Trade-Offs in Winterizing the Texas Power Grid

On February 8, a Monday, ERCOT notified power generators that freezing temperatures were on the way, and at that time were forecast for February 11 to 15, Thursday through Monday.  Versions of this warning were repeated on future days.  On February 11, Thursday, ERCOT announced that there could be record peak demand for winter power during the coming extreme cold front.  On Sunday February 14 the storm hit Texas, and ERCOT warned of higher than expected power plant outages, explicitly mentioning frozen wind turbines and limited natural gas supplies.  A short few hours later, early on Monday morning February 15, just after midnight, ERCOT moved to a Level 1 Energy Emergency Alert.  This was followed within an hour, just after 1 a.m., by a Level 2 alert that mentioned the possibility of rolling blackouts.  Then, a scant half hour later, ERCOT was at a Level 3 emergency, the highest level, and initiating rotating outages, ordering power providers to start cutting power to homes and businesses statewide.  ERCOT has since reported that it lost 40% of the electricity supply it had expected to be available, and that a total of 185 power plants were offline at some point.  It was not until Friday February 19 that ERCOT resumed normal operations, although the rolling blackouts were largely over on Thursday February 18.  For four days, Monday through Thursday, Texans had to contend with what many would decide was an almost inexcusable situation of little or no power during an extended spell of extreme cold.   

ERCOT’s action to impose rolling blackouts was necessary to save the grid from more severe and long-lasting damage - this much seems clear.  However, the deeper issue is the question of why we were in this position in the first place.  Texas had received prior notice of its vulnerability to extreme winter cold during a winter storm event in 2011.[1]  This heightens the concern about the 2021 storm and the desire to take actions to prevent future repeats.  Thus the issue is why we found ourselves in this vulnerable position in the first place, and why our power grid was insufficiently winterized to withstand the extended cold temperatures without imposing blackouts. 

Many questions arise from February’s power grid failure in Texas amid the worst winter storm in decades.  For the grid operators, there are questions of whether suggestions made in the report created in the aftermath of the 2011 storm were followed. Is a better plan to implement rolling blackouts that would spread the burden of electricity shortage more efficiently and equitably among residents and businesses needed? During the event, some households had uninterrupted power while others faced days of rolling blackouts, with some households entirely blacked out for days as local power distributers had essentially been order to cut so much load on their grids that they blacked out all nonessential areas, leaving no one available for rolling blackouts.  How do local grid operators decide on designating essential and nonessential consumers of electricity?

For power and utility companies, there are questions about the current winterization practices and whether these are adequate given the performance of the grid during the winter storm of 2021 and an earlier event in 2011.  Certainly winterization is possible to a much larger extent than practiced in Texas, as states in the far north have established power grids that are able to withstand more extreme winter weather that occurs on a regular basis.  So, why not Texas? 

Some are quick to blame Texas’ unwillingness to regulate its electricity market, and in particular blame the lack of mandated equipment upgrades to better withstand extreme cold conditions, especially in the wake of the similar power failure event in 2011. Texas officials were certainly aware of the vulnerability of the state’s power grid in severe winter storms, and here some argue that the winterization decision after 2011 should not have been left to the discretion of the power companies.  Others would add that, apparently, company profit motives were not strong enough to sufficiently motivate the desired level of winterization. 

The Texas legislature and executive branch is no doubt under intense pressure to deal with this issue.  The human cost was high, as was the economic cost.  Providing reliable electric power is the goal of the Electric Reliability Council of Texas, after all, and ERCOT proved spectacularly unable to live up to its name during the crisis.

All of this said, the investigation is ongoing, and it is important not to jump to conclusions before the facts are established.  Ill-conceived remedies can and do have unintended consequences.  There is no doubt that winterization is costly, and the costs of winterizing will be borne by consumers in the form of higher electricity prices and by power companies in the form of lower profits. 

The Trade-Off Between Cheap Prices and Reliable Service

ERCOT is one of the most competitive electricity markets in the country, and as a result, Texas enjoys relatively cheap electricity. In 2019, the average retail electricity price in United States ranged from 7.71 cents per kWh (Louisiana) to 28.72 cents (Hawaii).  The Texas average was 8.60 cents, well below the national average of 10.54 cents.[2] Texas’s advantage in cheap electricity, along with its relatively low tax burden, helps contribute to its low-cost business environment that has attracted businesses to move from other states.

Regulations and mandates are like taxes in that they add costs to business operations, and some of these costs will be translated into higher consumer prices. How much are Texas electricity consumers willing to pay in higher electricity prices in order to have a lower chance of rolling blackouts?  The answer must surely depend on the cost of winterization and how large a decrease this cost buys in terms of a lower chance for another rolling blackout event.  That is, there is a tradeoff between relatively cheap electric prices and reliable service during winter storms. What choice would Texas household-level electricity consumers prefer?  What choice would businesses prefer?  Many Texas businesses suffered lost business and losses due to freezing damage when electricity was cut off.  Restaurants suffered losses as refrigeration and freezer equipment lost power.  The choice of regulation or mandates should be guided by a thorough analysis of costs and benefits, and a thorough understanding of the tradeoffs involved.  Of course, it may be the case that the benefits from mandated winterization outweigh the costs, but we need to hear that from experts first on what are those costs.
 
Mandated Winterization is a Double-Edged Sword

While some of the costs of mandated winterization will be passed on to consumers in higher electricity prices, the rest of the costs will cut into power companies’ profits.  Why is this a problem to consumers?  Reasonable amounts of profits provide incentives to build new power plants or retain older ones, which is vital for maintaining a healthy capacity that can withstand shocks in demand or supply.  This is important because ERCOT’s 2019 actual reserve margin — a measure of the market’s backup power to help avoid blackouts — hit a historical low of 8.6%.[3] Looking ahead, ERCOT’s anticipated reserve margin between now and 2024 continues to be the lowest in North America and is also consistently below its reference reserve level.[4]

Mandated winterization is a double-edged sword because while it helps prevent a large percentage of power-generating capacity from going offline in extreme winter conditions, it cuts into company profits and therefore may reduce capacity in the first place. The relatively low reserve margin has been a problem in Texas for years, which has been blamed on power companies struggling for profits.[5]

To summarize, are electricity customers in Texas willing to pay higher prices in order to ‘buy insurance’ by winterizing the power grid? Is it more effective to have a larger capacity all year long or to have better protection against extreme winter weather that happens infrequently in Texas? These are high-stakes questions without an easy answer. A careful cost-benefit analysis would inform this issue before jumping to conclusions that specific government interventions are warranted.