Cheap Natural Gas Means Lower Electricity Prices Except In Texas

Why ERCOT’s Power is the Most Expensive in the U.S

In 2023, Texans paid more for wholesale electricity and suffered more calls for conservation than residents served by any other grid across the nation.

And there’s no reason to expect that to change anytime soon.

The great irony for the energy capital of the world is that the low price of natural gas drove down electricity prices everywhere but Texas, the nation’s largest natural gas producer. Texas also has more utility scale renewable electricity generation than any other state. The low and zero fuel prices cannot overcome the flawed market design used by ERCOT, the Electric Reliability Council of Texas. The market design handicaps the capital investment required to produce inexpensive and reliable electricity supplies.

We predicted this outcome more than a decade ago.

Let’s review. For eight of the 10 years prior to ERCOT’s failure in 2021, the average wholesale price received by generators was less than the cost of building and operating new generating plants—natural gas turbine units to be specific. Unable to recover their costs, investors refused to build new power plants and, in fact, cut back on maintaining existing coal and natural gas power plants, many of which had already been written off. During 2023, ERCOT frequently reported more unplanned outages for its generator portfolio than PJM, a much larger grid that serves all or part of 13 states and the District of Columbia.

At 1:38 a.m. February 15, 2021, the ERCOT grid suffered a cascading series of failures attributed to a lack of weatherization of key components of the electricity supply chain. Unprotected power plants froze. Natural gas deliveries dropped off. Coal piles froze. A pump for the cooling reservoir of a nuclear power plant froze and tripped off the reactor. ERCOT and the local utilities that distribute electricity failed to manage a process of rolling blackouts that could have preserved grid stability.

Facing a demand call of more than 70,000 megawatts, ERCOT came up 52,000 megawatts short at the low point of the debacle. Extended blackouts across a customer base of 26 million people caused 246 deaths and cost the state more than $100 billion in property losses and economic losses. Hundreds of lawsuits for wrongful deaths and economic losses are pending.

What Has Texas Done Since The 2021 Freeze?

The first bills out of the Texas Legislature following the storm consolidated governance of the ERCOT grid under the governor and required that the electricity supply chain, including natural gas providers, improve weatherization. In August 2021, the Public Utility Commission of Texas quickly adopted recommendations made 10 years earlier by the North American Electric Reliability Corporation following the 2011 ERCOT grid failure.

In the summer of 2021, the newly appointed PUCT chair stated that the ERCOT market design needed to be totally scrapped. He resigned from the post in 2023 following the Legislature’s rejection of his proposed solution.

Texas continues to embrace its electricity-only market design under which power plants only make revenue when they are generating electricity. Think about paying firefighters only when they at a fire—and they have to buy their own hoses, ladders and firetrucks. And because there are almost 1 million more Texans today than in 2021, demand has grown but ERCOT’s tweaks to the market have only increased prices without increasing reliability or investment in new power plants.

In 2023, the Texas government created the ECRS or ERCOT Contingency Reserve Service. Under this rules regime, existing power plants are paid to step out of the daily market to create “reserve capacity” where none existed before. Texas government missed the fact that because ERCOT was already short capacity for peak demand days the plan did not actually create any new supply. In fact, the ECRS created an artificial shortage, leading to the mirage of more peak demand days for the market during 2023. ERCOT’s Independent Market Monitor has attributed $12.5 billion in overcharges to this new market regime.

Implementing ECRS transfers wealth from consumers to the power plants—including renewable plants. It is worse than a tax because there is no quid pro quo, no requirement that the power plant operators build new supply capacity.

ERCOT’s portfolio of electricity supplies is not static. The nation’s largest portfolio of utility scale wind and solar farms continues to expand rapidly. This means legacy coal and natural gas power plants will be used less often and will not have any revenues on those days they are not generating electricity into the market. More of these plants will retire and take the electricity they could provide permanently out of the equation.

In 2021, the Texas government refused offers by Warren Buffet’s Berkshire Hathaway
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Energy and Starwood Energy Capital to build new natural gas power plants across the state. That was then. In the wake of a failed summit with BlackRock
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and other investors, Texas Lt. Gov. Dan Patrick said earlier this year that Texas may build its own power plants since the free market cannot provide relief. The governor himself has traveled the state to beg utilities for solutions, but without fixed power purchase agreements or a clear horizon to making money, no new natural gas power plants will be built.

In one potentially positive development, Pattern Energy is attempting to complete its Southern Spirit transmission project, which will bring up to 3,000 megawatts of cheap electricity to Texas from the federally regulated grids in Georgia, Alabama, and Mississippi via a high voltage DC powerline. Certainly, there is no irony for the Texas Legislature that less regulated power markets can provide less expensive electricity to Texas—or provide a $2.6 billion capital project, hundreds of jobs, and an expanded tax base for those states.

Paying More For Less

Renewables have bolstered the grid, but they will not immediately save Texans money.

The day when renewable resources can replace all coal and natural gas power plants is in the distant future. Think about it. Assume, for simplicity’s sake, 100% efficiencies and capacities. One 1,000 megawatt natural gas generator can be replaced by two solar farms of the same capacity (12-hour days) and three, 4-hour battery packs. Announced solar farms and utility scale battery projects will cost more than $1 billion per 1,000 megawatts of capacity, but at $1 billion each, it will take more than $5 billion to replace $1 billion.

This renewables growth requires a costly buildout of transmission lines to move the power to urban consumers from the rural areas where wind and solar farms are situated. Transmission companies are guaranteed a rate of return on their assets whether or not they are in use. Because renewables rarely operate at 100% of nameplate capacity, to transition the grid to 100% renewables will require a relative overbuild of transmission line capacity that will also offset the zero cost of fuel enjoyed by renewables. Consumers are already seeing this component of their bills rise.

Counterintuitively, and wrongly, Texas has embraced expanding electricity demand without making sure there is enough supply capacity in ERCOT. Cryptocurrency miners have been the primary beneficiaries. They arbitrage the ERCOT market by purchasing electricity at prices below what any other consumer pays, receiving massive payments or credits from the ERCOT market when they sell that electricity back to the grid in times of tight market conditions. For example, low price purchase contracts at 2.5-cents per kilowatt hour and credits of $5 per kilowatt hour. Texas cryptominers already consume more electricity than the City of Austin on a daily basis. By adding more cryptominers to the grid, ERCOT guarantees that each one will make money playing the electricity arbitrage game—at the expense of the everyday Texas consumer. ERCOT’s Independent Market Monitor has pointed out that increased cost to consumers.

The local utilities that distribute electricity in Texas are increasing their rates to consumers, also. These are the regulated monopolies in each service area that distribute electricity to consumers. In Houston, for example, CenterPoint Energy
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has increased rates to recover the cost of the increased weatherization requirements and the adoption of the 2011 NERC recommendations. And, because of the ERCOT market failure, the PUCT and ERCOT ordered CenterPoint to add 500 megawatts of generators and approved the rate increase to recover the costs from consumers. CenterPoint is looking a lot like its regulated and vertically integrated predecessor, Houston Lighting & Power. Shoving generators into a guaranteed rate of return entity proves that the ERCOT market design cannot continue.

The fourth segment of the ERCOT electricity supply chain is the retail electricity provider or REP. These companies are the middlemen between the generators, transmission operators, and local distribution companies. The REPs do not have any skin in the game. In the best of times, they match consumers’ preferences for time of day electricity usage, green or cheap electricity by trading with generators and commodities markets for fixed price contracts or futures contracts. Due to the increasing price volatility in the ERCOT market—again, illustrated by the chart above—these REPs are finding it more expensive to lock in fixed price contracts for their customers. This is a cost they pass along.

Unscrupulous REPs are often caught short as they take their customers’ monies and can’t back up their fixed rate promises. Why should they? They can walk away without consequence leaving the consumer to be thrust into the Provider of Last Resort power marketer bucket at ERCOT at higher rates. The Texas Legislature mandated bailouts of these REPs following 2021, and consumers will be paying down these billions of dollars for the next many years.

There are major profits to be had in the Texas market, and no one should be surprised. Since Enron first gamed the California electricity market in 2000-2001, we have taught that game to students.

Texas continues to miss opportunities to “fix” the grid. The governor, PUCT, and ERCOT now routinely warn residents that rolling blackouts are in the toolkit for tight market conditions, just as rolling blackouts are used in Turkey, Pakistan, and Venezuela.

Texas electricity consumers are also voters in this single state electricity market. They are enraged by their rising bills. The magical thinking that Texas could get more for less is over and should have been over long ago. The Wall Street Journal pointed out in 2021 that Texans had been overcharged $28 billion due to the ERCOT market design. Add in hundreds of deaths and billions of dollars more in overcharges and economic losses. Without positive action, ERCOT Weather Roulette will continue for years to come with volatile and higher prices, and more frequent calls for conservation. In other words, ERCOT and all its failures are a repudiation of the so-called benefits of deregulation and the Texas model of electricity.