Texas: What Went Wrong
and how can we prevent other states from suffering the same fate?
By Mark Rossano
This article is not going to point fingers at who is to blame for Texas’s current situation—politicians will do enough of that for everyone. I want to dig into what caused the failures, and how they can be addressed and avoided in other parts of the country (and to be fair, the rest of the world). Energy Infrastructure and proper redundancy, reliability, and sustainability across all levels is a passion of mine because I expect more from America, and I believe we can deliver. We must have an open conversation about the true issues at play: baseload power, transmission, and storage and how they can be addressed, using an old concept we used to do called COMPROMISE to achieve goals.
Texas continues to face a systemic collapse across their grid driven by cascading failures across all forms of power generation. Natural gas facilities don’t have gas, wind turbines are frozen, a nuclear reactor tripped… essentially, a failure on all levels. ERCOT (Electric Reliability Council of Texas) provides electricity to most of Texas and operates as an independent grid from the rest of the U.S., which is comprised of interconnects East, West, and Texas. The grid operates a wide range of power generation: nuclear, natural gas, wind, hydro, solar, biomass, geothermal, and other local means.
The sale of electricity is a bit more complex as it is broken into a broader wholesale market that breaks up the grid further into specific regions. Many of these regions are interconnected and can allow for an ease of selling power across various areas of the interconnect. The unique nature of the Texas Interconnect and ERCOT limits the cross sale of power and also allows other regions to limit the sale of power across lines. For example, the cold weather hitting Texas right now spans from North Dakota to Texas, with other regions SPP (Southwest Power Pool) and MISO (Midcontinent Independent System Operator) also facing stresses. SPP had to also limit power consumption in some parts of their grid, but were able to offset the problems and normalize capacity. ERCOT has been different because of their limitations in generating power from peak shavers and importing electricity from other regions. The severe cold has caused force majeures to be issued throughout the state on pipelines and LNG facilities, and Governor Greg Abbott restricted the sale of natural gas outside of Texas. With pipelines frozen and power gen incapacitated, it will take a big thaw before things can normalize… but first, some background.
Each region of the U.S. has power generation capacity broken up into baseload and peak shavers. Baseload is an asset that runs constantly and will only go off-line for planned maintenance or extraordinary failure. Nuclear, coal, and natural gas (or “thermal” assets), as well as hydro dams, make up the lion’s share of baseload in the United States. Over the last decade, the whole U.S. grid has been retiring key baseload assets (mainly coal) and replacing them with either outright natural gas capacity or with renewable power with a backup natural gas turbine. In warmer climates (like California), some renewable power is using a battery backup structure, but current technology and weather remains prohibitive for broader deployment.
There have been a lot of comments regarding the construction and underlying reliability of ERCOT capacity. But remember, this is Texas… so the need for winterizing assets has always been an afterthought. Other parts of the country that deal with colder temps annually have solutions for a lot of these issues. For example, natural gas power generation can have heat tracers on pipes, valves, and various connections; insulation around key equipment; indoor power generation vs. open to the elements. Insulation would be near impossible to implement in Texas due to the heat, but the other components could be installed as a retrofit or at the time of construction. The only problem is, it costs money. Wind turbines can be outfitted with insulated turbines, oil and fluid heaters, resin covered blades to limit ice buildup, and other high-grade components to protect the asset… but again, it costs money. Wind also decreases in the winter months due to the physics of how wind is created, so ERCOT already had a massive range of expected wind output: 12%–43%, and in really bad weather 6%–7%. Many of Texas’s wind turbines (except for those along the coast initially) ended up freezing, limiting total output, while solar panels were covered with snow or ice, limiting capacity. Most of the renewables in the country (especially in Texas) are backed up by short-cycle gas turbines, which are assets that can turn on in 2–3 hours. These assets are called peakers, or peak shaving, and can come online quickly to fill a growing electricity need during peak hours or surging demand, such as heat waves or cold spells. Coal can be used as peak shaving, but there are limitations: it is costly and timely to maintain because it can take 24–48 hours to bring it online, coal piles can freeze together if not rotated, etc. All of these restrictions make natural gas the preferred and cost-effective method.
Natural gas peak shavers don’t require consistent gas purchases because they are only operational at intermittent times “as needed,” so why waste money buying gas on take or pay contracts? Instead, the contracts are structured with interruptible supply for natural gas. This is fine as long as there is gas available in the pipeline for sale, but if the gas dries up, so does your delivery because… you guessed it, it can be interrupted. Not to deviate too far (we’ll save this topic for its own article) but natural gas is sold into the market in various capacities. In this case, we will discuss two: 1) during bid week (the first 5 days of the month) E&Ps designate how much natural gas they will sell (anywhere from 70%–90%), downstream clients put in their demand numbers, and a price is set for the month; 2) E&Ps preserve gas for sale in the spot market or pool gas that can be sold “as needed.” These dynamics can normally handle surges, and the proximity to storage in the South also provides buffers from salt domes and other injection sites. Pool gas can be moved throughout the system from the “city gate” or “backhauled” from other locations as long as the price is right. But this past week in Texas… well… has broken this system.
Natural gas demand spiked in Texas and all around the region, drying up excess capacity and sending prices of spot natural gas up hundreds of dollars. The freeze-offs at the wellheads of producing wells caused shutdowns in new natural gas production, also limiting the available gas across the region. Treated natural gas has a maximum of 7 lbs of water per 1MMCF, so not really enough to freeze, but at the wellhead, it is a very different story. This makes gas from storage more viable given its low water content. There is a lot of water that comes along with producing oil and natural gas—which has to be separated and treated, either at the well site or piped to a facility. To avoid damage, the operator will shut down the well in cold weather to protect the asset in what is commonly called a “freeze-off.”
Over the last decade, the U.S. has been shuttering coal plants, and in Texas the shift was no different, as wind and natural gas took market share. Wind relied on the backup generation from thermal, and those demand requirements grew in the winter months when less wind blows. This created a ticking time bomb as peak shaving became more of a mainstay in power generation and baseload was retired. The below chart shows the amount of installed wind capacity, but during the winter, actual capacity drops by over half. This puts extra stress on baseload and causes peak shavers to kick in more frequently to fill the gaps in the system.
As the cold weather ripped from North Dakota down to Texas, cracks in the grid were starting to form. The below chart highlights how nuclear and coal maintained steady activity as wind died down starting Feb 9th and was quickly replaced by natural gas. But remember, it is cold! Everyone in the area was starting to crank their heat to keep warm, which pulled natural gas out of the system quickly. Midstream assets responded by pulling down spot natural gas from storage and pools to fill the rising demand. Texas and the surrounding areas also rely heavily on electricity to heat their homes. So as the temperature dropped, demand rose for electricity, and natural gas power plants were turning on in rapid fashion to stabilize the grid as power demand accelerated.
There are rules on who gets distributed natural gas first—residential, industrial with firm contracts, then industrial with interruptible contracts. So the first crack came with peak shavers losing their natural gas supply as pipelines looked to protect pressure and keep residential customers supplied. As all of this was going on, the equipment that is broadly exposed to the elements started to fail. Equipment at power plants, midstream compressor stations, and other industrial assets started to freeze over and created a cascading drop in available natural gas and electricity. In order to maintain grid integrity, ERCOT began rolling blackouts to cut power in a controlled fashion and keep the system up and running.
The below chart is just a snapshot of the shortfalls that existed in the Texas energy market, with prolonged issues still expected across the system. Even a nuclear reactor was kicked offline at South Texas Nuclear Power Station after the water intake pipe froze, causing an automatic shutdown. In order to bring a reactor back online, there is a massive checklist that has to be completed for safety measures. This isn’t as simple as turning a switch back on or just opening the window to cool down the reactor.
Just like most catastrophes, Texas’s latest disaster has been a series of unfortunate events. What caused such a broad breakdown resulting in an estimate of 30k MW of power shortage? There is enough blame to go around the circle many times, but we need to address the problem—because the failures in Texas are coming to a grid near you. Each failure needs to be a lesson learned where politics step aside so we can structure a system that is sustainable and redundant in all conditions. As global climate change takes hold, extreme weather is becoming the broader norm (I wrote last week about droughts and floods becoming more common), and this includes extreme heat and cold in all parts of the world. I am not here to argue Why is climate change happening? or Who/what is causing it? But it is clear that weather patterns are shifting to be more extreme, and we must adapt.
ERCOT is an “energy only” system, which means producers are only compensated for power produced, while a capacity market provides compensation for readiness or spare capacity for power as well. It is unlikely ERCOT will adopt a spare capacity fee like other areas of the U.S., but there is value in having a monthly “fee” that can be used to upgrade the system by winterizing some assets. So here are some solutions for the future:
Provide a dual-fuel mandate at natural gas facilities that are deemed “critical.” This means the facilities will require at least 2 days’ of diesel available to power the generators. We are in Texas, remember—the refining capital of the world—they have a few barrels laying around.
As more focus is put on renewables, the price of projects has to factor in winterizing in some capacity (such as winterizing wind turbines), long-term NG (thermal) capacity that has storage (dual fuel capacity-diesel), and long-term contracts that provide for power supply to buffer grid capacity.
Build more baseload assets: coal, nuclear, or natural gas facilities (with dual-fuel capacity or heat tracers, or better yet: both) to provide adequate backup for alternate power sources.
Some people may not like the option of coal facilities or nuclear, but with the growth of carbon capture and advancements in reactor technology, these are very viable options due to their reliability. Politics have gotten in the way of the construction of both, but there is fantastic research highlighting the effectiveness of pebble reactors and coal with scrubbers and carbon capture. There are also advancements in renewable technology, micro and regional grids, smart grids, and storage capacity. This isn’t a “one size fits all” approach, but we need to recognize that weather, soil content, sun exposure, and many other factors have to be considered for national grid stability.
We are consistently asking the grid to do more as we have electrification mandates in various states, a push for more electric vehicles, and more electronics and interconnectivity in the house/office that pull from the grid. This build-out is happening as we retire coal and replace it with assets that need to have redundancy against inclement weather.
The real estate market has been booming with a record pace of permits and new construction, and a large part of these buildings are popping up in the South and Southwest Mountain regions. Each of these new houses is consuming a growing amount of electricity just as we pull baseload capacity out of the market. We are replacing it with natural gas (thermal) and renewables, all of which are great, but we need to ensure redundancy. Nobody dies when it is 65 and sunny with a 10 mph breeze; the loss of life happens when it is below freezing in people’s homes. These extreme weather events also result in millions of dollars in water damage from burst pipes and other destruction. The problems span across both the residential and industrial space: right now, about 2M barrels a day of refinery throughput will be offline for 4+ weeks to repair damaged equipment from the cold.
If the U.S wants to remain the top economy in the world, we need to have a serious conversation about baseload capacity. Thermal and renewables can work hand-in-hand, creating reliability and redundancy to keep costs low and industries open. The climate is changing, and extreme weather is happening more frequently. Electricity consumption is rising, from a heating source to the hundreds of compliances that are now interconnected, to make our daily lives more efficient. The cascading failure of the Texas grid could happen anywhere in the U.S. if we aren’t careful about baseload capacity. During the winters of 2013–2015 in the Northeast, we generated almost 87% of our power from nuclear and coal after renewables failed and natural gas facilities encountered freeze-offs (now there is a dual fuel mandate). Several of those coal facilities have been shuttered and replaced with more green solutions and natural gas.
Texas is a lesson for the rest of the U.S. in what challenges we face upgrading an aging and fragile grid. Are these assets up to the challenge? Will the planning go well? There are so many opportunities to increase baseload in the U.S. and still achieve the dream of reducing carbon emissions while securing a grid for the future. Our demands are increasing, but we ignore the fundamental groundwork of baseload power, transmission, and storage. We have yet to solve the storage conundrum, but we do have the ability to secure baseload power and increase transmission lines to help bridge the widening gap to the future. There are countless comments about crypto mining or EV adoption, but this grid is already fragile and getting worse by the minute. Japan has resorted to building around twenty-two coal facilities to replace their nuclear fleet following Fukushima, while China and India build out coal plants to provide cheap goods to the U.S. We have been exceptional at outsourcing our carbon footprint and burying our heads in the sand about the full life cycle of our products—from the raw materials to the disposal. I am not screaming from the rooftops to build coal, because we have other options available- especially natural gas. It does operate in Canada at artic temperatures, so we can clearly build redundant assets— same can be said about wind turbines in cold climates. We have options, but we must be realistic about what is right for the region it is being built and does it have proper redundancy. Other countries are already making decisions on how to address the baseload problem, and we must get serious on doing it ourselves.
It is time to take action. We all expect Netflix to turn on, our cell phones to charge, and our homes to be heated, but we ignore the VERY THING THAT DELIVERS IT. Wake up America, or widespread blackouts will become our new normal.
FOUNDER AND CEO, C6 Capital Holdings
Mark Rossano is a financial industry veteran and renowned expert on global financial markets and supply-chain analysis. As Founder and CEO of C6 Capital Holdings LLC, he provides investment and consulting services to clients across multiple sectors with a pronounced focus on global product flows.
Mark’s deep-dive supply chain expertise is in high demand—he serves as a consulting executive to several international businesses, is an equity partner in several others, and is now a frequent contributor to Bloomberg TV after serving as a Bloomberg Energy Industry Analyst.
That expertise and deep-dive knowledge has been crafted over many years in a variety of roles such as Senior Energy Analyst and Macro-Economist positions at Elevation, Candlewood Investment Group, and South Ferry Capital Management, to his formative experiences as a Portfolio Manager at FNY Capital and Morgan Stanley Investment Management, where he managed an eight-person team focused on developing a global trade platform to invest in rates, foreign exchange, commodities, and equities.
M.B.A. in Finance, Whitman School of Management
Loyola College in Maryland
B.A. in Economics