JuanValdez, What Happened To The Grid?

Well the first part is right. Many to all REPs would have been short on their supply going into the Day Ahead and Realtime markets because heating demand would have caught them by surprise. So, they were paying the $9k rate. But at that point, they have no option but to provide supply. Once you get to the Realtime market, customers just use what they use and their REPs have to settle up. The power plants likewise probably had to burn more gas than they had arranged for bilaterally, and had to buy at the high gas prices. But their incentives to do so are: (a) they get $9k/mwh, (b) they are dispatched (told when to turn on and when to turn off) by ERCOT and would have to fake a malfunction to not run, and (c) if the PUCT found out they could have run and chose not to, they'd be excoriated, punished, shamed, and put themselves in danger of more and adverse regulation in the future.

There had been some recriminations about the blackouts in Northern Mexico, with Mexican plants complaining that Texan gas suppliers cut them off and Texan gas suppliers saying the Mexicans were unwilling to pay the market prices. I'm not sure who is right on that one.

Again, I don't know a lot about gas, but I'd say this about the 2011 report. There was a lot of specific recommendations for ERCOT and power generators of what they should do to avoid a repeat. But while it acknowledged a problem in gas production, they had some very weak recommendations there (basically we should look into this further) so I wouldn't be surprised if nothing was done there.

 

I get it. The California energy crisis (which lasted for the better part of a year, not a week) though was caused by criminals who found flaws in a new market construct. Our market has been working for 20 years. We might have criminals, but it seems unlikely that they finally found a cheat just in time for an epic winter storm. Big picture, the main culprits here seem to be shaping up to be: (1) climate change, (2) under-estimation by ERCOT, (3) unwillingness of the Legislature/PUCT to require sufficient minimum design standards for power plants, and (4) lack of recognition of the electricity industry's reliance on the gas industry, and sufficient regulation on gas production in light of our dependence. I've seen a lot of blame thrown at our "deregulated" (in quotes because we're restructured and still have regulations) market, but I'm still a believer. We still have the best market construct in the country (and arguably the world), and I don't think it's the cause of the crisis.

 

Cali was shady. Enron, Reliant, Dynegy, others were shutting down plants for fake maintenance to cause blackouts and rise prices, then they would turn the plants back on. It was pure price manipulation and people went to jail.

This situation was driven by infrastructure + cold weather. You have something like 25Bcf of gas generated in Texas a day, freezeoffs happen and now you're at half that. Texas doesnt develop as much gas storage as other states bc why bother, you have all this production. The storage you did have was max withdrawn.

Why was gas so expensive? Demand through the roof, no supply. People were pulling gas out of storage in northern states and backhauling it back to Texas to try to keep deliveries whole. So you're paying replacement cost of northern gas + storage overrun + transportation to get it down there. And there is delivery risk in that move on a lot of levels. You're praying the downstream will take it, you worry the pipeline wont declare a FM somewhere along the path - if you buy from someone in Ohio to flow to your market in Texas, and something happens along they way you just cut your supplier in Marcellus. They could be stuck with pipeline imbalance charges and hit you with them. If they have to shut in production thats very expensive.

 

I like this thread, cause instead of asking a bunch of yoyos,
you went directly to someone you know who is intelligent and well cultured
@pgabriel

Call on us anytime
@Ziggy @Space Ghost @DaDakota @JuanValdez @Rocket River

you know the two digits

 

I read one of the problems with gas was dehydration from pipeline drips. It's just one component of dehydration but it doesn't work in unheated pipes at temperature below freezing.

 

Apologies if I'm just talking to myself now. But I've been thinking about winners and losers in this debacle.

Losers:
* Griddy customers: Just to get it out of the way. They signed up for direct exposure to the wholesale markets. They perhaps didn't know what they were getting into. Blessed be they who lost power and were prevented from buying electricity at ridiculously high prices.

* Griddy: While they passed through their high energy costs to customers, they lose in other ways. I'm not sure they were able to pass all ancillary costs to customers, and those were higher than energy costs in some hours. MacQuarie did come and fund them to stave off immediate default. But, everyone in the Texas political community and in the industry want them dead, so I'm not sure how long they can last. Would not be surprised to see their business model effectively outlawed in this legislative session.

* Competitive retailers of electricity (aside from Griddy): Mostly short on their positions because of the ramp up of demand, they have to cover weather-related demand at $9k/mwh but sell it to customers at contracted rates. 20 retailers are on the watchlist for bankruptcy.

* Customers of regulated power and gas utilities (like Entergy, CenterPoint, Atmos Energy, Austin Energy, CPS Energy, etc): The biggest losers of all because there's millions of us and we won't even realize what's happened to us, mostly. The utilities spent essentially $1,000/customer extra (very rough) for the gas and power needed to supply their customers. These companies flatten out the volatility for their customers, but they do not absorb any of the risk. They will file for recovery of all their costs and it will likely be granted by state utility commissions. That means they get to put a rider on our utility bills to collect extra to cover what they had to spend this last February. For example, CenterPoint Energy spent an extra $1.2 billion to supply gas to their gas utility customers, which is very roughly a bit over $500/customer. With some back-of-the-envelope math, if they raise our gas bills 25% for 6 years, that should do it.

Neutral or Mixed:
* Customers of competitive retail electricity companies: Yeah, yeah, everyone is afraid of the scary high variable price bills. A good portion of these customers are on fixed-rate contracts, so they were completely insulated from the high prices of the storm. Completely. Their retailer might go bankrupt protecting them, but that's how it goes. Many of these retailers have also promised now to not increase rates on their variable rate customers to mitigate the costs of the storm, so they're protected too. Even the retailers who do increase rates can only do a small fraction of their costs -- maybe they charge 20 cents or 25 cents, but not anything close to a Griddy-like $90. It is counter-narrative perhaps, but the evil capitalists actually saved their customers from risk while the angels at nonprofit electric co-ops throw their customers to the effin' wolves.

* Regulated gas and power utilities: They get rate recovery for everything. They spent billions extra, mostly for gas, in TX, OK, LA, NM, KS, AR and beyond. But none so far have indicated any concern that their shareholders will bear any of that cost. There have already been orders in TX and KS at least approving it. They take no profits from commodity supply and will not take any risk. They are like giant state-sanctioned Griddys.

Winners:
* Merchant generators: Usually they'll sell much of their generation forward at fixed prices, so they were mostly not earning $9k/mwh. But, they could for whatever exposure they left themselves, provided they could get their plants to run. If they contracted forward and then failed to run, they might have had to buy at spot prices to satisfy their contracts, which would be a loss. Also, some generators also have retail arms, so they net their retail losses against their generation gains. So overall, not big winners, but maybe modest winners.

* Gas E&P: Not my area, but looking like winners here, at least for the ones who could run their wells. Again, they might have sold forward at fixed prices, so maybe they don't get all that upside.

* Financial speculators: Some big winners here. Companies with firm capacity on pipelines or who bought forward to speculate on realtime prices must have made a killing. MacQuarie Group actually published guidance right before the storm and then a few days later revised it upward because of how much money they made on the event.

 

Absolutely amazing visit by President Biden today extremely motivating -- his leadership will power Texas through these tough times.

 

Long-term LOSERs - all of us in increased electricity and home insurance rate. The costs will be absorbed now but will be passed on to customers over the years, starting immediately.

One thing I hear is Texas Electricity cost is one of the lowest in the nation (before this event) due to de-regulation. But is that true? Maybe the wholesale price is cheaper and maybe even some larger customers benefits, but overall, customers under deregulation sure are paying more. Why is 1+1=3 here? You have any insights here?

It seems the losers all along have been customers under de-regulated system in TX and now all Texans will pay even more. LOSERs!

Texas Electric Bills Were $28 Billion Higher Under Deregulation - WSJ

For two decades, its customers have paid more for electricity than state residents who are served by traditional utilities, a Wall Street Journal analysis has found.

Nearly 20 years ago, Texas shifted from using full-service regulated utilities to generate power and deliver it to consumers. The state deregulated power generation, creating the system that failed last week. And it required nearly 60% of consumers to buy their electricity from one of many retail power companies, rather than a local utility.

Those deregulated Texas residential consumers paid $28 billion more for their power since 2004 than they would have paid at the rates charged to the customers of the state’s traditional utilities, according to the Journal’s analysis of data from the federal Energy Information Administration.

...

 

Not sure what you mean.

As for how much de-regulation has costed consumers, the comparison is within TX, not outside.

"Those deregulated Texas residential consumers paid $28 billion more for their power since 2004 than they would have paid at the rates charged to the customers of the state’s traditional utilities, according to the Journal’s analysis of data from the federal Energy Information Administration."

 

I see what you are saying now. I grouped both of them together.

TX deregulation (not retail choice) is said to lead to one of the lowest electricity cost in the nation. Within TX, customers with retail choices (let’s just call it that) paid all-together much more than customers without choices. If both statement is correct, it sounds like the better solution should have been deregulation without retail choices.

Ps. This isn’t new (higher costs to customers with retail choices) and has been reported many times - first time I read about it was probably at least 5 years ago. Speak to the lack of customer advocacy within PUC and ERCOT.

 

I'll try to unpack some of this.

1. Comparing state prices for electricity is a bit simplistic, but Texas is top-10 on overall prices and around #20 for residential prices. The reason I say it's simplistic is that natural resources have a big role. For example, states with abundant hydro resources tend to have very low rates because hydro has almost no variable cost. But Texas does alright.

2. You are very right about costs being absorbed now and paid for by consumers later. What you're not understanding is that it will not be the competitive suppliers in Texas that will be doing that. The competitive retailers cannot price in their historic costs; they can (at best) price in their future risk. If they try to recoup their past losses with higher prices, their customers will just jump to another competitive retailer who isn't doing that. And there is always another competitive retailer because the barrier to entry in this market is fairly low. Customers of competitive retailers were protected by those companies. They suffered heavy financial losses and some will go bankrupt because they had to serve us at high wholesale prices. But the shareholders will pay, not us the customers.

3. It will be the regulated utilities (think Austin Energy, CPS Energy in San Antonio, Entergy, CenterPoint Energy for gas, Atmos Energy in North Texas for gas, and then all those regulated utilities in neighboring states like LA, AR, OK, KS, NM, CO, etc) that will pass that cost to customers. They can, routinely do, and will ask their regulators for a rider on utility bills to cover their losses from buying expensive power and gas in February. The regulators will grant it and millions of people will pay it because those utilities are monopolies and customers cannot leave. Since many of us are in Houston, I'll necrobump this thread when CenterPoint tells us how much they're going to charge us for all that expensive gas they served (expensive gas, btw, I didn't get to burn because my power was out).

4. That WSJ article is crap. I'm actually really disappointed in the WSJ as an elite market-minded newspaper that they actually published such shoddy work. Here's what's wrong with it.

(A) As I said earlier, natural resources play a part in prevailing prices, from state-to-state and node-to-node in Texas. When we restructured the market, we grandfathered some coops and munis. They already had lower prices than places like Houston and Dallas. You have, for example, hydro power in the Lower Colorado River Authority. That was part of the reason why Houston and Dallas wanted restructuring and they did not. So comparing prices from place to place isn't terribly valid.

(B) Markets set efficient prices, which means (as you suspected) that large commercial and industrial customers benefited more from restructuring because they could pay according to their market leverage (which is great imo because it gives Texas an economic advantage as a place to do business and then it's reflected in the prices charged to consumers in Texas, but that's a side point). A regulated entity cares more about their political masters, who in turn want votes for human beings, so they come up with rate schedules that extract value from commercial customers (who don't want to leave their markets) to subsidize residential customers. So when you do an analysis to compare residential rates, the delta you find actually reflects a pricing cross-subsidization. And, those customers end up paying from the other pocket anyway because the goods they buy have to cost a little extra to cover those energy costs.

(C) Given the importance of physical location in forming prices, a more honest analysis would look at what prices do over time in each territory. Looking at it that way, you'd see prices in competitive areas have come down since restructuring (thanks in part to the fracking boom) and they haven't really improved in monopoly utility areas (despite the fracking boom). Because they don't compete, utilities tend to get fat over time, but the competitive retailers have just gotten leaner.

 

Thanks JuanValdez. 1+1 is getting closer to 3. I'm still not understanding many things.

1- Many retailers are going to belly up, leaving only the few bigger players. How is this "marketplace" competitive especially when the smaller players cannot survive the "wholesale" spot price that we just witnessed. I don't see how smaller players are able to enter and gain a foothold again due to the high risk to them, unless there are some regulations in place to "artificially" makes it more competitive (e.g. larger player must charge a min price to customers, or smaller players get funding from the state, etc.) but that would I think cause cost to go up and mess up the whole idea of free competition.

2- Since de-regulation broke up retailers from wholesalers (energy producers) and retailer can buy from any wholesalers within the state, why does locality within TX matter that much? Are we saying that the loss in transmission is that significant? Or is there an extra fee/charge for longer distance transmission?

3- Who owns the transmission lines from producers to retailers and from retailers to customers? I assume this is still fully regulated as it involves every players. If this needs to be beefed up (and I assume it needs to be because it seems the "balancing" of load shredding wasn't balanced at all), aren't we all going to end up with additional charges?

4- I disagree with some of your 4b, but I don't want to get into that at this point.

 

I've been wondering about load shedding as well. Seems like centerpint/someone should have the ability to shutoff smart electric meters remotely at the individual house / business granularity.

I don't think there needs to be new hardware infrastructure to do smarter rolling blackouts where the customers can be notified in ahead of when power will go out and resume. Shedding power can also be done in a much smoother manner to better match power generation.

If it's only a software infrastructure that needs to be built, maybe it's a project that can done in a few years and a few million dollars rather than tens or hundreds of millions. Does anyone have insight?

 

Complicated answer to a simple question. Restructuring in wholesale markets in Texas and elsewhere has definitely reduced prices and there's good scholarship on it. Restructuring retail markets in the Midwest and Northeast has not been very successful. It has been successful in Texas.

1. As I'd said, the barrier to entry is low. You need a way to sign up customers, a way to buy electricity in the wholesale market for them, a way to bill, and collateral to post. I now have several colleagues from big retailers who have hung up their own shingle. There is another segment of the industry that will "sleeve" small retailers. "Sleeving" is when they will cover your wholesale participation, including posting collateral, and you just focus on signing up customers. Which you can accomplish to some extent just by posting the lowest price on powertochoose.com. Prices will probably increase in the near-term to reflect the risk retailers face of disasters like this one. But invariably, new entrants are always eroding the risk adder by competing on price (and gambling/praying they can sell out before the next disaster). I've already seen this cycle after the 2014 polar vortex that hit the Midwest. Six companies went out of business and the risk adders went up, but now salespeople complain their risk adders are all gone again.

2. First off, if you own generation and have customer relationships, you use your own generation to hedge your customer positions. If you own really cheap hydro power and have captive customers, you don't sell it to the market, you serve it to your customers. Second, there are ancillary costs associated with making the grid go, including moving the power you bought from the hub to the loadzone (the customer). There are a couple thousand nodes in ERCOT with their own settlement prices. So if a locality is near very cheap power, or conversely has a transmission problem that cause frequent congestion on the line, it'll impact prices.

3. Transmission is still fully regulated. Distribution is also fully regulated. But those systems didn't fail. The gas wells and the power plants failed. Texas I'm sure will continue to invest in transmission and bill it to customers just as regular business (and to respond to growing renewables). The distribution utilities might need more investment (I don't know) to address their capabilities to roll blackouts in a disaster. If so, you'll see that reflected in utility bills.