Texas Outages Due to Physical Problems, not Market Failure

by Greg Stark, Enerdynamics Instructor

Back in February, I wrote a blog post titled Why Does Cold Create Outages in Texas?, which examined the series of events leading up to and the possible reasons for central Texas’ rolling blackouts of Feb. 2, 2011. Since that cold (and dark) February day, the Electric Reliability Council of Texas (ERCOT) has spent time investigating the cause of the blackouts. Part of what ERCOT sought to determine was whether the blackouts resulted from a failure in the physical system or whether market participants’ manipulation strategies and/or abuses of market power played a role in the blackouts.

The investigation’s subsequent report from the Independent Market Monitor (IMM) for ERCOT found no market manipulation during the Feb 2. blackouts.  While the report doesn’t give a very complete explanation of  specific events causing the blackout, it does provide some interesting data related to how much tripped off how fast and what the reserve margins were at various times.  I personally wish the report better described how much tripped off how fast and why from a physical manner.  That information has been very hard to come by except in bits and pieces from multiple reports.

However, the report does contain several interesting points that I feel are worthy of note and discussion. These include:

  • The data behind the analysis aimed at determining if physical withholding of capacity and/or unplanned outages (whether intentional or unintentional) contributed to profitability (or lack thereof). The IMM looked at some of the biggest generators and found that any company with over 10% reduced/withheld/lost capacity during the blackouts on Feb. 2 lost so much money from penalties and contractual commitments that they weren’t even close to overcoming such losses with the higher market prices on Feb. 3.
  • The day-ahead market bids for Feb. 3 (the day after the blackouts) were closing during mid- morning on Feb. 2 when the system was in pretty bad shape, so the Feb. 3 day-ahead LMP prices reflected an assumption of scarcity.  However, by the time Feb. 3 rolled around, the system was stabilized and the real-time prices were well below the day-ahead prices.   This demonstrates a working market since prices reflect known conditions at the time the prices were set.
  • A couple of 1500 MW baseload plants were scheduled for planned outages starting Feb. 1, and a 500 MW plant was scheduled for Feb. 3.  Current rules don’t give ERCOT the authority to require a plant to delay its planned outage with short notice if a potential problem might exist in the next several days. Thus, ERCOT did not ask the 1500 MW units to delay their planned maintenance outages on Jan. 31. During the height of the problem, ERCOT contacted the owner of the 500 MW plant scheduled to go offline Feb. 3; the owner voluntarily delayed its outage.
  • ERCOT does have the authority to cancel transmission outages and did cancel a number of scheduled transmission outages starting on Jan. 31 in advance of the cold weather.
  • The report contains an interesting analysis of the performance of ERCOT’s energy-only market as opposed to the capacity market approach used in other ISOs such as PJM, ISO New England, and NY ISO.  The energy-only market depends on high prices incurred during occasional supply shortages to result in sufficient revenues that incentivize generation owners to build enough generation capacity to meet peak loads. This is in contrast to capacity markets in which generators receive an on-going fixed payment for providing capacity. According to the IMM, the fact that prices rose to the $3000 cap during the event indicates  the market is working as intended from the standpoint of providing sufficient revenues to generators to ensure needed capacity for reliability purposes.

So if the markets worked, no one manipulated them and there was sufficient capacity, why did all the lights (and heaters) go off?  With the exception of ERCOT not having authority to cancel planned outages, the answer is physical systems need to be upgraded to handle colder temperatures if the once-a-decade-or–so outage is going to be avoided. Whether that makes financial sense or not is a discussion for another time.  ERCOT experienced the same cold temperatures a week later on Feb. 9-10 without incident.  By that time, most of the problem plants had taken measures to add temporary heaters or implement other mitigation strategies in areas that experienced freezing.

About Enerdynamics

Enerdynamics was formed in 1995 to meet the growing demand for timely, dynamic and effective business training in the gas and electric industries. Our comprehensive education programs are focused on teaching you and your employees the business of energy. And because we have a firm grasp of what's happening in our industry on both a national and international scale, we can help you make sense of a world that often makes no sense at all.
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