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Continued fallout from the Texas blackout: big financial trouble for energy providers, higher bills, and more blackouts.
The Electric Reliability Council of Texas (ERCOT), Texas’s primary grid operator, released a preliminary “seasonal assessment of resource adequacy” that predicts three extreme risk scenarios based on historical data from the summer of 2011. If Texas experiences similar conditions this season, which is likely, the report predicts capacity for power generation could fall short 3,614 megawatts.
The worst-case scenario would see the grid short by 14,000 megawatts, based on low wind output, low solar output, extreme peak load, and extreme generation outages of all sources. These numbers could mean 2.8 million Texans without power.
Winter weather in February 2021, combined with an unusual set of regulations and infrastructure shortcomings, left hundreds of thousands of Texans without energy supply. The higher demand resulted in higher electricity prices for many. According to data from EIA’s Electric Power Monthly in May, the average February electricity price was higher for all customer sectors in Texas compared with the same period last year.
Bleak predictions come alongside a bad financial outlook for the state’s many retail electric providers. In April, the Texas Public Utility Commission ordered ERCOT to implement a temporary adjustment to its scarcity pricing mechanism, which is designed to equalize real-time prices and the system-wide high offer cap (the statutory maximum is $9,000/MWh during the height of the forced outages).
Since then, several retail electric providers have filed for bankruptcy. Many companies and regulators (ERCOT, the PUCT, generators, retail electric providers, gas utilities, etc.) have been hit with lawsuits. Due to higher energy prices, ERCOT increased counterparty collateral requirements. In April, the PUCT issued an order extending the deadline to dispute ERCOT invoices related to February 2021 outages from 10 business days (stipulated by the current ERCOT protocols) to six months. The commission has not taken additional action on settlement invoices.
Some companies have defaulted on their financial obligations to the grid manager due to high ERCOT settlement invoice amounts. This leads to termination and exit from the market while leaving a lot of “unpaid bills.” Some have voluntarily terminated their registrations with ERCOT, opting out before their inevitable default. On April 14, ERCOT proposed a plan for a default invoice process whereby default invoice amounts would be capped at a monthly total of $2.5 million. It could take 96 years for ERCOT to recover the full amount being uplifted. Lucky for the companies affected, ERCOT will not issue default uplift invoices until after the current Texas Legislative session, which ends no sooner than May 31. Time will tell if Texas legislators pass a bill to help companies pay their debt or allow ERCOT to securitize the default amount.
Currently, ERCOT has reported short payments (i.e., payments due but unpaid) related to the winter weather event totaling $2.9 billion; however, this amount is expected to fluctuate some as bills are paid and other amounts are disputed. The plan to satisfy this debt is a default uplift process wherein other market participants pay this balance over time.
The high ERCOT settlement invoice amounts have caused some market participants to default entirely on their financial obligations to the grid manager, leading to involuntary termination and exit from the market, mass transition of some retail customers, and leaving a high amount of “unpaid bills.” In anticipation of defaulting, others have voluntarily terminated their registrations with ERCOT, attempting to exit before materially breaching their market participant agreements for nonpayment. Two REPs have entered into payment plans with ERCOT, and others may follow. Non-opt-in entities (NOIEs), like the Brazos and Rayburn County electric cooperatives, have failed to satisfy their payment obligations but continue to operate in ERCOT under bankruptcy court protection and supervision. Currently, ERCOT has reported short payments (i.e., payments due but unpaid) related to the winter weather event totaling $2.9 billion; however, this amount is expected to fluctuate some as bills are paid and other amounts are disputed. The plan to satisfy this debt is a default uplift process wherein other market participants pay this balance over time.
ERCOT on April 14 unveiled a plan to implement a default invoice process. Under the ERCOT protocols, default invoice amounts are capped at a monthly total of $2.5 million, meaning it could take more than 96 years for ERCOT to recover the full amount being uplifted. For now, ERCOT anticipates that only the short payment amounts due from market participants that have entered into payment plans with ERCOT will be excluded from the total default uplift amount. The substantial amounts owed by NOIEs, including cooperatives and municipal utilities, will be included.At this time, the amount owed by the NOIEs make up the vast majority of the amount being uplifted.
ERCOT’s filing indicates that it will not issue default uplift invoices until after the current Texas Legislative session (ending no sooner than May 31). acknowledging the possibility that a financing bill may pass to assist market participants in paying down their debt or allowing ERCOT to securitize the default amount immediately, so it can pay those to whom it has outstanding payment obligations. Currently, ERCOT anticipates issuing default uplift invoices sometime in summer 2021, unless the Texas Legislature or the PUCT directs it otherwise.
Industrial and commercial customers had the most significant average price increases. Prices in both sectors more than doubled compared with the previous February. Industrial prices rose from 5.40 cents per kilowatthour (kWh) in February 2020 to 12.15 cents/kWh in February 2021, and commercial prices rose from 7.89 cents/kWh to 16.29 cents/kWh. Although the residential price in February 2021 was only 7% higher than it was in February 2020, it was the highest residential price since July 2008.
Changes in wholesale electricity prices can affect the prices retail electricity customers pay. Wholesale electricity prices in the ERCOT averaged $22 per megawatt-hour in 2020. However, during periods of strong power demand or when generating resources become unavailable, wholesale electricity prices in ERCOT increase, sometimes substantially. In February 2021, wholesale prices held at or near the $9,000/MWh ERCOT price cap for approximately 77 hours, from midnight on February 15 to the morning of February 19.
The extent to which February’s high wholesale power prices affected the amount paid by retail electricity customers depended on the rate plans in place. Most residential customers in Texas are on fixed-rate plans where they pay a set price for electricity through their electricity providers, shielding them from wholesale price increases. As a result, the average residential electricity price was only 7% higher than last February.
In contrast, average prices in the commercial and industrial sectors more than doubled because a larger share of consumers in those sectors are enrolled in dynamic pricing plans. Under the various types of dynamic pricing plans, a customer’s electricity price fluctuates, depending on factors such as power demand (higher prices during periods of high demand) and the wholesale price of electricity.
Average electricity bills are calculated by dividing utility revenues by the number of customer accounts. These customer accounts vary in size. Commercial customer accounts can range from small neighborhood stores to large hotels; industrial customer accounts include both small establishments and major manufacturing facilities. Electricity bills are based on electricity prices and how much electricity customers use, collectively measured as retail sales.
The commercial and industrial sectors in Texas saw the largest percentage increase in average electricity bills. The average commercial bill was almost twice as much in February 2021 ($1,050) as it was in February 2020 ($541). The average industrial bill rose from $1,976 in 2020 to $3,385 in 2021, a 71% increase. Residential bills increased by a relatively moderate 17% and averaged $134 in February 2021 compared with $115 in February 2020.
Average electricity sales to industrial customers were down 24% in February 2021 compared with the same time last year; commercial sales were 6% lower. Residential sales were up 9%. Although both industrial prices and commercial prices increased significantly, the percentage increase in the average industrial bill was less than in the commercial sector because of the sharper decrease in average industrial customer sales.
Following the Texas blackout, Turbomachinery International wrote about the need for winterizing the grid and other ERCOT shortcomings:
Fossil fuels are a big part of the Texas economy. For 20 years, they that have felt the squeeze as renewable energy has grown to generate approximately 25% of the electricity in the state. So it would be convenient for fossil fuel advocates to blame the problem on the highly diminished output of wind and solar generation during the storm. Indeed, wind turbines were shut down due to freezing and solar panels contribution fell to almost nothing due to cloudy daytime conditions along with snow and ice. But there is plenty of blame to go around, too, for thermal plants including gas, coal and nuclear that produce the other 77% of the power.
The facts are that the thermal fleet was not properly winterized. Why not? One possible explanation is that during 2020, the winterization inspections called for by ERCOT were done virtually instead of in person. Another possible explanation is that the process of winterizing a thermal plant causes some reduction in performance during the summer months. Most generation in Texas is privately owned with financial results normally pegged to performance during the hottest days in June-Sept. Therefore, there is a natural bias for asset managers to be more highly focused on summer instead of winter.