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What Can Be Learned from the Persistent Electric Power Outages in Texas?

Lutz Kilian

April 01, 2021

Texas suffered massive power outages during unusually cold temperatures in February. Millions of households lost access not only to power but also to heat and water for days—a situation that was foreseeable and could have been avoided.

Texas’ Unique Power Setup

Texas made a decision that can be traced back to the 1930s to operate a “Texas-only” electric grid, which covers 90 percent of the state. It excludes El Paso, much of the Panhandle and portions of far East Texas. This decision minimized federal oversight of the sector.

The grid is run by the Electric Reliability Council of Texas (ERCOT), which manages the flow of electric power to more than 26 million Texas customers (Chart 1).

Chart 1: ERCOT is One of Three Grids Serving Texas

Downloadable chart

ERCOT is subject to oversight by the Legislature, but elected leaders delegated their regulatory authority to the governor-appointed state Public Utility Commission (PUC). ERCOT’s members include large consumers (such as cities or companies), power generators and power marketers, electric utilities, and providers of power transmission and distribution. These market participants, along with ERCOT staff, seek to provide a reliable bulk electric system and equitable access to electricity.

The Texas electricity market was deregulated and largely privatized in the late 1990s and early 2000s. Increased competition to provide power at the lowest cost helped lower electricity prices, but, given the absence of a mandate to winterize the grid, little attention was given to insulating the equipment against rare spells of extreme cold.

In an electrical grid, supply and demand must be balanced at all times because electricity is not easily storable. ERCOT made plans for backup power generation in the event of a winter storm but underestimated demand during the 2021 freeze and overestimated its power generation capacity. The outages far exceeded what ERCOT had predicted in 2020 for an extreme winter event.

When power demand exceeds supply, electric grid components fail and may take weeks to rebuild. When the grid was minutes away from complete failure on Feb. 15, ERCOT was forced to shed some of the load on the grid by constraining demand (Chart 2). Utilities accomplished this, under orders from ERCOT, by cutting the power of most industrial customers and many residential customers. These planned outages also curtailed natural gas-powered residential heating that relied on electricity to operate.

Chart 2: Available Generation and Estimated Load without Load Shed

Downloadable chart | Chart data

What Went Wrong?

Installed capacity for generating power in Texas relies on natural gas (48 percent), wind (29 percent), coal (13 percent), solar (6 percent) and nuclear energy (5 percent). ERCOT correctly anticipated that production from wind and solar would be down in winter, along with many power plants undergoing maintenance. What ERCOT did not anticipate was how many of the remaining natural gas power plants—and, in some cases, coal and nuclear power plants—would stop working because of the extreme and sustained statewide cold.

The problem started on Feb. 14, when several natural gas producers in Texas began experiencing difficulties maintaining production, as water that is co-produced with natural gas started freezing in pipes. This lowered the pressure in the larger natural gas pipelines feeding fuel to power plants, making it more difficult for these plants to operate. Additionally, equipment in some power plants running on natural gas also froze.

As these power plants went offline, utilities cut the power to industrial customers—including to wells that produce natural gas and pipelines that transport this gas—to preserve service to residential customers, triggering a downward spiral. Overall, about half of the state’s natural gas production came to an abrupt halt. Once offline, power plants were often unprepared to restart in the freezing conditions.

Why Was the State Not Better Prepared?

The last time Texas experienced a major freeze was in February 2011. Even though that storm was less severe, natural gas producers also encountered difficulties dealing with the cold. Had ERCOT not implemented rolling blackouts in 2011, that cold snap would have caused widespread power failures throughout the region.

This may come as a surprise to residents of other states, since it is no mystery how to winterize power plants and pipelines or the production of natural gas. This is done routinely in in the northern U.S. and in Canada, but many Texas power generators never made the necessary investments because neither the PUC nor state legislators mandated such winterization.

Preventing Future Outages

Areas in Texas outside the ERCOT grid suffered few persistent outages in February 2021 when facing similarly adverse weather conditions. What did those areas do differently, and what can we learn from their experience?

A start would be to winterize power plants, processing plants and pipelines by insulating pipes, gauges and pumps. It may also make sense to require these companies to have diesel backup generators. Likewise, it would seem essential to winterize new natural gas production going forward.

The alternative strategy of building storage capacity for natural gas near power plants would likely be prohibitively expensive. Dual-fuel technology that allows power plants to burn diesel or fuel oil in an emergency may provide a lower-cost alternative.

In addition, paying power generation companies to invest in more spare capacity would make the system more resilient. An alternative would be to connect ERCOT’s grid to grids outside Texas. Integrated grids can trade power in response to rapid demand surges or unexpected supply shortfalls. This advantage has to be weighed against increased federal oversight. An interesting question for regulators will be what combination of reforms are most cost effective in preventing persistent outages.

Legislative Responses

The risks associated with delaying plans to winterize the grid were readily apparent years ago. In the past, neither the PUC nor the Legislature were prepared to make mandatory their guidelines about winterizing the grid. This reluctance may be about to change. Recently, a number of legislative proposals have been discussed that would mandate that both electric power generators and the gas pipeline facilities that fuel them be weatherized for extreme winter events.

Whether the changes adopted by the Legislature end up being substantial or not, it is clear that the price of electricity in Texas will increase. Either the costs of winterization and related measures will be passed on to retail customers or, if there is no action, consumers will have to buy backup power generators to prevent similar outages.

About the Author

Lutz Kilian

Kilian is a senior economic policy advisor in the Research Department of the Federal Reserve Bank of Dallas.

The views expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.

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