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How the Texas energy grid failed and what may cease it from taking place once more

Karla Perez and Esperanza Gonzalez warm up by a barbecue during a power outage caused by the February 16, 2021 winter storm in Houston, Texas. Winter storm Uri has historically brought cold weather, power outages, and traffic accidents to Texas as storms with a mixture of freezing temperatures and precipitation swept across 26 states.

Go Nakamura | Getty Images

Millions in Texas are still in the dark after the deadly winter storm that caused the state's worst power outages in decades, leaving homes without power as temperatures plummeted to record lows.

As the state struggles to restore power, questions arise as to why Texas was so ill-equipped and what can be done to make sure it doesn't happen again.

A confluence of factors led to the historic blackouts, and officials are already calling for an investigation into the chain of events.

Looking ahead, experts say the state can take a number of steps to address future issues, including weathering equipment and increasing reserve margins.

"We need to better understand how vulnerable our energy systems are – both electricity and the vulnerability of power and natural gas systems combined," said Daniel Cohan, associate professor at Rice University. "This will take some regrouping and there won't be a single step. We will need a portfolio of steps."

Winterize equipment?

The storm threw snow and ice across the Midwest and South, turning off electricity generation while consumers turned up their thermostats in freezing temperatures.

No power source was immune – coal, natural gas, crude oil, wind and solar production all declined. Freezing the pipeline impeded the flow of natural gas and crude oil. The outages were concentrated in Texas as the network was forced to shed load and was unable to keep up with the surge in demand. At one point more than four million people were without electricity.

"It was an event with black swans from both the demand side and the supply side, and the freezing caused this supply problem," said Michael Bradley, general manager at Tudor, Pickering, Holt & Co. Noting that device freezing is not a headline event .

However, over the weekend all 254 Texas counties were put under weather warnings, which is rare. When a cold front hits an area, production is usually relocated to another location. This time it was not possible and the equipment could not be serviced on icy roads.

Vehicles move on a snow-covered road in Houston, Texas, February 15, 2021.

Chengyue Lao | Xinhua News Agency | Getty Images

Of course, weight machines work in places much colder than Texas. One step that can be taken would be to winterize equipment. The state is used to extreme heat and drought, but its infrastructure is simply not equipped to operate in extreme cold.

"They have the infrastructure in place 99.9% of the time," said Rebecca Babin, senior equity trader at CIBC Private Wealth. "They're really poorly equipped at these stern events. They have no incentive to invest in the infrastructure to make these improvements."

Texas has the only deregulated electricity market in the US.

Most of the state's power is controlled by the Texas Electric Reliability Council known as ERCOT. It is a competitive price market that trades on supply and demand. Companies are trying to bring the cheapest form of energy to market, which can come at the expense of building more reliable infrastructure systems.

"Texas has chosen to run its power grid as an island," said Cohan of Rice University, which means the state can't import power from other states when it's needed most. He added that the effects can also be felt in the summer when Texas has an abundance of energy that it cannot export.

Increase reserve margin?

ERCOT, among others, underestimated the severity of the storm.

Before the bad weather, ERCOT estimated how much electricity it would need under different scenarios, but the reality even exceeded its extreme forecast. "The extent of the forecast error was massive," said the consulting firm ICF International.

While ERCOT has a reserve margin – the amount of oversupply necessary to meet peak electricity demand – since the market is not regulated, companies do not want to bear the costs. An increase in the reserve margin would mean that crises of this magnitude could possibly be avoided across the board. While it would be difficult to force the reserve margin to increase, incentives could encourage adoption.

Matt Breidert, Portfolio Manager at Ecofin, described the Texas power grid as a "Wild West" market based on short-term prices. If Texas were hooked up to the broader network, "it could have a more stable resource portfolio to handle this event."

Electricity prices are rising

With utility efforts to keep the lights on, electricity prices are rising across Texas as contractual obligations force companies to buy at any cost.

CIBC's Babin noted that Texas’s unregulated market is exacerbating price volatility as power producers are forced to buy megawatts on the open market.

Some of the increased costs could land on Texan consumers' utility bills. Companies like Griddy, which give consumers access to wholesale prices for electricity, have shown ways for their users to switch electricity suppliers to protect them from volatile price fluctuations.

"Electricity prices are typically $ 20, 30, 40 per megawatt hour, and due to extreme events, the price of electricity hit the $ 9,000 ceiling. That's very extreme," said Ron Silvestri, senior analyst at Neuberger Berman.

Natural gas prices rose 3% on Wednesday after rising more than 7% on Tuesday. For the month prices are up 26%. While the impact on oil prices was more subdued, West Texas Intermediate crude oil futures were trading at a 13-month high on Wednesday.

The role of renewable energies

Customers wait in line to attend the Frontier Fiesta in Houston, Texas on February 17, 2021.

Thomas Shea | AFP | Getty Images

Some have fingered renewables causing the blackouts, but in reality the vast majority of the outages were due to problems with natural gas production.

That is, the sun and wind went offline too, as frozen leaves made wind turbines inoperable.

But after the disaster, the role of renewables in the Texan energy mix is ​​likely to be reassessed.

Bradley of Tudor, Pickering, Holt & Co. said he believes the adoption of renewables will slow in favor of greater expansion of natural gas. While renewables weren't the main culprit here, they are an intermittent source of power, which means they can't ramp up operations at will. Natural gas and coal, on the other hand, can.

Energy storage is key to making renewable energy a more reliable electricity alternative, and Neuberger Berman's Siluberri said the Texas blackouts could also lead to a faster buildup of storage options.

You have an infrastructure that meets the requirements 99.9% of the time. They are really badly equipped at these tail events. You are not motivated to invest in the infrastructure to make these improvements.

Rebecca Babin

Senior Equity Trader at CIBC Private Wealth

"Storage at the grid level increases the reliability if the possibilities for power generation are reduced," said analysts at the research company Baird. "In addition, both solar and storage systems offer network operators additional functions such as peak current shedding and / or shifting."

Demand response programs are another way for companies to monitor the grid, especially as increased use of renewable energies affects what is available. With a smarter power supply, utilities can get an accurate picture of the current picture of supply and demand, while demand-response systems can provide a controlled way to contain usage.

"The central idea is that electricity consumption can be reduced temporarily in times of high demand, but instead of being disruptive, as is the case with load shedding, this is done in a controlled manner," say the analysts at Raymond James.

With millions of people left without electricity and the weather deteriorating, regulators are calling for an investigation into the events.

"The Texas Electric Reliability Council has been far from reliable for the past 48 hours," Texas Governor Greg Abbott said in a statement Tuesday. "Far too many Texans have no electricity or heat for their homes because our state is exposed to freezing temperatures and severe winter weather. This is unacceptable."

Texas isn't the only state to have recently been plagued by power outages.

During the summer, California was plagued by blackouts, and while the causes are very different this time around, the instances show the fragility of the network. As extreme weather events become more common and demands are placed on the power grid – including electric vehicles – infrastructure is tight.

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