What happened in Texas was more than a “crisis” –it was a tragedy on multiple levels. It certainly created a captive audience with respect to better understanding our energy industry, particularly its weaknesses and dangers of variable pricing structures.
With the number of resulting class-action lawsuits increasing, how can the industry protect consumers from mass energy failures and outrageous energy costs?
Grit Daily spoke with Joe Haugen, the Director of Power Supply at IGS Energy, who is responsible for IGS Energy’s power supply and risk management. Haugen is responsible for power pricing, power trading and hedging, and wholesale market operations behind more than twenty utilities in ERCOT, ISO NE, MISO, and PJM.
“At a high level, the wholesale markets in Texas were not set up to drive as much investment in generation that was needed during the crisis,” Haugen says. “The Texas markets are based on the concept that you get paid for what you generate–when there is not enough generation, the market goes into scarcity pricing and sets the price of power at $9,000/MWh.”
Why Wasn’t Texas Prepared?
The overarching question goes back to why the State of Texas just wasn’t prepared from a utility standpoint. “Since this has historically happened so infrequently, besides low-cost renewable sites, it has been difficult to invest in building new generation and adding weatherization and backup fuel sources to current generation,” Haugen explains. “In my opinion, scarcity pricing does little to drive investment because it is difficult to predict. Instead, banks and generation developers are using futures markets and expectations of costs to make decisions.”
Haugen believes that if Texas wants to remain an energy-only market, it will need to change its construct to increase the reserves needed in the market and reduce the price cap in order to protect customers.
“For example, a price that clears $1,000 9% of the year is going to have more of an impact on investment than having $9,000 hit 1% of the year by creating a better expectation of revenue.”
The Market Needs to Maintain Grid Reliability
The wholesale energy market first needs to function as intended to drive competition, while maintaining grid reliability and incentivizing investment, Haugen explains. “Widespread blackouts are unsustainable and, frankly, unacceptable. Competition, consumer choice and innovation help ensure reliability and affordable prices. I also believe there are some design elements that can be implemented.”
Retail Suppliers Need to Manage Risk
From there, Haugen believes that retail suppliers need to step up and manage their customers’ risk. “Selling customers products that shift the risk to the customer should only be for the most sophisticated commercial and industrial customers, combined with ongoing education. As an industry, we have to take accountability for the best interests of our customers with the products we sell.”
With Climate Change, the Data is Clear
For environmental activists, climate change has certainly played a part with the severity of the Texas disaster.
“The data is clear, and the science is indisputable,” Haugen explains. “The frequency at which extreme weather events are happening tell us a huge part of climate change’s impact. When you see two different 100-year weather events only 10-years apart, you have to question whether our climate is acting in the same way that it has historically.” Haugen referenced a similar cold weather event back in 2011.
“And if our climate is acting differently and we are seeing extreme events more frequently, and it’s clear that we are, then our climate is changing, and we need to prepare to handle events like this more frequently. We need to listen to science-based approaches to slow climate change.”
Deciphering Fixed vs. Variable Pricing
For consumers, it’s important to distinguish between fixed and variable pricing, hoping to avoid the financial risk and enormous energy costs associated by such a crisis like we witnessed in Texas.
For the uninitiated, sticking with a known or fixed price is best, according to Haugen. “Variable products will typically move up and down with the market, and if you don’t understand what is moving the market, you are really just gambling.”
Haugen says IGS Energy along with other suppliers differ because of how they manage extremes for variable customers’ risk. “Our rate does move up and down with market expectations, but we work with our customers to continually educate them and advocate on their behalf. That kind of approach allowed us to avoid burdening our customers with those huge energy bills like we recently saw in Texas.”
Case Study: NRG Energy
Indeed, the Texas power crisis changed the notion that utilities are generally considered to be “sleepy stocks” with relatively attractive dividend yields and stable businesses. NRG Energy (NYSE: NRG) was a company that many investors were concerned could be harshly hit as the winter storm sent the price of power soaring. Thankfully, the storm didn’t seem to have caused significant financial damage to NRG, as many predicted.
NRG stock was up almost 9% in premarket trading. Futures on the S&P 500 and Dow Jones Industrial Average, for comparison, were each up about 1%.
But not all companies were as lucky. San Antonio’s municipal-owned utility said it got hit with an estimated $1 billion in energy costs, with one company stating it incurred $200 million in charges from the state’s grid operator and $800 million for fuel; costs that could take residents of San Antonio at least a decade to pay.
The utility has said that it will look to spread the cost of the storm over at least 10 years. Gold-Williams said that CPS Energy is continuing to negotiate to bring those costs down. She said that despite the unprecedented winter bill, it’s better equipped to weather the financial hit from the storm than some other Texas towns.
Brazos Electric Power Cooperative, the largest power generation and transmission co-op in the state, filed for bankruptcy Sunday after the company racked up an estimated $21 billion in charges over seven days of the storm, with the city of Denton racking up at least $207 million in power purchases over the span of a few days. This was more than triple its entire electrical power costs for fiscal year 2020.
Yet, what happened in Texas and consequently, its market conditions, the energy industry needs to approach “extreme” weather in the future with caution. “You need to embrace the fact that extreme weather is going to happen more often due to climate change, and you have to approach planning for market conditions in ways that focus on future modelling that can be stress tested,” Haugen advises.
“Going further, there are multiple ways to improve reliability in the power markets including the market construct described earlier. But other areas of the US have taken a different approach by utilizing a capacity market. This pays generation everyday a fixed amount to guarantee there is enough generation available when needed. It is an insurance policy, but it comes with a cost. Often, you pay a generator every day even though they may only operate a few times a year. But those generators would have come in handy in Texas during the event.”
The IGS Energy executive also says that having large, interconnected transmission grids throughout the U.S. can help move power to other regions when something like this happens.
“Additionally, enforcing winter preparations when it comes to the weatherization of plants and having back-up fuel on site is encouraged. Some states have stronger requirements and incentives than others when it comes to facilities and equipment winterization and general reliability. Many generators can switch from natural gas to stored oil for brief time periods.”
Improved communications between fuel sources, generation, and the regional dispatchers should be in place as well. All this to say, our energy industry needs help, and it starts with educating consumers and state regulators about the weaknesses, but also the advantages of utilizing renewable energy for the future.
