Inside the Texas Power Crisis
Read Time: 4 Minutes
The recent cold-weather snap that paralyzed Texas focused nationwide attention on Texas Interconnection, the state’s electrical grid. The network supplies electricity to more than 25 million Texas customers and represents 90% of the state’s electric load. It is operated by the Electric Reliability Council of Texas, or ERCOT. To understand what happened in Texas and its implications for the future, GLG recently spoke with Greg Forero, CEO of Power Development at HGP Storage, which streamlines the process of evaluating, acquiring, investing in, and managing energy storage resources. He was formerly Vice President of ERCOT at Constellation Energy and Director of ERCOT Oversight Operations at UBS. Edited excerpts of the conversation follow.
Let’s start with some background on the Texas power market.
As everyone who follows the news now knows, ERCOT is independent from the rest of the country and independent from oversight by the Federal Energy Regulatory Commission. It is not electrically interconnected in a meaningful way to any other state. Texas is different from other markets because unlike capacity markets, where there are rules about offering energy in return for receiving agreed-upon standby payments, we have an energy-only market. ERCOT does not pay a capacity payment to generators and allows them to offer electricity at whatever price they want.
Let me jump ahead and answer the question that’s probably on everyone’s mind after the recent problems: Will Texas change and become a capacity market? My belief, and the belief of many of my colleagues, is that it won’t. First, the integration alone would take many years and represent a significant cost. Second, ERCOT is focused on a program to make the electrical market more efficient, called real-time co-optimization; it’s something that’s a nine-digit expense. So it’s unlikely that ERCOT even would be able to switch at this point.
The fact that ERCOT is a supply-and-demand market is the reason we’ve seen electric bills that have made the news. Most pricing is determined by long-term contracts. Most of whatever doesn’t meet up that way comes together in the day-ahead market. The very little that’s left meets in the real-time market, which is meant to be only a balancing market; it was never meant to be the main market. Generally, ERCOT has been very reliable and there has been excess generations, which translated into real-time prices being lower than contract prices. That makes sense, since people are willing to pay a small premium to lock in their price. But obviously that has changed given recent events, as ERCOT was completely out of anybody willing to offer to produce or take in power.
Even if a capacity market isn’t in the cards, do you see changes coming that would help in situations like the recent one?
This is purely my opinion, but I believe Texas is going to have to accept higher prices in order to ensure system reliability. The question of who will pay the higher price is a good one. Atmos, a publicly traded natural gas distributor, said recently that it has spent about $3.5 billion on gas while having only about $800 million in cash or near cash. So a lot of the price is going to fall on shareholders and bondholders. We’ve seen certain wind farms that had sold block hedges, or fixed-price power, get the keys taken away from them by major money-center banks because they couldn’t meet the margin on their hedges. So a lot of the cost will be borne by natural gas providers and hedge providers. Many smaller renewable players will be forced to give up control of their business.
The latest development is that ERCOT said it won’t settle trades, pay invoices, or receive invoices until the Texas Public Utility Commission (PUC) and state leadership make up their mind about what they want to do. My colleagues and I believe that the PUC won’t set prices lower, but that could cause huge political problems. The fact is, however, that the vast majority of the ERCOT load is fixed-price, meaning that most residential customers aren’t receiving those $17,000 bills that got a lot of attention. At Griddy, the company most famous for having variable pricing, only about 25,000 customers out of 11.7 million had variable pricing.
What’s in store for the grid’s reliability?
A lot has been made in the news about the wind being low. But at this time of the year we don’t expect much wind, and the wind capacity factor was 11%, which really isn’t that much lower than what we would have expected. To get much more efficient on the renewable side, we should winterize the wind charges. We also can make a huge difference by weatherizing natural gas plants and even the nuclear plants. The biggest costs will be the natural gas system, because there are aboveground manifolds everywhere throughout Texas. A lot of those were the freeze points. This is going to be a huge process and a significant cost, but the local natural gas system needs to be upgraded.
About Greg Forero
Greg Forero is the CEO of distributed generation firm HGP Storage LLC with over 18 years of experience in the energy sector. HGP built three distributed generation power plants in ERCOT to prevent rolling blackouts by adding emergency reserve capacity to the market. Early in his career, he was an energy trader at TXU Energy, where he managed the 22,000 MW of power generation assets for TXU through the deregulation of the ERCOT power markets (natural gas, wind, coal, lignite, nuclear). He served as Vice President of ERCOT at Constellation Energy, Senior Energy Asset Trader at Williams Energy, managing 4,000 MW in Southern California and 1,500 MW in the Midwest, and Director of overseeing ERCOT at UBS. Greg has developed long- and short-term power project across the United States and originated and managed multiple energy deals with major integrated energy companies, E&P producers, and hedge funds.
This power industry article is adapted from the February 22, 2021, Remote Roundtable “ERCOT – Texas Power Crisis” If you would like access to the transcript for this event or would like to speak with power industry experts like Greg Forero, or any of our more than 900,000 industry experts, contact us.
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