ERCOT Island

Texas power is administered by ERCOT which supplies electricity to 90% of Texas and 25mm people. I actually had a chance to learn quite a bit about power trading in Texas some years ago when I was looking at a fund that just electricity in TX. Coming from listed futures world where you might look at PJM futures, it was interesting to dig into ERCOT. It’s most distinctive property — it is not connected to any other grid in the US. It’s an island.

This fact resurfaces in interesting ways. But before we get to that, 2 bullet points:

  • ERCOT has 85% thermal fuel stack (coal and gas mostly), 5% nuclear, wind/solar <10%
  • In an extreme weather event there are allowances for outages. In other words, they expect some amount of failure. They call it Extreme Generation Outages During Extreme Peak Load. (via @JesseJenkins)

Here is an example of how things become uselessly politicized instantly. As the failures started happening, there were reports that renewables like wind and solar were not doing their job as the turbines had frozen. Well, this is one of those easily manipulated half-truths. Yes the wind and solar were incapacitated, but within the range of what’s expected. At times they overperformed and at times they underperformed.

The real story was how the thermal sources, which comprise most of the capacity anyway, failed due to pipe freezes and fuel shortage. In an extreme case they were expected to lose 20% capacity and they have lost closer to 40%. This says nothing about the relative merits of thermal versus renewables. It’s more to point out how the narratives become twisted.

But political winds blow both ways.

Conservative values faced criticism as the tight budgets were seen as the culprit. A culture of frugality with public funds was painted as insensitive. Capitalist corner cutting that comes back to haunt you in a disaster. I get it. Is the cost-cutting mentality creating value or underpricing benefits? Maybe Texas was penny wise and pound foolish.

But it’s not that simple. Byrne Hobart pulled data that showed that TX pays 20% less than the national average for electricity.

I don’t know what to say. I just have questions:

  • What is driving those savings?
  • Were those savings pulled from measures that might have mitigated the effects of this once-in-a-generation cold streak?
  • Should the state divert some of those savings into a disaster fund?
  • If these events are so rare, why would we expect low-margin energy utilities to underwrite plants that will be stranded assets 99.9% of the time?
  • What does it cost to weatherize plants and fuel sources? Who’s bears that cost?
  • Covid exposed how hyper-optimized our supply chains are. Is there a parallel story here? Do we have too much MBA mentality in places where we need engineering principles like redundancy & points of failure?

Ultimately, will the isolation of ERCOT be proven to have been worthwhile? The history of ERCOT and public works in TX is couched in that southern “don’t tread on me spirit”. No power. Tough luck. Should have had a generator. The tradeoffs and complexity of how public goods was on full display in Texas this past week. John Arnold, probably the most knowledgeable human on energy economics on the planet, frames the debate well here:

The story of the Texas chill is a political story, an engineering story, a weather story, an economics story, but most importantly a human story.

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