In response to the February extreme cold weather event in Texas, resulting in significant electric outages across the Electric Reliability Council of Texas (ERCOT) system, the National Regulatory Research Institute (NRRI), an arm of the National Association of Regulatory Utility Commissioners (NARUC) published a new report: “Regulatory Questions Engendered by the Texas Energy Crisis of 2021.”
Authors Carl Pechman, PhD, and Elliott Nethercutt lay out a slew of important regulatory questions that have arisen in the wake of the event. One question is whether active or passive market manipulation was a play.
From the report:
“One way to withhold generation is to take a generator offline during needle peaks to perform discretionary inspections, such as deciding to shut down a generator during a time of a critical system conditions to have divers search a unit’s cooling water intakes for zebra mussels. This is a reasonable thing to do under normal circumstances but is an exercise of market power when the system is experiencing such a high level of stress.”
Passive withholding, said report authors, occurs when a generator, for example, winterizes only a portion of its fleet in anticipation of high market prices when a cold-weather event occurs.
More from the report:
“As a consequence, generator owners may have an incentive to make weatherization enhancements to only a portion of their fleet, enabling those units to operate through extreme temperatures and access higher revenues that would more than compensate for generation units that are forced out of service. Sophisticated generation and trading companies have game theorists who evaluate alternative ways in which their firms can gain profits. In retrospect, a firm that selectively winterized its generators would have made significant profits.”
The authors explain that investigators should be able to determine if passive withholding was at play by performing an analysis of winterization investments made by plant owners as well as fuel procurement practices and effected availability for providers with larger generator portfolios.
There is also the question of the gas prices. Texas is the only energy market in the United States whose market rules tie energy prices directly to a natural gas price index and there is a low price cap (LCAP) of $2000 per MWh or 50 times the natural gas price index value determined by ERCOT. Further, the market cap for electricity pricing is $9,000 per MWh in ERCOTs territory. In the case of the last Texas freeze, the price for natural gas rose so high that it was not economically viable for the natural gas-fueled generators to generate electricity. As it was explained by an economist in an ERCOT board meeting, ‘if you sell your goods at the market for $2 but it costs $10 just to get to the market, why would you go?’
According to the NRRI report, without that cap in place, “gas prices would have driven energy prices to as high as $17,957/MWh.”
Whether or not these natural gas prices may have been inflated due to an exercise of market power also warrants investigation by FERC and the appropriate Texas authorities, said report authors.
Further, the authors question the decision by ERCOT to artificially keep the electricity price at that market cap, which they decided to do after an emergency meeting that took place during the crisis on February 15.
Again, the report:
“There is a presumption by the Commission that enabling such market prices was consistent with the design of the market. However, if this was not contemplated in the market design, then the Commission’s actions were taken simply to raise market prices. Without sufficient information to create expectations about the response, this action needs to be investigated to determine whether or not it inappropriately led to the exercise of market power for which profits should be disgorged….. At issue is whether or not the Commission had a reasonable expectation that generators would actually respond. Indeed, it is important to determine whether this action inappropriately effectuated the enormous wealth transfer that will result in continued economic disruption, customer hardship, bankruptcy, and business failure in the midst of a pandemic.”
NRRI said in a press release that it introduced these questions to foster better understanding of the event, facilitate conversations, identify potential solutions and focus on a learning experience that will help to prevent such crises in the future.
“The solution to building a more resilient grid will involve the input of many stakeholders. It will be a complicated conversation, with many competing interests, but a necessary one,” said NRRI and NARUC Executive Director Greg R. White.
To download the entire report, click here.