Kennedy School Professor Who Designed Texas’s Energy Market Defends Skyrocketing Prices Following Winter Storm

After a winter storm in Texas earlier this month left the state's residents to contend with widespread power outages and skyrocketing electricity prices, William W. Hogan, the architect of the state’s energy market system and a professor at the Harvard Kennedy School, said in an interview with The Crimson Wednesday that the state’s electricity market had “worked as designed” given the conditions.

Hogan, an energy policy professor, has researched the structure of energy markets for several decades and advocated for a specific type of scarcity-based market model in an attempt to reduce prices for consumers. In 2013, Texas chose to adopt Hogan’s model.

Per scarcity-based pricing models, when the power supply is scarce, as was the case during the recent storm, the price of energy increases.

Energy generation dropped during the record-setting storm due to loss of power plants, fallen transmission lines, and damage to the grid. As a result, the price of energy rose, and some Texans whose power remained on saw their energy bills increase precipitously.

One Texas resident, for example, told the New York Times that the cost of his electricity went up 70-fold. He now owes $16,752 for his energy bill, wiping out his savings.

Hogan acknowledged in the Wednesday interview that such situations are “terrible.” Still, he argued the end result could have been much worse.

“The people who didn’t lose their power, they’re much better off than the people who lost it,” Hogan said. “Even if they had to pay bills for it, then that’s going to have to be figured out.”

He added that Texas residents who ended up with high power bills “chose not to have long-term contracts that protected them."

In Texas, the energy market is unregulated, meaning consumers can choose to pick a long-term, fixed-rate energy plan or a variable rate plan, among other options. Fixed-rate energy plans lock the consumer into a certain price, even if market rates rise or fall. Variable rate plans offer prices that respond more quickly to the market, and thus are more vulnerable to rate hikes due to natural disasters or other adverse market conditions.

Hogan said situations like the one seen earlier this month are uncommon and that the system works well, with low prices during normal conditions.

“You have to have a balance of supply and demand essentially all the time, every minute,” Hogan said. “If we get out of whack because demand drops or supply falls, you can get in trouble very quickly.”

Hogan added that the recent storm was a “one-in-100-year event” — well outside the normal bounds the system was designed to operate in.

Though Hogan emphasized the magnitude of the winter storm in Texas could not have been anticipated, Texas previously encountered problems meeting demand on its energy grid. In 2011, a winter storm caused 1.3 million people in Texas to lose service, and 4.4 million people to be impacted by outages.

University of Michigan School for Environment and Sustainability professor Peter Adriaens said in an interview that although it is not yet certain that the recent storm was caused by climate change, extreme weather events will become more common as the world experiences its effects.

“Climate change is causing events that used to be rare to become more common,” Adriaens said. “Those are the impacts or effects of climate change that could be more unpredictable. Events are more extreme and in locations where you don't expect them, such as in Texas.”

Adriaens disputed Hogan’s claim that those who maintained power but had to pay high prices were better off than those who lost power entirely.

“I don’t think that is really a fair reaction,” Adriaens said. “The question is, ‘should you ever have to pay that much for your energy?’”

Several Kennedy School students from Texas said they were disappointed that the market was designed with the possibility of such outcomes witnessed over the past month.

Kennedy School student Christopher J. Stewart, whose family was in Texas during the storm, said residents' negative experiences with the energy system during this crisis matched his expectations for a state where politicians have long pushed for cutting costs.

“It was interesting to see a comment from Professor Hogan that the system worked as designed because I actually think that that’s true — I think the system did work as designed,” he said. “It’s not surprising, because under the guise of fiscal responsibility, they’ve defunded a lot of our public services.”

Y. Joana Ortiz, another student at HKS, also said she was disappointed to hear Hogan’s position, but said it pointed to a “larger systemic issue.”

“Maybe people are surprised by his bluntness, but I think if you do not grasp that you live in a capitalistic society that favors private market for profit, I mean, that is the basis of our country,” she said.

Ortiz added that she believes Texas should meet the recent disaster with bold action.

“I think there certainly needs to be accountability, but I actually don’t even think accountability is enough,” she said. “I think there needs to be major reform and personally, I think that will really manifest itself in the next state election cycle.

—Staff writer Isabel G. Skomro can be reached at isabelskomro@thecrimson.com or on Twitter @isabelskomro

—Staff writer Raquel Coronell Uribe can be reached at raquel.coronelluribe@thecrimson.com. Follow her on Twitter @raquelco15.