What Happened In Texas?

A glimpse into the failures of electricity grid design and extreme weather planning.

by Bahi Kandavel

The rolling power blackouts that recently occurred in the state of Texas were not without precedent, yet the damage was far greater than the state could have anticipated: 4.5M electricity customers without power, 110 deaths, 33% of homes and businesses without electricity, 48% of generation offline, and electricity spot rates hitting the cap of $9,000 per megawatt hour (MWh). While a similar event occurred in 2011 and plant operators created a set of best practices for winterizing equipment, these were voluntary recommendations that were largely not implemented. And as a result of COVID-19, ERCOT – the state-supervised operator and de facto clearinghouse for wholesale power in Texas – did not thoroughly inspect natural gas and coal plants for winterization.

Previous bouts of freezing weather led to blackouts at least seven times between 1983 and 2011. Policymakers in Texas have long had to grapple between the tradeoff involved in winterizing the grid against rare winter outages and low rates. The preference for low rates has historically prevailed, but with the latest blackout things may be about to change.

Early on the rhetoric coming from certain corners was that renewables were to blame, but power sector experts have dismissed that notion. Even with wind and solar down, the lack of natural gas supply made it near impossible to meet the electricity demand. Grid operators were responding to a peak demand of 69,150 MW – much higher than the projected peak of 57,699 MW for the winter season and higher than the previous record of 67,915 MW set in January 2018. ERCOT had an extreme outage scenario of 13,953 MW of thermal (natural gas, coal and nuclear) outages which was doubled in this situation.

Thus, the main story is the failure of thermal power plans due to a failure of winterization. Typically, colder climate generators invest in various de-icing measures and protective infrastructure, but Texas decision makers opted to overlook these in favor of lower costs to end customers.

Headlines were made by a company called Griddy Energy which sent massive bills to customers and was even accused of price gouging. Griddy passed wholesale electricity rates directly to customers instead of fixed-rate electricity plans that offer a consistent rate regardless of market conditions. They represent just 0.6% of the market but were singled out by ERCOT and had their ability to conduct activity in the market revoked. As a result, they were forced to power down. Then there was Brazos Electric Power Cooperative, the largest and oldest wholesale power firm in Texas, which filed for bankruptcy due to a $1.8B bill owed to ERCOT.

The core issue is that of grid design. Greater resiliency is needed in the grid. Perhaps the entire fleet does not need to be winterized, but a certain portion does. Credit must be given to the ERCOT staff who did an incredible job ensuring the integrity of the grid, avoiding long-term blackouts or infrastructure damage.

Municipalities and co-operatives that were not well-hedged experienced the most economic damage. Hedge mandates and public assistance will likely be instituted because of this incident. Hedge mandates will naturally create opportunities for power traders who are needed to provide liquidity, and investors will be drawn to ERCOT to help facilitate the upgrades needed for infrastructure. Most notably, Warren Buffett’s Berkshire Hathaway has put forth an $8.3B plan that would bring online 10 GW of gas plants and emergency gas storage. These developments should bring better liquidity to ERCOT, greater capital requirements (infrastructure, winterization) and an increased reliance on the forward curve to value investments.

The key will be balancing reliability while not overspending, which is complicated by climate change. Record-breaking heat waves in California resulted in load spikes along with lower-than-expected generation and constrained imports, triggering rolling blackouts. Weather-related power outages are increasing across the US, as are more extreme storms and temperature swings. Planning based on historic events will simply not be good enough going forward.

Bahi Kandavel is Founder and Trading Director at Northstar Trading, and serves on the Advisory Council for Tamils in Finance.

This article is re-published from the March 2021 issue of “Street Talk”, TiF’s flagship publication. Interested in writing for us? Click here for our submission guidelines.