Millions of people lost power in Texas after a brutal cold snap overwhelmed the state’s ill-prepared electricity grid, leaving large swathes of the state cold and in the dark.
The effects on energy markets will likely be temporary, although for several days the impacts on supply, demand and prices have been severe.
Collapse of electric grid
A cascade of power plant failures beginning on Monday led to rolling blackouts, and then quickly spread to much larger grid-wide outages. As of February 15, roughly 34 gigawatts of power generation were off the system, according to the Electric Reliability Council of Texas (ERCOT), which oversees the grid.
Next-day power prices for Tuesday soared close to $1,500 per megawatt-hour.
Prices went haywire. Next-day power prices for Tuesday soared close to $1,500 per megawatt-hour, while 5-minute power prices spiked to $11,000/MWh. The annual average at the ERCOT North hub was $26/MWh last year.
The same dynamic unfolded for natural gas prices at certain hubs. The Oneok Gas Transportation hub in Oklahoma saw natural gas prices shoot up to $999 per MMBtu for next-day delivery on Tuesday, up from $4 a week earlier. Even the much larger market for Henry Hub saw prices spike to $30/MMBtu. “It’s a shocking situation,” Cody Moore, head of gas and power trading at Mercuria Energy America LLC, told Bloomberg. “It’s chaos. It’s crazy with the prices.”
Texas Governor Greg Abbott falsely blamed renewable energy for the main cause of the blackout. Around 16 gigawatts of renewable energy went offline, but some 30 GW of thermal power plant capacity were disconnected. The frigid temperatures cut off upstream supply. Texas gas wells froze, slashing the availability of gas for gas-fired power generation. “Texas is a gas state,” said Michael Webber, an energy resources professor at the University of Texas at Austin, told the Texas Tribune. “Gas is failing in the most spectacular fashion right now.”
Two-thirds of the capacity offline was either gas or coal. Even nuclear plants were not spared – the water supply at the South Texas Project nuclear power plant froze, forcing the plant to shut down.
The cause of the outage has more to do with inadequate planning for unexpected weather.
Rather than blaming one particular power plant or source of generation, the cause of the outage has more to do with inadequate planning for unexpected weather. Wind farms and power plants are not weatherized to handle such low temperatures, which are a rare occurrence in Texas. More importantly, the Texas grid keeps very low volumes of capacity in reserve, leaving few tools at its disposal in the event of a supply shortfall and/or a demand surge. In this crisis, supply and demand shocks occurred simultaneously.
The Texas grid is also disconnected from the rest of the country, which means it is unable to import power from elsewhere. The lack of redundancy built into the system leaves it vulnerable to black swan events.
Oil markets also see disruption
The state’s oil industry was also hit hard. With West Texas frozen, Permian basin oil and gas plunged. Initially, around 500,000 to 1.2 million barrels per day (Mb/d) of Permian oil production was shut-in, according to Rystad Energy.
Icy roads disrupted the movement of sand, water and people. The loss of electricity cut power to pumpjacks. Even wellheads froze.
The figure quickly ballooned as the outages mounted. Around 4 Mb/d was knocked offline by mid-week, according to Bloomberg, or about 40 percent of total U.S. oil production. Roughly two-thirds of Permian output has been sidelined, maybe even more. The cold negatively impacted oil operations in multiple ways. Icy roads disrupted the movement of sand, water and people. The loss of electricity cut power to pumpjacks. Even wellheads froze.
The Texas crisis should ease, but it could take some time. “As producers need pipes to be fully running and power prices to normalize before they return production, a substantial return in production may not occur until this weekend at the earliest,” Amrita Sen, chief oil analysts at Energy Aspects, wrote in a note.
Oil prices moved up in response to the outage, but didn’t spike as high as might be expected, given such a large outage. That is because refineries have also been slammed, negating much of the demand pull. “The now-estimated up to 3.5 million bpd production shut-in peak nearly matches the upwards revised 3.6 million bpd in refinery capacity shut-ins,” Bjornar Tonhaugen, head of oil markets at Rystad Energy, said in a statement. “[T]he net effect on crude supply and refinery demand seems to be modest and close to net zero.” If not for the refinery outages, crude prices would be “rocketing higher.”
Governor Abbott asked Freeport LNG to reduce production to spare gas for the rest of the state.
One other impact is the volume of gas that has flowed to the array of LNG export terminals on the Gulf Coast. Governor Abbott asked Freeport LNG to reduce production to spare gas for the rest of the state. Cheniere Energy reportedly slowed production at its sites in Sabine Pass Louisiana and Corpus Christi, Texas. Sempra Energy’s Cameron LNG facility lost power, curtailing production there as well.
“LNG exports are definitely contributing to a gas shortage, and continued LNG exports are driving scarcity for natural gas for power generation in the U.S.,” Katie Bays, managing director at FiscalNote Markets, told Bloomberg.
But she warned of reputational impacts. “By telling Freeport to dial back exports, it’s playing into an existing perception by Asian, especially Japanese, customers that the U.S. is not a reliable source of supply,” she told Bloomberg. “In LNG markets, reliability is everything. So, that is a potentially negative long-term implication.”