The energy-only market experiment and its limits.
Texas operates the most unique electricity market in the United States: ERCOT (Electric Reliability Council of Texas), an interconnected grid that covers most of the state's population but has only minimal connections to neighboring grids. This isolation is intentional — it allows Texas to avoid federal jurisdiction under the Federal Power Act, which applies to interstate commerce but not purely intrastate electricity systems.
ERCOT restructured in 2002, creating a competitive wholesale market with a distinctive design choice: no capacity market. Unlike PJM, MISO, and ISO-NE, ERCOT relies entirely on energy prices to incentivize sufficient generation investment. When the grid is tight, real-time prices spike — in theory, high enough to attract new capacity. This is the "energy-only" model.
The energy-only model has an elegant economic logic. If generators face unlimited price spikes during scarcity, they will build more capacity to capture those revenues — exactly the investment signal that the missing money problem argues for. You don't need a capacity market if you let energy prices do the work.
ERCOT set its real-time price cap at $3,000/MWh, later raised to $9,000/MWh. During severe scarcity events, the market is allowed to signal that electricity is genuinely scarce by clearing at prices more than 100 times normal levels.
Texas's energy-only model was tested catastrophically by Winter Storm Uri in February 2021. A severe cold snap brought temperatures far below historical records across the state. Electricity demand for heating surged to record levels. And at the same time, roughly 30% of Texas's generation capacity — including natural gas plants, coal plants, and wind turbines — failed due to equipment not winterized for extreme cold.
For four days, ERCOT operated on the edge of complete grid collapse. Rotating blackouts became extended outages. Millions of Texans lost power for days in subfreezing temperatures. At least 246 people died. Real-time electricity prices hit the $9,000/MWh cap for days on end — producing enormous bills for customers on variable-rate plans and financial windfalls for generators that stayed online.
The Uri crisis raised fundamental questions about the energy-only model. High prices had not incentivized the weatherization of generation equipment. The market had not accounted for the value of resilience during extreme weather. And the isolation of ERCOT — its deliberate independence from neighboring grids — meant it couldn't import power from systems less affected by the storm.
Post-Uri, Texas lawmakers passed legislation requiring winterization of generation equipment and directed ERCOT to develop an "Operational Reliability Standard" — a capacity adequacy mechanism that functions somewhat like a capacity market without being formally structured as one.
The energy-only debate continues. Some economists argue that with proper weatherization requirements and higher price caps, the model can work. Others argue that the nature of electricity markets — the potential for catastrophic social harm during extreme events — requires mandatory capacity mechanisms regardless of the economic theory.
February 15, 2021, 1:25 AM, Texas. ERCOT initiates emergency rotating outages as grid frequency falls dangerously low. Generating units across the state have been tripping offline for hours as equipment freezes in record cold. According to a subsequent analysis by the University of Texas Energy Institute, ERCOT's grid was 4 minutes and 37 seconds away from a complete, uncontrolled blackout — a cascading failure that could have left most of Texas without power for weeks as damaged high-voltage equipment was replaced. The controlled outages held the system together, but left millions of Texans without electricity for days in subfreezing temperatures. At least 246 people died, and the Texas state medical examiner later raised the estimated death toll above 700.