Who Is To Blame for SWP’s (and Texas’s) Forced Outage?

I am back following a forced outage, due to forced outages of Texas electricity generators caused by the cold snap–brutal by Texas standards, routine compared to what I experienced in my 40+ years up north–that is just relaxing its grip. Having some foresight, I had laid in some firewood, and that kept things from getting unbearable. Other than the power outage, water pressure was an issue: I thought my faucets needed a prostate check, but as of about 10AM the flow is back.

So, with fingers crossed, I have the opportunity to comment on what happened. As with so many things–everything?–today, the commentary has been highly partisan, and largely wrong. Blame wind power (or the lack thereof)! Uh-uh! Blame fossil fuel generation!

The facts are fairly straightforward. In the face of record demand (reflected in a crazy spike in heating degree days)

TEXAS heating demand is not forecast to return to near-normal until Sunday: pic.twitter.com/w3cGWF5OXn

— John Kemp (@JKempEnergy) February 18, 2021

supply crashed. Supply from all sources. Wind, but also thermal (gas, nuclear, and coal). About 25GW of thermal capacity was offline, due to a variety of weather-related factors. These included most notably steep declines in natural gas production due to well freeze-offs and temperature-related outages of gas processing plants which combined to turn gas powered units into energy limited, rather than capacity limited, resources. They also included frozen instrumentation, water issues, and so on.

Wind was down too. Wind defenders have been saying that wind did great! because it sucked less than ERCOT (the Electricity Reliability Council of Texas) had forecast; that is, wind generation was somewhat higher than the low levels that ERCOT had predicted. The defenders were spinning, even if the turbines were not.

However, wind performance was objectively worse than thermal. In the weeks prior to the Big Freeze, wind was operating at ~50-65 percent of installed capacity, and supply ~40-60 percent of Texas load. When the freeze hit on Monday (and I was throwing another log on the fire), due to turbines freezing, capacity utilization fell to around ~10 percent to ~5 percent, and wind was generating ~3-10 percent of ERCOT load. Meaning that the relative performance of wind vs. thermal was worse during the cold wave, even as bad as thermal performance was. Further meaning that if wind had represented a larger fraction of Texas generating capacity, the situation would have been even grimmer.

The last few days wind defenders have been saying that the problem wasn’t with wind per se, but the failure to winterize adequately wind generators in Texas. After all, there are windmills in Antarctica! (Not to mention Sweden, etc.).

This brings to mind what Adam Smith wrote in the Wealth of Nations:

By means of glasses, hotbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries.

That is, you need to consider cost. Yes, winterizing windmills to withstand the conditions observed in Texas this week is inside the production possibilities frontier, but winterizing is not free. It is a question of whether the benefits exceed the cost.

The same thing is true with regards to thermal generation (and natural gas production). After all, power plants in far colder climes (it was below zero in Missouri, for example) hummed along in even more frigid conditions. Similarly, gas continues to flow every year in winter conditions in Canada and Siberia. But achieving these results is not free. It is a question of cost vs. benefit.

The cost of not winterizing power plants that shut down due to temperature-related outages (rather than limitations on fuel supply) were certainly material. Power prices spiked to around $9,000/MWh, and were routinely over $1,000/MWh. For a 500MW plant, losing an hour at a $9000 price means $4.5 million in revenue forgone. Even at $1,000, that’s $500K up the flue. (That’s the gross loss. The net loss is harder to calculate, given that natural gas prices also spiked).

That’s a lot of money, but whether it would have been worthwhile to incur the cost to ensure operation under the conditions we observed also depends on the probability of the event. Given the extremes observed, the probability is pretty small. Meaning that it might have been rational for generators to forego the expense: zero failure rate is never optimal. This is in contrast to a generator in say Minnesota, for which such conditions are the norm.

I would imagine that there will be a pretty intense review of utilities’ decisions regarding winterizing their plants. The cost should be fairly easy to estimate. By applying market prices or the value of lost load (VOLL) it should be similarly straightforward to estimate the cost of such weather induced outages. The probability, however, will be much harder. It is inherently difficult to estimate the probability of extreme events, especially when they are seasonal in nature.

Similar considerations hold for gas processing plants and gas wells. The opportunity cost, and the cost of upgrades, are fairly straightforward to quantify. The probability that the upgrades will actually pay off (by avoiding shutdowns) is far more amorphous.

The events of this week also bring to the fore longstanding debates regarding the appropriate generation mix in Texas. Yes, thermal experienced unprecedented outages, but as noted above, it performed both absolutely (measured by capacity utilization) and relatively (measured by decline in utilization) better than wind. Texas would have been better off with less wind and more thermal. Maybe not enough to avoid blackouts altogether, but enough to mitigate substantially their severity.

Texas has had longstanding concerns about reserve margins. The main drivers have been the retirement of substantial amounts of coal generating capacity, and relatively low rates of increase in natural gas generation (a measly 3.5 percent over the past 4 years) at the same time wind capacity has more than doubled and solar capacity has increased by 2000 percent.

The problems here are twofold. First, wind and solar availability and output are often negatively correlated with demand. (Solar wasn’t doing much at 10PM on Monday, now was it?) Second, and more insidiously, wind and solar generation depress prices–often to below zero–at other times, which undermines the economics of thermal generation. Hence, the low rate of investment in gas, and the actual disinvestment in coal.

As I said, this is a longstanding problem. I remember hosting a roundtable on this issue at UH in 2005 or 2006. Generators were already raising alarms that negative prices were a powerful disincentive to investment.

Things have only worsened since, and perverse policy is to blame. It is unarguable that wind and solar capacity have increased to extremely inefficient levels due to lavish subsidies, especially at the federal level. As a result, Texas has a grotesquely inefficient resource mix.

And with the new administration, the outlook is even worse. It has embraced increasing demand for electricity (electrify everything!–echoing the malign and evil Bill Gates) and subsidizing the production of electricity using unreliable renewables.

Texas’s travails raise questions about the viability of ERCOT’s “energy only” market design, in which generator revenues are solely from the sale of energy (or ancillary services). In this model, price spikes are intended to incentivize investment in generation (and upgrades to enhance availability rates). But price signals distorted by excessive renewables are a strong disincentive to investment.

The standard kludge in these circumstances is capacity requirements plus a capacity market. This was mooted in my roundtable so many years ago. If price signals are allowed to work, a capacity market is unnecessary and inefficient. But prices have been so distorted that it will receive serious attention going forward.

This is unfortunate, in the extreme, as the better approach would be to destroy the price distortions at their source–subsidies for renewables. Alas, in the current political environment it is likely that the nation will move strongly in the opposite direction, making the problem worse not better. Perhaps Texas could find ways of counteracting national policies–e.g., by imposing a state “reliability tax” on renewables–but this is likely to be politically impossible (although it would be a nice illustration of the theory of the second best!) Meaning that in the end, we will kludge our way to increasing reserve margins.

Not a cheery picture, but what is these days?