One of America’s Largest Energy Markets May be on a Path to Its Reckoning

In February 2021, an icy cataclysm struck deep into the heart of Texas.  As citizens struggled to combat severe weather conditions, wholesale prices for electricity spiraling upwards to $9/kWh (for comparison in 2020, wholesale electric supply prices in Texas hovered around 2.2 cents). The chief culprit for the spike was the decline in supply caused by natural gas plants that went offline when they succumbed to the harsh weather conditions that battered the state. In response to this failing, Texas passed SB 2 & 3 which provide for the weatherization of power generation, natural gas facilities, and transmission facilities against extreme conditions.

Additionally, the legislation also provided for governance reforms to the Electric Reliability Council of Texas (“ERCOT”), the overseer of Texas’ peculiar energy market. Many citizens were quick to blame the system operator which has uniquely operated without any direct federal oversight since the foundation of its predecessor in 1941. Since 2000, it has overseen Texas’ deregulated energy market that largely operates according to basic supply-and-demand principles. Post-storm, it has faced major criticism and lawsuits for its handling of the situation that ultimately left millions of Texans without power. In September, Richard Glick, the newly appointed chairman of the Federal Energy Regulatory Commission (“FERC”), took aim at the autonomy of the ERCOT. Glick has called Texas’ arrangement “very short-sighted” and promised to consider recommendations that would bring Texas’ mammoth energy market in line with those around the country.  While Texas’ oil pipelines that supply fuel to generators are generally exempt from FERC oversight, the FERC has alluded to pending investigations of pipeline operators for market manipulation.

These remarks may have been well-heard by the Texas Public Utilities Council (PUC). At a recent meeting, the PUC agreed to explore the possibility of setting a reliability obligation for all load serving entities. Such a reform would create a market for stand-by generation that the grid operator would call upon to perform during periods of high demand on the delivery system. Stand-by generation is typically not compensated by prevailing market prices at dispatch but rather by ‘capacity payments’ set on a roughly annually basis by the grid operator. While critics contend that the imposition of capacity payments, would unduly inflate the consumer cost of electricity and subsidize inefficient assets, supporters say that they would mitigate the widespread blackouts and exorbitant bills that Texans experienced.

As temperatures begin to drop around the country, some fear that Texas is still not prepared for cold winters ahead. The imposition of reliability obligations that clash with the philosophical underpinnings of the Texas market is still speculative and the effects of the recent legislation will not be immediately felt.  The legislature did not mandate that the weatherization requirements of SBs 2 & 3 be implemented until 2023. Because the legislation limited weatherization to only ‘critical’ natural gas wells and pipelines responsible for supplying power plants, regulators must go through the painstaking process of cataloguing such before regulators make asset owners responsible for upgrades.

The irony of America’s energy hub being unable to serve its citizens basic needs may be too much for its citizens to bear once more. In 2011 economists at the Dallas Federal Reserve estimated that it would cost between $85 million and $200 million annually to winterize Texas plants – less than 1% of the annual revenue of the Texas gas industry. On January 2nd, a cold front in West Texas caused gas production to plummet 25% before rebounding. For many Texans, the lingering clouds of energy worries will persist unnecessarily until a more permanent solution is found.