The latest debacle in the Texas energy markets left everyone scratching their heads. Here was a utility in ERCOT with tremendous experience and infrastructure in managing load requirements coming up short on an unusual, but not unheard of, weather event. The unnaturally cold weather disabled some of the traditional gas generation, and also knocked out a significant minority of the wind turbines that are supposed to be our future in electricity.
And, despite the warnings of meteorologists that couldn’t have caught ERCOT by surprise, the result was a rolling blackout throughout Austin, San Antonio and surrounding areas, leaving most of the city power-less — and freezing.
Wait, what?
The United States is now the biggest producer of natural gas in the world, and Texas residents, in the state where the largest percentage of gas is produced (25%) found that they couldn’t get enough of the stuff to keep warm.
Of course the lack of foresight in gas scheduling wasn’t the whole problem. As with all the weird happenings that have confronted the energy markets in recent years, there’s a confluence of problems all waiting to come together for this kind of major foul up. Let’s be really clear about one thing that could have been prevented with better management: The ability of ERCOT’s grid to distribute an ever more precious load was grossly lacking. Power prices on the spot market saw $800/mWh when they’re normally around $15 bucks and nat gas prices at the local hub (OGT) saw $1000/mmBtu when those prices are normally $3.
Smart grids? Not smart enough, at least not yet.
But here’s the point: This isn’t the first time that energy markets have failed us massively. In fact, it’s getting to be a rather common (and always disturbing) event. One only need remember the negative $35 a barrel oil price last April, due to poorly managed storage at the pokey and outdated West Texas Intermediate hub in Cushing, Oklahoma; or the negative natural gas prices we saw rather frequently in the Waha hub of West Texas during 2018. You could add water resource issues in California during the wildfires, if you wanted to throw more into the bucket, as Liam Denning did today.
No, the system is broken — and it’s showing it’s bankruptcy more and more often.
Clearly, the pricing and scheduling mechanisms I made my living on during the 80’s and 90’s and 00’s is no longer equipped to do the job. Basis pricing off of central trading hubs and held together using the futures markets is getting rickety — and showing it’s age fast. The implementation of trading technologies, fast algorithms and ever more complex alternative instruments and options are stressing this single hub system and central clearing mechanism. The coming wave of alternative energy sources - solar, wind, hydrogen, geothermal - and the technologies that are coming with them - carbon capture, batteries and other storage ideas — is further making the old system completely untenable.
It’s all got to go.
But, to what? Denning and I rarely agree, but we do here: the solutions aren’t simple to find, but my instinct says that this is a job for the silicon valley geniuses. I know about as much about blockchain as the local deli counterman, but the independent model there, unhindered as it is by currency constraints and centralized clearinghouses, must be a piece of the puzzle to all of this. When I figure out how that will precisely work, I’ll call the Winkelvoss brothers for $100m of start-up money (and make them another $3 billion).
But until some alternate system as advanced, compelling and as well-funded comes along, something that rivals the intense interest all the new renewable energy technologies and energy trading forces are getting, we should expect to see more of these kinds of frankly ridiculous disconnects with our current energy pricing and delivery systems.
Now — where DID I put that direct number I had to Elon Musk?
I agree with your argument. I also agree, "It's all got to go." For me, the question is what has to go. I would start with ERCOT, the isolated grid that doesn't want to play with others. It's not a surprise that when a grid is isolated, it's not very smart.