Warren Buffet’s half-right emergency rescue plan for ERCOT

Berkshire Hathaway (”BH”) recently provided a proposal to the Texas Legislature to add security to the ERCOT power grid in Texas (“Warren Buffett group lobbying Texas lawmakers for deal to build $8 billion worth of power plants for emergency use,” Texas Tribune, March 25, 2021). Half of the proposed idea hits the bullseye; the other sails far wide of the goalposts.

Increasing and improving short-term natural gas storage is necessary to improve the reliability of natural gas-fired electricity generation; additional natural gas-fired generation capacity in a market with sufficient peak generation capacity is unnecessary.

The proposal seeks to add two elements: emergency generation capacity (adding 10,000 MWs of new power plants) and fuel to run the plants for seven days by developing on-site natural gas storage.

The 10 gigawatts of generation would only be used during emergency conditions, making their economic utility questionable. Many observers have noted that ERCOT did not lack generation capacity during the February crisis. ERCOT lacked available generation capacity.

Following the BH plan would overinvest in generation that was not needed during the February crisis. To support this view, the reserve margin is an index that measures the amount of expected capacity needed during a season and the amount of generation expected to be available. The winter capacity factor measured in December 2020 in ERCOT was a robust 43%, meaning that it had 43% more generation than was expected during the peak hours over the winter season. This level of reserve margin is considered more than adequate by industry standards.

In power plant planning and management, a critical component is availability, and the watchword is reliability.

Availability means a plant that can come online and provide power reliability over a short period of time. The problem with Texas’ winter storm crisis was a twofold loss of availability:

  1. too many power plants were lost to freezing, and
  2. numerous natural gas-fired power plants that were counted on to provide reliability lost natural gas supply.

The main problem was not a lack of generation capacity but a lack of sufficient operating pressure in natural gas pipelines to meet the fuel needs of existing natural gas-fired generation. The loss of natural gas supply lasted for days.

While all sources of power generation underperformed during the winter storm, including wind farms and other renewable energy sources, natural gas-powered plants represented the vast majority of energy generation sources that failed, undermining reliability.  

And the decline in natural gas reliability may be exacerbated in the future by the large portion of Texas natural gas supply being exported as LNG, or by pipeline to Mexico.   

A variation of the storage component was posited during the recent Texas Senate and joint legislative hearings. The question asked during the hearings was, “how difficult is it to store natural gas for emergency use at the generation facility?” The answer is that Texas has developed natural gas storage capacity, but it hasn’t been applied to the ERCOT grid.

Contrary to common perception, Texas has a long history with backup fuel storage at power plants. For decades, baseload and intermediate natural gas plants were designed as dual-fuel facilities that used fuel oil as a backup.  However, much of the dual fired capacity was dismantled over the course of time because of the difficulty in maintaining the facilities as well as the higher cost of fuel oil.   But now Texas has developed another storage capability that has not been used in the ERCOT grid—Liquefied or Compressed natural gas “LNG/CNG”. 

Texas is the home of large capacity facilities for LNG in Corpus Christi and at the Sabine Pass facility near the Texas/Louisiana border. These facilities are now exporting approximately 10 BCF per day of natural gas. However, almost none of this gas is used domestically in Texas.

Texas could use already developed LNG capacity to create storage to be distributed throughout the grid for reliability, either as LNG or as CNG.  Enough supply at critical facilities would supplement the current natural gas and storage infrastructure.

This could solve the problem that caused the fuel loss experienced in February.

The BH proposal has severe flaws in that it proposes additional generation in a system that already has sufficient generation.

This would be a wasted investment in Texas. Yet, the onsite storage concept has merit.

Adding LNG/CNG would solve the availability problem while avoiding the expense for generation capacity that might never be needed. The current proposed weatherization legislation would address the operability of generation in deep freezing conditions, while storage would address the fuel loss issue.

One challenge to be addressed is the production of the LNG/CNG (especially its transportation and storage). Developing interchangeable storage tanks that could be transported via railcars would help provide a very flexible delivery system that could be expanded over time. This additional use of existing infrastructure would add both diversity and flexibility into the ERCOT grid. 

While we are sure that Texans appreciate Warren Buffet’s emergency rescue proposal, it involves much more than needed. Yet the idea of buttressing the fuel delivery system with additional short-term natural gas storage offers high value for improving ERCOT’s resiliency.

Larry Lawrence is president of Enterprise Risk Consulting, LLC. Lawrence has 35 years of experience, working extensively with public power entities, such as state agencies, municipal utilities, and co-ops. He has worked with a roster of U.S. public power agencies, assessing and developing hedging strategies and risk management policies and controls, conducting trader training, and advising on the use of hedging instruments. He is a graduate of the University of Texas at Austin.  

Neil F. McAndrews is senior principal of Enterprise Risk Consulting, LLC, with more than 30 years of experience in the energy industry, having founded one of the first integrated risk management programs for an electric utility in the U.S. He has extensive energy risk management experience with some of the largest wholesale power transactions in Texas. McAndrews has a B.S. in geology from the University of Iowa and a master’s in energy and mineral resources from the University of Texas at Austin.

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