Climate change, competition, and power sector
The piece has been authored by Prasanth Regy, who is a consultant with NITI Aayog.
The recent Intergovernmental Panel on Climate Change (IPCC) report has found that the climate is changing in an unprecedented manner. Along with global warming, climate change has also led to an increase in the frequency of extreme weather events, including more intense rainfall and flooding. The construction, operation, and maintenance of infrastructure needs to take these new climate patterns into account. In particular, power infrastructure (such as power plants, transmission and distribution infrastructure, and fuel supply arrangements) needs to be made resilient to climate change, with updated standards that are informed by an understanding of the changing climate patterns.
As an example, consider the snowstorm in Texas that happened a few months ago—in mid-February, the Texas power grid crashed during an unexpected, intense snowstorm. There are important lessons for us in India to learn from this tragedy about how even sophisticated markets can go wrong, especially in the context of extreme weather events potentially triggered by climate change.
The Texas electricity system is very lightly regulated. Texas policymakers expected that low regulation will spur competition and lead to low prices. Texas is the only US state to have its own separate grid, largely isolated from the rest of the United States. While this allowed Texas to avoid federal regulation, it also makes it difficult for Texas to import power from other states to meet emergency shortfalls. Texas also has an energy-only market: power producers are paid only for the power they produce, and high peak prices are supposed to incentivise producers to keep their plants operating in extreme weather. Texans are able to purchase electricity from a choice of suppliers offering a variety of contracts, and the cost of electricity is about 20% lower than the United States national average. But the designers of the system did not anticipate such extreme weather.
When the snowstorm reached Texas, the demand for power shot up as people tried to stay warm. Most of the power produced in Texas comes from natural gas. Due to moisture content in the gas, many pipelines froze and gas supply shut down. Many wind turbines also had to be stopped because of icing on the turbine blades. Power transmission and distribution networks were disrupted by snow and sleet damage. When high demand and low supply coincided, the price of power shot up, and the regulator was forced to shed load by cutting power supply to many parts of the state. Millions of people were left without power for days, and over two hundred people died.
Lessons for us
We in India should learn from these events. The central government desires to achieve a market for power distribution with multiple competing utilities, instead of the monopolies that exist today. The expectation is that greater competition will benefit consumers by improving the reliability of electricity and reducing its cost. But competition will also drive utilities to reduce their costs as much as possible, to the limit of regulatory permissiveness. Even today, without competition, poor distribution infrastructure is identified as one of the reasons for the frequent power breakdowns in many parts of the country. When competition is added into the system, cost-conscious utilities may create new infrastructure (or overhaul existing infrastructure) with little thought of resilience, unless the regulator forces them to implement higher resilience standards. This situation is complicated by climate change. In the future, frequent extreme weather events will grow more common. If competing utilities cut the resilience of power distribution systems to the bone in an effort to save cost, we have the recipe for a disaster.
It is critically important to create and enforce updated standards for achieving an appropriate level of resilience. But this is not an easy task. If the resilience standards are too strict, consumers and taxpayers end up having to pay too much for overly hardened electricity infrastructure. If the resilience standards are too lax, it can lead to the loss of lives and livelihoods if an extreme weather event does occur. Choosing the appropriate level of resilience involves seeking a balance between these trade-offs.
Greater competition can lead to more choices and lower costs for customers. But if the market is not well-designed, the interaction between the market and the rapidly changing climate can lead to greater fragility. Legislators and regulators need to choose the appropriate trade-offs between increased resilience and higher costs, and mandate updated resilience standards for electricity grids and other essential infrastructure.
(The piece has been authored by Prasanth Regy, who is a consultant, NITI Aayog. The views expressed are personal.)