Tag: natural gas

Guest Post: Electric Grid Failures are not Grist for Partisan Fights

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By David Spence

Transmission towers above snowy Katy Trail in Dallas, Texas (Feb. 2021)

Last summer California and Texas experienced almost simultaneous periods of very high electricity demand, triggered by hot weather. The California system struggled, experiencing several days of rolling blackouts; the Texas system did not. Characteristically, Texas Republicans (Ted Cruz among them) taunted California on social media, blaming renewable energy and over-regulation in the California market.

But what goes around comes around. This week the Texas’ grid failed in the face of an extended system-wide cold snap that froze power plant equipment and disrupted fuel supplies. No generation technology was left unaffected, but the bulk of the missing generation was natural gas-fired. That gave some on the left a chance to point the finger at fossil fuels and the less regulated Texas market design.

But neither crisis represents a fatal flaw in any particular electric generation technology, or either state’s market design.

As an initial matter, this is not about “privatization.” Most of the generators and sellers of power in Texas, California and elsewhere are privately owned and always have been.

It is true that the Texas market is lightly regulated, with easy market entry and access to transmission (but more price risk) for generators. There is competition and market pricing in both wholesale and retail markets. It is the only market in the country that depends almost exclusively on free-floating wholesale power prices to incentivize investment in new power plants. (Observers have long argued about whether that is enough of an incentive.) The state has no meaningful renewable energy or climate goals, but has nevertheless experienced massive investment in wind generation, giving Texas more wind capacity than any other state. The future promises a similar investment boom in solar generation. Retail power prices are low.

California, having suffered a breakdown in its competitive wholesale power market 20 years ago, is understandably wary of unrestrained competition. Its market has some competitive features but tighter controls designed to ensure both reliability and a cleaner energy mix. A spate of state climate and clean energy laws have led to the construction of more solar generating capacity and battery storage than any other state, and lots of wind too. Retail power prices are high, but most Californians don’t seem to mind.

And despite Texas’ lack of a climate policy, some proponents of a transition to a low carbon future actually like many aspects of the Texas market design.

Price competition and easy market entry benefit wind and solar plants because they are the least expensive forms of electricity generation. And some like that the Texas market rules allow wholesale prices to rise far higher during times of scarcity than they can in other markets, because that incentivizes conservation and demand reduction.

In competitive electricity markets in the northeastern United States (unlike Texas) some generators can qualify to be paid to be available as reserve power in the future. Some proponents of a green energy transition don’t like these “capacity payments” because they tend to go to coal- and gas-fired power plants.

So light-handed regulation has some unintended climate pluses. 

On the other hand, Texas owes its wind boom in part to a big departure from free market orthodoxy. It decided in 2005 to build new transmission lines connecting windy west Texas to cities in the east, spreading the cost of the lines across the entire customer base. Texas was able to socialize transmission costs that way because its grid is sealed off from the two big interstate grids that cover the rest of the lower 48 states. That isolation avoids federal regulatory jurisdiction, which arguably prohibits that approach to transmission financing elsewhere.

It is true that some of these features of the Texas market have led to lower generation reserves than the rest of the country. Experts have long debated whether that feature will trigger more outages in the future. But that was not the culprit this time. Even if Texas had more generating reserves, those plants may have been incapacitated by the cold snap too.

Rather, it was mistaken judgments about insuring against a low probability disaster that led to this crisis, and those judgments concern reliability rules and standards, not the Texas electricity market design.

The isolation of the Texas grid did prevent Texas from accepting a helping hand from neighboring states. Texas politicians seem in denial about that, either peddling the “wind farms are to blame” lie or the debatable notion that independence and self-reliance are worth the price of crises like this one.

February 18 marked the fourth and final day of the power outage at our house in Austin, and we remain under a boil water advisory as of this writing. We were lucky to find temporary heated shelter. Others will suffer much more, and some will die.

But it is a waste of time to use grid failures like these as ammunition for online ideological or partisan battles. Recognize them for the tragic failures they are; but think of them also as learning opportunities that will help grid operators and managers of power markets do better next time.

That isn’t a dramatic lesson, but it is a better one.

Both Texas and California experienced grid failures, and both will learn and adapt. Climate change will bring more severe weather more often. That, and the rapid growth of renewable energy will pose challenges for grid managers. But regulators and grid operators will find a way to provide reliable and affordable electricity anyway, because consumers (read: voters) will demand it. 

Those solutions may not be the same solutions everywhere, but that is as it must be. One size has never fit all in the American electricity sector.

The Shale “Revolution” Is About Gas *Prices* & Oil *Production*

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I’d like to make a quick point about the “shale revolution,” which may be old news to those immersed in North American energy policy but might be helpful to those just starting to think about the wider implications of increased North American production of oil and gas.

Increased production of oil & gas from shale formations using hydraulic fracturing and horizontal directional drilling is often referred to as North America’s shale revolution because of the way it has transformed oil & gas production, reserves, production, and pricing. But the “revolutionary” part of these changes mostly boils down to two big changes: 1) natural gas prices, which were rising, are now falling, and 2) oil production, which was falling, is now rising.

Increased production of natural gas has had a dramatic effect on natural gas prices because natural gas is hard to transport. If you can’t send natural gas by an existing pipeline to an existing market, your next best option may be to cool it into a liquid at −162 °C, load the liquid onto a giant, insulated, quarter-billion dollar vessel and ship it across the ocean, where it can be regasified and burned. This is an expensive process, so when natural gas production rises, prices fall quickly because there is little use for the excess gas in the markets it can reach. Prices will keep falling until 1) gas is so cheap that energy users reliant on alternatives like coal and heating oil switch to gas, 2) gas is so cheap that it can be profitably liquefied and sent overseas, or 3) gas is so cheap that it’s no longer worthwhile to keep expanding production. In the United States, there has been a bit of all three: 1) utilities and manufacturers have started to use more gas, 2) companies are planning several projects to export liquefied natural gas to Asia and Europe, and 3) there has been a bit of a slowdown in investment in new shale gas production. But natural gas prices can fall pretty far before any of these stabilizing factors kick in.

In contrast, despite all the recent controversies about oil pipelines and rail transport, oil is still relatively cheap to transport because you can send it by train or boat. And there is an integrated, worldwide market in oil so world oil prices tend to move in tandem. This means that increased production in the U.S. has little effect on U.S. oil prices. But a stable price means that oil producers can keep ramping up production at every possible opportunity and keep earning large profits. That’s why the shale revolution in oil has been about production levels, not prices. And it’s also why incomes have risen much faster in states with shale oil than states with shale gas.

So that’s why I say the shale revolution is mostly about 1) gas prices, not gas production, and 2) oil production, not oil prices. The following four charts show oil & gas production and prices from 1997-2013. They show that the shale revolution in the US has turned around rising natural gas prices and falling oil production. You can also see a more gradual increase in natural gas production. Finally, you can see that U.S. oil prices show little impact from all that increased production.

 

 

With increased challenges to crude transportation and growing liquefied natural gas markets, gas and oil markets may become somewhat more similar over time. But for now they are very different. So when you talk about the shale “revolution,” keep in mind whether you are discussing oil or gas and prices or production. It will help you make sense of many of the developments in energy markets and policy and will help you sort out some of the talking points from those arguing that the shale “revolution” changes everything and those arguing it changes nothing.