No News Is Good News: A Brief Discussion on the Recent Texas Market Crisis
Updated: Nov 29, 2021
Internal estimates from major utilities find that the average customer spends only 4 to 6 minutes per month thinking about the company that provides them their electricity and gas. Compared to the mind share of companies like Google - which itself has become so ubiquitous that we use its name to refer to general internet queries - one might think that utility companies are green with envy. However, it’s safe to venture that their mind share envy is only as green as their portfolios, because of a fascinating phenomenon: the objective of a utility is actually the opposite - to minimize the time that a customer spends thinking about them. The same study that found customers spend so little time thinking about their utility revealed that these same customers would be twice as likely to switch providers if they saw a “surprising” high bill. For these companies, then, no news is good news.
Utilities in the News
This is why recent Google trends might be concerning to residential electricity providers. Hits for the search query “electricity” (Fig. 1) and “deregulated” (referring to Texas’ “deregulated” power grid) (Fig. 2) are the highest they’ve been at any point in the past 12 months. Utilities, independent power producers (IPPs), and Texas’ Independent System Operator, ERCOT, are struggling as a once in a century cold event (Fig. 3) rocked Texas last month, leaving millions without power. If customers still had their lights and heat kept on, they saw power bills as high as $16,000. Figure 1. Google Trend search interest for “electricity” over the past year. The interest last month was twice as high as any previous interest this year to date. Figure 2. Google Trend search interest for “deregulated” over the past year. The interest last week was four times higher than at any point in the past year. Power system planners, like any operator of critical infrastructure, must prepare for the worst. Utilities must set their planning reserves to guarantee that they have enough power to serve their customer demand in any scenario. They use a quantity known as Loss of Load Probability, for which a typical margin is 1-day-in-10-years, or 2.4 hours per year, as the absolute maximum tolerable outage for an average customer. To a large extent, utilities have been able to weather storms that trouble the power system, both actual (such as cold fronts and natural disasters) and metaphorical (unplanned outages of power plants). However, scenarios will arise where maintaining this nearly inestimable reliability standard will lead to unrealistically expensive electricity. Using a quantity known as Value of Lost Load (VoLL), system operators are able to price into the market the option of shutting off power to customers (also known as load shedding), albeit at an extremely high rate, in order to prevent total system failure. To estimate this value of lost load, utilities rely on surveys that ask customers to estimate their willingness to pay to avoid an interruption in service. In the United States, residential consumers price their electricity at about $10,000/MWh, with commercial and industrial customers pricing it anywhere from $8,000 to $35,000/MWh.
Why did we see these pricing conditions? Heating, ventilation and air conditioning (HVAC) accounted for 35% of total primary energy in the United States in 2016. The rare polar vortex last month decreased temperatures across Texas by 50 degrees below expectation. This raised peak power demand from customers from a typical 55 GW to over 74GW, a system load typically only seen in the sweltering summer months.
Figure 3. The Great Plains saw record lows across the region on February 15th 2021, with cold temperatures breaking century-old records. An analysis from Wood Mackenzie reveals that, in line with trends over the past decade, about 14GW of thermal generation were planned outages, out of a nameplate capacity of roughly 85GW in ERCOT. This is expected - to avoid missing the typical summer peaks, coal and gas-fired power plants schedule necessary maintenance during the winter months where the opportunity cost is lower. However, these 14GW of outages ended up contributing to the lack of reserves and were not able to respond to ERCOT’s operational capacity notice calling them to come back online. This may have been driven by natural gas prices skyrocketing to more than 10x their previous value due to a gas production freeze-off that led to 18.7 billion cubic feet per day (Bcf/d) of gas being taken offline. The result of this freeze-off, as well as the lack of winterization of many gas plants in the region, meant that ERCOT saw a peak thermal outage of 32GW (representing nearly half of total system capacity), which shattered previous records. These woes were compounded because of the nature of gas delivery contracts: in emergency situations, firm customers of gas are prioritized - typically residential customers in need of heat. Interruptible customers are more likely to be natural gas power plants.
The Seasonal Assessment of Resource Adequacy (SARA) for Winter 2020/2021, conducted by ERCOT, was meant to diagnose the scenarios in which the Texas power grid might have been strained for capacity. Figure 4 shows, from left to right, the peak load scenario they expected, the “worst case scenario,” and the actual system scenario on February 15. That the resource outages and level of demand that led to blackouts were not forecasted, even in the worst case scenario, prompts discussion on how to prepare for events that are so rare, they have never happened before.
Figure 4. The expected peak load scenario, the “worst case” peak load scenario, and the actual scenario that led to the system-wide blackouts. inBalance Helps Utilities Navigate Meltdowns
Unfortunately, there is no easy answer. At inBalance, we believe that a combination of state-of-the-art modeling tools and an expert-level understanding of power markets is necessary to combat a growing sense of uncertainty around the nature of extreme market events. All of the previous six major US electrical outages in the last two years were caused by natural disasters, and the frequency and intensity of natural disasters is expected to grow with climate change. At the very least, it is irrefutable that power systems worldwide must transition to zero-carbon electricity to mitigate the effects of global warming that will result in the loss of many more lives, homes, and livelihoods. As renewable hardware investments increase, we aim to be the software solution to enable a resilient, zero-carbon grid. Our goal, then, is to keep your utility out of the news, because that means they are doing their job, and we are doing ours.