Houston we Have a Problem
Leonard Hyman and William Tilles

Hurricane Beryl barreled through Houston last Monday leaving over three million electric utility customers without power in the sweltering summer heat. Hurricanes, despite appearing with increasing frequency and greater force, are still relatively infrequent in terms of devastating any given electric utility’s service area. There are things that management routinely prepares for and executes and there are unexpected severe weather events no matter how accurately forecasted. In the latter case, management can only respond. They can't retroactively “harden” their distribution system after the lines are down and the poles are lying in the street. For this reason hurricane recovery always occurs in a crisis environment. The public profile of the utility and its senior executives is elevated instantly and suddenly subject to public scrutiny. The news features stories of angry customers anxious for information about power restoration efforts or upset about the lack thereof. From a business perspective, there is little upside and considerable downside from all this additional scrutiny. There is an asymmetry here—timely power restoration is expected, not rewarded, while extensive delays bring scorn from customers, regulators, and politicians. Houston-based Centerpoint, with almost one million customers still lacking power, is experiencing all of this right now. The latest Houston storm event brings up these questions:

1.  Are there technological fixes that could reduce the impact of these adverse weather events, or said differently, could increase grid resilience?  — And the answer is yes there are basically two grid-hardening approaches but both are unpopular. The strategy favored by utilities is to bury transmission lines underground which results in high reliability but at a steep price. Pacific Gas & Electric is embarking on this strategy as a way to increase grid resilience in fire prone areas. The estimated cost is in the tens of billions and the program provides considerable rate base growth which in turn drives utility earnings. The other approach, solar and battery based microgrids which essentially bypass the wires-based grid, also increases resilience but, being privately financed, adds liitle to the utility’s rate base and earnings growth potential. For this reason it is often disparaged by utilities, regardless of its usefulness in emergencies, and is not viewed as being in their economic interest.

2. Is there a deeper problem here?  —  We believe the answer is yes. Due to global warming and climate change, our built environment is increasingly unsuitable to maintain the infrastructure we need in our daily lives. Electricity is essential. We think access to it is almost the definition of a contemporary or modern lifestyle which includes on demand heating, hot water, A/C, lighting, and refrigeration, not to mention charging ports for phones and Ipads. A severe weather event with prolonged service restoration that deprives an area of electrical service for weeks or months (admittedly an extreme case) essentially forces the people in that service area to live the way they would in the nineteenth century. Can our technological society afford to put up with (and should it?) disruptions from natural events?

3. Would a Texas/ERCOT grid with better interconnections to other neighboring systems be better able to handle adverse weather events? —- The short answer is no. It doesn’t matter how many thousands of MWs of power are available from neighboring utilities if most of the in state power lines are down. However, the state has dramatically increased its expectations for future power needs and is likely to incentivize more fossil-fueled base-load power generation. If the Texas legislature pursues its plan to build more power generation (likely gas fired) without consideration of grid resilience, then all we can say is there may be power, but it is not likely to reach the people, at least not when they need it most.

As for the obvious question, “Will this happen again?”, we think the answer is just as obvious.

By Leonard Hyman and William Tilles for Oilprice.com

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and has provided advice on industry organization, regulation, privatization, risk management  and finance to  investment bankers,  governments and private firms, including one effort to place nuclear fusion reactors on the moon. He is a Chartered Financial Analyst and author, co-author or editor of six books including  America’s Electric Utilities: Past, Present and Future and  Energy Risk Management: A Primer for the Utility Industry. 

William I. Tilles is a senior industry advisor and speaker on energy and finance. After starting his career at a bond rating agency, he turned to equities and headed utility equity research at two major brokerage houses and then became a portfolio manager investing in long/short global utility equities. For a time he ran the largest long/short utilities equity book in the world. Before going into finance, Mr. Tilles taught political science .

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