In February 2021, Winter Storm Uri swept through the Lone Star State. Millions of people spent multiple days without power, water or food as the state scrambled to restore electricity and prevent long-term devastation to the electricity grid. According to some reports, the failure to adequately winterize electricity generation facilities ultimately led to dozens of deaths, ranging from carbon monoxide poisoning and car crashes to drownings, house fires and hypothermia.
So, what happens in the wake of such a tragic event? We gathered industry leaders from across the state, including former chairman of the Public Utility Commission of Texas and ex-officio board member of ERCOT, for our second annual Tilting The Grid summit. They discussed what happened, why it happened and what will happen now—to retail electric providers and utilities to ERCOT itself.
Erin Douglas from the Texas Tribune moderated the conversation between Becky Klein, Principal of Klein Energy LLC, Cameron Palmore, CEO of Almika Energy, and Don Whaley, President of OhmConnect Texas LLC. All three participants have extensive experience in the Texas energy space and bring unique perspectives from their respective organizations.
Here are the top three takeaways you need to know.
1. There is no market incentive to winterize generation facilities.
Texas has been very proactive to “summerize” — or prepare their generation facilities to operate under high temperatures and demand during the summer. However, the state has been complacent to winterize for several reasons, chief among them being there is no financial incentive for generation facilities to take such actions.
Overall, the panelists agreed that the disaster certainly could have not been avoided. They also thought the outcomes could have been less severe if the market would have offered some incentive to companies to prepare their facilities. It might have very well saved lives.
2. The market needs to determine how to make clean, reliable, and dispatchable resources more economical.
Compared to the rest of the United States, Texas has historically enjoyed the lowest wholesale electricity pricing with the exception of summers. This is in part due to the expansion of renewable energy resources, such as utility-scale wind and solar, along with the massive growth of residential, community,and rooftop solar. However, that has created several issues for the market in times of high demand.
Not only are renewables like wind and solar incentivized by the government, but they’re a free energy source — making the marginal fuel costs effectively zero. Thermals, such as coal, nuclear, and natural gas, cost. The extraction and transport of raw materials in order to generate electricity is not forgotten, and it eventually translates into higher prices for companies, and in turn, consumers.
So, what’s happened in Texas is these thermal facilities have been gradually decommissioned and replaced by renewable sources of energy. What renewables lack, however, is “dispatchability” — the ability to be moved across the state on demand. Solar and wind are intermittent, meaning they only create electricity when the sun shines and when the wind blows. And currently, Texas lacks the energy storage capacity for renewables to truly compete with the dispatchability of thermals.
The effect? The inability to produce electricity when we need it most. The panelists agreed that both the winterization of facilities and the expansion and dispatchability of clean energy resources be incentivized.
3. Communication is lacking across the board.
Our panelists unanimously agreed that communication has failed between every channel, from regulators and consumers to energy companies and utilities. Millions of dollars have been poured into the education of the public on energy choice and deregulation. However, during Winter Storm Uri, the public was essentially left high and dry as to what to do when a scarcity event like this occurs.
Such was the case with Griddy, who contacted their customers to switch to a different provider immediately to avoid being charged the market cap of $9,000/MWh. It was communication, but without the necessary context to help customers truly make the best choice for their lives.
The public must understand what their options are during circumstances like these. We should be taught how to prepare for blackouts and severe weather. ERCOT, utility companies, and REPs must be proactive in communicating with people when and how they can switch providers, and they must speak in a clear, engaging and educational way.
4. Some sort of relief is needed for market participants.
Retail electricity providers were unfortunately caught in the crosshairs between regulators and consumers. Many of the big name providers you see and hear on TV, radio, and billboards had to figure out how to navigate these uncharted waters in real time. Several providers still owe millions in electricity charges since the market cap of $9,000/MWh persisted for five continuous days, and they did not hedge in preparation for such a weather event.
The panelists agreed that there should be some sort of relief for providers who, unfortunately, must pay debts that could have been avoided if the facilities were adequately weatherized.
5. The competitive market is here to stay, but changes lie ahead.
Policy-wise, deregulation is here to stay, according to the panelists. There will be no fundamental overhaul of the electricity market in Texas. However, changes abound, including the possibility that Texas may move away from its historical energy-only market — a huge issue that legislators have debated for years.
While energy-only markets enjoy low prices and efficient energy generation, they leave individual competitors (retail electricity providers) and customers vulnerable. Yes, electricity prices like $9,000/MWh incentivize the growth and expansion of generation facilities, but that doesn’t include the burden that providers carry and, ultimately, what the consumer feels.
Capacity markets offer a solution of guaranteeing revenue growth with the promise of lower prices, if and when you show up do what you’re supposed to. This sounds almost too good to be true, and in some cases, it is. Plenty of challenges exist for this model, such as price depression.
The Challenges Ahead for Retail Electricity Providers
Whether you’re a current or incoming retail electric provider, you will have three headwinds moving forward:
- You will have to post more collateral than you did going forward.
- The cost of capital will be higher for you because lenders will approach the market with a bit more risk than before.
- Despite deregulation, two REPs still control about 60% of the market share. Companies must become even more savvy about how they enter the market. They must then figure out how to capture a share of the market, which policymakers will ultimately welcome.
The energy industry in Texas, like all of us, has been through a lot in recent years. Of course, several unknowns exist in terms of what’s to come for the consumer and the industry as a whole, but the industry remains excited about what’s on the horizon. For better or worse, power and utilities in Texas is changing.
We believe it will be for the better.