We were without power for about 40 hours spread out over three and a half days from February 15-18. I know someone in Austin who lost power for 64 hours straight and parts of his house got down to 30 degrees at night. Across the state, there are people in apartment complexes where water service hasn't been restored. This ended up being more than just a few rolling blackouts lasting the 15-45 minutes the ERCOT warned us about. So what happened?
There are
actually a couple of markets involved in what happened two weeks ago in Texas:
the market for fuel, the market for wholesale electricity, and the retail
market for electricity.
First, the
fuel market. For natural gas or coal-fired power plants, they must buy fuel.
Natural gas isn’t typically stored in Texas, but is bought off the transmission
pipelines from whomever it is that is pumping the gas into them. Natural gas
power plant operators generally acquire fuel via long term contracts through
which they buy a certain amount of gas to be used on certain dates. When they
want to generate more electricity, they can buy extra in a spot market that has
a price set in real time (a spot market simply means you are paying for it for
immediate use). Of course, gas producers must have gas coming out of the ground
that can be pumped into the lines for a generator to buy it. These electricity
generators are buyers in the fuel market and are sellers (along with solar and
wind turbine electricity generators) in the wholesale electricity market.
Second,
retail electric companies buy enough electricity from generators to handle the
demand for electricity from their retail customers. The electric companies are
buyers in the electricity generation market and are sellers of electricity in the
retail market. These electric companies mainly like to have long term contracts
with generators to buy power used by consumers so that they can lock in a
price. They can then offer a fixed rate to customers. They may pay $0.08/kWh to
generators and sell to customers for $0.10/kWh.
Of course,
electric companies don’t build dedicated lines connecting power plants to each
house they serve. Instead, there is one large grid of interconnected wires
(even though sections are partitioned off). Each power generator puts
electricity into the grid wherever they are located and consumers pull it out
when they turn on a light switch. There is no way to know which power plant
created the electricity that comes to your house. It is just an accounting
device that electric company X has customers who are pulling 5MWh of
electricity out of the gird, so they need to make sure they are paying
electricity generator companies to put 5MWh into the grid.
If electric
company customers want to take more electricity out of the grid than their
electric company has paid to put in, the electric company needs to buy more.
Outside of the long-term contracts, they can buy electricity off the spot
market of electricity generators are producing above and beyond what they have
already sold through longer term contracts. This spot market currently has a
price ceiling of $9.00 per kWh, about 100-300 times above the usual spot market
electricity price.
During the
recent cold snap, it became clear that there would be a spike in demand.
Electric companies knew they would be buying extra electricity off the spot
market. And by competing with other electric companies for that electricity,
the price might well be bid up pretty high. Power generation companies also
knew that they had a problem. Without proper winterization, they might not be
able to generate as much electricity as they had already sold. But even if they
could operate, knowing that the price for spot market electricity might be
high, they would need fuel, maybe more than they had contracted to buy at a
fixed rate.
Usually,
when the price of a good rises in a market, it is a signal to consumers to
scale back on consumption and a signal to producers to make more of the good.
In the electricity market, except for the customers of one company, Griddy, the
price paid for electricity is set by contract and does not vary much, if at
all, with demand. This means that millions of electricity customers could feel
safe turning on lights and heat pumps knowing that the price they pay is fixed.
The Griddy electric company only buys electricity off the spot market (usually
around $0.09 per kWh) and charges customers that rate plus any applicable taxes
and a flat $9.99 per month. Their customers get notifications to rate increases
and projections as to what their rate will be over the next several hours. I am
not sure how much warning they got that electricity would soon cost them
$9.00/kWh, a 100 fold increase over the average rate Griddy charges (As
an aside, there are fixed rate electric companies that offer electricity for
less than $0.08/kWh, so the alure of Griddy sort of puzzles me).
The fact
that most retail electricity customers pay a relatively fixed rate for
electricity means that when demand rose due to the cold weather, the price of
electricity paid by most customers did not rise in a way that would cause
people to turn off lights or set the thermostat lower (the exception being
Griddy customers). In this instance, the market mechanism only effects supply. This
can be enough for the market to still operate and avoid a shortage if the higher
price for electricity on the spot market provides an extra incentive to power
generators to add more electricity to the grid (without that price affecting
demand too, it just means there needs to be a larger supply effect). However,
there are two problems here. First, the time to winterize power generators was
well past, so only power plants that could operate could even consider upping
their quantity of electricity supplied. Second, even for generators that could
operate, getting fuel became an issue. Once they were no longer using fuel
bought under a previous contract at a reasonable price, they would have to buy
fuel on the fuel spot market. Because of frozen fuel compressors and pipelines,
the supply of natural gas was more constrained than usual. The spot price for
natural gas at the Houston Ship Channel was $180.66 on February 16. Not
surprisingly, this cost would raise a power generator’s cost per kWh to be
$9.03. It definitely seems the $9.00/kWh electricity spot market price ceiling
seems to have limited how much generators were willing to pay for gas.
Would
allowing the spot price for electricity go to $100/kWh have helped generate
more power? Probably not. The issues were technological limits to how much
electricity could be generated. ERCOT had set a ceiling on the spot market
electricity price of $9.00/kWh mainly to encourage the construction of new
power plants. In real time, as the price of electricity rose to that $9.00/kWh
ceiling, it was a little too late to build excess capacity or winterize
existing plants or fuel pipelines.
When demand
increased and the supply of electricity ran into its capacity limit, a shortage
developed. Once price adjustments were insufficient to eliminate the shortage,
the only way to manage it was to turn off parts of the grid so that electricity
use would match the quantity that could be supplied. It did not matter if your electricity
provider had contracted with power generators who were able to keep producing
or not. Remember, houses are not connected to power generators directly, but
onto a section of the grid. Shutting down sections of the grid is fairly
indiscriminate. This means there is no reason to shop for a more responsible electricity
provider, none of that matters once the overall shortage necessitates shutting
of sections of the grid.
At the end
of the day, the market failed. There is no realistic way, especially now, to
force all Texans to join a Griddy type plan where higher prices would signal to
people to shut off the lights, TVs, heat pumps, etc. That means the quantity demanded
of electricity will be unaffected by adjusting prices in the wholesale market.
On the supply side, the potential of very high spot market prices was hoped to
be an incentive for generators to invest in winterization and extra capacity
with the thought that it would pay off during bouts of cold (or hot) weather. As
it turns out, that that was not enough of an incentive. Once a weather event is
upon us, technological capacity limits how much power can enter the grid, no
matter how high the price gets.
So what can
be done? By regulating that all power plants and natural gas pipelines in
certain climate zones be winterized, it would increase the cost of generating
power across the state similarly. This would mean the price of electricity
would rise enough to cover the added cost of winterization and power plants
should remain just as profitable as before. The ceiling on the spot market
price of gas should be set where it maxes out just above the point where
maximum electric generation is reached. If increasing the price cannot cause a
supply response because of technological constraints, then further price
increases serve no purpose. That doesn’t mean the cap will be low. Ideally, we
would have power generation companies maintain backup generators that could be
turned on during bouts of cold weather. Clearly, the ceiling of $9.00/kWh was
not enough to have done that in preparation for this week. This is one case
where it might take a general electricity tax to come up with revenue that
could be used to subsidize excess capacity that could be brought online during
a energy crisis.
Hopefully
the legislature will finally fix this and capacity will be adjusted so that there
is always enough to meet demand. But what if this happens again for whatever
reason? How do we get people to fully have power to scale back usage a little
bit so that the rolling blackouts really can be 30 minutes and not 8-64 hours
long? Perhaps ERCOT could issue a notice that once a crisis emerges that all
electricity customers in the ERCOT area would have to pay $0.20-$0.25/kWh for
electricity until the capacity was able to meet demand. This would give those
who are on parts of the grid that have power an incentive to reduce usage,
maybe by setting thermostats to 62 degrees rather than leaving them at 75
degrees. Any excess revenue generated could then be evenly distributed as a
rebate to all customers in the ERCOT area. This would have the effect of ensuring
that anyone using less than the average amount of electricity, like those in
apartments or small houses, would not be made financially made worse off by the
price surcharge.
That no one at ERCOT saw what happened as a possibility is shocking. Thankfully, the problems are straightforward and easy to fix...if the legislature and governor find the will and wisdom to fix them.