An Overview of ERCOT and Texas’s Energy Grid

There are three main interconnected power systems in the United States: the Western Interconnection, the Eastern Interconnection, and the Texas Interconnection. The Lone Star State’s personal grid is overseen by the Electric Reliability Council of Texas and is better known as ERCOT. A question quickly arises: how did one state end up with its own independent energy grid? 

ERCOT’s origins date back to World War II. In 1941, in order to support the war effort and meet the increased energy demand near the Gulf region, a group of Texas electric utilities united to form the Texas Interconnected System. They decided to continue using and developing the grid after the war, and agreed not to interconnect or sell power outside of their interconnection. This was so that they could avoid federal regulation from the Federal Power Act and the Federal Power Commission (which preceded the Federal Energy Regulatory Commission, or FERC). This body later on evolved into the Electric Reliability Council of Texas in 1970, creating a formal organization to manage the power grid. 

ERCOT is now a nonprofit and formally recognized Independent System Operator (ISO). ISOs are recognized and guided by the FERC. In 1996, under Order 888, the FERC compelled utilities to deregulate electricity and power sources, providing them with necessary information about electricity grid operations, supply, demand, and rates. This goes hand in hand with Order 889, which created rules for the establishment and function of ISOs as nonprofit organizations to help operate electric grids and promote competition. ERCOT and other ISOs throughout the country do not own or produce electricity, but rather oversee and regulate energy grids. They may monitor energy markets, dispatch generation throughout the grid, and ensure that generation and load are balanced at all times.  

ERCOT is a self-contained grid and serves about 90 percent of Texas’s electricity flow. ERCOT schedules power on its grid that connects over 54,000 miles of transmission lines and 1,250 generation units. They liken themselves to a system similar to air traffic control: just as air traffic control only directs the planes and ensures everything runs smoothly, rather than owning any planes, ERCOT simply directs and manages the grid rather than owning it or contributing to energy production.  

The ERCOT board of directors oversees this management. The board consists of 9 directors with voting power, selected by the Board Selection Committee, and two non-voting members – the CEO of ERCOT and the Chair of the Public Utility Commission of Texas (PUCT). ERCOT is overseen by both PUCT and the Texas Legislature. Several policies from the legislature and PUCT have shaped how ERCOT and the energy grid function.  

By 1999, Senate Bill 7 was passed to guide ERCOT into transitioning to a deregulated market. In an energy grid, this means that rather than one or few companies monopolizing energy supply, a “price-to-beat” mechanism is employed to create a competitive market. The bill established a price floor for the transition, which allowed new retail energy providers to charge rates lower than the set regulated rate. Established providers were required to offer rates equal to or higher than the floor. This allowed time for new competition to emerge on the market. This competitive design promotes innovation and lowers prices over time, as consumers can switch to a more competitive provider. All REPs will compete to offer the best prices by seeking technological innovations to increase efficiency and lower prices. 

Furthermore, before 2010, ERCOT was divided into four competitive load zones. PUCT ordered ERCOT in 2003 to develop a nodal wholesale market design instead. Nodal pricing means that electricity pricing is calculated by a zone’s “nodal point,” or a specific location where transmission lines converge. In comparison to zonal pricing, nodal pricing is much more tailored and considered more efficient. Pricing can fluctuate every 30 minutes, depending on the current energy demand. This encourages more efficient energy use and provides an incentive to reduce energy demand by not running generators during off-peak periods. 

ERCOT and PUCT have also worked to increase the diversity of electricity sources in Texas, including the expansion of renewable energy. In 1999, they established a Renewable Portfolio Standard  (RPS) that required 2,000 MW of renewable facilities to be installed by 2009. The 2,000 goal was reached by 2006, and by the end of 2009, Texas had installed 9000 MW of wind capacity alone. In 2005, the Texas Legislature voted to increase the RPS to 5,880 MW by 2015 and 15,880 MW by 2025. Now, Texas leads the nation for wind-generated electricity. In 2023, wind energy made up 22 percent of electricity generation. Texas is also a national leader in solar.  

The Texas Legislature also granted PUCT authority both to construct and expand transmission capacity and to order the installation of smart meters to improve energy efficiency. Smart meters have been installed nearly system-wide in retail areas and can provide feedback on consumer energy use and demand. 

Though the success of Texas’s grid is an impressive feat, it has had its flaws. For example, in February 2021, Winter Storm Uri – an anomalously powerful freeze event – caused massive power outages and electrical failures throughout the state. Texans were without power for over two weeks, and many deaths resulted. Though ERCOT has limited connections to Mexico and the Eastern Interconnection for emergency electricity backup, there was not enough to support a statewide power outage.  

Texas’s energy grid is an exemplary model of how a deregulated energy market fosters innovation, competitiveness, and efficiency. Though its isolation may be a potential fatal flaw, the success of ERCOT over the past few decades has provided valuable lessons for how to improve U.S. energy distribution. 

Written by Emma Kelliher, Public Policy Intern