Imagine a four-day stretch without clean or running water, heat, electricity or even food, and temperatures near the zero-degree Fahrenheit mark. Now think about where you could be experiencing such an environment. It’s doubtful that Texas would be near the top of your list. Unfortunately, this combination of circumstances did recently happen in Texas and it surprised pretty much everyone, including the power companies relied on by residents.
Several weeks ago, Winter Storm Uri devastated people across the country, with those in Texas being hit extremely hard. The arctic blast left 4.5 million Texas homes and businesses without power, some for several days. This resulted in sky-high power prices and an inability to supply the power to match the demand. In this week’s chart of power prices in the Houston area, we can see how unprecedented the surge was. Over the past decade, there had been instances of power prices spiking from an average of about $40 per megawatt hour to $1,000 per megawatt hour. But during this winter storm, prices reached almost $9,000 per megawatt hour — nine times higher than any prior peak price! Seemingly everything went wrong at the same time and it has left the state reeling.
Power in Texas comes from a variety of fuel sources — primarily natural gas (40%), wind (23%), coal (18%) and nuclear (11%), according to The Wall Street Journal. During this winter storm, all of the primary power generation sources either failed to operate or did so at reduced levels. Some people blamed the frozen wind turbines for the unreliability, but frozen coal, unsafe power plants due to the cold weather and a lack of natural gas supplies all contributed to the energy shortfall.
The total damage from the winter storm, lack of power and resulting issues, such as water damage from frozen pipes bursting, have contributed to estimated total costs near the $19 billion inflicted by Hurricane Harvey (the state’s costliest storm) in 2017. Utility companies’ reputations and finances have been hit hard. In fact, some will be forced to file for bankruptcy, as the costs incurred over several days due to Uri amounted to more than their costs to generate power for the entire prior year! There must be a way to make the power market more reliable — so that the Electric Reliability Council of Texas (ERCOT) can actually live up to its name.
Our hearts and prayers go out to all of those impacted by the winter storm. Hopefully, this is something that power companies in Texas can be prepared for next time. Texas residents are still cleaning up and trying to get their lives back to normal, while insurance companies will be hit hard because of all the damage. The impact to the utility companies and ERCOT is still being sorted out, with costs in the billions here as well. Keep an eye on the utilities in this market that have the balance sheets, liquidity and capacity to literally weather the storm. They may prove to be solid investments as the market and individual companies learn from their mistakes and become stronger.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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