Texas power experts differ on how to manage risk two years after Feb 2021 storm

The kind of extreme weather that wrought havoc in the Electric Reliability Council of Texas market in February 2021 is likely to recur, but power sector executives differ on how much forecast load should be hedged, especially in light of current legislative, regulatory and legal uncertainty.

An Energy Marketing Conference panel discussion on March 21 focused on lessons learned in the two years since the deadly February 2021 winter storm, colloquially known as Winter Storm Uri, in which about 4 million Texas customers lost electricity.

"From a climate perspective, how likely do you think it is that we have another Uri in our lifetime?" asked moderator Dominique Bourda, managing principal of Capco Energy Solutions, an information technology consultancy.

"The short answer is it is likely," said panelist Ian Palao, vice president for strategic energy services at POWWR, an energy management consultancy, who has a master's degree in climatology.

"So, with global warming, there is something called sudden stratospheric warming," Palao said. "In the Arctic, there is a low-pressure system that extends from the ground all the way up to the upper level of the atmosphere. What keeps that cold air in the Arctic is a layer of winds encircling the entire world. The one thing that can stop those winds and break that dam, to let all that cold air south is warmth."

To cope with such an eventuality, residential power retailers must adjust their risk policies.

"So a 95% hedge to a 105% hedge – that is not working," Palao said. "It needs to be higher. It needs to be 125%, 130%."

Jay Harpole, CEO at APG&E, a Houston-based retail electricity provider focused on residential and small business customers, said his company was in "kind of a unique situation, in that we actually sold more electricity back to ERCOT than we bought from them."

APG&E hedged ancillary service costs and forward prices as "standard practice," Harpole said.

"We didn't have it all hedged, so it was still impactful," Harpole said. "No one should have had it all hedged. It was a crazy period of time."

Reversal of $9,000/MWh

During the storm, the three-person Public Utility Commission of Texas decided to set the wholesale power price at the systemwide offer cap of $9,000/MWh for the duration of the emergency, which Harpole said cost the state "the equivalent of the entire budgets for the Houston Independent School District, the Dallas Independent School District and the Austin Independent School district for an entire year."

Several entities that took big hits from the decision, including Vistra's Luminent Energy, sued to overturn that pricing, and the Third District Texas Court of Appeals on March 17 ruled in Luminant's favor, remanding the case for further action.

Harpole said he agreed with others in the Texas Legislature on efforts to overturn the decision in the spring of 2021, but instead, a bill providing bonds to spread the cost out over decades, from which proceeds have largely been distributed already.

"So I have no earthly idea how in the world we can get all that back together," Harpole said.

Market reforms since storm

During that spring 2021 session, the Texas Legislature enacted an omnibus Senate Bill 3 to address power market reform, and the PUC on Jan. 19 responded by recommending a plan for what has been called a "hybrid" of capacity and energy-only markets designed to encourage investment in dispatchable generation.

However, lawmakers in the current Texas Legislature have criticized this "Performance Credit Mechanism" as too costly and too uncertain to encourage dispatchable generation.

Palao said, "The senators that wrote Senate Bill 3 have said this is not in compliance with Senate Bill 3."

Whatever happens, Palao said, "increased cost is going to come to us, thus it's going to come to our consumers."

"We don't know how to price it in now, and this has happened over and over since Winter Storm Uri," Palao said.

Meanwhile, ERCOT is about to implement a fifth ancillary service, the ERCOT Contingency Reserve Service, designed to provide backup when intermittent renewable resources fail to perform, "and no one knows what it costs," Palao said.

"There's no forward market for it," Palao said. "All our customers are going to have to pay it in June or July, and it wasn't contemplated in each of our contracts."

Andrew Singer, Constellation vice president for commercial and industrial regional sales, said retail customers are not ready for another "black swan" event like the February 2021 winter storm. "They have very short memories."