Blackout: How high natural gas prices bankrupted Texas’ oldest electric power cooperative
The story of Brazos Electric Power Cooperative and the US electric grid’s largest rolling blackouts in history
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March 1, 2021, the oldest and largest Texas power cooperative filed for Chapter 11 bankruptcy protection. Brazos Electric Power Cooperative had entered the month of February 2021 in fine fiscal shape. The events that unfolded in the days to come left the company with an unexpected $2.1 billion bill they were unable to pay.
Beginning on February 13, 2021, extremely cold polar temperatures stretched across the Great Plains and Midwest, dipping far into Texas. The relentlessly frigid weather crippled critical infrastructure needed to provide basic heating and electricity to customers. Wellheads at oil and gas fields experienced freeze-offs where conditions are so bitter ice forms and blocks gas flow, clogging pipes. Compressor stations that maintain pipeline pressure to keep gas flowing lost power service due to rolling blackouts to preserve the grid. These events led to the largest controlled blackout in U.S. history.
This resulted in massive financial exposure for the entire utility industry. Market participants within organized wholesale electricity markets have obligations to “bid in” their demand projections along with their supply of generation on a daily basis. This allows the market engines to solve for price efficiency by selecting the lowest-cost power plants to run, keeping more expensive generators in reserve or offline in case they are needed.
When a power plant is selected to be online, but fails to do so, it creates a financial position where utilities must “buy back” the undelivered energy at the prevailing prices. For Brazos Electric who sits in ERCOT, the wholesale power market covering most of Texas, that meant $9,000 per megawatt. Due to constraints throughout the natural gas delivery network caused by cold temperatures, many power plants were forced offline due to lack of fuel supply. This continued throughout the week in mid-February and the losses mounted.
A diversified fuel fleet certainly helps matters. A coal power plant producing at $15 per megawatt (MW) selling into a wholesale market at $9,000/MW has healthy margins. Natural gas power plants less so given that was the fuel that spiked in price, driving the price of electricity higher as they tend to be the marginal units who set the price.
The issues arose where utilities became energy deficient for their system. If you have 100 MW of demand and 100 MW of your own internal generation, you are able to serve your load with your cost of generation. If you lost 100 MW of generation due to fuel supply constraints, you are now serving your 100 MW of demand with the $9,000 market price. Electricity is traded for an hourly basis, so you are paying $900,000 for that one hour. Multiplied by 24 hours, that’s over $21 million/day. This example doesn’t capture the full picture as many utilities have more than 100 MW of total demand, and generator outages totaled over 61,000 MW during the energy crisis.
Heading into the 2021–22 winter heating season, utilities are still licking their wounds. Natural gas prices are the strongest they’ve been in autumn since 2009. Europe has already had a dozen suppliers fold due to record prices overseas between August 1 and October 14, 2021. Utilities everywhere are scrambling to recommission old coal plants, or seasonal units only ran during the summer months.
One thing is for certain — energy markets are more volatile than ever. Stable industries like utilities are staring at price uncertainties they are finding difficult to manage. The risk mitigation strategies will be to reduce financial exposures within the wholesale power markets with more conservative and redundant fuel supplies. That’s easier said than done. Just ask Brazos or the dozen UK suppliers.
