A little while back it got really cold here in Texas. While the situation in Lubbock was not as apocalyptic as it was in places like Austin, it was still a crazy aberration in Texas weather—the kind of crazy aberration that will become more and more our reality as our climate continues to change. Folks in other parts of the state were without electricity and water for days. It was a scary scene for many of our friends and family members.
Wanting to understand more deeply the quirks of the only independent electrical grid in the country, Travis sat down with TTUP author Andy Bowman, who is CEO of Jupiter Power and Austin resident. Andy is the author of the upcoming The West Texas Power Plant that Saved the World and has had many dealings with the Electric Reliability Council of Texas, which we know as ERCOT. Travis and Andy talked about what exactly happened, who’s responsible, and how to fix it.
Sheesh, man. Are you and your family thawed out down there in Austin? What was your experience of this madness?
Thankfully for us we did not have it too bad. We only lost power and water for about half a day. This said, we had friends all over town who were dealing with days without power, near freezing temperatures inside, and then burst pipes when things finally thawed. I’m not sure why our neighborhood was spared; it likely had to do with being on the same circuit as the fire station down the street.
Okay. So. What happened? Can you talk a bit about why the Texas power grid was particularly vulnerable to extreme winter weather? I know that certain politicians rushed onto Fox News to blame frozen wind turbines, but of course pretty much all forms of energy in Texas experienced some sort of failure, with natural gas being the main culprit. I know that these same certain politicians are now eager to wag fingers at ERCOT administrators. Is that fair?
There were two things that went wrong that week, one of them really simple and the other really complicated.
The simple thing was the weather: Forecasts the prior week had underestimated the severity of the polar vortex, and so starting late Sunday night temperatures dropped much more quickly than expected and started to affect power plants much worse than expected too. As single-digit temps rolled into the Panhandle and on south, power plants started to fail in its path. Thermal plants (coal, gas, and nuclear) are extremely complex machines with pipes of different fluids all over, and unlike Minnesota or New York where it is cold all the time, in Texas many plant owners had decided it wasn’t going to be cold frequently enough to justify paying to insulate all those pipes. It didn’t help that the cold temperature also interrupted some natural gas pipeline flows that brought gas to the power plants, so if they weren’t off-line already due to cold, they might not have had fuel to burn.
Many wind plants went off-line too, mostly for the same reason that took the thermal plants off: complex hydraulic systems frozen by the extreme cold, since most wind plant owners had also made the call that it didn’t pay to install the kind of cold-weather insulation that North Dakota turbines have. Waves of freezing rain also grounded wind turbines for a time by icing the blades, and snow covered solar panels, blinding them to their fuel source.
The result of all this was a rapid collapse in generation, which ERCOT had to match as quickly as possible with an equivalent reduction in electricity users, else the whole grid come crashing down—and voila, millions of homes lost power late Sunday night. ERCOT needed about 75 gigawatts of power to meet demand last week, but due to all these generator outages, only about 45 gigawatts of generation were available.
The second crisis, which has really only just started to unfold, has a more complex backstory. This crisis is the financial one afflicting a vast array of businesses that provide us Texans our electricity. In a nutshell, extraordinarily high wholesale power prices wreaked havoc from the Friday before the freeze straight through to the next Friday. A large number of power companies had to pay extremely high prices for power from wholesale markets, which they in turn then sold to their customers at much lower, fixed rates. A large number of generators also suffered massive losses, arising out of their failure to deliver power they couldn’t generate to their wholesale customers under power supply contracts. Several natural gas companies faced similar situations—they had obligations to deliver natural gas that their frozen pipelines couldn’t deliver, so they owed their customers sky high default payments as well.
The outline of the sum of all these damages is staggering. Yesterday (Friday, February 26) ERCOT scrambled to cover more than $2 billion in payments it owed various companies from the terrible week before, but because so many parties were defaulting on their payments into ERCOT, ERCOT had to rob from another pot of funds set aside from other transactions. Required payments for the coming week are expected to be very large also, raising serious questions about ERCOT’s liquidity, a real doomsday scenario. Publicly traded generation owners have released market warnings of losses arising out of deep freeze totaling billions, and a single natural gas company, Atmos, may face billions in losses. On top of all this, a long list of energy retailers is likely facing bankruptcy.
How could losses this large occur in one of the country’s most innovative power markets over just a few days’ time? The answer lies in ERCOT’s unique market design. ERCOT uses what is called an “energy only” system, which is a market with no special feature ensuring a means of supporting backup power plants being built. Every other grid in the US has energy markets as well as what are called “capacity markets” that are designed to support power plants with the capacity to generate extra power when needed. The “energy only” approach has been a cornerstone of the PUC’s (Public Utility Commission) orthodoxy on market design for decades, and it endured even after the 2011 polar vortex that was more or less a trial run for what we saw occur last week—brutally cold temperatures pulling large numbers of generators off-line, resulting in rolling blackouts—and the awful 2011 summer that followed it, the hottest and driest on record since the 1950s also resulting in rolling blackouts.
In the aftermath of these dual 2011 crises, the PUC debated in 2012 introducing a capacity market, and the idea started to gain momentum. However, one commissioner was dead set against the idea and when he politicized the question by casting capacity payments as “an energy tax,” the other commissioners more or less conceded defeat—what Republican-appointed commissioner could sign on to a “tax”? This turned out to be the pivotal moment in the whole saga, perhaps the one to which most of today’s financial wreckage can be traced. In order to somehow produce the results of a capacity market system—adequate backup generation being financed and built—without utilizing a capacity market, the commissioners instead went all in on a very odd approach to the problem: they decided to dramatically raise the cap on market prices.
Power prices in ERCOT are set essentially by an auction, allowing supply and demand to settle the price, but occasionally in times of scarce supply prices go higher, up to a cap. Prior to 2011 the cap had been $1,500 per megawatt hour, but in the wake of 2011 the commissioners and their consultants settled on the idea that if you set the price cap high enough, then generators would be able to get all the power plants we could ever want built. How high is high enough to achieve this? Power in ERCOT normally settles in a very cheap range of say $25–$35 per megawatt hour, and clearly a $1,500 cap wasn’t getting the job done. The commission raised the cap to $3,000 per megawatt hour in 2012, then to $4,500, and finally up to $9,000 where it is today.
The idea with this new approach was that if you create a situation where generators could make an absolute killing every time the markets were short of power by charging 360 times the normal price for power then you would ensure that enough power plants can get financed that you would . . . prevent power shortages from ever happening. But this circular reasoning was obviously flawed. Even reading it now, it’s hard to understand how they thought this system would actually succeed, and of course, it hasn’t. As last week showed, this market design was an utter failure. It completely failed to attract the generation needed to address power shortages, but wildly succeeded at creating a massive financial wrecking ball that is now tearing through the Texas electricity industry, the vast majority of which are companies that participated in Texas’s market in good faith making investments and delivering services to keep Texans’ lights on every day.
While the crisis of the blackouts last week could have been prevented by the legislature requiring winterization of power plant infrastructure and a good enforcement system, in my view there was likely nothing that could save us from the eventual implosion of the $9,000 per megawatt hour market design. Its fiery destruction was inevitable—the only question being, when would Texas’s electricity grid, endemically short of power during summers and many winters too, finally come up short for an extended period, exposing consumers and generators to the obscene $9,000 per hour price for days in a row during their time of greatest need. Unfortunately, it isn’t only bad in the rearview mirror; to the extent the PUC and legislators allow it to remain in place now, it is essentially a ticking time bomb waiting to go off again. We could see similar conditions occurring as soon as this summer if it turns out to be really hot and we see a rapid growth in energy demand from a robust COVID recovery.
I wonder what you think of our deregulated power grid in general. It does seem to make us more vulnerable to extreme events such as these, but at the same time, is it easier for energy upstarts in Texas than it would be anywhere else? From my own experience, I’ve had it both ways as a consumer. When I lived in Waco, I was able to shop around for my power and buy it from a company that did all renewables. I was willing to pay a bit more for that. I’ve also lived in San Antonio and Lubbock, where all the power is provided by the municipal power plant. So I’ve had a few different flavors of Texas power. As an energy entrepreneur, do any advantages outweigh the dangers?
As someone who has worked to advance renewable generation in each of the different grids around the country over the last 25 years, I can say without hesitation that ERCOT is the best in most ways that matter. The technical and administrative people are top rate, the rules are applied in a transparent and evenhanded way, and the rulemaking system is open to participants to share their points of view on the matters of most importance. Other grids I work in, such as Southwest Power Pool and the Southeastern Electric Reliability Council, can be plagued by overreach by the incumbent utilities, bureaucracy, and provincialism in general. So ERCOT is my favorite place to work from this perspective.
From a consumer point of view, I am at a bit of a disadvantage because as an Austin resident for nearly all of my adult life, I have not participated in retail deregulation. We have one choice here in the People’s Republic of Austin, Austin Energy. And they do a great job—they have consistently pushed the envelope on renewable energy and provide quality service and competitive prices. So my view into exactly how consumers do in deregulated Texas is not crystal clear.
All this said, the consequences of the disastrous market design I describe above are impossible to overlook. One of my best friends started a retail utility a couple years ago, and his business has suffered terribly through the last couple weeks. As the true scale of financial destruction from the deep freeze becomes clear, it is not obvious how people will remap our power business to deliver cheap, reliable power again. We need real change and I worry about politics getting in the way of a high-quality solution since the timing of this disaster has ensured that political hacks in the legislature may see an opportunity to grandstand rather than make sound policy.
I want to ask you to do some amateur political forecasting. Are there any tangible improvements to the grid that the Texas legislature can demand of ERCOT and then actually follow through on? What would increased oversight look like besides roping executives in for hearings? I’m going to go ahead and assume that there’s no political will to join up with national grids, but what do you think? Any possibility of big changes?
I do not see this as a situation of the legislature demanding action from ERCOT to address what has happened but rather the people demanding a robust set of reforms from the legislature and from the governor through the PUC. In my view, ERCOT made errors but also was hamstrung in taking the kinds of action warranted; there is blame to go around to the PUC and the legislature, and they are being disingenuous to the extent they are trying to depict ERCOT as the only party holding the bag here.
The national news has described the crisis as a Texas problem, but the real facts are that our neighboring grids to the north and east had significant power shortages also. Places like Oklahoma and Mississippi were short as well and didn’t have much extra to send us, even if there were more connections. We’ll need to see more analysis of the details, but based on the picture to date, not just Texas needs to be looking at making some changes to how weather extremes are going to be handled in the future.
Part of the problem will come down to economics: ultimately it is we ratepayers who will bear the cost of weatherization of power infrastructure, and there will be judgment calls about how much protection to require. In 2014, a polar vortex descended on the Pennsylvania area and it was accompanied by blackouts, power market mayhem, and dangerous conditions for residents. That happened in an area already prepared for colder weather and fully under federal jurisdiction, but it was not enough to prevent pretty terrible consequences.
The real concern I have going forward is that the events of the last two weeks take our eye off the ball of what is our real problem: not extreme cold events from polar vortexes but extreme heat events. Just like the cold temperatures put our power plants outside their range of operation this year and in 2011, in summer 2011 we saw extraordinary, prolonged heat bring power plants down in surprising ways. For instance, some cooling lakes used to maintain the power plants in safe conditions became so super-heated that they were too hot to effectively cool down equipment. Other plants saw lake levels fall below the levels of the intake pipes. Air-cooled plants were unable to get cool when ambient temperatures did not fall below 90 degrees even at night. We seem to forget what we saw that summer, but that is the most likely next crisis, not just in Texas but in places like New York and the Midwest, where plants are much less prepared for those temperatures. There are terrible costs for human health to losing power in extreme heat just like there are in extreme cold. Such are the worries we face as we barrel on into the acceleration changes to climate we are seeing.
Finally, the most important question of all. We escaped major blackouts up here because Lubbock is not on the Texas grid, but Lubbock Power & Light is scheduled to join ERCOT this summer. Should we still do it?
I am a big fan of ERCOT at the end of the day, especially up against the Southwest Power Pool, and I am in support of LP&L joining ERCOT. I have a great deal of faith that we will come up with the right solutions to the crisis of the last two weeks and that ERCOT will emerge better and more resilient than it was before. So, yes, hold course, and we can’t wait to have Lubbock in the house!