Berkshire Hathaway’s Plan to Fix the Texas Electric Grid: Give Us Money
Under the proposal, Texas would pay Berkshire to build 10 new natural gas plants, with costs plus a guaranteed “rate of return” passed on to all electricity consumers. These plants would ordinarily not produce power, but would be able to produce up to 10 gigawatts (GW) of power in an emergency when called on by the state’s grid manager, the Electric Reliability Council of Texas (ERCOT).
The advantages of this plan are… somewhat mysterious? For one thing, the implied price tag of $800,000 per megawatt (MW) of new installed electric capacity is pretty high. But beyond that, the Berkshire plan does not appear to address any of the actual causes of the February blackouts, and depending on how it worked in practice it could easily increase the risk of more blackouts in the future.
All electric systems have to maintain enough electric capacity to meet peak levels of demand. Since average electric demand is far below peak demand, most of the time there is going to be a lot of unused capacity sitting around. How to pay for this is an important issue in electric market design. Texas chiefly relies on scarcity pricing to ensure sufficient capacity is available during peak periods. When prices rise, more plants come online or ramp up generation to meet the demand.
Contrary to what you may have heard, this system has served Texas fairly well. The February blackouts occurred not because of a lack of generation capacity, but because nearly half of the existing capacity was unable to function due to weather-related issues, particularly disruptions in natural gas supply. Had the extra 10 GW of natural gas generation Berkshire is proposing been built in February, would it have all been able to function? Would it have been able to maintain fuel supply? If not, the Berkshire proposal sounds like responding to your car running out of gas by filling your back seat with more spare tires.
Perhaps the closest analogue in the current system is that the ERCOT pays approximately a dozen generators to be prepared to operate in a “black start” scenario where the entire grid has gone down. Even of those generators nearly half had outages during the February blackouts.
Not only would the Berkshire plants not necessarily be available in a crisis, but to the extent they were used they could end up undermining the scarcity mechanism that generally ensures adequate electric capacity. Unlike the Berkshire plants—which would be guaranteed a profit even if they are never used—many competitive generators rely on the higher periods from brief scarcity events to keep them economical. When the plants are providing electricity to the grid, this could reduce scarcity and hence prices, discouraging investment in new capacity and increasing the likelihood that otherwise marginally profitable plants could be driven out of the market. Over time, the Berkshire plants could end up crowding out an equivalent amount of generation capacity, leaving the whole system no better off—but still footing the bill for the Berkshire generators.
Instead of coming up with complicated ways to further enrich Warren Buffett, Texas should consider addressing the actual problems behind the February events, such as issues relating to natural gas supply or the lack of communication between the ERCOT, generators and distribution utilities.
Image credit: Bohbeh