Electricity Markets

What went wrong, part I

It’s been longer than normal since I’ve written a blog. Just as I began to formulate a Presidents’ Day-related missive, a massive arctic blast (or polar vortex or polar storm, choose your term) was settling in for a long and devastating stay in vast swaths of the middle of the country. I witnessed the evolving situation with concern for both family (my brother and his family and numerous cousins live in Texas), for our members on the front line, and for the many residents facing extreme conditions.

Before the long weekend, the staff and I at APPA had heard some rumblings from a couple of members about very high wholesale natural gas and electricity prices in places like Oklahoma. On Valentine’s Day, the financial impacts became even more acute, and the magnitude of the reliability challenge became clearer. While the focus in the national news has since been on Texas, parts of the Southwest Power Pool’s territory were under “load shedding” requirements (i.e., targeted outages) as utilities and other generators sought to maintain grid stability, and utilities within the Midcontinent Independent System Operator market also saw strains on the supply. The extreme measures that SPP and the Electric Reliability Council of Texas, the market operator in Texas, took, in conjunction with utilities in these regions, saved the grid from major damage that could have caused outages for weeks or months. But as we know, these measures also left many people without electricity while temperatures in the region were the coldest they had ever been in modern history.

The simple cause of this situation was that demand greatly exceeded supply. In Texas, demand significantly exceeded the historic peak because of the sustained, extremely low temperatures. Utilities and system operators have plans that account for peak demand (load) and have different methods for projecting peak load in given years, but all rely on historical data on which months are the hottest or coldest and when demand has spiked due to previous extreme weather conditions. In Texas, peak is typically in the hot summer months. February is normally when temperatures begin trending upward from the relatively mild winter (as compared to more northern climes) and some power plants go offline for planned maintenance. Planned maintenance was one factor impacting supply in Texas. In Texas and also in some cases in SPP, all types of power generation were challenged to some degree. The primary fuel sources are natural gas, coal, nuclear, hydropower, wind, and solar. Natural gas now comprises the largest portion of the electric generating portfolio, displacing coal-fired generation in recent years because of market conditions favoring resources that have lower greenhouse gas emissions.

Using natural gas in this primary way has had its benefits. It has contributed to the electric utility industry’s reduction of greenhouse gas emissions by 30% since 2005. It also works well with the intermittency of wind because natural gas-fueled generators can more easily ramp generation up or down depending on if the wind blows a lot or a little. The increased supply in the U.S. has also reduced natural gas prices to historically low levels over the last several years.

But the availability of natural gas was challenged during the arctic storm as demand for home heating spiked. Some natural gas wellheads were frozen and other gas-fired electric generators were not properly weatherized. This contributed to demand significantly outstripping supply. It also caused the price of natural gas to skyrocket, in turn causing the price of wholesale electricity to skyrocket. And when I say skyrocket, I mean prices hundreds of times higher than normal.

The forensics have begun on the other “root causes” and factors causing this humanitarian, reliability, and financial crisis in the middle of the country. Lessons can be drawn from the western electricity crisis of 2001 when, months after that crisis, Enron was found to have been directly manipulating the market for its gain. The analysis and determination of any potential manipulation in this case could also take months. However, electric customers in the affected areas should not have to wait for months for some financial relief. APPA is seeking such relief from Congress in the short-term.

This is a complex situation involving many factors, which we will come to better understand with time. However, we have known for years that some elements of this situation could have been avoided. For example, I’m reminded of a report we released in 2010, “Implications for Greater Reliance on Natural Gas for Electricity Generation,” which identified steps that needed to be taken to increase system resilience and avoid reliability issues as natural gas was increasingly used for electricity production. One such step, discussed on page 72, described ways to improve coordination between the gas system and the electricity markets, pointing to a system used in Ontario, Canada.

As federal agencies investigate this recent crisis, we are also working with our members to better understand what went wrong, what went right, and what needs to be improved so we can act accordingly in the future. In Part II of this blog, I will discuss the impacts on public power utilities more specifically and delve more deeply into steps we can take to ensure public power communities remain resilient, reliable, and strong.