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What Texas' Blackouts Mean for Electricity Markets? - Barış Sanlı

The latest Arctic cold pushing Texas power prices to record levels such as 9000$/MWh is going to start a new discussion on capacity mechanisms, renewables, and pricing in wholesale electricity markets. We can not be sure how the whole discussion will evolve, but it will get deeper.

Two years ago, we were talking about Abqaiq attacks and their importance for oil markets. The most critical part of the Middle Eastern oil is hit from the heart. But Texas is just as important and critical for gas and oil production. The weather events in Texas can be felt around the world. Today oil prices increased, gas prices will also follow.

In such freezing temperatures, oil wells and productions are getting affected. The flows will be disrupted. That can further increase the stress on the energy system. Surely, the fossil production and transmission system is hit by Arctic cold. But not to the extent of electricity since there are storage possibilities on the fossil side.

The cold weather in Texas will leave the region in a matter of days. But the discussions will remain. One of the most important of all is the freezing of wind turbines. The blades of wind turbines are covered with ice. This weight change can harm the blades and the overall operation. There are examples of wind turbines shutting down to protect their blades and equipment, but this concurred with the highest demand and coldest weather in Texas. 12000 MWs of wind turbines were shut by Sunday morning.

But the biggest news was the record high 9000$/MWh electricity prices. Because electricity demand is expected to surpass possible generation. This is the crucial part of the whole discussion. Prices are record high, but consumers are not reacting. The wholesale part is giving a response. One wholesaler is offering 100$ for its customers to stop buying electricity from them.

You can price anything at any price. Electricity is another one of these commodities. It is a public good. You can create the mechanism and price it accordingly. Electricity markets are social constructs, and there are many ways to invent electricity markets.

But that one wholesaler is giving a signal of what is possible and what is not. It can knock on the doors of consumers or call them to consume less. But it prefers to pay cash for customers to leave. Converting consumers to active participants of the electricity system is a tireless effort with zero results. Instead, paying handsome money to get rid of the consumer looks like a better option.

The second important discussion is regarding capacity mechanisms. Should we all pay an hourly amount for the whole year as insurance for such extreme events, or should we just pay the maximum amount when these events happen? The PJM market prefers the former, Texas-ERCOT prefers the latter. It all boils down to market structure and perception of electricity prices.

If electricity prices are highly political items, then you design the market in the PJM way, or like Europe, high prices come and go. In Texas, however, the prices may persist for some time. The important point is the transmission of these costs to consumers.

There are other possibilities like matching Texas like mechanisms with hedging instruments to manage such events' financial impact. Therefore extreme markets need solid hedging instruments to help their players manage their risks. Otherwise, high prices can be highly dangerous.

What did these high prices mean for the rest of the electricity markets? Capacity mechanisms are here to stay and flourish. But there is not a single winner of such schemes. The security of supply should be managed by both physical and financial contracts or mechanisms. The risk stemming from major events can not be managed by wholesalers alone. Consumers should be dragged into the game.

But it is harder to achieve. The only way forward is electronic control systems embedded in everyday appliances. EU is not pushing hard for forcing appliance makers to automate demand response. The US doesn't have it on the agenda. But we should think as a consumer as not the human agent but the electronic appliances to solve this problem. The automated transactions between the appliances and system operators without the consumer huff and puff are probably the only way forward.


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