Playing the blame game
Reading the coverage of the devastation caused to Texas and its power grid by the recent polar vortex has been sobering and instructive. What’s clear is that many see these disasters as a chance to sharpen their knives and have a dig at whichever aspect of the system they don’t like: Renewables, fossil fuels, deregulation, poor demand forecasting, the lack of an explicit capacity market, Texas’s stubborn refusal to be electrically connected to the rest of the US – all these have been fingered as the culprit. They are all wrong, or at best only a partial explanation of what happened.
In case you’ve been avoiding media for the past couple of weeks, you can catch up on the basics of the Texas energy crisis in our previous blog on the subject. Suffice to say it was one of the most serious and large scale losses of electricity supply in a rich country in recent years.
To understand what the underlying issue really is, it’s useful to consider two concepts: resilience and governance. The resilience of a system is its ability to stand up to extreme events – mostly but not only weather. This may require very different considerations from how best to run a system in normal conditions. In particular, it’s not the kind of problem that a market can be assured of naturally solving (although markets can often deliver resilience – think of the insurance and reinsurance markets, which are designed to provide financial resilience to extreme events). This isn’t a reason not to have a market, but rather a reason to consider what regulations could augment the market to provide resilience.
In this case, the Texas electricity system lacked resilience in two ways. One is that many generators were not protected from extreme cold weather. The types of generators affected this way include wind, gas, coal and nuclear – a clear sign that explanations focussed on this or that generation type are way wide of the mark. Fundamentally, this is a sign that the revenue opportunities for being available during a very rare cold snap did not outweigh the upfront cost of “weatherising” plant to make sure it would run on these very cold days. How rare this cold snap was is debatable. A similar cold snap occurred in 2011, but in many parts of the state, the minimum temperature was more like an even colder spell in 1989 or in some cases back to 1947. In any case media coverage has largely cited 1989 and 2011 as the two points of comparison in recent history, which is supported by a technical assessment following the 2011 event. That’s two times in the last 40 years, which is a pretty rare revenue opportunity. In other words, it makes more sense to think of the lack of weatherisation not as a market failure, but as the kind of resilience that is not likely to be delivered by the market alone.
This is evidenced by the fact that after the 2011 event, ERCOT, the market operator for Texas recommended weatherisation and reviewed companies’ plans and actions, but there was no mandatory requirement. If ERCOT didn’t think it needed to (or wasn’t empowered to) insist on weatherisation, then a capacity market or a different generation mix would have made no difference.
The second element of the lack of resilience was that even if the gas generators were all winterized and ready to run, they couldn’t all get fuel. The Texan gas system runs largely on a just-in-time basis, given that most gas is sourced in-state and there is normally scope to ramp up production quickly in response to increased demand. But as with the power sector, a lot of the gas infrastructure froze up and gas flows were significantly down. At the same time, demand for gas for residential heating skyrocketed, and this use is given priority (side note for climate warriors who think this “proves” Texas shouldn’t be using so much gas-powered generation – under a decarbonisation scenario, this heating load would all be electrified and so the demand spike would need to be solved for the electricity system – in other words it just moves the problem around).
This brings us round to the second point – governance. ERCOT has no jurisdiction over the natural gas industry or its infrastructure. This is regulated (lightly, of course, it’s Texas after all) by the Railroad Commission of Texas (RRC, which, by the by, no longer regulates the rail sector…). In other words, it’s a systems issue, covering areas under the jurisdiction of multiple regulators (you could add in housing design and water supply as other areas to consider), and so the buck has to stop with the state government. It’s there that the trade-offs of incurring extra costs in different sectors of the economy against protecting Texans from the impact of extreme weather need to be debated and decided. And it’s the government that needs to follow through on the outcomes, even if specific monitoring and enforcement activity is delegated to ERCOT, the RRC or some other agency. The considerations may need to cover another dimension of resilience – financial resilience – if reports of retailers declaring bankruptcy are any guide.
It’s too early to say if this will happen. The firing of ERCOT’s CEO suggests that the focus is still on pointing the finger elsewhere and finding convenient scapegoats. Hopefully the inevitable reviews and inquiries over the next few months will allow for real solutions to be advanced.