Texas - Could it ever happen here…may be not, but what are the lessons?

As investigations continue on the causes and implications of the Texas energy crisis, there may be a temptation to think this could never happen on our European shores. However, perhaps more saliently there are lessons to note which will have significant consequences for our energy systems as they decarbonise. The impact of extreme weather events, the need for firm resources in power generation and the balance of power between market forces and policy intervention are all themes we shall need to consider as our low carbon energy systems evolve. Together with Adrian Del Maestro we take a look at some of the possible lessons.

Dramatic fluctuations in temperature and power generation output

The significant fluctuations in temperature that wreaked havoc in Texas are already evident on our European continent. In Dachwig in Thuringia, eastern Germany for example, morning temperatures on February 14th plummeted to -22 degrees Celsius One week later they reached highs of 18 degrees Celsius during the day. A staggering delta of 40 degrees Celsius in the space of just a week!

Moreover, as cold weather conditions swept across Germany, by late January the elements were shaping generation output. Wind and solar contributed a meagre 14% to domestic power generation while conventional power, made up of coal, gas and nuclear, provided nearly 80% [1]. Fortunately there was the necessary thermal generation to back up renewables. But bear in mind that nuclear power will be phased out in 2022 and coal by 2038 in Germany.

This illustrates that as more intermittent weather-driven renewables are added to our energy systems, we shall be increasingly exposed to both severe shortages of power and equally massive power surpluses. Surpluses sound more attractive than shortages, but the former bring their own challenges. Stormy days for example, can be so windy that the power flows from onshore and offshore wind farms can overwhelm the power grid, potentially triggering its collapse. And these power overflows can undermine the grid stability of neighbouring countries whose energy systems are interconnected.

Market supremacy or the need for intervention?

In many ways the Texas energy crisis highlighted that there may need to be societal and political constraints to market forces. The market deals with issues and imbalances through a variety of mechanisms, such as price signals. However, as Texas illustrated, unfettered market forces mean some retailers now face ruinous bills after having to buy power at maximum prices. After tracking at about $17/MWh prior to the crisis, the ERCOT North Hub price rose to $9000/MWh- more than 500-fold in price. Residential consumers are also facing bills in the thousands of dollars for that week during the crisis. The laws of physics that dictate supply and demand must continuously be in balance in electricity markets, further aggravate these price swings.

In light of this, there may be an argument that such price outcomes are not politically acceptable in Europe and therefore greater market intervention by government is needed or will be demanded. This certainly chimes well with current practices, as we are already witnessing governments play a more interventionist role when dealing with the pandemic. The implementation of lockdowns and curfews across Europe and more recently the deployment of vaccines, all reflect governments intervening in our lives with broad public approval.

So what might be the implications of a rising rivalry between market forces and government for the European energy system? In Europe we chopped up value chains in energy allowing the market to ‘discover’ solutions for those parts where competition was possible and desirable (generation and supply) and to regulate those parts deemed natural monopolies (grids). Competition also means allowing ‘the power of the market’ - or the infamous ‘invisible hand’ - to dictate outcomes. Does this warrant a reconsideration of how we structure the market? Is unbundling sensible? Or should we allow new forms of integration? In general there are two ways to deal with increasing uncertainty and volatility - which we will increasingly witness as we decarbonise our energy system - either further integration across the value chain to internalise risks, or by promoting more market orchestration through state intervention and regulation.

The age of plenty is ending and the age of ‘constraint’ is starting?

In Europe we have been spoiled with the way we view access to power. We have grown up in an age of plenty and with an expectation that power is ‘Always On Anytime’. But with the growth of renewables might this have to change? The cost of ensuring that all power demand can be met at any time, will come at a significant premium. This is certainly the case in weather-driven systems that require nearly the equivalent capacity in back-up generation or storage.

The cost implications may trigger a shift in the public mindset akin to what we see in public services where we accept that there are queues and capacity constraints. Should we aim for satisfying average demand at all cost, rather than satisfying peak demand at all cost? Or something in between? Perhaps we are facing a future where power rationing becomes the norm across parts of the economy, when supply cannot meet demand (or meet demand at socially acceptable costs).

This would require greater collectivity and the participation of all users of the system (what TenneT, a transmission system operator, calls ‘crowd balancing’). Needless to say critical services like hospitals would be exempt. It would start to put a price on ‘peak power’ and the way we run the system. And before we get accused of suggesting rolling blackouts, our point is as with internet bandwidth at home, capacity gets squeezed rather than being cut-off.

Electrons AND molecules are the way forward

While the future is renewables power generation, another lesson from Texas is the need for firm resources. We need molecules to back up the intermittency of renewables. As to what sort of molecules – such as rainbow-coloured hydrogen or natural gas – that is another discussion. Increasingly therefore we will need to think about the energy system, rather than the electricity or the gas system. The emergence of Energy System Operators that leverage the strengths of molecules and electrons and use conventional gas, green gas, storage and hydrogen, to run the system will likely occur in the next decade.

So whether the Texas incident could or could not happen here in Europe is less relevant. What is more relevant are the implications for energy security in a future where extreme weather events become more frequent and investment in renewables generation grows. And we need a discussion of what level of ‘Always On Anytime’ is socially acceptable and what resilience we need to build into our systems. There is a role here for the market, but also for policymakers.

[1] Source: Agora Energiewende data based on January 24th, 2021 

This article was written by Dr. Paul Nillesen, a partner in PwC Strategy& Netherlands and Adrian Del Maestro, a director in PwC Strategy& UK