The situation continues to be dynamic and we expect major repercussions in upcoming days.
The following is a partial list of possible outcomes/consequences:
- Power producers and/or retail electric companies could face serious losses: Units with contracts for firm delivery of power, such as heat-rate call options (HRCOs), fixed-volume hedges or power purchase agreements (PPAs), or other obligations such as day-ahead energy or AS obligations may face massive losses if unable to generate in real time. With so many units on outage, and renewables under-producing, the exposure to real-time power may be much higher than usual. Retailers with exposure to spot power prices could also face major losses.
- Some power generators may earn very high returns: On the other hand, generators with merchant exposure that are able to sell power could earn huge returns. Peaker net margin, an indicator of total scarcity pricing, could easily hit the $300/kW threshold at which point the power price cap is cut from $9,000/MWh to $2,000/MWh.
- The magnitude of the event could prompt structural changes in the power market: ERCOT does not have any mechanism to enforce a minimum planning reserve margin as do most other major power markets. Partially as a result, ERCOT has had extremely low reserve margins for the past several years. Among skeptics of ERCOT’s approach, a common quip was “ERCOT is one blackout away from a capacity market.” Such a blackout may have arrived. On the other hand, the weather is being described as unprecedented–and ERCOT estimated its winter reserve margin at 43.2%: well more than typical enforced minimums (15-20%). A capacity market may not have helped in this case.
- At a minimum, ERCOT planning will need to change: As shown in the table above, the magnitude of the forecast error was massive. While ERCOT’s forecasts are largely indicative since they lack a capacity market mechanism, many observers reference ERCOT’s forecasts for their own planning purposes. The miss echoes recent summer blackouts in CAISO, mentioned in our white paper—California's blackout signals a need for enhanced reliability planning—which similarly had a connection with poor planning and estimation of reserve levels.
- Beyond ERCOT, federal policy changes may be on the table: MISO, SPP, and other areas have also experienced blackouts amidst dangerous weather conditions. Measures targeted at grid hardening, resilience, climate adaptation, etc. may result.
We continue to monitor the events in Texas and will share updates and further analysis as the situation evolves.