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Why Energy Is Different in Texas

Texas' energy market is unlike those in other states in two distinct ways: It has its own electric grid and it's deregulated.

Sam Becker Contributor
Sam Becker is a freelance writer whose work has appeared in and on CNBC, Fortune, USA Today, Business Insider, and more. Sam is also the author of the growing finance and strategy-focused newsletter, "Not Pretty, Not Rich."
Sam Becker
5 min read
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Power lines near Austin, Texas. The Lone Star State has an energy system unlike any other in the continental US, including its own grid and a deregulated energy market.

Jordan Vonderhaar/Bloomberg via Getty Images

Everything is bigger in Texas. And in terms of electricity and energy, it's different, too.

The primary difference between Texas' energy market and others around the country is that Texas has its own energy grid, the Electric Reliability Council of Texas, or ERCOT. For households in much of the state, the electricity market is also deregulated, meaning that consumers have a choice of which supplier they get their power from, rather than from a single, centralized entity.

Those factors combined make the Texas energy market perhaps the most unique among US states -- at least among the 48 contiguous states. And how Texas ended up with ERCOT and its deregulated market (or energy choice for consumers, as it's sometimes referred to), is interesting in its own right.

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The history of electricity in Texas, and why Texas has its own power grid

Trying to get a grasp of the history of the energy market in Texas is difficult -- like trying to chase down sagebrush being blown across the prairie. 

Electricity first came to the state in the 1880s. But in the subsequent decades perhaps the most important elements that led to the creation of Texas' energy market as it stands today is the development of its energy grid and, much later, deregulation.

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Texas' grid, ERCOT, is flanked on either side by the Western and Eastern Interconnections, which connect the states on either side of the Rockies, respectively, and the three interconnect with standard "alternating current," or AC, lines. But Texas has its own energy grid -- even though that grid doesn't conform exactly to the geographic boundaries of the state. El Paso, for example, is part of the Western Interconnection.

Texas ended up with its own grid mostly as a result of geography and regulatory preferences, experts say.

"Geographic boundaries prevent things," said Ross Baldick, professor emeritus in the Chandra Family Department of Electrical and Computer Engineering at The University of Texas at Austin, and a Fellow of the Institute of Electrical and Electronics Engineers. Mountain ranges are a good example, and Baldick said "the Rockies were a natural barrier to the Western US," effectively cutting off Texas from the Western Interconnection. 

Politics came into play in terms of reluctance to connect to the Eastern grid. ERCOT itself was formed in the early 1970s, largely with a goal of remaining out of reach of federal regulators -- specifically the Federal Energy Regulatory Commission. That agency is tasked with regulating electric transmission between states, and Texas -- notorious for being independently minded -- didn't necessarily want to be subjected to federal oversight.

"If you connect with standard alternating current lines across state lines, the constitutional implication is that the trade of electricity becomes subject to the interstate commerce clause" of the US Constitution, meaning federal oversight, Baldick said. "An important issue to some Texans is not being under federal jurisdiction, meaning that Texas did not want to interconnect and be deemed to be under federal jurisdiction, and therefore have wholesale trade subject to the feds."

As such, a combination of geographic and political barriers led to Texas developing and maintaining its own grid. 

President Lyndon Johnson played a part in Texas' electrical history, Baldick said. Johnson was a native of the Texas Hill Country, growing up when it was a rural and remote area in the central part of the state. It was a region that "lagged behind in electrification, and one of the significant legislative achievements of LBJ was rural electrification," Baldick said.

Many people in the area, mostly women, spent hours hauling water out of wells and bringing it back to homes, Baldick said, and Johnson made it a point to bring electricity to the area, which allowed for electric pumps. It also allowed for rural electric co-ops to form, other electric utilities to develop, and for further electrification around the state to grow. 

ERCOT and deregulation

While ERCOT is its own electric grid, it's still connected to the others. It's connected to the grid in Mexico, for instance, and has a couple of connections to the Eastern Interconnection. This allows for transmission during times when the grid is stressed. In 2011, for instance, ERCOT actually imported electricity from Mexico.

The deregulation of Texas' energy market was another critical junction in bringing it to where it is today. 

The market was deregulated in two parts: The wholesale generation market in 1995, and the retail market in 1999. Accordingly, there is wholesale and retail competition, Baldick said. He added that, "in a good deal of Texas, there are multiple competing retailers" to choose from.

Solar panels in a flat area of Texas.

Solar energy is a fast-growing market in Texas, which produces more clean energy than any other state. 

Jordan Vonderhaar/Bloomberg via Getty Images

How does the Texas deregulated electricity market work?

The Texas electricity market functions more or less like deregulated power markets in other states. There are companies or entities that actually generate electricity and other companies that bring it to communities, businesses, and homes -- suppliers. The idea behind the deregulated market is to spur competition and give consumers a choice as to a supplier and hopefully, to get the best deal.

As such, many households in Texas can choose their energy supplier, but not all have the ability if there's only one supplier in their area. There are some parts of the state, too, which are not deregulated, and are serviced by a single utility company.

But for people who do have a choice, there is a huge list of potential suppliers. In order to choose one, you can compare the "plans" offered by different suppliers in their area -- similar to choosing a cell phone plan, in some respects -- and then contact the one you choose to start service. Assuming a household isn't tied into a contract of any type, they could expect a switch over from their old provider to their new one more or less automatically, as coordination of stopping the previous service and starting with a new provider occurs on the back end. 

For many Texas residents, the process can be completed online.

How does Texas generate electricity?

Perhaps the most surprising thing about Texas' overall energy profile is that it produces a huge amount of power from renewable sources. It's the leading producer of wind power in the US, and is second in solar power production -- largely due to its geography. West Texas is windy and sparsely populated relative to the eastern part of the state, making it ideal for wind farms.

And ERCOT, along with the deregulated power market, also makes it relatively easy for almost anyone to connect to the grid and supply power. 

Data from the Energy Information Administration show that non-hydroelectric renewables (wind and solar, mostly) account for the second-largest source of electricity production in the state, as of summer 2023. However, most of the state's electricity production is sourced from natural gas-fired power plants. Coal-fired power plants are the third largest source, and nuclear plants are fourth. So, while renewable energy is a critical component of Texas' overall electricity market and profile, natural gas is the leading generation source.