Risk and Reward in the Energy Industry: Lessons from Texas

By now, it is clear that the recent outages in Texas were not caused due to a specific asset or asset class, or market design, as my colleague Brett Feldman describes. The entire system orchestration failed. Wind and gas generation, transmission and distribution, the gas and water grids all suffered issues due to their design; most of them lacked the ability to withstand extremely low temperatures. 

In this crisis, the system did not fail to perform as expected. In 2011, ERCOT recognized the weaknesses in the system so the sector was aware what would happen in an event like the week of February 15. That said, it is difficult to manage risk from unpredictable events like this, as they are usually abstract and outbid for resources by other more pressing issues. In this case, very few people called for new regulation mandating better winterization with the necessary increase in energy rates.

No System Is Perfect

When planners design necessary changes to the power system they need to balance between the probability of an event affecting the grid—with the economic and societal costs that the event would cause—and the economic cost of enhancing the system to cope with those eventualities. Planners have the tools to design reliable power systems, but it is up to communities (through their regulators) to set the level of reliability they expect and accept that it has a cost attached to it. For some people, a similar event every decade might be acceptable, for others, a few minutes without electricity would be too much. 

Although the economic and community costs caused by the February crisis have been shown everywhere in the media, Texans have benefitted significantly from the current power system design. The cost of their system is low and that is reflected in their monthly energy bills, they have some of the lowest prices per kilowatt-hour in the world, benefitting both residents and companies operating in their territory.

On the other end of the spectrum, Europe has one of the most resilient energy systems in the world, but that is transferred to significantly higher electricity bills. For comparison, a resident in Texas pays about $4/month in transmission and distribution utility charges, while someone in the UK would pay about $8/month.

What Do We Want from Our Future Power System? 

Power system design considerations are as far from everyone’s minds as something can be (except in Texas), but they shouldn’t be. We are going through the most important energy transition in a century and the decisions we take now will have a long-term effect on the energy system and on everyone’s lives. The introduction of renewables and distributed generation, the electrification of heat and transport, and the opportunities opened that neural grid technologies are creating new ways in which we can achieve a reliable grid. However, communities need to decide how to allocate risk and costs. Only then can we worry about checking all the options to reach an optimal solution.