04.04.2022 - Poker Game with Electricity: What Blackouts in Texas Have to Do with the Energy Transition
A year ago, Winter Storm Uri knocked out power to large parts of Texas for five days. Power plants for generating electricity and the gas infrastructure were unable to withstand the cold. The economic damage reached into the three-digit billion range. A research team from BOKU Vienna set out to find the reasons for the lack of preventive measures and has now published its findings in the renowned journal Nature Energy: Expensive preventive measures represented a high financial risk for power plant operators, because weather phenomena like this are rare. Only a change in the system can prevent them - an important lesson that will also play an important role in Europe's future energy system.
Extreme weather events like the cold snap that hit Texas in February 2021 are very rare. But when they do occur, they result in enormous financial and humanitarian damage. Nevertheless, the Texas power grid was not designed to withstand the cold temperatures. The grid operator therefore had to carry out rolling blackouts and disconnect several million consumers from the grid. The economic damage amounted to up to 200 billion dollars. But why was the infrastructure not designed to withstand such cold events? Researchers at BOKU investigated this question.
Financial risk deters investors
"Investments in protecting power plants against cold weather entail a financial risk for the operators," explains Katharina Gruber of the Institute for Sustainable Economic Development. It is true that they could earn enormous sums during such events, when there is a shortage of electricity. That's because in the Texas electricity market, prices rise up to 200 times regular prices, depending on supply. However, the rarity with which such cold events occur also poses a high risk.
The researchers found that, on average, it almost always pays for power plant operators to invest in preventive measures. "On average of all expected weather events, investors* make massive money," Gruber said, but in individual cases you can be unlucky. There is a 2 percent chance that no such event will occur in the 30 years following the investment, he said. In that case, they would not make their money back. The authors of the study see this as a major reason why power plant operators have decided against hedging their power plants. Even under the assumption of rising temperatures due to climate change, an investment is profitable, albeit with an even greater risk. Moreover, although temperatures are rising overall, this does not reduce the probability of individual cold snaps.
Consequences for the energy transition in Austria
Texas takes a very market-based approach to financing electricity suppliers: electricity is traded on spot markets. If reserve capacity becomes scarce, i.e., if there are only a few power plants available to step in during an emergency, the price rises sharply. This economic incentive for power plant operators is intended to ensure that even under extreme conditions there is enough capacity to guarantee the power supply in any case - by building new power plants or improving existing ones. As the Texas case shows, however, the financial incentive is sometimes not enough. The form of regulation chosen for electricity markets also has a significant impact in Europe on how the energy transition can be safely advanced.
In Austria, the risk of power plants failing due to low temperatures is significantly lower. However, in the context of the energy transition, power supply will depend heavily on the climate, for example through solar and wind energy. Here, individual extremes can and will occur. "We should already be thinking about which rare events with a large impact can occur, what technical options there are for prevention and how we deal with them - whether market-based or superordinately regulated," says co-author Johannes Schmidt. The team will address these questions in their future research work.
The study has just been published in the journal Nature Energy:
Assoc.Prof. Dr.nat.techn. Johannes Schmidt
University of Natural Resources and Life Sciences, Vienna
Institute for Sustainable Economic Development
Tel.: +43 1 47654 73118