The Texas Big Freeze
Could the Texas Big Freeze Happen Here?
The Valentine’s Week deep freeze in Texas was felt across the country. Not just Texas but the entire country was impacted by natural gas supply disruptions that impacted prices. The finger-pointing in the wake of the crisis saw blame leveled at generators, ERCOT (the Texas grid operator), and Texas Governor Abbott even blamed it on the not-yet-enacted (or drafted, or debated, or presented) Green New Deal. But the true blame lies squarely on a lack of preparedness, isolation, and an unwillingness to learn from mistakes of the past.
The crisis in Texas was bad. Very bad. As temperatures dropped, energy demand increased–people needed to heat their homes and businesses. In short order, peak demand went from 55,000 MW to 74,000 MW, but there was no energy supply to meet this demand. Fifty percent of power generation went offline, and there were 32,000 MW of outages. Coal piles froze; freezing rain impacted gas wells, fossil fuel generators, and wind turbines. Water lines to a nuclear power plant froze, taking it offline as well. Power lines came down leaving many without heat, which led to freezing pipes and horrific damage to homes and structures. It was a perfect storm of supply and demand—a worst case scenario.
Should Texas Have Been Prepared for This?
At the core of this crisis was the cold weather and its duration. The weather was not a surprise. Every day the National Oceanographic and Atmospheric Association (NOAA) publishes weather projections for the coming 8-14 days. In addition, utilities and the energy sector (drillers, pipelines, generators, and suppliers) all subscribe to bespoke weather services just because of the large impact weather plays on production and consumption.
Not only was the cold weather certainly predictable, in fact Texas experienced a similar (but smaller) cold weather event in 2011 that required rotating blackouts. This earlier episode prompted the Public Utility Commission of Texas (PUCT), which oversees ERCOT, to review the preparedness of the grid in the face of extreme cold weather events. In response, PUCT recommended that power plants weatherize their infrastructure although it did not make it a requirement. In Forbes, CEO of ERCOT Bill Magness said that ERCOT performs weatherization checks of some generating facilities and makes recommendations, but it does not have the ability to require the generators to implement the recommendations or penalize units that are not taking measures to guard against the cold.
Price, not regulations, were used to ensure reliability. Generators weighed the cost of weatherization against the probability of a supply disruption. A one in 10-year event would create a low probability that one generator would have to be shuttered due to weather. If one plant closes prices go up a little. A joint failure event would be assigned an even lower probability. If system reliability is not part of a generator’s criteria (and it isn’t in Texas), the system is open to these types of events. And that is exactly what regulation is for.
Could a Similar System Breakdown Happen in New England?
The answer is not “no.” During the Polar Vortex of 2013-2014, New England saw an extreme run up of energy prices in response to increasing demand and decreasing supply. In response ISO-NE, the region’s electric grid operator, implemented the Winter Reliability Program (WRP), which incentivized oil fired and dual fuel natural gas generation to procure sufficient fuel before winter began and therefore be able to burn oil during periods of peak demand.
As recently as December 2017 – January 2018, the WRP nearly failed when an extended stretch of extreme cold weather caused generation to bump up against EPA emission limits. In addition, supply of fuel oil was interrupted because barges could not navigate river ice and roads became dangerous for transport due to snow and ice. The cold affected natural gas well heads in Pennsylvania and caused natural gas pipeline issues. If the cold weather had lasted a little longer, New England would have seen a severe crisis.
In contrast to Texas, however, New England has not forgotten these issues, and ISO-NE continues to propose a number of solutions. One of those recent solutions involves payments to the Mystic Generating Station, the region’s largest generator, to keep it online from 2022 through 2024. Another solution is the Interim Winter Program for the winters of 2023-2024 and 2024-2025, similar to the WRP. ISO-NE is also pursuing more permanent solutions for beyond 2024 to improve fuel security for power generators. These solutions will need vetting by FERC, and in fact, the first version of the fuel security program has already been rejected.
In another contrast to Texas, New England’s electric grid is connected to neighboring systems, to help in crisis situations. The region can draw upon power from Canada or PJM, which covers 11 states from New Jersey to Illinois. By comparison, Texas has a closed system, not interconnected with any other region. When this crisis was occurring, they could not seek any outside assistance. ISO-NE also has the power to penalize generators who do not perform as required.
New England could also never see the price increases experienced in Texas. During this event, the maximum wholesale energy price of $9,000/MWh was reached. As a gauge of the price impact to generators, many of which needed to purchase back up power at those exorbitant costs, Texas’s largest electricity cooperative Brazos Electricity Cooperative filed for bankruptcy after receiving a $1.8 billion dollar bill from ERCOT. In addition, residential and business customers that were on wholesale market products were subjected to those charges, and there were a number of news stories of residential customers receiving bills of $10,000 and greater.
In New England, the maximum wholesale market charge is limited to $2,000/MWh, which if hit for an extended period could put businesses or residential customers who are on wholesale market products in financial jeopardy. At PowerOptions, we offer many managed risk products; for example, members can completely remove any price risk through fixed prices that do not penalize for changes in use. And when members want to take advantage of the market, PowerOptions is here to advise when the highest risks are likely to occur and how to manage those risks.
The financial consequences of the Texas Deep Freeze will alter the Texas energy market, but the real issue at hand is the risk that the state’s energy infrastructure is allowed. Instead of finger-pointing and ignoring events of the past, will they finally enact the system changes and protections that will mitigate another future episode?