March 3, 2017
The unfortunate events in Texas during early February was the third time in 13 months in which a swath of the country experienced serious power outages. First, there was the polar vortex in January 2019 that left many in the Eastern half of the United States without power. Then, there were the California wildfires in October 2019 that left nearly 3 MM people in Northern California without power for five days. And most recently there was the disaster in Texas where a cold snap forced rotating outages across most of the state just when people needed it most, and left dozens dead. A sad story to read about indeed.
If you were like me reading extensively about the Texas outages, you probably felt that same emotion and had a few additional questions pop up like: what the heck is ERCOT? Is there seriously someone behind a curtain like Wizard of Oz making sure the electrical grid operates? And hopefully since you clicked on this article, what is a reliability market and how does that have anything to do with it?
So let’s dive in.
Viral Memes
I’m sure many of the readers have seen this meme that shows a helicopter de-icing a windmill. Well, it’s true that windmills failed in Texas (the picture in the meme is actually from Sweden), and it’s true helicopters were probably used to de-ice blades during the outages in Texas. The meme and the argument it presents, though, is a classic red herring. Gas power plants AND wind power plants failed during this disaster (with capacity losses of gas far exceeding capacity losses of wind). The New York Times reported that only 7% of Texas’ electricity supply in the winter is supplied by wind. And remember, the northern Midwest operates wind and natural gas power plants during the winter (read: like under conditions that Texas experienced this February). The question is not so much a question of wind vs. gas; it is a question of “what’s different about Texas and its electrical grid?”
ERCOT and Who is Behind the Curtain?
That brings us to ERCOT and the Wizard of Oz analogy. Short answer: yes there is literally the equivalent of the man behind the curtain in Wizard of Oz. There is a team of folks that work (way, way) behind the scenes to make sure your lights come on when you flip the switch. They work for entities called Independent System Operators (ISOs). They design, run, and oversee electricity wholesale markets, and keep the electrical grid running like it should. There are seven of these ISOs scattered around the country: PJM, MISO, ISO-NE, NYISO, CAISO, SPP, and Texas’ very own ERCOT. The NE-ISO website does the best job explaining ISOs and a bunch of other nuances associated with the electrical grid; you can read more here: NE-ISO Website. But back to the point, what’s different about Texas or should we say what’s different about Texas’ ISO, ERCOT?
What’s different about Texas and ERCOT?
One of the many answers to that question is reliability markets. A key goal of all ISOs is to ensure the reliability of the grid. One way the ISOs do that is by designing and overseeing a reliability market within their jurisdiction. In other words, they create a competitive market where activities that help ensure grid stability are financially rewarded, and activities that hurt grid stability are penalized. ISOs, like PJM and ISO-NE, have a competitive market where it is mandatory for whoever sells electricity to buy capacity on their customers’ behalf. The capacity procured always exceeds forecasted demand (a little cushion or an insurance policy). The capacity is auctioned three years in advance to give time for price signals to change behavior in the market (say for instance, building a new power plant). The power generators then are paid for this capacity as long as they are able to generate power, but regardless if they actually do generate power. Here’s the catch though: the ISO does not just take the power generators word for it, they test the power generators by periodically calling on them to generate outside of emergency conditions. If a power generator says they will be available (and are getting paid for being available) and do not generate during the test, they are financially penalized.
How does ERCOT feel about reliability markets? Well…. they don’t explicitly have one. In fairness, they do have an ancillary market in which some aspects of a reliability market are handled, including demand response (which is near and dear to our hearts at blip energy). But they do not have a forward capacity auction three years in advance. It is unclear on how or if they test electricity generators, or how they financially reward or penalize them (at least unclear to us writing the article). One way ERCOT does try to handle reliability is to raise the price ceiling in their wholesale electricity market — the market that ERCOT designed and now oversees to incentivize electricity production, not grid reliability. The rationale is that the higher price ceiling ($9,000/MW-hr vs. other ISO’s price ceiling of $2,000/MW-hr) should incentivize investment in new plants and reliably operating existing ones. An electricity producer, running at 75% capacity, generates more revenue at the price ceiling in two days than an electricity producer, running at 100% capacity, generates at stable prices of $35/MW-hr for an entire year.
Texas Power Plant Incentives vs. Mid-Atlantic Plant Incentives
Let’s take two power plants, one in ERCOT and one in the mid-atlantic ISO called PJM. The power plant in ERCOT might say “what’s the chance of it getting really cold this winter? And if it does get cold, what will the wholesale market for electricity be? Is the chance of it getting really cold combined with the price enough for me to cover my winterization costs?”. That’s a lot of uncertainty for a plant, and as we saw, results in a lot of plants skipping winterization. And why should we expect otherwise? When the grid failed, sure the generators wished they would have been online charging customers $9,000/MW-hr, but the brunt of the burden was on the residents whose power was turned off when they needed it.
Now let’s turn to the plant in PJM, they sit down and say “what’s the capacity market at for being available to run this winter? Is it high enough to cover my costs of winterizing? If it is, I’ll sell my capacity and use the money to pay for the winterization. Oh and am I ready to pay a hefty fine if it does get cold, I said I would be ready to run, and I can’t?” Much less uncertainty. And if the grid does fail as a result of generators not being available, the generators are held financially responsible through fines.
But is this ‘insurance’ expensive?
Let’s use a concrete example with prices and costs to help. You are a homeowner that uses about the national average of 10,000 kW-hours or just about 27 kW-hours per day. At a single point in time when you are pulling heavy from the grid, you are drawing say 5 kW. Your ISO tells your utility “yeah but let’s build in some cushion, utility company you need to buy 20% more capacity than the customer’s peak”. So the utility goes out into the capacity market and pays a generator to be available to generate 6 kW (120% of your peak) when needed on your behalf. If you live in New England, the utility will pay a very cheap price of $2.00/kW/month in the capacity market. In other words, $12 of your monthly bill is associated with this insurance policy. Whether you see it as a line item or not, it’s there… unless of course you live in Texas, then it really isn’t there. Not all of that $12 is an absolute increase in your overall bill, as the added revenue stream to generators should make the electricity generation market more competitive. The electrical utility in Chicago, called ComEd, has a nice, simple video on capacity charges if you want to learn more: ComEd: What is a capacity charge?.
Conclusion
Here at blip energy we are firm believers that a robust, well-run reliability market helps ISOs accomplish the challenge of grid reliability. We also know there is more than one way to cook an egg, and we know that having a reliability market does not make a region invincible to power outages. Still, it seems the Texas and ERCOT approach did not have the intended results for its residents. Look for some of these topics to be broached as pressure mounts in Texas for reform.
As always, if you think we missed something or have something wrong, leave us a comment or drop us an email at hello@blipenergy.com. Hopefully you enjoyed the article!
