Texas' Power Crisis Was Also a Gas Crisis
(Bloomberg Opinion) -- Texas’ power crisis was also a gas crisis. The symbiosis of the state’s grid and its pipelines means one can take down the other.
A critical element of the state’s multi-dimensional power crisis was centered on gas-fired generation, by far the largest segment of the state’s fleet to trip offline. That isn’t supposed to happen. Fossil-fuel plants champion their reliability as competition from intermittent renewable power intensifies. Gas, in particular, has been marketed as a cleaner source of energy than coal and one that can work in tandem with wind turbines and solar panels. Quite simply, gas is expected to show up immediately when the call comes in.
And it’s expected to show up in two ways, both to fuel generating plants and supply heating networks. Ordinarily, Texas has no problem with this except in extreme situations. But climate change is simultaneously supercharging those extremes and making them less out-of-the-ordinary.
An organizing principle of any power grid is its ability to handle peak demand. In air-conditioned Texas, that tends to be the summer.
Since no one’s firing up the boiler when its 100F outside, gas-fired power plants aren’t competing with households for fuel in the summer. Conversely, in the winter, Texas’ residential gas demand shoots up by 6x on average. But since demand for electricity is usually much lower than in the summer, power plants aren’t competing heavily for supply, so it all balances out.
Until something like last week’s Arctic blast shows up.
That sort of cold is just something Texas isn’t used to. Combined with the state’s generally laissez faire approach to regulation, that meant investment in weatherization for power plants, pipelines and oil and gas wells wasn’t a priority. So problems cascaded through the system. Gas production in the Permian and Haynesville basins dropped by perhaps 8 billion cubic feet per day, or a third, according to Morgan Stanley. So plants, even if able to run, may have simply lacked the fuel to do so. As power supply dropped, compressors on the pipelines running on electricity failed, further depressing gas supply in a feedback loop.
And in the background, Texas’ reliance on gas has been increasing. Residential consumption in the winter has been fairly stable over time, averaging about 1 to 1.5 billion cubic feet per day. But there have been significant increases in winter demand for gas from Texas’ power plants and industrial and commercial customers over the past decade.
Winter gas demand has exceeded the summer’s in only one out of the past 19 years (not counting this year). But in the past three winters, gas demand was higher than in every prior summer going back to 2003.
The strain is compounded by Texas’ energy-only power market. Power generators can, in theory, pay extra for committed gas supply. In practice, the economics of merchant generation are generally so weak that power-plant operators can’t afford to take on the risk of buying gas they don’t need (and suppliers can’t afford to take on such weak credits as counterparties). The pipelines are financed on the back of long-term supply contracts signed by gas utilities, regulated entities passing through the cost of fuel to customers over time (who in turn are also shielded from immediate spikes in wholesale gas prices). They take priority over the “interruptable” gas-fired power plants.
That last point is less relevant in a freeze like this one; priority doesn’t count for much on an empty pipeline. But like the frozen equipment that kept gas-fired plants from running last week, the interface of Texas’ more regulated gas market and deregulated power market presents another point of potential failure when supply and demand tighten.
This is not an issue confined to Texas. Energy’s multiple identities as tradeable commodity, saleable service and essential public good have long made grid regulation and competition uneasy bedfellows (see California’s power crisis in 2000-01 that took down the governor). As Christine Tezak, a managing director at ClearView Energy Partners, puts it: “We don’t really have power markets; we have administrative constructs with market characteristics.”
Those constructs and characteristics will have to be revisited in Austin. Even the no-brainer stuff like winterizing the system or building more gas storage facilities carries second-order effects, though. In theory, a mandate would impose costs on everyone, leaving none disadvantaged in relative terms. In practice, though, some generators might decide to withdraw rather than take on both the cost of hardening their own equipment and paying extra for what would now be more expensive gas, once producers and pipeline operators internalized their own upgrade costs.
Overall, a higher price for gas-fired power, or concern it might not be there, shifts considerations for all other generators too; the competitiveness of new renewable power and storage projects is, to a large degree, benchmarked against the availability of peaking-gas power. Curiously, for all the blame misdirected at wind turbines this past week, one outcome of this could be even greater market share for (appropriately winterized) renewable energy twinned with storage over time. That, in turn, would also change the economics of summer generation, which is when many merchant plants hope to make a disproportionate share of their annual income. Against that, and more immediately, renewables are just one part of a system that relies on all of its major elements to function well. As the big freeze fades, fixing the increasingly important gas-power nexus in Texas must be a priority.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.
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