The Economic Impact of Power Outages and Heat Waves in Texas

As record temperatures drive record power demand, ERCOT is asking Texans to conserve energy.

Electrical outages and extreme temperatures cause economic harm by disrupting production, wages and inventory - leading to lost production, wages lost as wages are lost as production halts as well as inventory spoilage, inconveniences and inconvenience. Although their costs are mostly financial in nature, they also produce considerable externalities.

1. Lost Production

Extreme weather costs the US economy billions each year in lost output and wages, damaged inventory, delayed production and infrastructure damage. Severe storms and high temperatures are major culprits behind power grid outages; an aging electricity transmission system makes outages even more likely.

Texas grid operator ERCOT has seen demand for electricity exceed what is available from their grid; as a result, ERCOT is encouraging residents to conserve energy, and has even instituted temporary service interruptions due to rotating outages.

As of Monday afternoon, electricity supply lagged demand by approximately 12,000 megawatts; enough power for roughly half the homes in Texas. That gap was expected to widen further throughout the day. ERCOT was also facing the loss of over 4 GW due to scheduled maintenance - an event common during winter season.

These factors left ERCOT's grid operator with only 2,300 megawatts as its safety margin, leaving no cushion against blackouts if energy consumption dropped below this threshold. If it did fall below 2,300 megawatts, further precautions would be taken such as asking consumers to conserve energy or turning off some power sources; should margin levels fall further below 2,300 megawatts, an emergency energy alert system (EEA3) will activate and coordinate suspensions of service for both residential and commercial customers across ERCOT's region.

ERCOT has taken measures to ensure its grid is ready for future extreme heat events, including mandating regular maintenance on nuclear plants and encouraging new resources to come online. But these investments take time, leaving its infrastructure vulnerable in severe conditions despite recent upgrades.

Texas serves as an instructive example for the rest of the country as well. As America's most populous and energy-rich state, Texas has shown how quickly an unregulated electricity market can fail in an emergency -- some reports even suggesting the system was only minutes from collapse and leading to months-long blackouts.

2. Expenses

Power outages can quickly add up in costs. Not only are wages and productivity of workers affected by power outages lost, but there may also be costs related to spoilage of inventory, delivery delays and inconvenience. Furthermore, in the case of heat waves there could also be expenses related to air conditioning costs.

American electricity outages cost the economy billions annually due to extreme weather. Lost output accounts for 20-25% of these costs annually; as extreme weather becomes more frequent and intense, so too will losses increase.

The American electricity grid is growing increasingly vulnerable to extreme weather events. Storm damage to power lines or infrastructure problems that require repair often causes expensive power outages that need expensive repairs to rectify.

Between 2003 and 2012, 679 weather-related power outages that affected at least 50,000 customers resulted in economic losses of $33 billion (U.S. Energy Information Administration; Sullivan et al, 2009). Each of these outages caused average of $18 per customer losses (U.S. Energy Information Administration;

Weather-related outages have multiple direct costs that can include lost output and wages, spoilt inventory, reduced sales and disruptions to production. Their indirect costs, however, are harder to quantify and more difficult to assess accurately; some manufacturing businesses located away from the scene of a power outage may incur additional costs when their supply chains are disrupted; online businesses could experience decreased traffic as a result; this extra expenditure is known as externalities.

Recently, Superstorm Sandy caused more than twice its original estimated damage ($13 billion), leading the U.S. government to invest in smart grid technology as an effort to minimize future disaster costs. These investments have successfully reduced these costs significantly.

Texas is experiencing high energy demands this summer from homes and businesses using air conditioners to beat the heat, making it more challenging for the Electric Reliability Council of Texas, or ERCOT, to balance supply with demand. ERCOT has asked Texans to conserve energy to avoid outages.

3. Delays

Texas power grid is on the brink of disaster as demand for energy peaks as Texas residents open their air conditioners this summer, according to Electric Reliability Council of Texas estimates. Their warning noted that Texas' grid was "very close" to reaching capacity as it battles severe drought and high temperatures.

ERCOT's warning sparked considerable outrage from state lawmakers and consumers alike, who demanded answers on why emergency measures weren't taken earlier. State leaders have committed themselves to taking swift steps this year in response to this problem.

There are multiple factors contributing to North Carolina's vulnerability, including an inadequate power generation capacity and a drought which has depleted soil moisture, creating hotter and longer heat waves according to National Oceanic and Atmospheric Administration scientists.

Short term, the situation could improve as more solar and wind energy come online and transmission lines are upgraded to accommodate this source of power, although experts caution that such additions might not be sufficient to offset the effects of long-term drought and an increasing population.

Though this study's estimates of outage costs are based on private costs for customers who lose power, they neglect externalities - nonpecuniary costs that have an impactful ripple effect on millions of people and affect air transport, economic disruption and health risks.

The authors of the study acknowledge that their methodology may contain limitations. It relies on the assumption that costs associated with power outages are proportional to their impact, and excludes costs related to smaller storms. Furthermore, quantifying lost economic activity due to outages remains impossible.

The Tribune's editorial board believes the state must strengthen its commitment to renewable energy and take measures to prepare its system for increasingly extreme weather. Disclosure: Calpine, Rice University and Texas Competitive Power Advocates have been financial supporters of The Tribune - a nonprofit, nonpartisan news organization funded through donations from members, foundations and corporate sponsors - but this does not influence editorial content in any way.

4. Damages

Losses caused by power outages and heat waves can be devastatingly costly to businesses, with billions lost in lost output, wages, spoiled inventory, production halts and production setbacks alone. Even beyond direct affect companies themselves, power grid disruptions also incur costs - prompting increased investments into grid modernization and resilience projects in response to outages as a way out.

This summer will place immense strain on Texas electricity grid. Demand typically spikes during this season as people use air conditioning units to beat the heat.

But this year could be hotter and drier than expected, leaving ERCOT with very limited operating reserves to respond to heat waves that arise - potentially leaving vulnerable Texans exposed to risks like heat exhaustion and stroke. Even if demand remains flat, that could force ERCOT's grid to shut off power to specific areas during a heatwave for extended periods - leaving many vulnerable people exposed to exhaustion or stroke as a result of being without electricity for too long.

ERCOT has issued conservation appeals in recent weeks, asking customers to reduce electricity use for a few hours at a time. Texasans have responded well so far, yet even with continued conservation measures the operating reserves could run low by late summer and city officials can order blackouts as necessary to protect essential services like hospitals and fire stations from harm.

Though Texas' current system was designed for free-market operation, its resilience against extreme weather conditions leaves much to be desired. Therefore, state leaders must impose changes that include winterization measures, minimum capacity requirements and long-term planning strategies if they hope for change to occur within their state. It isn't too late for Texas to make these necessary modifications but doing so will take more courage than expected.

The Texas energy crisis serves as a reminder that reliable electricity cannot be taken for granted; its importance to our economy, safety and quality of life cannot be understated. Furthermore, deregulation in this sector must stop; instead we require resilient infrastructure which responds more actively in response to severe weather events, with public utilities playing an active role in shaping energy markets.