How Extreme Cold Turned Into a U.S. Energy Crisis

February 2021 won’t soon be forgotten in energy markets. Over the better part of two weeks, a cold blast across the central U.S. froze natural gas pipelines, sent electricity prices skyrocketing to record levels, caused U.S. oil production to drop by more than 4 million barrels a day and led to power outages at 5 million American homes and businesses, mostly in Texas. There was no shortage of blame to go around.

1. What started this?

A polar vortex -- a girdle of winds that keep cold bottled in the Arctic -- buckled and released record-breaking cold across much of the U.S. Gas pipelines seized up, wind turbines froze and frozen water vapor forced the shuttering of oil wells, even as homes and businesses raised demand for heating to record levels. Prices of heating fuels, including oil and natural gas, surged. Demand for propane climbed to a 17-year high. Wholesale electricity prices in Texas skyrocketed to $9,000 a megawatt-hour, the maximum allowed in the market. Natural gas spot prices reached $1,250 per million British thermal units before falling back to $4, in line with prices the prior week.

2. So the weather was to blame?

Most directly, yes, but other finger-pointing began immediately. Some blamed the green transition to wind power, since many frozen turbines stopped spinning. Others said Texas’s deregulated power market, unique in the country, had allowed companies to skimp on maintenance and upgrades. Some power plants that weren’t fully weatherized shut down, wiping out generation capacity. Some assigned blame to Ercot, the Electric Reliability Council of Texas, which manages the flow of power to consumers.

3. Is that fair?

Partially. Icing on wind turbine blades was a real problem, and wind accounts for nearly a quarter of the state’s supplies. But the cold wreaked havoc on the region’s entire energy complex, crippling fossil-fuel and renewable resources alike, and generation from wind farms actually exceeded forecasts on some days. As for Ercot, its authority is somewhat limited. In 2011, the last time freezing weather caused rolling outages, it released best practices for power generators to follow, but it couldn’t require anything, said Adrian Shelley, Texas office director of Public Citizen, an advocacy group. Texas lacks the long-term planning processes that other parts of the country employ. The deregulated and competitive nature of the Texas market makes possible massive price run-ups.

4. What put the lights out?

With so much power offline, Ercot and the Southwest Power Pool -- which manages the grid for West Texas and all or parts of 13 other states -- had little choice but to implement rolling electricity outages to protect the grids from total collapse. (In the past three decades, Texas has only resorted to such a drastic measure four times.) The Midcontinent Independent System Operator, which manages the flow of electricity in 15 states, also ordered such controlled blackouts in Arkansas, Louisiana, Mississippi and Southeast Texas.

5. What’s different about the Texas system?

The state doesn’t run so-called capacity markets like other parts of the country. These markets act like insurance policies, whereby electricity generators are paid to guarantee that their supplies will be available when consumers need them on the most extreme hot and cold days. If they don’t show up, they face stiff penalties. The grid spanning much of the eastern U.S. runs a market like this, for example. Texas is also home to the most competitive electricity market in the country, where people switch power providers like credit cards. It’s a cutthroat business, and as a result, power providers offer incredibly low rates and incentives to new customers. This can set them up for failure during extreme events like this if they aren’t properly hedged for a surge in wholesale energy prices.

6. How might this crisis change the energy landscape?

The crisis reinforces the need for policy makers and regulators to think carefully about what a world wholly dependent on electricity for lighting, cooling, heating, cooking and transportation would look like under extreme circumstances. The same risks were on full display last year when California, the largest electric car market in America and one of the biggest in the world, went through rolling blackouts of its own caused by intense heat waves and wildfires. Proposed solutions include large-scale batteries that back up power plants; broader, more regionalized power grids; and smaller, more localized “microgrids” capable of operating on their own in times of crisis. Some policy makers in Washington have argued that this dependency means it’s critical to preserve coal and nuclear power plants as so-called baseload resources that are available to run around the clock. The issue is gaining urgency as climate change only stands to bring about more extreme weather. That doesn’t just mean extreme heat, but extreme cold too.

The Reference Shelf

©2021 Bloomberg L.P.

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