. 2)

Price controls working as well as they usually do.

Bloomberg:

Argentina’s government is investigating several food companies for allegedly withholding production or deliveries, possibly increasing oversight of an industry that already faces widespread price controls.

The Production Ministry plans to investigate Danone SA, Unilever PLC and Procter & Gamble Co, among others, for not “increasing production to its highest level of installed capacity” and ensuring proper delivery, according to a statement published Wednesday. The ministry says its goal is to protect consumers.

The three companies didn’t immediately respond to emails requesting comment.

Random Walk
There are bad taxes and there are bad taxes, and as bad taxes tend to do, this one endured (in this case from 1696–1851), despite initially being envisaged as lasting for just three years.

Robert M. Schwab and Wallace E. Oates on Britain’s Window Tax:

The window tax must rank among the very worst taxes in the history of Western Civilization. Imposed in 1696, the tax (a kind of predecessor of the modern property tax) was levied on dwellings with the tax liability based on the number of windows. The tax led to all kinds of efforts to reduce tax bills through such measures as the boarding up of windows and the construction of houses with very few windows (sometimes whole floors of houses were windowless). In spite of the pernicious health and aesthetic effects and of widespread protests, the tax persisted for over a century and a half: it was finally repealed in 1851.

The authors of the paper recount various absurdities, often grimly amusing:

Although the window tax removed the need for tax assessors to enter the house to count the number of hearths, the tax created some administrative problems of its own—not the least of which was the definition of a window for purposes of taxation. The law was vague, and it was never quite clear what constituted a window for tax purposes. In 1848, for example, Professor Scholefield of Cambridge paid tax on a hole in the wall of his coal cellar (HCDeb., 24 Feb., 1848). In the same year, Mr. Gregory Gragoe of Westminster paid tax for a trapdoor to his cellar (HCDeb., 24 Feb., 1848). An individual might even have to pay tax should a brick fall out of the wall if the hole admitted light into the house. Such an outcome could prove quite costly by forcing the resident to pay a higher rate on every window in his house. This issue was a source of considerable unrest among taxpayers. Indeed, as late as 1850, there were continued requests to the Chancellor of the Exchequer for clarifications on the definition of a window . . .

[The tax’s] distorting effects were widespread and profound. Residents throughout England and Scotland boarded up windows to avoid the tax. In 1848, Mr. Byers, the president of the Carpenters’ Society in London, reported to Parliament that nearly every house on Compton Street in Soho had employed him to reduce the number of windows (HCDeb., 1848). In many houses, bricks took the place of previously existing windows. Moreover, newly constructed dwellings economized in drastic ways on the number of windows. There is a case of an apartment building in Edinburgh in which the entire second floor (containing bedrooms) had no windows at all. The most serious impact of the window tax was on human health. The protests against the tax and the studies of its effects document the health crisis created largely by the lack of fresh air and ventilation. A series of studies by physicians and others found that the unsanitary conditions resulting from the lack of proper ventilation encouraged the propagation of numerous serious diseases such as dysentery, gangrene, and typhus . . .

A tax system creates a “notch” if a small change in behavior leads to a discrete change in both average and marginal tax rates. As we noted above, the window tax incorporated notches throughout much of its history. Consider, for example, the tax schedule over the 1747–57 period. As we showed above, a consumer who owned a home with nine or fewer windows paid no tax. But his neighbor whose home had ten windows would pay a tax of 6d for each of his windows. Consequently, the marginal tax rate for the tenth window was 60d (which is equal to 5s) and the average tax rate was 6d. Notches are uncommon and have received relatively little attention in the literature on taxation. “Kinks” are far more common. A tax system creates a kink if a small change in behavior leads to a discrete change in the marginal tax rate but just a very small change in the average rate. The United States federal individual income tax, for example, has several kinks. Earning an additional dollar could move a taxpayer into the next higher tax bracket, thus raising the marginal tax rate with (almost) no effect on the average tax rate…

It appears that the continued use of the window tax was, in part at least, a response to a setting of extreme budgetary tightness in which there was little room for reduction in any tax rates. Perhaps the lesson here is that when governments need to raise significant revenue, even a very bad tax can survive for a very long time.

Oh.

(H/t: Marginal Revolution)

— A.S.

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