How Texas electricity regulators can use markets to make the grid more reliable
The recent snowstorms and historic low temperatures that ravaged Texas comprised an extreme weather event of a magnitude not seen in decades. Mechanical devices froze at power plants and wind turbine blades iced over, taking generation resources offline at a time when electricity demand was increasing to heat Texas homes that are not insulated against such deep cold.
One insurance industry estimate puts the cost of the region’s winter storm at $18 billion, which raises the question of how much should be invested to prepare for infrequent yet large-magnitude weather events and how we might build a more resilient grid.
Critics have identified several factors they think explain the outages: unreliable wind turbines, unreliable natural gas plants, the lack of interconnection with other transmission grids, and Texas’ market-based regulatory model. But what isn’t understood by opponents of a market-based model is that in order to function, even traditionally regulated top-down allocation methods require information that is inherently decentralized. Markets are a complement to — not a substitution for — such methods and can better inform the management of megawatts.
Texas experiences winter storms infrequently but has persistent triple-digit temperatures in summer. Although a deregulated grid in Australia (an example often compared to Texas) has adapted reasonably well to high-temperature events, Texas must prepare for extremes in both heat and cold. For example, the February 2011 Texas freeze was soon followed by the hottest June-August temperatures ever recorded.
Texas power plant owners implemented some weatherization based on a National Electric Reliability Council analysis of those outages, but that weatherization was insufficient in the face of the persistent single-digit temperatures. Weatherizing power plants for summer heat means ventilation, while winter weatherizing means trapping heat inside plants, which increases the challenge and the cost of summer ventilation when the grid regularly hits peak demand during 100-degree temperatures.
Texas energy resources were not engineered for the recent low temperatures, and all sources were affected. Over one six-hour interval, wind generation fell 32%, coal fell 13%, and natural gas fell 25%. Blaming specific sources like wind farms or natural gas power plants is misguided, although this event reveals weak links in the natural gas supply chain from wellhead to home. Natural gas comes out of the ground with water, which froze in single-digit temperatures. Fuel-supply contracts generally specify that if gas is in short supply, heating customers get priority, so natural gas power plants went offline as fuel was diverted to home heating.
Natural gas plants provide the bulk of electricity in Texas and provide essential backup for wind and solar resources. Since Texas winter demand is low compared with summer, fossil fuel plants are also taken offline for normally well-planned maintenance, and are unavailable for use or reserves. Widespread electric heating in Texas, along with building insulation not designed for such low temperatures, drove up demand at the same time as supply faced unusual and unexpected constraints.
The fundamental challenge in such a complex system is real-time physical and economic coordination of supply and demand, made more difficult and costly in the face of both summer heat and winter cold.
The Electric Reliability Council of Texas is a nonprofit corporation that manages the transmission grid and operates the wholesale market platform, with considerable oversight from its board and the Public Utility Commission of Texas. ERCOT’s markets have enabled valuable investment in natural gas and wind generation capacity, simultaneously reducing both prices and greenhouse gas emissions while meeting summer peaks reliably. ERCOT’s markets are the best in the nation for providing generators with incentives to perform.
Many news sources have emphasized that the Texas grid is separate and “isolated” from the Eastern and Western grid systems, the implication being that interconnection allows power to be imported from other regions into Texas. Texas is a large and varied state, so the vast majority of the time, interconnection would not benefit Texas consumers or producers. Interconnection is also not likely to be a panacea because extreme weather events also affect neighboring states; both the Southwest Power Pool and Midcontinent Independent System Operator transmission operators faced the same outage decisions as ERCOT, although in smaller magnitudes.
The challenge facing ERCOT is deciding how much this winter outage risk reduction is worth. We all buy home and car insurance and hope that we never have to use it. What looks like a prudent decision before the fact may afterward look like either a waste of money if you do insure or a failure to plan for hazards if you don’t. Weatherization to such low temperatures would add supply costs on the order of 8%, a substantial number for such a large amount of capital infrastructure.
How can the resilience of ERCOT’s grid be improved without resorting to costly regulatory mandates that may or may not yield benefits? ERCOT could implement clear market rules requiring natural gas generators to have firm supply contracts in order to be certified as an eligible resource for emergency conditions. Plant owners have incentives to do so because they would have market access under high-price conditions where their performance would more than compensate them for the insurance cost of fuel security.
ERCOT can also take advantage of Texas’ deregulated retail market structure to incentivize more customers to reduce consumption in return for bill savings, creating demand flexibility. Using digital devices and automation to send prices to residential devices would allow consumers to reduce their demand during extreme stress and high prices. Similarly, the Texas market design is well-suited to increasing battery storage, which has been made increasingly economical due to innovation. Batteries enable households to choose to self-insure against outage risk, and when interconnected in their local distribution grid, they can serve as resources to provide energy or grid services to others.
These enhanced capabilities provide the flexibility required for resilience in the face of extreme threats.
