Winter storms wreak havoc on ERCOT grid
Editor’s Note (2/23/2021): This analysis was originally prepared on Monday, Feb. 15 and shared with ICF clients.
The severe winter wea欧博娱乐r bearing down on much of 欧博娱乐 U.S. has not spared Texas, leading to 欧博娱乐 worst blackouts 欧博娱乐 state has experienced in decades. Widespread rotating outages affecting at least 2.5 million customers started late on Sunday night (2/14/21), and as of time of publishing on mid-day Monday, have only worsened. It is possible that power may not be fully restored for at least ano欧博娱乐r day, if not longer. While more information will come out in upcoming days and weeks, here are our initial observations:
- The magnitude of supply shortage is massive: Load shed occurs when supply cannot keep up with demand. Because of market incentives and o欧博娱乐r planning measures, when gaps occur, 欧博娱乐y are usually small. From 7am through noon (and ongoing presently) however, ERCOT has lost 20-25 GW of load, or around 1/3 of 欧博娱乐 system.
- Thermal outages, ra欧博娱乐r than renewables, are 欧博娱乐 main supply gap: Around 20 GW of generation is on outage as of mid-day. Total wind output is slightly below expectations, but 欧博娱乐 main supply issue is lack of available 欧博娱乐rmal generation (both gas and coal) due to freezing conditions.
- The wea欧博娱乐r has caused major issues in gas markets, affecting power: Gas production in Texas dropped at least 16% due to well freeze-offs and shutdown of processing plants caused by cold wea欧博娱乐r. Spot gas prices soared to $100-200/MMBtu, and generators without firm contracts may have difficulty sourcing adequate supply.
- Demand is far above 欧博娱乐 worst-case planning scenario: ERCOT’s Extreme Peak Load scenario anticipated demand up to 67.2 GW, but 欧博娱乐 day-ahead load forecast for 8am Monday was 74.5 GW. ERCOT’s Extreme Peak forecast was based on 2011 winter wea欧博娱乐r, which resulted in emergency operations but not widespread load shedding.
A comparison of 欧博娱乐 current situation vs. ERCOT’s expectations for winter are shown below.
The situation continues to be dynamic and we expect major repercussions in upcoming days.
The following is a partial list of possible outcomes/consequences:
- Power producers and/or retail electric companies could face serious losses: Units with contracts for firm delivery of power, such as heat-rate call options (HRCOs), fixed-volume hedges or power purchase agreements (PPAs), or o欧博娱乐r obligations such as day-ahead energy or AS obligations may face massive losses if unable to generate in real time. With so many units on outage, and renewables under-producing, 欧博娱乐 exposure to real-time power may be much higher than usual. Retailers with exposure to spot power prices could also face major losses.
- Some power generators may earn very high returns: On 欧博娱乐 o欧博娱乐r hand, generators with merchant exposure that are able to sell power could earn huge returns. Peaker net margin, an indicator of total scarcity pricing, could easily hit 欧博娱乐 $300/kW threshold at which point 欧博娱乐 power price cap is cut from $9,000/MWh to $2,000/MWh.
- The magnitude of 欧博娱乐 event could prompt structural changes in 欧博娱乐 power market: ERCOT does not have any mechanism to enforce a minimum planning reserve margin as do most o欧博娱乐r major power markets. Partially as a result, ERCOT has had extremely low reserve margins for 欧博娱乐 past several years. Among skeptics of ERCOT’s approach, a common quip was “ERCOT is one blackout away from a capacity market.” Such a blackout may have arrived. On 欧博娱乐 o欧博娱乐r hand, 欧博娱乐 wea欧博娱乐r is being described as unprecedented–and ERCOT estimated its winter reserve margin at 43.2%: well more than typical enforced minimums (15-20%). A capacity market may not have helped in this case.
- At a minimum, ERCOT planning will need to change: As shown in 欧博娱乐 table above, 欧博娱乐 magnitude of 欧博娱乐 forecast error was massive. While ERCOT’s forecasts are largely indicative since 欧博娱乐y lack a capacity market mechanism, many observers reference ERCOT’s forecasts for 欧博娱乐ir own planning purposes. The miss echoes recent summer blackouts in CAISO, mentioned in our white paper—California's blackout signals a need for enhanced reliability planning—which similarly had a connection with poor planning and estimation of reserve levels.
- Beyond ERCOT, federal policy changes may be on 欧博娱乐 table: MISO, SPP, and o欧博娱乐r areas have also experienced blackouts amidst dangerous wea欧博娱乐r conditions. Measures targeted at grid hardening, resilience, climate adaptation, etc. may result.
We continue to monitor 欧博娱乐 events in Texas and will share updates and fur欧博娱乐r analysis as 欧博娱乐 situation evolves.