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Blame Game - Part II

Like two children trying to pin the blame for Grandma’s broken vase, each side of the great political divide regarding the environment has been pointing blamingfingers for the blackouts in Texas. We will find out more details as time goes on and the necessary investigations go forward. However, as usual the true culprit is likely to be a combination of factors.

I was not surprised when the Wall Street Journal – which often exhibits a level of climate skepticism – published an editorial that colored the Texas trauma as a cautionary tale of over-reliance on renewable power. The same day, Bloomberg News – whose editorial bent tends to be a green cheerleader – squarely placed the blame on the failures of the thermal generation fleet.

Break! Go to your neutral corners!

When two boxers are caught in an embrace that does not serve to determine who is the better pugilist, the referee orders the fighters to “break”. Sometimes, the referee will tell them to go to “neutral corners” to reset the match. If we could do that in the debate between the “skeptics” and the “greens”, finding facts and arriving at sensible outcomes might be possible.

Clearly the generation infrastructure in Texas was not built to handle an event like the one it has just experienced. As a summer peaking system, a heavy load would be 50 GWs. On the first day of the recent blackouts, the peak was 70 GWs. That is 20,000 Megawatts over a high load day in Winter. To put this in perspective, that is more than 10 large nuclear units, 40 average sized natural gas units, or nearly 100 wind farms!

It is also true that the natural gas system in Texas was not built to gather and transport fuel in such extremely low temperatures. That capability exits in North Dakota and Oklahoma but not in the Permian Basin.

Wind generation was low, and, in some cases, turbines froze, but not at levels that were decisive. Traders were telling me wind output was only 4-7% off normal output this time of year. Solar was probably down because of snow cover but again – not at decisive levels.

In these early days, it seems reasonable to believe that this was an extraordinary event that created a demand dynamic of unheard-of levels that also constrained supply systems for extraction and delivery of fuel. Even a nuclear unit was reportedly down because a system detected that water was not being delivered for cooling which was probably the result of freezing conditions.

This leads to the key question: Should an electric system be designed to procure and deliver at such levels and under such circumstances even though these conditions are considered highly unlikely, “stochastic” events? And if so, how should that system be procured and compensated?

Some might reflexively point out that a market model, based on economic efficiency, will not give the incentives to procure to such outlier levels. Natural gas prices have been so low for so long that an E&P company or a pipeline may not have the incentive to make necessary investments for such an unlikely situation. A fair point.

But would a regulator have the inclination to allow for recovery for expensive investments that lie outside the normal life cycle of an investment? Experience in almost any regulatory jurisdiction suggests that finding that procurement for outlier events would not often meet a “reasonable” standard and therefore a utility would not have the permission to proceed.

The struggle in the next few years will be how we resolve this paradox, and reaching that resolution will be complicated by the rapid integration of renewables. Switching epochs at a time when there may be a need to procure beyond normal reliability thresholds requires a heavy dose of setting aside political talking points and engaging in discussions by people of good will.

Broadly Speaking…

One of the delights of the occasional long drive lately has been to listen to the ever-increasing number of high-quality podcasts. One of my favorites is produced by The Economist. A recent podcast discussed a near future in which prices for hydrocarbons (Oil, Natural Gas) will be high while, simultaneously, the price for inputs to renewable energy generators may be high.

At first this may seem odd as oil is available in great surplus. The problem is one of supply whereby the members of the OPEC cartel cut supply to boost prices. Additionally, some producers are being sidelined for political reasons (Iran) and US production has been drastically cut back in reaction to low prices. For Natural Gas, since the long-term outlook for hydrocarbons is murky at best, investment in production may not be attractive.

But what about renewables? Well, that may be both a demand and a supply issue as well since global demand for renewables is growing rapidly. While renewables may not have high input costs, the drive for storage may increasingly find a squeeze for the materials necessary to make batteries. There are few places where cobalt, lithium and rare earth metals are available and many of these are difficult to access.

While policy makers and regulators are tasked with guarding against high prices, some object to high prices to the point where they seem to ignore market fundamentals which can perversely lead to chronically high prices – or dangerously low levels of investment. The move to adopt renewables and storage is beneficial for many reasons. However, the transition could be a bit bumpy as policy desires clash with the fundamentals of supply and demand.

If the future view of energy expressed by The Economist is at all close to our collective reality, the need for an earnest discussion on goals and design is necessary. What level of reliability do we wish to procure while meeting our environmental goals? What is the cost of that agreed-upon goal? Finally, how do we structure the procurement level and necessary compensation without paying more than we need? We have seen very poignantly in Texas how devastating the consequences of not addressing these difficult questions can be.  Perhaps it is time to “break”, return to neutral corners, and reapproach this discussion constructively, and with the necessary sense of urgency.