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Texas Power Grid Failure: Wrinkling the energy transition dream [free access]

March 11, 2021

A major power blackout, which started on February 10, 2021 and is still ongoing in some counties in Texas, US, has left millions of people without electricity and has plunged the state into crisis. As the energy-rich Texas plunged into darkness, putting lives at stake and electricity supply at the mercy of the free market, it has raised serious questions about the reliability of the grid.

 

Due to a rare and brutal blast of winter weather, blackouts occurred across Texas as the unprecedented winter storm ‘Uri’ hit the state in February. With temperatures plunging below freezing levels, natural gas froze up at the wells, in the pipes and at generating plants, and unweatherised windmills were knocked off, cutting off the energy sources on which the state relies for its power supply.

 

Part of the reason for the blackout is the free market mechanism governing the state of Texas. The drawbacks of Texas’ self-enclosed grid, cut off from interstate commerce, were clearly reflected when power demand increased significantly during the storm and power supply could not catch up with it. Since Texas is disconnected from the rest of the country, reserves could also not be imported.

 

Market structure

In 1996, the Federal Energy Regulatory Commission (FERC) issued Order 888—which was an introduction to open access reforms—requiring transmission providers to amend their Open Access Transmission Tariffs (OATT) explicitly to allow voluntary reassignment of all or part of a holder's firm point-to-point transmission capacity rights to any eligible customer, subject to a price cap. The Order was introduced in an attempt to allow states to restructure their electric power industries to promote more competition.

 

Some states, primarily in the southeast and the west, maintained the vertically integrated structure. The rest of the nation moved to a market structure in which generators compete to sell their electricity. Regions created new independent organisations—known as independent system operators (ISOs) or regional transmission operators (RTOs)—to regulate the flow of power in the grid. In particular, Texas is managed by the non-profit Electric Reliability Council of Texas (ERCOT). Under the free market regulation, generators compete to sell their electricity and market monitors—such as Potomac Economics (independent market monitor for the wholesale electricity markets operated by ERCOT)—ensure that generators follow the rules. This approach created power markets that prioritise generating electricity at the lowest possible price, which meant that power generators could now offer their electricity, typically at a particular price each hour, on exchanges run by market operators such as ERCOT.

 

Furthermore, the Texas grid is independent from the country’s two other electrical grids that cover the eastern and western US. Most of Texas’ power supply is connected to a grid entirely within state lines and it has limited connections to other grids. The only connections the Texas grid has to outside grids are ties to the eastern power grid and the power grid in Mexico. However, those ties only allow for transfers of small amounts of power. 

 

Texas has a predominantly independent grid because of its response to the 1935 Federal Power Act, which gave the federal government the authority to regulate power companies that engaged in interstate commerce. Thereby, the Texas power companies agreed not to sell power outside of Texas, which enabled them to avoid federal regulation.

 

Cause and impact of the recent crisis

The recent power crisis has its roots in the free-market mechanism governing the Texas power grid. It is primarily the market operators, such as ERCOT, which figure out how much electricity is needed across the regions they serve and choose the lowest-cost bidders to supply it. If a generating company is not selected, it loses the opportunity to sell its electricity during that hour, failing to create revenue for its power plants, fuel and workers. Thus, generators have an incentive to bid as low as possible and sell as much electricity as possible. Owing to this principle, generators do not have much incentive to invest in advanced technologies, such as winterisation of equipment, as this would drive up costs, which may force the generator to submit higher-priced offers in the market and potentially lose out on opportunities to sell its electricity.

 

This is largely why hardly any investment was made in Texas towards winterisation of equipment, such as the natural gas pipelines. In fact, following a cold wave in 2011, which also led to severe power shortages, federal regulators had identified options for winterising the Texas power system; however, ERCOT did not make it mandatory for the energy companies to carry them out. It is evident that the plant operators did not heed the lessons from the 2011 crisis, slowly pushing Texas towards the recent crisis.

 

In addition, the lack of appropriate transmission infrastructure both across Texas and inter-regionally meant reserves could not be imported into the state when demand spiked during the winter storm, leading to continued blackouts instead of outages on a rolling basis.

 

The staggering imbalance between Texas’s energy supply and demand caused prices to skyrocket from about USD20 per MWh to about USD9,000 per MWh in the state’s freewheeling wholesale power market.

Apart from this, the blackout resulted in many fatalities across the state and businesses being heavily impacted as power could not be supplied to essential facilities such as hospitals, factories, etc.

 

Aftermath of the blackout

Initially, the Governor of Texas blamed the shutting off of renewable sources of energy (wind and solar) for causing the power grid failure, though the speculations were put to rest when industry data and expert opinions later made it evident that the state’s dominant energy source, natural gas, provided drastically less energy than expected.

 

According to an ERCOT official, more than half of ERCOT’s winter generating capacity, largely powered by natural gas (about 45 GW), was offline due to the storm. It is estimated that about 80 per cent of the grid’s capacity, or 67 GW, could be generated by natural gas, coal and some nuclear power. Only 7 per cent of ERCOT’s forecasted winter capacity, or 6 GW, was expected to come from various wind power sources across the state.

 

ERCOT disclosed that about 16 GW of renewable energy generation, mostly wind generation, and 30 GW of thermal sources, which includes gas, coal and nuclear energy, was offline.

 

The financial consequences for energy players in the state are only beginning to come into focus. Electricity retailers have requested Texas' power regulator—Public Utility Commission (PUC)—to suspend immediate collections on the massive bills issued by ERCOT arising from the state’s electricity outage, as energy market participants are trying to mitigate the threat to their financial health. The invoices issued by ERCOT almost plunged the state's largest electricity cooperative—Brazos Electric Power Cooperative Inc—into bankruptcy and are threatening the finances of many stakeholders such as municipal power authorities, energy retailers and cooperatives.

 

Moreover, disputes between ERCOT and power buyers have surfaced over the bills issued by the grid operator to these companies. Some electricity buyers have made it clear that they are unwilling to provide the requested payments while waiting for the disputes to be resolved.

 

Amid the chaos, a filing by Potomac Economics—the independent market monitor for the PUC of Texas—has revealed that ERCOT had kept the market prices for power at very high levels for more than a day after widespread outages ended late on February 17, 2021. ERCOT is believed to have made a USD16 billion pricing error in the week of the winter storm. In order to comply with the Commission Order, the pricing intervention that raised prices to value of lost load (VOLL) should have ended immediately on February 17, 2021. However, the PUC unanimously vetoed a request to cut about USD16 billion from state power charges during the final day of the February crisis, stating that even a partial repricing could have unintended effects on stakeholders such as a cooperative or maybe an entire city. The PUC clarified that decisions were made about these prices in real time, based on information that was available to all market participants and the effects of undoing the decision made could be dangerous, with unknown consequences.

 

Meanwhile, counties such as Harris County have directly blamed the PUC of Texas for failing to heed winterisation warnings outlined by FERC in 2011. The Commissioner of the County has also indicated that Harris County could move away from ERCOT to a new power grid system.

 

The way forward

The Texas blackout has sparked widespread debates and raised concern over climate change and the need to explore ways in which energy transition can be appropriately implemented. The immediate need to strengthen the grid and establish an extensive high voltage transmission network across Texas has been duly recognised.

 

In general, the electric grid regulators have opined that Texas will have to develop vast supplies of power storage, such as energy storage batteries, which could compensate for weather-related spikes in demand. Moreover, as technology is progressing, the costs of utility-scale battery storage are dropping, making it commercially viable.

Furthermore, discussions are also underway to enable a more robust winterisation programme and strategy in Texas to protect the power generation and transmission equipment from failing to respond in emergency situations as the temperature dips.

 

Most importantly, the loophole in the deregulated Texas power market needs to be fixed, wherein power producers can reap the benefits of supplying electricity to Texas customers, but they are not required to supply power during a lengthy emergency and also face no penalties for it.

 

Furthermore, the Texas grid needs to be strengthened so that it can withstand adverse weather conditions and avoid such catastrophic power failures in the future.