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To Fix the Power Market, First Fix the Natural Gas Market

Capacity requirements don’t assure reliability when generators can’t get fuel.

Texas has gone through a terrible period, President Biden has declared a state of emergency and efforts are continuing to alleviate the suffering caused by a week of record cold, and massive problems with the Texas electric system. At the same time, fingers are pointing and the knives are out. Blame has been directed at everything from frozen wind turbines, to Texas’ semi-isolated grid, all the way to allowing non-Texans onto the board of the Electric Reliability Council of Texas (ERCOT). One criticism that I’ve followed closely is the role of Texas electricity deregulation in general, and its wholesale market design in particular. Yet, although virtually every story mentions it, few seem to consider the implications of the fact that many of the problems that hit the Texas electricity system stem directly from the failure of its natural gas system.  

EuWmHGhXUAM_ru8For those of you who don’t follow the energy industry that closely, natural gas is not electricity. The natural gas system in Texas isn’t regulated by ERCOT, wasn’t deregulated by George W. Bush, and to my knowledge doesn’t use wind turbines. Those pointing to the superiority of electricity market designs outside of Texas need to consider how those designs and regulations would fare if they ran out of natural gas.

One of the main criticisms of the Texas market is that it doesn’t have a capacity market, or capacity requirement. In the electric industry we are used to thinking about the supply shortages problem as one we combat by keeping extra generating capacity. What is overlooked in all this discussion about capacity is that every major supply shortfall event going back to California’s crisis in 2001 has resulted not from a lack of capacity but from a lack of electricity, or electrical energy. The problem is that capacity can’t keep the lights on or heat your house if it’s not operating.  

In Texas, the failure of the more-than-adequate capacity to generate electricity was shared across all the technologies and fuel sources. But by far the biggest shortfalls came from the gas-fired power plants, and much of that shortfall was because those plants couldn’t get gas. This is not a new problem, but Texas was by far the most disastrous manifestation of the problem.[1]

Different Markets, Different Standards

Obviously natural gas and electricity are very different energy commodities, and it is logical for them to have different regulatory and market structures. That said, the contrasts between the transparency and oversight of electricity markets and natural gas markets are glaring.  Consider the following dimensions:

 Regional Reliability Planning

Since 1968, in the wake of blackouts on the east coast, the federal government has required electric utilities and system operators to coordinate their resource planning and to file detailed analyses of their needs as participants of regional reliability councils that operate under the umbrella of the North American Electricity Reliability Corporation (NERC). The NERC develops standards and best practices for electricity balancing authorities to follow. To my knowledge, there is nothing close to an equivalent of NERC in the natural gas industry. If it did exist, an equivalent institution for gas might develop standards around storage, pipe insulation, and backup generation for compressors and pumps. 

Screen Shot 2021-02-25 at 9.24.32 AM Wholesale Price Transparency

Electricity markets in areas with Independent System Operators (ISOs) function as centralized exchanges that handle almost all of the power flowing through their systems. As part of their role in balancing supply and demand, they determine and publish high frequency prices that set the value of electricity at a highly granular level of time and space. The natural gas market operates on a combination of non-transparent over-the-counter (OTC) trades and exchange-based standardized contracts in a handful of locations. And the gas markets that are transparent don’t do weekends.

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The natural gas prices that are reported are derived either from surveys of OTC trades or from these standardized contracts. It’s not an ideal environment for price formation – remember the Bunny Slipper Lady? News articles that did focus on the natural gas market during the Texas freeze displayed pictures like this one. The problem with this picture (line graphs!) is that it glosses over the gaps in trading days. A more representative picture would look like this.

The absence of liquid transparent markets can be a problem when crises hit during, say, Presidents’ Day weekend. Everyone, including gas generators, are scrambling to get gas and it’s not clear exactly who to call and what to pay them. In that kind of chaotic market environment the gas that is available is not likely to flow to the uses where it would do the most good. 

In that kind of situation, electricity generators can’t get gas, so load is curtailed, so gas wells lose power, so generators can’t get gas, …. You get the point. When the Governor bans exports by executive order, it’s a sign that something is seriously wrong in the market. 

 Retail Service Priorities

In most of the country we are used to thinking about electricity capacity problems as all about heatwaves. In heatwaves people need cooling, and air conditioners run on electricity. In cold snaps, people need heating, and many households rely on natural gas furnaces. This is still the case in Texas, even though electric heat has been growing. In most of the country therefore electricity demand peaks in the summer. Over the last two decades however, a majority of the generation capacity also needs natural gas. So, most of the supply shortage events outside of California have happened in the winter and have been driven by the competition for gas between heating and electricity generation. 

We still lack the right mechanisms for allocating scarce gas between these competing demands. The lack of transparent prices is part of the problem. Another is the incentives of the natural gas distribution companies responsible for meeting the heating needs of their “core” residential and commercial customers. They would face holy hell if they curtailed their heating customers, but can lay low when the power is shut off to those customers instead. The kind of regulatory blowback they might face if they fell short far outweighs the benefits of selling off some gas to electricity generators, even when their own customers might benefit from such a sale. This kind of “skewed incentive” was at the root of this paper by Severin Borenstein, Meghan Busse, and Ryan Kellogg. 

These skewed incentives, combined with illiquid markets and the absence of other coordination mechanisms can lead to the gas that is available being used in the wrong ways. The “right” answer would likely be to turn down thousands of furnaces, close some shops, and help keep the lights on. The current state of integration of our natural gas and electric systems does not operate at that level.

Moving Ahead

It’s quite possible that even if nothing went wrong with the gas system there would have been serious energy shortfalls in Texas. We will know more and more over time. Even outside of Texas though, one of the greatest threats to electricity reliability is the reliability of the natural gas system. The Trump administration’s answer to this threat was to subsidize some baseload coal and nuclear power plants (only the deregulated ones). Even ignoring the climate implications and the frozen coal piles, keeping billion-dollar plants operating beyond their economic lifetime to deal with a one-week in three-year problem can’t make sense. Gas storage, or even on-site dual-fuel gas/oil capability would probably make more sense.  

But the first priority should be to make sure the gas that is available is being used in the way that creates the most benefits and minimizes the risk of another hell-freezes-over week in Texas again. A more reliable and transparent gas market would be a good place to start.

Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.

Suggested citation: Bushnell, James. “To Fix the Power Market, First Fix the Natural Gas Market” Energy Institute Blog, UC Berkeley, March 1, 2021, https://energyathaas.wordpress.com/2021/03/01/to-fix-the-power-market-first-fix-the-natural-gas-market/


[1] It has been argued that electricity capacity requirements could also require plants to have contracted for sufficient fuel as well.  This is easier said than done given the myriad types of possible contracts and the difficulty determining whose fault it may be if gas cannot be delivered.  Ultimately the effectiveness of any such requirement depends upon the penalties for non-compliance.  Electricity systems with capacity requirements rely upon performance penalties to provide the incentives for generation capacity to be available.  Even the largest penalties are still smaller than the $9000/MWh incentives faced by electricity generators in Texas.

You could impose huge penalties on generators for not having enough gas, but then you could end up with the opposite skewed incentive problem, where the gas distributors can’t buy the gas they need from electricity generators afraid of paying those huge penalties.

13 thoughts on “To Fix the Power Market, First Fix the Natural Gas Market Leave a comment

  1. It may no longer be wise to have every structure’s entire electricity supply relying on external power lines that are susceptible to being crippled by unforeseen events, including storms of unprecedented magnitude. There also are coronal mass ejections to consider, however rare, in which power grids are vulnerable to potentially extensive damage and long-lasting power outages.

    I could really appreciate the liberating effect of having my own independently accessed solar-cell power supply (clear skies permitting, of course), especially considering my/our dangerous reliance on electricity. And it will not require huge land-flooding and potentially collapsing water dams, nor constructing towering wind turbine farms.

    Each building having its own solar-cell-panel power storage system — at least as an emergency/backup source of power — makes sense (except, of course, to the various big energy corporation CEOs whose concern is but dollars and cents).

  2. “Even outside of Texas though, one of the greatest threats to electricity reliability is the reliability of the natural gas system.”

    By its very nature – any system powered by a fuel delivered through buried pipes, from original sources hundreds of miles away, is unreliable. But when the Pacific Plate slips northward up to 7 meters along California’s San Andreas Fault, as it most certainly will in the next 30 years, California’s woes will make Texas’s seem trivial by comparison.

    That’s when the El Paso Pipeline crossing the fault will rupture. This single pipeline from Texas is responsible for delivering the fuel used to generate 60% of California electricity. Reliant on natural gas to accomodate their intermittency and voltage instability, California’s wind and solar plants (vaunted for their “flexibility”) will be useless.

    “The Trump administration’s answer to this threat was to subsidize some baseload coal and nuclear power plants (only the deregulated ones). Even ignoring the climate implications and the frozen coal piles, keeping billion-dollar plants operating beyond their economic lifetime to deal with a one-week in three-year problem can’t make sense. Gas storage, or even on-site dual-fuel gas/oil capability would probably make more sense.”

    Why the author lumps coal and nuclear generation together – as if nuclear’s “climate implications” weren’t only positive, as if any U.S. nuclear plant is operating “beyond [its] economic lifetime” (whatever that means), as if nuclear, refueled at 18-month intervals, isn’t the most fuel-stable source of electricity of all, is inexplicable. As is his conclusion “on-site dual-fuel gas/oil capability would probably make more sense” – when California is already predicted to miss its 2030 climate goal by a wide margin:

    https://blog.ucsusa.org/mark-specht/diablo-canyon-is-shutting-down-is-california-ready

  3. The UC Berkeley co-generation plant uses a normally natural gas fueled gas turbine generating electricity. However this gas turbine can also run on jet fuel, which is stored on site. I was told on a tour of the plant that they get a reduced gas price if gas can be shut off during periods of high demand, when the plant just switches to stored jet fuel.. Would a requirement for gas generators in Texas to switch to stored jet fuel during gas shortages be a viable emergency back up?

    • “Would a requirement for gas generators in Texas to switch to stored jet fuel during gas shortages be a viable emergency back up?”

      It could be, depending on how often the generators switched to jet fuel (No. 2 fuel oil). The problem is that jet fuel deteriorates with age so it can’t be stored for more than one season. Maybe additives can extend its life. Not my expertise.

  4. Nice article. I generally like the Haas energy posts.

    We rely more on just-in-time natural gas delivery and less on stored gas. Aliso Canyon in California stored lots. Boston had two artfully painted above ground storage tanks. Outside Boston working with Commonwealth Gas I visited an underground LNG facility that sucked gas from the pipeline all summer, stored it, then released it during the winter. That’s closed, now.

    I’m personally supportive of fission energy power plants that have months of on-site fuel storage.

  5. I generally agree with James’s diagnosis of Texas’s electricity problem. He notes that natural gas distribution companies “…would face holy hell if they curtailed their heating customers”, which may understate the problem. If a gas distribution company closed certain valves, natural gas pressure to a residential customer’s operating gas stove-top might drop so much that the flame went out, potentially causing a safety problem when the distribution company restored the normal pressure, and the gas flowed without blame.

    None of this diminishes James’s support for regional reliability planning and wholesale price transparency on the gas side. As he says, “The ‘right’ answer would likely be to turn down thousands of furnaces, close some shops, and help keep the lights on.” I tend to agree. To get there, it’s my semi-educated opinion that the residential gas market would require dynamic pricing and daily monitoring of gas use. I look forward to reading others’ thoughts.

    • One letter needs change: “gas flowed without blame” should be “gas flowed without flame”.

  6. Revolutions have a way of eating their own young. The fracking boom seems to be no different. Natural gas in the Permian shale fields has often been more of an inconvenience than a source of profit when pricey liquids were the primary goal in the breakneck race for production. Oil producers flared billions of cubic meters of natural gas under the seemingly less than watchful eye of industry regulator, the Texas Railroad Commission.

    In the Permian in recent years the Waha gas hub had developed a reputation for other-worldly prices for natural gas. Sometimes pennies, usually dimes, but often negative prices were quoted for gas at the Waha hub. Such prices were an illustration of an industry that had run completely beyond its infrastructure. Yes, 2020 saw pipeline takeaway infrastructure in the Permian began to catch up to phenomenal field production levels, but winterization did not.

    During the “Great Texas Freeze” the frigid temperatures that froze water and gas liquids in field wellheads, clogged gas processing facilities, and collapsed gas output produced breathtaking prices of a stratospheric kind at the Waha hub https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/natural-gas-spot-prices-soar-as-us-west-freezes-62688923.

    While unusual, this kind of brutal cold hits Texas every 30 years or so. The last cold snap (much less severe) to impact the Texas grid was in 2011. It was a serious hit – so, the Federal Energy Regulatory Commission and the North American Electric Reliability Corporation together produced an after-action & recommendations report https://www.ferc.gov/sites/default/files/2020-04/08-16-11-report.pdf

    An issue noted in the report (along w frozen instrument panels & cooling water feeds) was that wellhead ‘freeze-offs’ shut off the gas flow to many generators. No gas; no electricity. Since then, natural gas production in the region has more than tripled (fracked gas pushing coal-fired power plants across US into closure).

    Further, after the 2011 debacle’s impact in New Mexico gas delivery to retail home heating seems to have understandably been given priority over power generation.

    In 2013 ERCOT commissioned a report titled “Long-Term Assessment of Natural Gas Infrastructure to Serve Electric Generation Needs Within ERCOT”. Appendix A http://www.ercot.com/content/committees/other/lts/keydocs/2013/BV_ERCOT_Gas_Study_Appendix_A.pdf details a chilling scenario of a “doom loop” where severe cold cuts gas production at the wellhead, which cuts power generation, which then feeds back to cut electric power to gas field pumps & compressors – cutting gas output even further.

    The consequences of a bitter cold snap on the crucial nexus of gas and electricity were a known risk in Texas. Yet, the blackout crisis happened anyways.

    Lessons will finally be learned – at a very high price indeed.

  7. We ( Alberta ) supply half of the Bay Area’s natural gas – reliably. Continental energy security should include integration of continental energy production. In Canada we have it all ( oil, gas, hydro, uranium ) . The Texas fracking crowd lobbied against the KeystoneXL pipeline, although the refining complexes on the gulf coast are desperate for our product, their refineries having been redesigned to handle Venezuelan crude, now unavailable. It’s complicated. Russell Kalmacoff B.Comm., M.B.A.(Haas).

  8. A few observations:

    – When the PSPS outages started, I looked at system level outages on the West Cost back to the 1980s–none was caused by a physical shortage of generation capacity. Most were caused by transmission line failures. The August blackouts look to have been caused by a market failure allowing exports among other problems.

    – Having reviewed hundreds or thousands of emails among traders during the 2000-01 crisis as an expert for the California Parties, it was evident that certain companies that had vertically integrated gas affiliates were using the opaque gas markets to shield how they were passing through high electricity rents by charging high prices between the affiliates. And there was no real way to check the legitimacy of those prices. (It also was pretty easy to manipulate RECLAIM prices in the same way.)

    – One issue for serving core customers is use of pilot lights. In California, an outage of 4 million or 10 million residential customers would require months of service calls to ensure the safe restart of service.

  9. The Texas crisis involves repeated lessons from before. In 2011, it was really cold in Texas, and there was a lack of fuel to keep the lights on. In the 2014 “polar vortex” is was really cold in the Midwest and Northeast, and there was a lack of fuel to keep the lights on. In the 2000-2001 California power crisis, there was a severe drought (reducing “fuel” to hydro units) and a failure of a natural gas pipeline in New Mexico; both reduced the ability of available generating units to make electricity, and prices went soaring, and there were brief periods of inadequate supply.

    But these are rare circumstances — a few days every decade or so. It does not make sense to build supply-side resources that are needed only a few days every decade or so. It makes more sense to address this on the demand side of the occasion. If Texas had control over every water heater, thermostat, spa, swimming pool, and laundry equipment, it could have SELECTIVELY controlled less-essential loads and limited home heating to avoid freezing, and problem kept the lights on.

    No region of the country has a power system designed and maintained to meet extreme weather conditions. People have the power go out due to winter storms, summer tornadoes, and hurricane-season events every year. We lose service ten times as much due to distribution failure as we do to generation system failure.

    A few important lessons learned (again and again):
    1) It does not make sense to build 20-lane freeways so ‘just in case’ multiple accidents block ten lanes, people can still get to work on time; the same is true for power systems;
    2) It makes no sense to have a wildly volatile wholesale power market if retail customers do not see those prices IN ADVANCE so they can respond to them;
    3) In extreme weather, stuff breaks. Every emergency planner advises all of us to be prepared for 72 hours without power, gas, or water. We do that at my house, with an inverter that connects to the car, stored water, a wood stove, a propane camping stove, and other elements of preparedness.

    Yes, the Texas failure was spectacular, and devastating to many in Texas. And yes, there will be major bankruptcies and other financial fallout (Brazos Electric Cooperative filed as I wrote this on March 1). But the basic lessons are repeats of lessons we have learned too many times before.

    • Jim, great observations!

      “It does not make sense to build supply-side resources that are needed only a few days every decade or so. It makes more sense to address this on the demand side of the occasion.”

      I could not agree more.

      “If Texas had control over every water heater, thermostat, spa, swimming pool, and laundry equipment, it could have SELECTIVELY controlled less-essential loads and limited home heating to avoid freezing, and problem kept the lights on.”

      This is the top-down, “command-control” approach to determining what is less-essential and what is not and it is inefficient because no system operator can know the priority that any individual customer places on any particular use at any given time. The better way is to let the customers make those decisions for themselves by responding to dynamic pricing signals that toll off the requisite amount of demand in the aggregate. This argues for widespread adoption of some form of dynamic pricing that indexes retail rates to the wholesale market real-time spot prices.

      In ERCOT less than one-half percent of retail customers (those served by the Griddy and Octopus retail suppliers) were exposed to the wholesale real-time prices. And these suppliers did not offer customers any ability to hedge their most valuable loads (big mistake).

      “We lose service ten times as much due to distribution failure as we do to generation system failure.”

      Absolutely right! This is why slavishly adhering to a LOLE target of one event (or even day) in ten years is nonsensical. If the LOLE target in lowered by a factor of 10 customers would barely discern the difference because the frequency of distribution failures would still dwarf the frequency of wholesale market supply shortfalls. Incidentally, a consultant (Astrapé Consulting) recently completed a study indicating that the ERCOT’s energy only market provides sufficient incentives through scarcity pricing to support a reserve margin that translates into an LOLE of five days in ten years. See: http://www.ercot.com/content/wcm/lists/219844/2020_ERCOT_Reserve_Margin_Study_Report_FINAL_1-15-2021.pdf.

      The Astrapé study did not examine the impact that a significant amount of retail price responsive demand would have on the wholesale capacity reserve margin. However, it did note that adding an additional 5 percent to that reserve would reduce the LOLE to one day in ten years. Achieving a 5 percent reduction in peak demand through dynamic pricing is not a difficult goal. This implies that customers will voluntarily reduce their low-value loads by enough to obviate the need for rolling blackouts.

      Actually, the potential exists in Texas to achieve peak demand reductions much higher than five percent if enough customers actually see retail prices approaching the $9,000 per MWh price cap. Griddy customer data support this conclusion.

      “2)It makes no sense to have a wildly volatile wholesale power market if retail customers do not see those prices IN ADVANCE so they can respond to them;”

      Yes. Furthermore, the existence of a significant amount of retail price responsive demand will greatly reduce wholesale market volatility because retail customers’ voluntary load reductions will slow the rate at which operating reserves are depleted and limit the scarcity surcharges imposed by the ORD curve.

      “But the basic lessons are repeats of lessons we have learned too many times before.”

      Apparently not. LOL!

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