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Cold comfort in Texas

The situation in Texas last week was a shock to everybody, but especially those of us who are involved with the electric power industry in one way or another. The press and politicians have identified a number of reasons why things went so badly wrong; all of them are in one sense true. However, I believe there are two primary reasons why the outages happened; I’ll discuss one in this post and the second in (hopefully) my next post.

First, I’ll mention three “also ran” reasons. Each of these derives from one of the primary reasons.

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1.      ERCOT failed to plan adequately. Of course, a statement like that is always 100% accurate after the fact, because it’s essentially a tautology: An outage happened. Planning happened beforehand. Therefore the planning failed.

2.      The real substance behind the failure to plan reason is that there wasn’t enough backup generation available. But in this case, even more backup wouldn’t necessarily have done any good, since so many plants were disabled anyway. Just having a few more plants that couldn’t generate power when needed obviously wouldn’t have saved the day in Texas.

3.      The primary power generation fuel in Texas, natural gas, is the least resilient in cold weather, because of the huge, exposed infrastructure required to get the gas from wellhead to power plant. So even if the gas-fired generation plants had all been working perfectly, they wouldn’t have been able to generate enough power because the fuel couldn’t get to them.

But the reason behind all three of the above reasons is that Texas trusted the markets too much and went way too far in deregulation. The theory of deregulation is that the possibility of making big gains in periods of stress will cause generators to invest what they need to be able to take advantage of the high prices that come with that stress.

Of course, competition works fine in normal circumstances, as long as you have a large enough number of independent suppliers in the market. Each supplier is incented to produce as much power as they can, since no single supplier can dictate the price they’ll receive. If they feel the current price is too low, they can stop producing altogether, or they can take a chance on pricing themselves above the market, on the hope that there will be certain market imperfections that allow them to get away with a higher price. But in the end, absent some long term imperfections, they won’t be able to sustain a higher price.

On the other hand, if enough suppliers stop producing and supply is constrained at least temporarily, the price will move back up until once again there is enough supply to meet demand.

But as we know, when the cold weather hit Texas last week, lots of suppliers stopped producing, for one of two reasons:

1.      Their own equipment had been frozen or otherwise negatively impacted; or

2.      In the case of many natural gas generators, they could have kept running if they’d had a good gas supply available. But they didn’t, because of wellhead and pipeline equipment that froze.

As a result of these outages, prices spiked to astronomical levels (as they were intended to do), but this didn’t bring forth a flood of new supply – it simply wasn’t there. So while some people suffered terribly because of lack of power, many of the “lucky” people whose power had remained on didn’t feel so lucky when they opened their power bills to find costs in the thousands of dollars.

You might think this situation would cause the people who designed the deregulated system to admit there was a problem. However, the main architect of this system, Dr. William Hogan of Harvard, said a few days ago “As you get closer and closer to the bare minimum (of production, meaning more and more generators are failing), these prices get higher and higher, which is what you want.”

I have to admit, I’m not sure I could find a better example of an academic so wrapped up in his ideas that he has lost all connection with reality. It’s crystal clear that the higher prices wouldn’t solve the immediate problem at all – the needed generation just wasn’t there, period. What he presumably had in mind (if anything) was that the high prices will make a lot of generators and would-be generators sit up and take notice, so that the next day they’ll visit their bankers and ask for money to expand their capacity. But this ignores a few bracing realities:

1.      These high prices, unlike the not-quite-as-high prices in previous cold weather outages like 2011, are unlikely to stick. There is so much outcry that they’ll be at least partially rolled back. The generators will be forced to swallow this, even though there’s probably no way that can be done legally. This will have the opposite effect on any ideas they might have of expanding.

2.      These cold weather events are very infrequent. Who knows? What Texas just went through might be the worst such event in the next 50 years. How can you plan on such a rare occurrence?

3.      And even if Texas gets more events like this one, what’s to say the same thing won’t happen – that lots of plants will be disabled, so they can’t take advantage of the high prices anyway? In fact, that’s close to certain, unless the new plants are winterized much more than the current ones were. That might get them through the spike, but then you face Problem 1: Who says the high prices will be allowed to stand?

Almost all states have deregulated generation to some degree, but Texas stands out in the degree to which it pushed the idea to its logical extreme. And it seems they have a Harvard professor to blame for that.

But there is an even more fundamental reason for the power grid failures. That story is coming soon to a blog near you. 

Any opinions expressed in this blog post are strictly mine and are not necessarily shared by any of the clients of Tom Alrich LLC. If you would like to comment on what you have read here, I would love to hear from you. Please email me at tom@tomalrich.com.

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Bob Meinetz's picture
Bob Meinetz on Feb 25, 2021

"Of course, competition works fine in normal circumstances, as long as you have a large enough number of independent suppliers in the market."

What "market", Tom? There never has been a free, competitive market in utility electricity, and there can't be - the end user has no free choice.

I'm sure Professor Friedman must have covered that somewhere in his lectures (?)

Tom Alrich's picture
Tom Alrich on Feb 27, 2021

Bob, the power generation market is almost completly deregulated. It started with the National Energy Policy Act of 1992. Even if a utility owns generation, it has to be in a separate unregulated subsidiary, and the utility can't buy from that subsidiary if it can get a better price from another generator.

Bob Meinetz's picture
Bob Meinetz on Mar 1, 2021

Tom, deregulation does not generate a "market" out of thin air. Just because a utility must choose the lowest price from its suppliers does that mean end consumers can suddenly choose another provider if they're being gouged. Without free choice available to the end consumer of a product or service, there is no "market".

"Even if a utility owns generation, it has to be in a separate unregulated subsidiary..."

And how would an unregulated subsidiary, with all profits flowing through to its parent holding company, qualify as an independent, separate supplier?

No doubt attorneys for Standard Oil, before the Sherman Antitrust Act, argued there was a market for oil between the multilayered trusts the company had set up to exploit customers dependent on it for their supply of fuel. They lost.

Before the Public Utility Holding Company Act of 1935 (PUHCA), utilities argued there was a market for electricity. They lost, too.

That utilities deregulated electricity in 1992, and 2005, did nothing to create a market (Enron, and the California Electricity Crisis, were a direct result).

"The theory of deregulation is that the possibility of making big gains in periods of stress will cause generators to invest what they need to be able to take advantage of the high prices that come with that stress."

Only a theory proposed by generation profiteers would expect us to believe more competition results in higher prices. More competition, and a reliable supply of electricity, is the last thing they want.

Tom Alrich's picture
Tom Alrich on Mar 2, 2021

Bob, there are regional markets for power (run by the ISO/RTO's), and they're very competitive. The utilities that are delivering the power bid for what they need - on an hourly basis sometimes - and the generators compete to provide it.

In some states, consumers can buy plans sold by providers, who may or may not be generators, that bypass their utility altogether. These are the providers in Texas that ended up paying huge bills on the spot market, and passing that along to the consumers. That's what all the $10,000 bills were - it wasn't the utilities, whose rates are regulated. These plans have not been a very good deal in Texas and in some other states.

Linda Stevens's picture
Linda Stevens on Feb 26, 2021

Thank you for this excellent article. I firmly believe there needs to be some regulation of energy and this is a great case study example of why. It reminds me of the deregulation days of Enron. 

Tom Alrich's picture
Tom Alrich on Feb 27, 2021

Thanks, Linda. Deregulation itself isn't bad, but the way Texas did it was. Power markets are deregulated in most of the country now, and they're not having the problems Texas had. See this post and the two (at least) that will follow it.

Jim Stack's picture
Jim Stack on Feb 26, 2021

Excellent article on this very rare event. Thank you for showing the FACTS so people don't jump to the wrong conclusions. This was not a normal event so it is hard to justify some of the expenses. Of course some things should be done just for normal events to make the GRID better. Micro GRIDS sound like they could be encouraged and are not a threat. Homes and businesses with solar, battery back up and even generators should be encouraged so we all have a better GRID . We all have to work together. 

Tom Alrich's picture
Tom Alrich on Feb 27, 2021

Thanks, Jim. The problem wasn't so much that Texas didn't plan for this type of event, but that that there is no mechanism which could be used to prepare for future events like this, other than high prices. And the high prices didn't help anything but the bank accounts of power producers; there's no obligation for them to prepare for future events like this, which as you say are rare. See this post and the next two (or more).

Matt Chester's picture
Matt Chester on Mar 1, 2021

but that that there is no mechanism which could be used to prepare for future events like this, other than high prices

As they say, when you only  have a hammer in your toolbox, everything starts to look like a nail...

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