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.
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.
Not sure they learned the lesson from the last time this happened or maybe have not implemented a process to fix it. Last time, the Gas Company was shutting gas off to power plants because households have priority and in many cases did not know they were shutting off gas to the plants.
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