A 2019 winter storm, which brought high winds and subzero temperatures to Texas, caused a power grid collapse that blacked out millions of consumers and resulted in over 200 deaths.. The Texas legislature called for studies and proposals to remedy the situation, which led to the four legislative bills discussed below. Their solution is pretty straightforward: 1) create financial incentives for up to 10,000 MWs of new, mostly gas-fired peaking units, 2) set aside $10 billion, including zero-interest loans and subsidies for existing gas peakers, and 3) require electricity providers to compensate peaking generation (mostly gas-fired) via a market-determined rate to ensure plant availability when demand is high and power supplies tight. The last piece of legislation is aimed at limiting the further development of wind power by increasing grid interconnection costs, especially for remote renewable locations relatively distant from demand centers. Demand reduction techniques, often much cheaper and faster to implement than new build options, never entered the chat so to speak.
We should point out that this legislation bears a considerable resemblance to an April 2021 proposal made by Warren Buffett’s Berkshire Hathaway to build 10,000 MWs of gas-fired peaking plants in Texas for a price of $8-9 billion. These proposed plants would sit idle most of the year and would be dispatched by ERCOT (the Texas grid operator) on very short notice (10 minutes, according to the company). One unique feature mentioned was that these facilities would store LNG on-site to avoid a repeat of unexpected gas plant outages due to weather-related problems in the gas distribution system. But the real chef’s kiss part of the deal was that Mr. Buffett and Co. wanted no part of the deregulated Texas power market. (See item three above, which would provide the guaranteed rate of return Mr. Buffett is seeking.) Only a regulated or guaranteed return would be acceptable to them, and the legislature capitulated while still publicly proclaiming ERCOT to be a truly free market for electricity. The local press noted that Berkshire Hathaway had at least eight lobbyists working in the state capital in Austin.
Given the considerable influence of oil and gas interests in Texas, coupled
with an almost gleeful disregard for environmental concern, this really wasn’t a surprising decision. But we think this decision if implemented on the scale contemplated, will nevertheless be a colossal mistake. Having the political process insert itself into policy decisions typically requiring considerable expertise is always a crapshoot. In this case, the politicians did accept what we believe to be the correct message—as a standalone grid, they need more electric generating capacity in the state during the winter. And their preferred solution was new gas-fired peaking power plants, a big state subsidy, and a financial smackdown of new wind power development. If it were simply a matter of business as usual, we could tsk, maybe comment about unabated CO2 emissions and how they ignored obvious demand side management solutions adopted elsewhere, or discuss the longer-term implications of gas price volatility as LNG exports turn gas into a worldwide as opposed to a domestic market.
The problem the politicians are addressing is the right one—the state is very short of electric power, especially in the winter, as we have now seen several times in the past few years. But it’s not clear that short-term, peaking power—however it’s fueled—is the answer. These winter storms create high electrical demand that lasts for days. And if so, the need in Texas is likely to be for more (and far more expensive) base load power generating capacity that can safely operate for months and months between planned outages as demand keeps increasing. The Berkshire/Buffett proposal strikes us as like trying to fill a flat automobile tire with a bicycle pump. It puts in the air, but it’s woefully inadequate to the demand of the situation. But the real short circuit in their thinking stems from a thornier issue. There are three simultaneous changes occurring in Texas and elsewhere. First, with apparent changes in the jet stream, winter storms are penetrating further south. Second, there is a considerable push for more electrification of residential and commercial heating systems. And third, when we put the first two items together, we see a likely shift from summer to winter peaking utility. This means the winter demands on the power grid will exceed those of the summer. (This has enormous implications, especially for power generators who schedule extended maintenance outages in the off-peak months.) Other North American power grids would likely try to compensate for their shortfall via power purchases outside the system. That’s not an option for electrically un-interconnected ERCOT.
In each of the two previous winter storms, the natural gas system as a whole (from wellhead to power plant) performed badly, with considerable freeze-related failures across the supply chain. The longer the freeze lasted more plants failed under weather-related stress in a type of cascade. It’s not very windy in Texas during the winter, so large wind farms don’t meet the need either. And conventional fossil-fired plants were a bust in the last storm across the entire Southeast, also impacting TVA and Duke Power. Only nuclear power plants were relatively unaffected by the extreme cold weather. (Technically, the South Texas Nuclear Project did have a minor cold weather-related equipment failure in the 2019 storm, but this was promptly remedied, and the affected unit returned to service.) Our point here is simple. Nuclear electric power generating stations actually performed well under adverse winter conditions, while gas and coal plants did not. But the economics of new gas peakers (relatively cheap to build, expensive to operate) remain highly compelling compared to new nuclear power plant construction, especially if environmental externalities like CO2 emissions are disregarded. The question is whether they will be remotely adequate to satisfy elevated longer-term spikes in demand.
The likely response from the environmental community, focusing on CO2 emission and remediation, while correct and proper, will likely obscure our main point in the public dialogue. Texas, the southernmost state in the US, is or will soon be a winter-peaking electricity system due to a combination of changing weather patterns and shifting consumer preferences for electric heating systems. But neither of these new factors, weather and elevated winter electrical demand, appear to have entered the recent political calculation. Winter gas reliability issues aside, the real question is will these facilities provide adequate capacity when needed. They’ll definitely provide some power. The question is will it be enough for the length of time needed? Our guess is no.
All we can conclude is that politicians in Texas have accepted something resembling the early 2021 proposal from Berkshire Hathaway for 10,000 MWs of gas-fired peaking plants operating under a utility-like compensation scheme. Cheap, quick, and dirty may have been an acceptable standard for new electric power generating stations thirty years ago. But the real issue for us is that in a winter peaking electrical grid, the elevated demand lasts all winter (because people are now using more electricity for home and commercial heating)—and not just during the bad storms that spike demand to extreme levels. These new gas peakers can’t run all winter and appear to us to be an expensive, inadequate response to a clear lack of electrical capacity. Instead, it looks more like we’re getting the solutions of yesterday to the problems of tomorrow.
By Leonard S. Hyman and William I. Tilles
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