Frigid temperatures in Texas last month pushed almost 4 million people into darkness as the electricity grid collapsed. This spurred debate and stirred controversy globally in the energy sector regarding the cause behind such widespread power outage. Initially, fingers were pointed at the wind turbines, whose blades froze, for causing the statewide grid outage but wind energy, during this part of the year, accounts for only around 13 percent of total electricity generation capacity.
The main reason behind the crisis was the drop in the natural gas production as the temperatures dropped. The drop in the natural gas production was largely caused by the freeze-offs, which occurs when water and liquids inside the natural gas pipelines, wells and valves freeze essentially blocking the flow of natural gas to power plants. As opposed to natural gas production in the northern states which is winterized, the infrastructure, for instance wellheads, gathering lines and processing facilities were not prepared for sub-zero temperatures.
Frigid temperatures and associated power outages are not new to Texas. Cold weather events in the Southwest prior to 2021 include 7 such events since 1983, however, 1989 was the very first time Electric Reliability Council of Texas (ERCOT) implemented system wide rolling blackouts to prevent prolonged and further widespread power outages. During all these events a decline in natural gas production was observed, but the reduction in supply to consumers in the region was limited to the years 1989, 2003 and 2011 only.
During the storm of February 2011 electrical entities of the region did not anticipate problems in meeting consumer demand as they had reserve margins, but the reserves did not prove sufficient. A study conducted by FERC and NERC found that the rolling blackouts, were mostly the result of trips, derates and failures to start. A huge amount of generation capacity was lost during the event and affected 3.2 million people. The most common cause in 2011 for power outages was due to frozen sensing lines which caused automatic unit trips.
There are as such no technological limitations when it comes to winterization of the energy sector, but it is more of a question of financial viability. The wind energy industry has the capability to design wind turbines that work in freezing temperatures where turbine blades can be designed to operate in sub-zero temperatures. Turbine blades can be heated, anti-freeze fluids can be employed followed by greater insulation of gear boxes. A variety of anti-icing technologies can also prevent the buildup of ice on turbine blades, detect ice when it can’t be prevented and remove ice safely.
But winterization did not make much financial sense to the electricity companies in Texas as it doesn’t experience such low temperatures as regularly as in the Upper Midwestern U.S., Canada and Northern Europe.
Timeline of events
During the weekend of February 13-14, the temperature dropped more than what ERCOT estimated and as demand for electricity hit a record, the utility had to implement rolling power outages starting early morning Monday, February 15th. Temperatures in Texas averaged 30 degrees Fahrenheit lower than the normal during.
On Tuesday, 16 GW of renewables went down, including generation from wind, and 30 GW was lost from thermal sources including coal, gas and nuclear. By Wednesday 46 GW of total electricity generation was offline with 28 GW of thermal and 18 GW of renewable.
As the demand soared and regional power generators crashed, the frequency of the system also started to drop from the normal 60 Hz to 59.3 Hz. Had the system frequency’s fallen below 59 Hz, the state’s electrical system would have suffered from cascading blackouts which would have lasted for weeks or months and could have caused physical damage to equipment. This would have been much more difficult to recover so to protect the system, load was deliberately shed by the system operator.
Figure 1: Rapid decrease in generation plotted against frequency and time. Source: ERCOT
Energy profile of Texas
Texas is the leading energy producing state of U.S. holding around 23% of nation’s natural gas resources. As per the Energy Information Administration (EIA), in 2018, Texas produced 9,578 trillion Btu of natural gas followed by 9,181 trillion Btu of crude oil production and 431 trillion Btu of nuclear electric power. Where coal production stood at 329 trillion Btu.
When it comes to energy consumption, Texas’ natural gas consumption stood at 4,597 trillion Btu which is nearly half of what it produced that year. Excess natural gas is exported to other states and neighboring Mexico.
As per data released by EIA regarding Texas electricity generation by source (November 2020), natural gas fired plants produced 15,425 thousand MWh of electricity, Non-hydroelectric renewable plants produced 8,913 MWh of electricity followed by coal fired generation and nuclear fired generation.
Decline in the natural gas production
As per the EIA, during the recent cold snap, U.S. dry natural gas production declined to as low as 69 Billion cubic feet (Bcf) per day on February 17, a decline of 21% compared to the previous week. In the case of natural gas, production in Texas dropped almost 45%, from 21.3. Bcf/d to a daily low of 11.8 Bcf/d for the same time period.
Although natural gas production started to increase as temperatures increased, the decline in supply triggered a drastic spike in the henry hub natural gas spot prices which rose from 2-3 USD per MMBTU to 6.118 USD per MMBTU for 16th February flows.
Cheyenne Hub natural gas spot price rose to 176.141 USD per MMBTU for 16th February flows. Waha Hub natural gas spot price rose to 157.714 USD per MMBTU and SoCal Citygate natural gas spot price rose to 136.341 USD per MMBTU for the same day flows.
Daily production reached an estimated 20.9 Bcf/d on February 24 which is only about 0.3 Bcf/d lower than the average in the week ending February 13 and the Henry Hub natural gas spot price once again returned to 3 USD per MMBtu.
Figure 2: Texas natural gas production (Jan 2016 -Feb 2021) in billion cubic feet per day. Source: U.S. Energy Information Administration
Market response
During the energy situation in Texas, the Governor of Texas imposed a ban on natural gas exports until normal power supply is restored. The decision impacted Mexico the most as the country depends on U.S. gas supplies mostly from Texas. Already earlier in the week of crisis, natural gas supplies to Mexico from Texas were interrupted because of frigid temperatures pushing millions in the Mexican northern states into darkness and economic damage was estimated at 2.7 billion USD as manufacturers were forced to stop work (About 60% of electricity produced in Mexico is generated from natural gas).
Mexico, which is Texas’ largest customer of natural gas, was able to restore its electricity grid by February 17 (five days) by shifting to Liquified Natural Gas (LNG), coal and diesel to fuel power plants. It also ordered the purchase of LNG from suppliers in Texas as well. The shift from natural gas to oil is not sustainable and is likely to raise the cost of electricity in Mexico.
Wholesale electricity prices in Texas rose from 22 USD per Mwh to 9000 USD per Mwh following breakdown of generation. Not all consumers were affected by soaring electricity prices but the ones who opted for floating rate contracts, which are tied with wholesale prices of electricity, saw the price per kilowatt-hour increase from 0.02 USD to 9 USD.
Texas is a de-regularized highly competitive electricity market and the only state in U.S, which offers wholesale electricity to consumers. One such utility company is Griddy Energy which connects consumers to the wholesale electricity market for a monthly fee, which is, in most cases, automatically withdrawn from the consumer’s accounts. Following the spike in electricity prices, Griddy passed on the skyrocketing prices to their customers but many were unable to pay. ERCOT revoked Griddy’s right to conduct activity for lack of payment and the company requested all 29,000 of its customers to shift to some other utility company. Other utility companies which offer fixed rate contracts to consumers were not accepting new customers during the emergency situation which left them with no other option than to stick with Griddy. On March 1, after receiving over 400 complaints in two weeks, the Texas attorney general filed a lawsuit against Griddy for false and misleading advertising and market practices.
Wholesale market organizers in Texas are seeking more collateral from participants in a bid to protect against a potential series of defaults.
A German utility RWE had sold its expected power production from wind turbines in advance in the wholesale market, but company had to buy back power it already sold at a price 10,000 times higher than the selling price as it could not fulfill supply obligations. RWE could post a loss of 15 % of its annual operating profit forecast.
Figure 3: U.S. major power grids and regional electric reliability organizations. Source: North America Electric Reliability Corp
Looking Ahead
The recent Texas power failure has exposed the vulnerability of not just conventional power generation but renewable generation to frigid temperatures. Widespread power outage could have been avoided, had the energy sector been adequately winterized. Previously winterization was not considered necessary in a state where usually the temperatures are mild, but some utilities which made changes were less impacted this time. El Paso Electric, after the winter storm of 2011, replaced and upgraded equipment that was designed to work at a low of plus 10 degrees Fahrenheit to work at minus 10 degrees. Also, one of their power plants which was redesigned to run with either natural gas or fuel oil and was able to switch to fuel oil.
Secondly, Texas is the only U.S. state which has an independent, isolated power grid. During normal situation, Texas has energy far more than it requires so there is no need for electricity grid interconnection but during emergency situations when local energy infrastructure comes under strain electricity can be imported through interconnections with other states. But lack of these interconnections has added to the vulnerability of Texas’ electricity grid along with other contributing factors. Far Western Texas, which is connected to the Western Grid, did not see the power outages like the rest of Texas (see figure 3).
There is a great risk of a series defaults and losses stemming from the downstream distribution side to the upstream oil and gas sector. Companies such as Vistra Energy said they had a one-time adverse impact of over 900 USD million because of lack of natural gas needed to operate their power plants. These losses are likely to mar the growth in the power grid equipment market in North America and have radically reduced the fiscal space needed to finance the cost of winterization of energy sector hence government may need to incentivize the winterization as a deregulated market can’t mandate it.
However, ‘Solar coupled with battery storage’ has emerged strongly out of this energy crisis as it was able to keep the lights on in Texas despite frigid temperatures. Market of solar systems backed with battery storage is expected to observe growth in Texas where surge in the renewable energy driven by aforementioned systems may require utility companies to change their business models in the long run.
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