Just over a year ago, a cold front moved into Texas and stayed there. As demand for electricity soared, various generating sources fell offline, leading to extensive grid failures that left customers without power for days. Nearly every form of power generation suffered from failures, as did the system supplying generators with natural gas. The total cost in terms of lost business and lives is estimated at roughly $130 billion.

Initial analyses provided some suggestions on how Texas could restructure its grid to provide better protection against future events like this. But a new study has asked a related question. Texas has economic incentives that should induce commercial generators to install winterization equipment on their own. Why weren't those incentives enough to get generating companies to install cold-weather hardware?

The new analysis finds that the financial incentives for winterization carry a high degree of risk. And the total incentives for winterization are far lower than Texas paid for the failure to winterize.

Risk and reward

There are two practical ways of ensuring that private companies will winterize their generating hardware. One is to simply make it a legal requirement—the sort of thing that the state government is reluctant to impose on businesses. The alternative is to provide financial incentives that will induce the companies to perform the winterization themselves.

In Texas' case, the incentive was the ability to sell power at high prices when demand was high compared to production. Texas capped the rate at $9,000 per megawatt-hour, which facilities could have earned had they been able to stay online during the Texas blackout. The idea is that, even though winterization costs money, companies should be willing to invest that money based on the expectation that they can earn profits that offset the costs when the weather gets bad.

Advertisement

But an investment in winterization also comes with risk. Cold fronts don't run through Texas every winter; the state can often go decades between major cold snaps. A company could conceivably pay for winterization and receive minimal payback if the Lone Star State goes a long time without a major cold period.

To quantify the risks of winterization, the researchers took 70 years of climate data for Texas and projected the grid's needs based on the demand seen during the 2021 blackout. This showed that the 2021 blackout was the product of unusually severe conditions. 2021 saw a deficit of 1.45 terawatt-hours in total; the next closest event in the previous 70 years was a 1983 cold snap that would have created a deficit of 1.26 terawatt-hours had it happened in 2021. In total, however, there were eight events that would have caused power deficits in the 70-year period.

The economics of avoiding failure

The researchers estimated the economic return for winterizing different types of generators. For gas generators, winterizing at the point of construction would net more than $1 billion in revenue during a plant's 30-year lifetime, assuming it was among the first plants being winterized. Even after 13 gigawatts of gas capacity are winterized, the 30-year revenue would be roughly a half-billion dollars.

But the results varied based on how often cold snaps take place. In a bit over 1 percent of the scenarios based on historic weather, there would simply be no cold events during the plant's 30-year lifetime. In 16 percent of cases, even being in the first gigawatt of generators winterized would fail to turn a profit. By the 10th gigawatt of winterized capacity, there's a 35 percent chance that winterization wouldn't turn a profit.

Coal and wind have very different economics since they have fewer fuel-supply issues to worry about. (A significant portion of the failure of gas plants came from a failure to get gas to the plants.) As a result, winterization is economical under almost every circumstance.

Advertisement

Why have there seemingly been so few generating companies that chose to take the risk of winterization? One potential reason is that a lot of Texas' generating facilities have already been built. That means the facilities have a shorter useful life span, which reduces the time they have to earn a return on investment in winterization. Another problem is that the gas generators need to ensure supplies from other companies, which may not have winterized their equipment either.

But the biggest problem is the misalignment between the societal value of ensuring a steady power supply and the financial incentives for winterization. The cost of the power failure was an order of magnitude more than the cost of winterizing enough of Texas' generators to avoid a power failure.

Misaligned incentives

The math to understand the problem is simple. Take the $130 billion cost of the grid failure, and divide it by the 145 terawatt-hours of additional power that Texas would have needed to avoid the failure. During the blackout, each additional megawatt-hour of production should have been worth $87,000, according to that math. Instead, Texas capped the rate at $9,000 per megawatt-hour.

One way of dealing with that misalignment is to simply remove the cap and let the market sort it out. But the cap is there for a reason—even with it in place, some Texans ended up with monstrous power bills as a result of plans that sold them power at market prices.

There are alternatives, however. One would be to increase the interconnects between Texas' grid and those of its neighbors, but Texas' independence in this matter is apparently a source of pride. Another alternative: Simply mandate a certain percentage of Texas' generating capacity be winterized. The latter is the path the state has chosen, though it handed the process over to a committee, so we'll have to wait to see how much of a margin of safety gets built into Texas' grid.

Nature Energy, 2022. DOI: 10.1038/s41560-022-00994-y  (About DOIs).