What’s Up with My Power? Part I of III

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Visorie Industry Insights: Power & Utilities

Given many of us are without power recently, I thought I would share some thoughts on the Power & Utilities (P&U) industry. I spent many years doing Strategy and Management Consulting for the P&U industry in the US and other parts of the world. I’m not here to say I have all the answers to our current power problems, but more to explain how I look at the industry and the forces that drive it. To give it the depth we need, I’ll do this in three parts (assuming that only a few of you are P&U experts). The Utilities industry consists of several components, some of these are regulated entities, and others are deregulated. The ones you are probably most familiar with are large, investor-owned utilities, smaller municipal and co-op utilities, independent power producers, transmission companies, and merchant generation companies.

The industry is divided into four components:

1) Generation is the production of power (generally, fossil, nuclear, and renewables), 2) Transmission moves power from the generation to the markets, 3) Distribution handles moving power from the market into your homes, and 4) Retail sales deals with your account and aggregating power, transmission, and distribution charges, forecasting demand, billing, and collection of payments. The large integrated utilities maintain all four components; smaller companies may serve one or two. So your local co-op may only handle regional distribution and retail sales, counting on someone like Oncor to supply transmission and Luminant to supply generation. This distributed model sprung from Texas Utility industry deregulation starting in 1999.

Utilities make money by generating, transmitting, or distributing kilowatts of energy at a certain rate. In Texas, ERCOT serves to make a market for power. ERCOT is known as a “balanced market” in that it seeks to balance supply and demand at all times. Why is this important? The key reason: the utilities industry is the only one I know of that requires supply and demand (also referred to as “load”) in the grid to be balanced at any point in time. Think about it: when you turn on your TV, you signal energy supply to adjust to the load somewhere in the grid. That’s amazing! How the grid manages this is beyond this article’s scope, but that balancing act is at the core of the problems we are experiencing now.

Our ERCOT grid serves most (but interestingly, not all) of Texas, and we only have a few connections to the outside. This limits Federal (“FERC”) regulation but also limits our ability to source power from outside of the state. Given the wide-ranging weather conditions, I’m not sure how much it would have helped this week.

There is record load (for this time of the year) on the grid, as well as outages caused by weather (think icy tree limbs). Many of us are experiencing planned outages that are a response (also referred to as “load shedding”) to the increased load – there isn’t enough generation being sold into the grid to meet demand. Some markets have access to power, and others do not. Why is that? The weather knocked out much of our distributed generation capacity (including coal, gas, wind, and solar). We don’t have enough standby sources (also known as “spinning reserves”) or “peaker units” (normally gas-fired generation) to take up the slack. To cover generation supply needs, ERCOT has to buy power on the spot (also known as the “real-time”) market. On Monday, the spot price for a megawatt-hour spiked to $9,000 (meaning there is a very limited supply).

What’s the financial impact of this, and what are the incentives that drive industry behavior? I’ll discuss this next. As always, please reach out to me at njramsey@visorie.com with comments or questions. And stay warm!