Trading and Risk

ERCOT Outage: How Large a Role Did Natural Gas Play?

byEnverus

The cold snap that hit the central U.S. in mid-February not only crippled Texas, but also supported price spikes from neighboring states all the way to California.

The Southwest Power Pool (SPP) and Midcontinent Independent System Operator (MISO) manage the electricity grid for Oklahoma (SPP) and Louisiana (MISO). In addition, the California ISO (CAISO), which manages SP-15’s southern California area, was impacted by high natural gas prices that sent wholesale power prices soaring.

During the cold snap, MISO and SPP sent out emergency alerts on February 14, 2020, for February 16-17 as load shedding, or demand reduction, was expected. Record load of over 42 GW was measured Monday and Tuesday in SPP.  Blackouts were experienced in Oklahoma and Louisiana with 75,000 of Entergy’s MISO south residential clients losing power and SPP shedding load Tuesday morning.  Prices in MISO south moved as high as $3,000 on the evening of February 16 and nearly $20,000 the evening of February 15 in SPP.

In California, where temperatures were mild, gas prices were ~$128/MMBtu from Feb 12-15. Power prices were nearly $1,000 the morning and the evening of February 17.

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Were Widespread Problems Caused by Natural Gas?

Several natural gas facilities had to shut operations because electric power was cut off from the Electricity Reliability Council of Texas (ERCOT), but currently public available data are not available to measure exactly which plants lost power supply.

What we can see in currently available data is by how much and when gas flowing on interstate transmission pipelines declined. The observable interstate system in Texas currently represents 25-30% of activity. Therefore, it is not a complete picture, but it does provide some leading indicators about what the final data may eventually show.

For example, the following table shows gas flows by category from the pipeline sample in Bcf/d for various time periods leading into and during the event:

 

Gas Flows by Meter Type, in Bcf/day

From this we can see that no part of the ‘upstream’ sector was immune to the event and we can start to infer that perhaps the Processing stage of the supply chain was disproportionately affected. However, it is important to re-emphasize this is merely early indication and by no means conclusive.

We can reasonably conclude that operations continued generally as normal ahead of the weekend that began on Feb 13. By February 15, the declines were in full effect and following Feb 18 the system rapidly returned to normal as the weather warmed.

 

How Closely Related Was ERCOT’s Outage to Price Spikes Beyond Texas?

Since the natural gas transmission grid is nationally connected, there were coincident effects on other regions.

It is not accurate to imply that Texas alone was responsible for all of the neighboring regions price spikes. However, the largest population demand centers will often have the most significant effects on the entire network.

This weather system affected the entire mid-continent region from the Canadian provinces all the way to southern Texas. Natural gas processors in Oklahoma struggled equally because it was simply dealing with the same weather issues as Texas.

Another way to look at this is to consider market action on the west coast in California. Here the region was not affected by the cold weather, but price action was also significantly higher than normal. This region relies on Texas and the Rocky Mountain regions for a large portion of its gas supply, both of which were underperforming due to the weather-related issues.

Therefore, California had to turn to rely on above average withdrawals from local storage facilities to fill the gap. As a result, prices soared above $110/ MMBtu but not as high as the West Texas prices that were north of $200.

California normally prices at a premium to Texas to keep the pipeline supply flowing west. As you can see, that premium disappeared, but California still had to set extremely high prices to incent larger storage withdrawals than the relatively normal weather experienced there.

 

 

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