Message from the Founder: Thoughts on the Texas Energy Crisis

The big news over the last few weeks in the energy world, at least in the U.S., was the grid outage in Texas. A lot has been written about the causes, some complete nonsense, such as blaming it on the Green New Deal.  There were many causes that converged to create this crippling disaster, in addition to the extreme cold that is well beyond the norm for Texas. 

One cause that has not gotten enough attention, in my opinion, is the absence of a capacity market in the Texas market structure – it relies entirely on an energy market.  This may sound hyper focused, but since electricity markets was a main topic of my dissertation over 30 years ago, I feel compelled to expound on the importance of capacity markets. 

Theoretically reliance solely on an energy market could work, and extremely high prices during an emergency would be expected. That expectation would (again theoretically) motivate investment in capacity infrastructure.  

However, this approach is fundamentally flawed for three obvious reasons. First, it relies on consumers reducing consumption in response to high prices; but if they are unaware of the price spikes there is no way for them to respond in time. In addition, only some of their energy consumption is adjustable and that adjustment would have to happen automatically.  Secondly, consumers cannot be expected to deal with the size of the resulting bills. 

The third flaw is that developing a generation system becomes a very risky investment if the return relies on an extreme event. Undoubtedly, there may be speculators willing to make that bet, but they would require a very high return. That is a very expensive way to finance capital intensive infrastructure. 

The more important insight from the Texas fiasco is that centralized grids are inherently vulnerable.  Although extreme weather caused the outage in this case, other outages have been caused simply by human error that cascades through a centralized system.  In fact, most outages are caused by ordinary occurrences like lightning, a contractor digging in the wrong place, or a car accident that takes out a power pole.   

Regardless of the cause, the only way to protect against a grid outage is to locate the generation asset where the power is used.  Admittedly, the economic value of reliability is hard to quantify and varies dramatically with the intended use of the electricity.  There are obviously many places where that value is very high. It isn’t just hospitals and data centers – these have always had backup diesel gensets. Today the cost premium for reliable distributed generation has become quite modest and practical in many more places.  

HOMER’s philosophy has always been that since solar and batteries are inherently modular, unlike traditional generation technologies, they should be deployed in a distributed way. The sun shines everywhere. As long as we are expanding the use solar + storage, let’s do it in the most reliable way.  HOMER software is exactly what is needed to understand the actual costs – and savings – of distributed generation. 

In anticipation of an expanding role for distributed generation in our daily power supply, we are also developing a new version of HOMER, HOMER Front, for larger “Front of the Meter” projects. Stay tuned for more information on this development in the near future. 

This month’s newsletter features a story on the Texas energy crisis, as well as an article about a promising financial innovation for mini-grids in Africa.  And please join us for our upcoming webinar: “Microgrids and Hybrid Power Everywhere: Optimizing the New Energy Wave” on March 25 and the Middle East and Africa Renewables Summit this week where I will moderate a panel discussion on March 10.