The Texas energy crisis: its causes and consequences
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Before this week, the lowest February temperature recorded in San Antonio was 16°F (-9°C) in 1895, when Grover Cleveland was president. On Tuesday, that record was shattered. Temperatures in San Antonio hit a new February low of 12°F (-11°C), as a blast of cold air roared down the central US from Canada to the Gulf of Mexico. The resulting collapse in power generation in Texas left millions without electricity, exposing critical vulnerabilities in the state that takes being in being the heartland of the US energy industry.
The lessons will be studied for years to come, but at the end of the first week, the outlines of the disaster are becoming clear. The role of renewable energy in the crisis has been much discussed, but the reality is that there was a much wider failure of the electricity system in Texas. In terms of megawatts of generation capacity that were unexpectedly unavailable, it was gas-fired plants that were the source of the biggest problems.
The disaster began with a disruption of the stratospheric polar vortex: the west to east circulation of air around the Arctic. On 5 January there was a sudden stratospheric warming: a sharp increase in temperatures that caused the flow of winds to slow and ultimately change direction. That allowed cold polar air that had been bottled up over the Arctic to escape and flow down across the US.
There does not seem to be any clear link to global warming. The trend in sudden stratospheric warming events has been roughly flat since the 1970s, although there was a strange lull between the late 1980s and late 1990s. That lull may have helped create a false sense that these are rare events. In fact they occur on average about six times a decade, although they do not always cause the southward rush of cold air that we have seen in the past week.
The clearest warning signs in energy markets came from natural gas prices last week. Production freeze-offs, caused by water and other liquids freezing and blocking the flow of gas out of the wellhead, started spreading as temperatures dropped. As supplies tightened, prices soared at some hubs, with some buyers paying more than $600 per million British Thermal Units for Midcontinent gas. At the beginning of the month, it was below $3.
Those prices were “set to rise even higher with more severe cold on its way,” noted Eugene Kim, a research director on Wood Mackenzie’s Americas gas team. Wellheads in Texas were not well prepared for freezing conditions, he wrote, and “power outages may occur and logistical issues such as icy roads may hamper normal field operations.”
Those conditions began to materialise over the weekend, as snow started falling in Texas. By Monday morning, the grid operator ERCOT was forced to begin rolling blackouts affecting millions of people, which for many would last for days. Power on the ERCOT grid is monitored in real time by Wood Mackenzie’s Genscape service, and its data showed the problems hitting almost all types of generation between Sunday and Monday.
The average capacity factor — generation as a percentage of nameplate capacity — dropped from 19% to 14% for wind, but there were also steep declines for thermal plants. For the plants followed by Genscape, which account for the majority of the generation on ERCOT, the average capacity factor dropped from 52% to 43% for gas, and from 73% to 60% for coal. Even nuclear fell off, from 94% to 75% of maximum output. Those declines hit as demand for power surged, with Texans trying to heat their homes in unusually cold conditions, and the system could not cope. There were blackouts in several other states, including Louisiana, Alabama and Mississippi, but Texas was the worst affected.
There appears to have been a range of problems hitting the Texas power plants, but the common theme was equipment failure at facilities that were not fully prepared for the bitterly cold temperatures they faced. ERCOT had modelled various scenarios for difficult winter conditions, in its Seasonal Assessment of Resource Adequacy, published last November, but it had not reckoned on such a broad-based collapse in the availability of generation capacity.
As predicted, the blackouts added to the problems facing gas production, in turn creating more problems for some power plants. At the peak on Tuesday, about 18.7 billion cubic feet per day of gas production was lost because of freeze-offs, Genscape estimated. That is equivalent to about a fifth of total US output. Prices spiked as a result, with daily cash prices in the Midcontinent going as high as $1,250/mmbtu for some deals.
By Thursday evening, more than 2 million customers had had their power restored, although there were still about 300,000 facing outages. Temperatures were expected to start rising steadily on Friday, with Houston getting into the 20s in Celsius / the 70s in Fahrenheit by Wednesday. It will take time for the full cost of the crisis to emerge, however, and the recriminations can be expected to last even longer.
Temperatures as low as the ones we have seen this week are rare in Texas, but not unprecedented. A cold spell in February 2011 caused outages affecting millions of customers, although the conditions were not as severe and the blackouts were not as widespread or as prolonged. A report on the incident by the staffs of the Federal Energy Regulatory Commission and the North American Electric Reliability Corporation acknowledged that it was difficult to know how much should be spent protecting the grid against cold weather events that would not come every winter. However, it added: “In many cases, the needed fixes would not be unduly expensive”. It made a number of recommendations that the task force believed would make the grid more resilient to cold weather in a cost-effective way.
The question of how far those recommendations have been adopted will be closely scrutinised in the weeks to come. Rebecca Miller, Genscape’s research manager for ERCOT, said: “Some winterisation has been done, but there has not been a market-wide push for it. One lesson from this week is that many of the stakeholders involved in the electricity system in Texas could have done more to make supply more resilient.”
The crisis also raises questions about the direction of travel of the US power industry towards greater reliance on renewables and gas-fired plants. Wade Schauer, Wood Mackenzie’s research director for Americas power and renewables, highlighted the implications of the phase-out of nuclear and coal plants for future polar vortex events. To replace the contribution that coal and nuclear have provided in the past nine days, the US would need five times as much generation from wind and solar, or rely more heavily on natural gas. Advances in long-duration storage might help address that problem, but it is a reminder of the scale of the challenge that decarbonisation presents, especially with nuclear power on a long-term declining trend.
US oil disruption supports expectations of tighter markets
Texas is the leading state in the US for both oil and gas exports, and the disruption to output caused by the freezing conditions and blackouts has had implications for global markets. By the end of the week, though, the challenges to supplies were already passing.
High gas prices created incentives to divert gas away from LNG export facilities along the Gulf of Mexico coast. Texas-based Freeport LNG began shutting in trains starting early morning on Friday 12 February, and was fully offline by the morning of 16 February. The volume of feed gas slowing into US LNG plants plunged from about 10 billion cubic feet a day in January to about 2 bcf/d this week.
As gas prices and power prices fall back down to earth, however, exporters will be well incentivised to re-ramp LNG activity quickly, as US to Europe and US to Asia shipping arbitrages remains open. Cheniere Energy’s Sabine Pass facility in Louisiana is fully back online already, Genscape’s infrared cameras have shown.
For oil, similarly, the impact appears to have been significant but short-lived. Freeze-offs cut US oil production by more than 1 million barrels a day on Monday, but as temperatures rise output is likely to be fully restored within a few days.
Anne-Louise Hittle, Wood Mackenzie’s head of Macro Oils, noted that crude markets were already primed for strength, with growing concerns about a tightening balance of supply and demand. Fears of a prolonged impact of the freeze on oil production helped drive prices higher, with Brent crude trading above $65 a barrel for a while on Thursday.
Hittle said: “The increase in oil prices this week likely will help push OPEC+ toward a decision to increase production when it meets next month on 4 March.”
The US has agreed to meet Iran to discuss its nuclear programme, starting a process that could eventually lead to a relaxation of the sanctions that currently restrict Iranian oil exports. Antony Blinken, the secretary of state, told his counterparts from France, Germany and the UK that the US was prepared to join them in negotiations with Iran, in an attempt to encourage it to return to compliance with the 2015 international agreement over its nuclear programme. There is still some way to go before a deal can be reached, however.
Iran will have to take a number of steps to meet US conditions, and has indicated it would take those measures only after sanctions were lifted. Javad Zarif, Iran’s foreign minister, tweeted: “Our remedial measures are a response to US/E3 violations. Remove the cause if you fear the effect. We'll follow ACTION w/ action.” In a second tweet, he set out Iran’s position in more detail. “US unconditionally & effectively lift all sanctions imposed, re-imposed or re-labeled by Trump. We will then immediately reverse all remedial measures.”
Companies are rushing to develop lithium mines in the western US, to meet soaring demand for battery raw materials. Ranchers and Native American communities have raised concerns about projects being granted fast-track approvals.
A panel of two judges from a US court of appeals has extended an order that blocks ConocoPhillips from opening a gravel mine site and building roads to support its 100%-owned Willow project in the National Petroleum Reserve in Alaska. Wood Mackenzie analysts said the injunction almost certainly pushed the Willow project, a key part of ConocoPhillips’ Alaska strategy, back a year, and could affect its final investment decision.
Electric vehicle owners on average drive their cars only about half as much as people drive internal combustion engine vehicles, according to new research published by the Energy Institute at Haas. The researchers suggest that the result may reflect the fact that drivers do not yet view EVs as good substitutes for their ICE cars. “Unless there are major improvements in EV technology, regulators and policy-makers have more work to do to convince drivers to abandon their gasoline-powered cars for EVs,” the researchers write.
And finally: another energy book. Bill Gates has become increasingly interested in energy and climate change in recent years, investing more than $1 billion in technologies to cut emissions. He has now written a book to set out his views on the issue: How to avoid a climate disaster: The solutions we have and the breakthroughs we need.
It is a serious contribution to the climate debate, providing plenty of food for thought even if you disagree with his conclusions. And there is a good passage in the introduction summarising his position, which might be able to win widespread support. “The world overall should be using more of the goods and services that energy provides”, Gates writes. “The key to addressing climate change is to make clean energy just as cheap and reliable as what we get from fossil fuels.”
Quote of the week
“We are in a much better place than we were a year ago, but I must warn, once again, against complacency. The uncertainty is very high, and we have to be extremely cautious. The football match is still being played, and it is too early to celebrate and declare any victory against the virus. The referee is yet to blow the final whistle.” — Prince Abdulaziz bin Salman, Saudi Arabia’s energy minister, warned oil markets that the outcome of the next OPEC+ meeting, scheduled for 4 March, was still uncertain. The minister was speaking. Reuters had earlier reported that OPEC+ sources said the group was likely to ease its curbs on oil supply in April, following the rise in prices.
Chart of the week
This comes from the latest in our Horizons series analysing the big subjects in energy and natural resources. The report, by Murray Douglas, a research director in the Europe gas team, looks at the EU’s hugely ambitious goal of cutting greenhouse gas emissions by 55% by 2030, as a milestone on its road to net zero by 2050. One of the crucial conclusions on achieving that objective is that the price of carbon will have to be significantly higher than it is today. For deep decarbonisation, technologies including low-carbon hydrogen and carbon capture in the power, steel and cement industries will have to be widely used. But as this chart shows, even at their lowest estimated costs, these technologies generally need carbon prices higher than their current levels in the EU’s emissions trading system.