Key Takeaways:
- Any large-scale failure of the energy system in the U.S. will result in public policy changes that incentivize more capital spending and that is good for the regulated gas and electric monopolies that grow earnings by growing their “rate base”, the investment base upon which they earn their allowed rates of return.
- This will help re-center the debate between renewables and fossil fuels as ALL forms of electricity generation (wind, solar natural gas, nuclear and coal) were compromised so no single solution will ever be reliable enough.
- Natural gas heating kept homes from freezing. If all homes had converted their heating systems to electricity this would have been a massive public health disaster.
Lessons from Past System Failures
In 2010 in San Bruno California and in 2014 in East Harlem, New York natural gas pipelines failed causing deadly explosions. State governments and their public utility commissions responded over the next few years to incentivize and accelerate the replacement of older pipes. This increased the growth rate of the average gas utility’s rate base and earnings from 3-4% per year to about 8% per year.[1]
Implications for the Energy Transition
Following the Winter Storm Uri February disaster, the head of the Texas Railroad Commission (TRC) claimed that renewable power is crowding out fossil fuel investment and undermining reliability. The TRC is the chief regulator for Texas’ oil and gas industry, but also tends to be its chief cheerleader. In fact, all systems failed in February, and loss of thermal generation—mostly gas—was the primary driver of the blackouts. Complicating things further, compressor stations that move gas through pipelines depend on electricity and about half of Texas’ electricity is generated by – you guessed it – natural gas, meaning that the solution is system hardening, more redundancy and more fuel diversification, not less. The interdependency of the energy system is often overlooked during these events. For example, during Hurricane Sandy, the lack of electricity shut down gasoline service stations so people couldn’t get fuel for their generators.
What do Texas and California have in Common?
California always wants to “do their own thing, which in this case means being greener than everyone else. So, over the last five years, California shut down 8 natural gas fired power stations representing 10-11% of its statewide power generation. According to their prior plans, this generation capacity would be replaced by more renewables and higher imports of wholesale power from other Western states, much of it generated by coal and natural gas. But when the heat wave hit California, it also hit the other Western states so imports into California were not sufficient to meet demand. As in Texas, when demand for electricity exceeds supply, grid operators can be forced to implement rotating blackouts to avoid permanent system damage. And, as in Texas, the intermittency of renewables was not a surprise nor a shortfall relative to plan. The failure was a lack of redundancy and surplus capacity due to planning process driven by politics rather than engineering necessity.
Texas’ fierce political independence also contributed to its crisis. To avoid federal oversight, the state’s electricity grid has very limited interconnections the other major U.S. power systems, making it an electrical “island,” unable to import power from neighboring states. One solution would be to build new high voltage transmission to allow more power to flow into the state, which would represent a potential multi-billion-dollar opportunity for transmission and distribution utilities. So, what California and Texas each have in common is that if they cannot (California) or will not (Texas) depend on their neighbors for help when their own systems are stressed, they each need significant investments in surplus capacity and system hardening. California has already adjusted its ten-year resource plan which now calls for roughly the same amount of gas fired generation in 2030 as in 2021, albeit at a lower share as renewables continue to grow.
Rebalancing Investor Sentiment
Investor sentiment on natural gas has suffered as investors pour money into solar panel and fuel cell producers. Many are arguing that all fossil fuels, including natural gas, are simply going away, especially as communities in California, New York, and Massachusetts have proposed banning new natural gas hookups. However, the rolling blackouts in California and Texas highlighted the importance of natural gas to reliable energy supply, with a corresponding shift in investor sentiment.
Less than 10% of U.S. carbon emissions come from gas fired space heating and cooking (electric power generation and transportation represent about 70%)[2]. Current regional challenges notwithstanding, the gas system is largely below ground, remains very robust and provides nearly 100% of back-up energy to non-rural households during blackouts, so the narrative about natural gas going away has probably been diluted by recent events.
Fun Facts Department – How cold weather affects all forms of energy:
Natural gas and crude oil come out of the ground with a fair amount of water, which is typically separated at the wellhead. In colder climates (such as the northern Rockies/Canada), wellhead facilities are protected from freezing, and pipes that gather the gas are typically underground. That’s not the case in the Permian Basin in West Texas, where gathering lines are typically above ground, and wellheads aren’t equipped for extreme cold, because it typically doesn’t happen. So, under conditions like this, “freeze-offs” can slow or even shut down production and were a significant contributing factor to the gas shortfall in Texas. Further, since natural gas pipelines rely on electricity and about 40+% of electricity is fueled by natural gas there is a negative feedback loop in gas transport even if the wells are not frozen.
Wind turbines are robust machines but can and do have to shut down under extreme conditions such as excessively high winds or periods of ice and snow. Texas gets 15-20% of its power from wind, while Kansas and Iowa derived 36% and 42% of their supply from wind in 2019[3]. Freezing rain / ice can cause all kinds of problems, particularly adding weight to the turbine blades and raising the risk of a rotating turbine breaking apart from centrifugal force or other mechanical stress. Under these circumstances, wind turbines shut down. In colder climates such as the Midwest, wind turbines are engineered to withstand these conditions to some extent, but less so in warmer regions.
Solar panels can’t produce electricity when they’re covered with snow. Even if they’re not covered with snow, cloudy conditions—common in winter—reduce their output.
Coal. Apart from the outdoor boiler vulnerabilities (see below), coal is typically stored in a big pile next to the plant. Rain followed by extreme cold turns the coal pile into a massive frozen rock which can’t be delivered to the plant. This scenario caused outages at several Texas coal fired plants.
Power plant design is also a key vulnerability. In typically warm climates such as Texas and other southern states, power plants are engineered and built to tolerate extreme heat, but not extreme cold so steam boilers are usually “outdoor design” vs enclosed in a building. This is good for dissipating heat, but exposure of feedwater piping and control hydraulics to extreme cold temperatures can render the plants inoperable. Depending on the design and the location this can affect not just old steam boiler coal and gas furnaces but gas turbines and nuclear power plants as well.
[1] Corporate Reports, Factset and EIP estimates for gas LDCs.
[2] Energy Information Agency April 2020 Monthly Energy Review.
[3] U.S Energy Information Administration, Electric Power Monthly, February 2020.
The Information provided in this article is believed to be accurate as of the date above. EIP reserves the right to update, modify or change information without notice. Any statements of opinion are EIP’s opinion and should not be relied upon as a prediction of any future event. The information is based on data obtained from third party publicly available sources that EIP believes to be reliable but EIP has not independently verified and cannot warrant the accuracy of such information. Investors are encouraged to seek their own legal, tax, or other advice before investing.