Texas Isn’t Ready for Another Deep Freeze

Mark Chediak and Naureen Malik
Sat, October 30, 2021




(Bloomberg) -- It’s been more than eight months since a glacial chill—the magnitude of which nobody quite anticipated—crept across Texas, forcing power plants offline, freezing natural gas wells and wreaking havoc on every part of the state’s energy system. Millions were plunged into darkness for days. Hundreds of people died. Damages topped $20 billion. And Texas’s leaders vowed to do everything within their power to prevent such a crisis from happening again.

But they didn’t do everything. And now, as temperatures are forecast to start dropping again in America’s second-most populous state, Texas is still at risk of another crippling energy crisis the next time it faces perilously cold temperatures.

When Republican Governor Greg Abbott signed in June a series of reforms intended to shore up the electrical grid that catastrophically failed last winter, he pledged that “everything that needed to be done was done to fix the power grid in Texas.” But one key segment of Texas’s energy system that fell woefully short during February’s deep freeze has gone largely unchanged: the natural gas system that seized up, choked power plants of fuel and led to shortages across the region.

“Texas has not done enough,” said Michael Webber, a University of Texas at Austin professor who specializes in energy. “We are not ready for another cold winter.”

The call for more preparation in Texas comes at a time when energy systems are aging the world over, buckling under the strain of ever-growing demand. Climate change is plaguing them with increasingly extreme weather, and a rapid transition to cleaner power resources has made them more fragile and easier to shock. Europe and Asia are already in the throes of energy shortages that threaten to spread to U.S. shores. And Texas—having been among the first to endure what would prove to be a series of energy crises worldwide—stands out as a test case of what could be done, at least if the political will is there.

When the freak arctic blast hit Texas in February, it sent a shockwave through the U.S. energy capital, triggering a cascade of failures. At its peak, the storm took down nearly two-thirds of the power supply on the Texas grid, causing widespread blackouts and, ultimately, at least 210 deaths. Multiple parts of the system were to blame: Regulators failed to predict the severity of the low temperatures, the grid operator vastly underestimated demand, wind turbines froze and gas, coal and nuclear plants tripped offline.

It’s the gas industry that has experts the most concerned heading into this winter. It’s the No. 1 supplier of power-plant fuel in the state, and dozens of generators reported trouble getting fuel after gas wells and delivery systems froze. For most of the crisis, gas-fired plants accounted for around half of the generation outages, according to data from the Electric Reliability Council of Texas, commonly known as Ercot. And yet, even after a spate of power reforms, there are no gas-sector winterization requirements in place for this winter, or next.

That’s because the oil and gas industry—an outsized influence in Austin—successfully lobbied to limit the scope of the weatherization requirements to only those facilities that a committee deems critical to the state’s power grid, not those supplying gas to, say, generators in other states, industrial users or exports. But that mapping process to decide which of the state’s hundreds of thousands of wells, half a million miles of pipeline and thousands of facilities are critical won’t be completed ahead of this winter. Regulators have until September 2022 to decide who’s on that list, and only then will winterization rules for those facilities be developed, a process that itself can take up to six months. In short, gas winterization mandates aren’t required to be in place until 2023.

That kind of regulatory carve-out isn’t uncommon in a state like Texas, where fossil fuels still reign supreme. The oil and gas industry was Abbott’s top campaign contributor from January 2017 through 2020, giving him $16.5 million, 21% of the total raised, according to a report by Texans for Public Justice, a watchdog group focused on curbing political corruption in the state. Abbott got about $4.6 million from oil, gas and energy interests during the post-legislative session this year, his biggest haul for that period since becoming governor, according to an analysis by the Texas Tribune.

The lack of requirements at gas facilities is in sharp contrast to power plants, which state regulators ordered to fix anything that broke during the storm by Dec. 1. By that same date, power plants will also need to finally meet the winterization standards that were recommended—but never adopted—after a similar storm in 2011 caused massive blackouts. State lawmakers also passed bills intended to reform Ercot and protect consumers from being exposed to sky-high wholesale power prices.

The only mandate for gas companies for this winter, meanwhile, is to register their facilities with utilities as critical infrastructure to protect against, but not necessarily eliminate, the risk of power cuts when the grid is stressed. But even then, there’s a special loophole that allows operators to pay $150 to opt-out of even that registration process.

“Texas is still vulnerable if the gas system is dysfunctional again,” said Neil Chatterjee, a former commissioner at the Federal Energy Regulatory Commission, or FERC, who stepped down this summer. The potential disconnect between power and gas upgrades is setting up the state for potential disaster. “It all must work in tandem.”

By opting not to winterize—a process the Federal Reserve Bank of Dallas estimates costs between $20,000 and $50,000 per new oil and gas well—the gas sector would be saving cash, something investors and lenders have been targeting after a decade of hefty spending and poor returns. Operators are also betting that enough of their own wells will remain open even if rivals’ freeze, potentially reaping eye-wateringly high prices. Due to February’s storm, power companies lost billions of dollars and several went bankrupt; gas sellers, meanwhile, ended up with an $11 billion windfall as demand for limited gas supplies spiked.

“There’s a moral hazard in the gas market where their underperformance was rewarded with unusual profits,” said Webber, who emerged as a prominent voice in the aftermath of February’s deep freeze, pointing out the flaws in Texas’s energy system and what went wrong. “We built our power sector on the assumption that the gas is dispatchable and available, but if you can’t get the gas, the whole system comes down.”

The Texas Railroad Commission, which regulates the oil and gas industry with what critics contend is a light touch, says it’s taking actions to encourage the sector to prepare anyway, even if it’s not being mandated. It sent a notice to gas operators earlier this month urging them to “take all necessary measures to prepare to operate in extreme weather conditions” this year. It’s inspecting sites to create a baseline to decide what the regulations should be, said Jim Wright, one of the group’s three commissioners. “We are in a lot better position” than in February, he said, noting that he’s now talking to the state’s power regulator on almost a daily basis.

Wright acknowledges, though, that the legislation “doesn’t really set deadlines that accurately address this current winter. It does address winters after this one.”

Meanwhile, no one in the sector has been able to estimate what percentage of the state’s gas industry has prepared for winter voluntarily. It’s not even clear if it’s being tracked. A spokesperson for the governor’s office didn’t reply to a request for comment.

“Natural gas companies made billions of dollars. The least they can do is go out there and make sure the state of Texas doesn’t have this situation happen again,” state Senator Jose Menendez, a Democrat, said in an interview, adding that he wants critical parts of the gas system prepared ahead of this winter.

Of course, some gas producers already take precautions. Since it began operating in West Texas, Ovintiv Inc., a Denver-based oil and gas company, regularly installs temporary insulation on pipes and key equipment, injects methanol into natural gas and installs wind walls at its field operations before each winter, according to a company representative. The company still lost production in February, though, due to power cuts.

The degree that a gas producer winterizes, if at all, will come down to the economics of its wells and whether it thinks Texas will see extreme cold in back-to-back winters. So far, most forecasts are for a milder-than-normal season across the southern U.S. due to La Nina conditions, though that won’t prevent the polar vortex that contains icy air above the North Pole from spilling out occasionally. Usually, Texas is too far south to feel those effects, but not always. Besides, last winter was a La Nina, too.

“If the same weather were to occur this winter, I don’t have a lot confidence for the gas industry to produce more gas than the last time around, and I have small confidence that the power plants would perform better,” said Beth Garza, a former utility executive and market monitor who is now a consultant for think tank R Street Institute. The gas industry has “a history of not being there for when they are most needed from the electric sector.”

Todd Staples, president of the Texas Oil & Gas Association, said it’s in the financial interests of gas companies to make sure they are operating and selling their product, adding that many companies are, in fact, winterizing. However, he contends it doesn’t make sense to apply mandates across the whole gas industry since only a portion of it supplies the state’s power sector. Power outages were the main reason for the drop in natural gas production during the storm, Staples said, citing an industry commissioned report on the event.

Still, a BloombergNEF analysis found 52% of the gas volume decline came before Ercot’s first power cut in the early hours of Feb. 15, suggesting frozen equipment was also to blame. Ercot estimates about 12% of power generation failures at the height of the outages were due to fuel supply issues.

“Gas got a little bit of a pass on some of these things, and that industry doesn’t have a market monitor and it’s largely unregulated,” said Carrie Bivens, a former Ercot operations manager who now serves as the independent market monitor for the grid with Potomac Economics. She concedes the industry can’t prepare for every possible situation, especially a “1 in a 100 years” event like what happened last winter. That’s a frequent talking point cited by power and gas regulators and traders: Ercot doesn’t usually have back-to-back cold winters.

Other market reforms are being discussed but won’t be ready for this winter, either. That includes expanding the state grid’s links to neighboring ones—something that could subject Ercot to federal authority. And unless regulators decide to change it, the wholesale power price cap will revert back to $9,000 a megawatt-hour at the start of the year after it was temporarily reduced to $2,000 after the February storm. Additionally, power producers can still seek an exemption “for good cause” if they can’t comply with the new mandates.

FERC Chairman Richard Glick said in September he wouldn’t let Texas ignore or water down federal recommendations to better prepare for cold snaps. FERC is looking at imposing reliability standards but it can’t push weatherization mandates on the gas industry. When asked by Bloomberg News at an October briefing about power plants in the state, Glick was wary. “I don’t think those plants are going to be weatherized before winter. I remain concerned, and I think it’s something we need to act on,” he said.

Texas has a history of sidestepping federal recommendations. After a February 2011 winter storm knocked off nearly 200 power plants in Texas and triggered blackouts for 3.2 million, a report by FERC and the organization that investigates large blackouts, called the North American Electric Reliability Corp., recommended the state consider requiring power plants prepare for winter and set minimum weather-preparation standards for gas producers. It’s those 2011 power recommendations that are now going in effect this winter, 10 years later.

As the days grow shorter, Texans who can’t shake the memory of last winter’s catastrophe aren’t leaving things to chance. Residents are buying backup generators. American Electric Power Co., a utility that serves the state, now has emergency mobile generation on hand. Power producers like Vistra Corp. are stocking up on alternative fuels at their facilities, even as the gas industry enjoys its loophole that lets it sit out upgrades.

With the state enacting too little change for her liking, Texas resident Kelly Hopkins went ahead and installed solar panels and battery storage to her home to avoid future blackouts. “Nothing has been done” to harden the grid, said Hopkins, 50, who teaches early American history at the University of Houston.

During the cold snap, the Hopkins’s lights and heat were out for three and a half days, so she erected a tent in the dining room and filled it with blankets, sleeping bags and mattresses to keep her and her family warm. The panels went up in May. When Hurricane Nicholas blacked out much of South Texas in September, they had lights, laptops, TV and refrigeration while the neighbors were without power for 18 hours.

“Climate change is making things more extreme, and although I don’t think we’ll see cold like that again, hurricanes are going to come and knock the power out,” she said. “Things are going to happen.”