This is Dana Perkins and you're listening to Switch on the B and EF podcast. So, as the saying goes, everything's bigger in Texas, and for the last few years that has also included swings in extreme weather conditions. When storm Jury hit the state in February of twenty twenty one, Texans rushed to heat their homes and the demand for electricity outstripped supply, sending prices soaring to nine thousand dollars
a megawatt hour and causing blackouts At a critical moment. Urkott, the state's grid operator, brought in reforms to avoid the issue persisting, but from late June of this year, a heat wave once again caused electricity prices to a times skyrocket. So what makes Urkut and these price fluctuations so unique? And as we prepare for more extreme weather, how might the state, as an independent energy island of sorts adjust? To explain what we might be able to learn from
this unique market. In today's show, I get to speak with benf's head of research for North America, Thomas Rowland's Rees and BNF's US power specialist Natalie Mandy Bratta. Together we discuss Urcot and how it operates the Texas grid and what this means for electricity prices. We also discuss Texas's growing renewable energy rollout and where solar fits into the equation, and finally, Bitcoin in Texas and how it
fits into grid flexibility. As always, if you like this podcast, if you subscribe, you'll receive an update on future episodes, and if you give us a review, it'll make us more discoverable by others. But right now, let's jump into the conversation with Tom and Natalie about Urkott. Natalie, thank you for joining us today.
Thanks so much. Shanna, it's great to be here.
And Tom, thank you for coming on.
Switched on, Thank you so much for having me.
So, Tom, you've been with the business as long as I have, which is, you know, since before we were a part of Bloomberg. And for those who are listening now, I thought we would have this moment where I was thinking about saying, Tom, welcome back to the show today, But actually you haven't been on with me, and you were on one of our initial pilot episodes, which I believe may not have seen the light of day. So what is it that you're hoping to realize in today's show.
Well, firstly, I hope that we can give an entertaining podcast. Then I think that so long as I'm not too boring, we should be able to do that because we're going to be talking about URKOT, the Texas power market, which is like the Wild West of power markets. Everything is just maxed out in URQUT. It's one of the most interesting things that I've had the opportunity to study in my varied career at BNFS.
So I'm really.
Hoping that we can convey why it's so interesting, why it's so extreme, and also maybe to make a little bit of a defense of ERCOT, because you know, one of the things we'll talk about is it's kind of fashionable to dunk on ERKOT because it's so extreme and it's Texas. Everyone loves to say, oh, those crazy Texans with their crazy power market, but it's actually been functioning reasonably well lately in very challenging conditions, and I think that's a story that is worth telling well.
And I bring up the fact that you haven't been on the show yet because I almost couldn't believe it when you said it, because you're one of my favorite people to talk to about some of the more interesting things that we are covering. So one of the reasons we decided now was the right time to delve in again into this very fascinating market had to do with this recent wave of extremely warm weather across parts of the US. But we're going to talk specifically about Texas.
Can you explain what happened and kind of the knock on effects to the grid.
Sure, So, in early June, the weather forecasts started really shooting up to I'm now in the US and I've completely converted to speaking in terms of fahrenheit. I'm a convert, so.
I'm a convert to celsius. So now I'm gonna have to calculate it on my phone while you're talking.
So basically, what I've learned is the reason fahrenheit works is that anything above a hundred is like super hot. And for about two months now, Texas has had temperatures that are above a hundred during the day, and so that is really when you're in the times when heat starts to affect infrastructure, it's it's not safe.
So it's it's been very extreme.
And to put this in context, in the US and a lot of other power markets around the world summertime and the sort of the hottest day of the year is what they all plan for because that's when air conditioning demand is at its highest, and so it's when electricity demand is at its highest. So the combination of a sustained period of heat and that has then led to record power demand means that URKOT has really been getting put to the test over the course of this summer.
And you'd reference that our cuts are particularly interesting. But also, let's say unique power market, So can you explain what is it that makes it different from let's say, other states in the United States.
There's a couple of things that make it different. One is just generally across the United States power markets, the regulatory structure is a lot more varied, and you can see a lot more of hybrids between regulated and liberalized markets.
Actually URKO is the least regulated, which of course everyone says, huh, typical Texas, But actually being the least regulated means that it most resembles a European power market in that generation is competitive and retail is competitive, and actually having competitive
retail is somewhat rare in the US. But also is that it is an energy only market, which means that all of the incentives for say, plants that just are there for that hottest day of the year are not through things like capacity markets like you see in other markets like PJM or in GB in the UK, but it's all through a mechanism where it just says, oh, on those days is designed to have prices go to really extreme levels so that those plants can make their
money in the space of a couple of hours a year. That makes it viable for them to stay online. But that means that it's it's quite volatile, and it's quite People sometimes describe it as a casino because if that day where prices explode doesn't come, then those plants don't make enough money. And if you get more of those days than you need, then those plants make way more money than they need. And ultimately the cost is passed on to consumers via the competitive retailers.
And then I.
Suppose the competitive retailers have this challenge of how do we offer the best deal whilst managing this risk.
So that's kind of why Texas is so interesting.
I'll just add on the last point you had about the energy only market. The mechanism that Urcott has are these scarcity adders, and those are happening in real time. So when reserves drop a certain threshold, Urcott adds to the power price to incentivize more power plants to come online.
I think a coworker compared it to Uber surge pricing, and I say, the other uniqueness of URCOT that people remember is that it's an island grid, so it's not connected to the eastern or western connection, so when supplies are low, they can't rely on imports from neighboring balancing authorities.
No ability to buy or sell any access capacity or required capacity.
Correct And just.
To put it in context, Natalie, what does say the power price on a typical day and how high can it go when we have these extreme prices.
I'd say probably between sixty e eighty dollars per megawat and a typical day. But on these extreme days, for example, on June twenty, we saw prices go to a close of five thousand dollars per megawatt, and just on July thirty one, we saw prices to twenty three hundred and fifty dollars.
What does this mean for retail customers like you and me?
That's a really interesting question because it is the job of the retailers to manage this risk and offer customers a deal that is palatable. So from a customer's point of view, they should just see that their energy provider offers them a deal for certain period of time and a price by magwa hour, and those energy providers have to go into the market and procure their energy and manage this risk, and you know, the deal they offer customers is kind of a reflection of can they make
a slight profit of while managing this risk. The reason I say it's interesting is because everything was so unregulated in Texas and they had competitive retail, which is somewhat unique in the US, although it's kind of commonplace in Europe and men. There was a lot of innovation and one of the very innovative ideas was a retailer called Griddy who said, you know what, rather than just say offering customers are fixed tariff, why don't we say let's
just give them exposure to wholesale power prices. I either hourly market will meet that using a smart meter and build them for it, and they'll just pay us a monthly fee. And you know, you run the numbers and this would say, like in twenty sixteen, they were saying this, you run the numbers on look, look at how wholesale prices have been. That'll end up working out cheaper for
you if you're okay with taking on that risk. I guess we're going to get on to talking about winter Storm Ury in February twenty twenty one, when the lights
went out but prices went to these high levels. That deal worked out extremely badly in that set of circumstances, and it was because no one anticipated that something like winter Storm Ury would happen, and so these customers half the time they didn't have any power, and then when the power was on, it was costing ten thousand dollars per megawat hour or something like that, and they were ending up with bills that were tens of thousands of
dollars that they couldn't possibly pay. And there are a lot of defaulting and financial pain happening off the back of this. So, in answer to your question, retailers are supposed to be innovative, supposed to manage the risk, there have been some missteps along the way.
We did a podcast back in twenty twenty one after Storm Mury which was this extreme cold front in Texas, which also did cause extreme prices and actually had some really terrible consequences. What do you think between then and now, between Storm Mury so extreme cold and now we're dealing with extreme heat, how has the grid innovated, how has it changed, how is it adapted? And how is the story different this time around?
I think there are too answer to that. The first one is the retail one, if you want to tackle that time, and I can talk about Urkard broadly.
Sure, I mean, I suppose on the retail side, I don't think. I mean, Nanati can correct me if I'm wrong. I don't think that there has been any the major reform apart from there's just a lot more caution. So I don't think anyone in their right mind is either signing up to or selling contracts that expose customers to hourly wholesale prices, because everyone saw how badly that went in twenty twenty one, so it's it's maybe just a little bit more conservative now, and perhaps that's not a
bad thing. I know we talk a lot about retail innovation, and that's part of the rationale for having competitive retail in both Europe and Texas, but maybe sometimes too much innovation is too risky, and so my understanding is that it's maybe a little bit more conventional in the way that they are are hedging the risks and then billing customers.
Urkat has introduced a few changes since Winter Storm Mury. The first is like short term market changes, the major one being during Winter Storm Muri, your price is went to nine thousand dollars per megawatt. That was the system cap for their scarcity adder. They reduced that to five thousand dollars per megawat, which is why we saw price is around that level this summer. The scarcity adder also
kicks in at a higher reserve level, so it's more conservative. Basically, prices will increase at a higher level than before to try and get power plants to come online. They've also added more ancillary services, which is another reliability service that Urcott has. But they've done a whole study to improve long term market design. The major one that passed earlier this year is called a performance credit mechanism. It's a
capacity like payment. So as we talked about before, other markets have capacity markets that procure enough supply over a certain number of years. Orcott has famously been an energy only market, but is trying to introduce this new payment that is more predictable and can be another revenue to power plants other than these extreme price fikes.
See the other thing I would say, though, that has changed, and maybe you don't say Urcott has changed this. It's just something that has changed generally is that there's a huge amount of solo beein to the grid. So typically these price spikes, apart from February twenty twenty one, which was an exceptional set of circumstances, typically you're expecting these price extremes, this lottery as we describe it, to happen during the summer and when the temperature is high, i e.
During the day all day.
Now, there's so much solar being added and still being added in Texas, it's enough now that we're at a stage where for most of the day you can rely on solar generating enough to meet that high demand, and so these price spikes aren't going to happen and won't be necessary. And it's only now during a more limited time window that during the late afternoon when the solar generation is ramping down but it's still hot that you
still have the possibility of these price extremes. And so while while solar doesn't completely eliminate this dynamic, it certainly reduced the probability of it and made it maybe a little bit more healthy and restricted, I suppose.
So between this cold snap which happened in twenty twenty one which really impacted the gas pipelines and wind power, we now have this additional solar that's been coming online over the past several years that's really creating or evening out the access in summertime. But as you point out rightfully, these spikes do tend to happen in terms of demand in the afternoon till late afternoon, often as the sun is setting and people are heading home returning home after work.
And my question really has to do with with all of this renewables roll out in Texas, are we also seeing storage or are we seeing grid flexibility being built in What are the mechanisms in place in order to meet that late afternoon peak energy demand.
Solar actually generates during that late afternoon peak of six pm, but it's we are now seeing that peak net demand, which is demand minus renewables, happen when solar comes offline. Eight to nine pm, so that more predictable renewables waiting off, more solar waning off could cause price spikes that happened later in the day. That what we've typically seen, which has been driven by demand in people coming home.
And to your question around storage data, that is creating an opportunity for storage. It's a very well defined time window where high prices are expected. You know, we've seen it in California that solar gets built and then storage follows. We're seeing the same happening in Texas. It's maybe at an earlier stage, but yeah, we are expecting in the next few years now a substantial amount of storage to get built in Texas to complement the solar.
Another show that we previously did, which we probably should have also featured you in tom was one that was around servers and as a potential source of flexible capacity. And this brings me to another point around well, certainly something that puts a lot of demand on servers, which
is bitcoin mining. There's an interesting connection here to Urka, and we'll come to that, but before we go there, talk a little bit about well, bitcoin mining and why is it so energy intensive and require so many servers?
So that's a good question because in a way, I understand very well the impact that bitcoin mining has on the energy system, but I'm certainly not a bitcoin expert.
But the way bitcoin works is that the system is built around that you create new bitcoins by solving complex computational problems, and you get rewarded with bitcoins for doing that, and you also, in doing so facilitate processing of transactions in the bitcoin market, and over time, the amount of energy required to create every bitcoin increases, the idea being that eventually all the bitcoins that are possible to be created will be created, but at that point in time,
it will be really energy intensive to create a bitcoin. Now I know that when I say, oh, it's very energy intensive, everyone has a sort of a knee jerk reaction and says, that's so bad, that it's so energy intensive, And I actually just want to maybe temper that a little bit. If you have, say, servers that consume a megawatt of power, and it costs barely any energy to produce some bitcoins, then you're just going to produce more bitcoins.
The fact that it's more energy intensive just means that you're still going to run your server the same amount, you'll just get less bitcoins from doing it, And actually that means you're more likely to switch off when power prices are too high, which is normally when fossil generation is happening. So Bitcoin gets a little bit of a bad rap for being so energy intensive, and I sometimes think that maybe misses the point a little bit.
But there is this flexibility element just built in inherently to the way the market functions.
Yeah, and you only get that flexibility element because it's energy intensive.
Well, let's back up still one more, which is is bitcoin very common in Texas? Like what's the connection between er cut and bitcoin.
I'm going to let Natalie give you the numbers, although I know what they are, but I will just anecdotally tell you.
I'll just anecdote.
Because I feel like she found out these numbers, but I'll anecdotally tell you when she was working on the Erko market outlook and she told me, oh, Tom, oh, bitcoin is a big factor in Texas, and I was thinking, oh, that's nice, a nice little side story, and she told me the numbers, and I was My first reaction was like, Natalie, I think you might have got your units mixed up
because the numbers were so unbelievable. But Natalie tell us what those numbers are, and I will just say she hasn't got her units mixed up.
Yeah, Urkott has about two gigawatts of bitcoin mining capacity online that has sprung up in the last year or two. Baseload demand in Urcott is forty five to fifty gigawatts, so that's not sensitive to temperature. So assuming bitcoin is running around the clock except during the stressful grid hours, that's about two to three percent of Urcott's basedload demand.
Now, what does it look like going forward? And is Texas a growing market for bitcoin miners.
Yes, Urcott has its own like large load Interconnection Q, similar to on the renewable side of Interconnection Q, except for these large loads, and it has about thirty seven gigawatts of these they're most likely duplicate projects and not all of them will come online, but we did here enough create a project database based on company announcements, and there could be five to six gigawatts in the next few years.
Now, when you first looked at those numbers, Tom certainly told us what his initial reaction was when you brought them to him. But when you stumbled upon this you know or didn't stumble upon when you researched this particular heart of Texas's energy grid. What was your initial thought.
Yeah, it was an interesting thing to track since there was a lot of news articles of bitcoin mining flocking to Texas and a lot of politicians welcoming them into their towns and cities. So we wanted a way to quantify how big of an impact this was, which is why we had to track in on a project a project basis and found those massive numbers. And the other thing that was hard to ignore was the amount of
demand growth that happened last summer. So the previous demand record are caught was seventy five gigawatts set in twenty nineteen, and that that held until last summer, and it broke the demand record close to a dozen times and reached eighty gigawatts, So that's six gigawatts of peak demand growth. Is quite rare in other parts of the US to have so much load growth, so we wanted to try and measure how much of it was the bitcoin that was adding to this tremendous load growth.
So we do know that servers generally do pose an opportunity for flexibility within an energy system, and I believe that you also came across some really interesting examples of where that has happened, specifically with bitcoin. Can you elaborate on some of those.
Last July, there was another heat wave in Texas and prices also exploded, and based on quotes and what we modeled demand, we saw that around one hundred and fifty dollars per megawatt, based on what the bitcoin price was at at that time, was about the break even price of bitcoin. So if anything above it, it made economic sense for these minds to shut off. And that's broadly speaking, a lot of these minds have different efficiencies.
Did many of them take advantage of it?
Yeah?
I mean I think they pretty universally took advantage of it because either they have demand response agreements in place, but if they're exposed to wholesale power prices, it makes no sense for them to mine bitcoin at a loss. And I suppose this kind of speaks to just why this is interesting to me, even if I'm not interested
in bitcoin. Is one thing that makes bitcoin unique as a load, and this is different from other servers, is that you can switch it off instantly because effectively, bitcoin miners they're trying to randomly guess the answer to a problem, and periodically they'll hit on the answer and get rewarded with some bitcoin and overtime. This averages out into quite a sort of easy equation for them to say, how much money do we make for every megawa hour we consume?
But what that means is when the price of power gets too high that it's not worth it for them, they can just switch off instantly. It's not like say AI servers or any other kind of server where there's ongoing operations that are happening that you can't just switch computers off. With bitcoin mining, they really can just instantaneously just pause their operations and just wait for the right time to switch them on again. So it's kind of the ultimate source of flexible demand.
There was one example of a bitcoin company, Riot Blockchain, last July when there was heat waves. They made nine point five million dollars from curtailing their operations and selling electricity back to Urkot, which is more than the five point six million that they sold that month.
So it's almost, well, not quite, but nearly double what they would have made if they actually did their core business. So speaking of a core business, that one might even think is quite synonymous with Texas when we think about the oil and gas industry. It's been there for some time, and they also have some impact on energy consumption. Would you be able to explain whether or not this hazard maybe has not been impacting any of the price bikes.
Yeah, so oil and gas production out in the Permian, which is in the far west region of Texas, has tripled them in that region. However, as arcot as a whole, it's quite low percentage of total energy demand.
So even though it's tripled in the Permian basin, it's actually, just to break it down, not that big of a deal because the overall demand for the total grid is not a big deal.
Yeah, it's less than ten percent. I believe most of the demand comes from the cities in central Texas.
Now, when do the hottest parts of the year really hit Texas? Because you mentioned that this heat wave that came through was in June, which really is what spurred our conversation. But we're not through summer yet, So what does August look like? Does it have a late summer in Texas in it? Should this be something that we should continue to be watching quite closely.
Yeah, I think this heat wave has been unrelenting. So in mid June we saw extreme temperatures and Arcott issuing a weather watch to customers, and in mid July they also issued another weather watch for the extreme heat. August has typically been when we've seen these really high power price spikes. Last summer, August cool down compared to April to July. So perhaps we could see that that trend again of cooling, or we could see even higher temperatures and prices hitting in August.
We'll definitely be watching the weather. And as we look into the future, you know you'd noted that solar really does occupy this very useful space in the way that electricity is consumed in Texas. Do we forecast that there will be additional solar broad online and that'll continue to be a really popular solution for their grid.
Definitely, we see about four to five gigawatts of solar coming online year over year.
So we've come to this section where I don't do it on every show, but sometimes I ask some questions that are watcher ignore because you guys are the experts, and I want to know what things are you keeping closer to the ground on and what sort of things are you potentially ignoring for the time being and will resurface in the future as they come up. So I've got a couple of them for you. In the watcher
ignorer category. You had noted that it looks like solar is going to be increasingly popular or continue to be popular going forward. How about wind?
Ignore? Oh am, I just am I supposed to give more than just saying that. I thought it was just really I want to.
I like that though, that was so clear that you didn't even hesitate for a second time.
I think that wind. There's already so much wind in Texas, and so it will continue to be an important part of the energy mix there. And sure there will continue to be wind being developed, but it's just getting eclipsed by the rate of which solar is being added. So I know that we all associate, well we don't all, but those of us who look at these things associate
Texas with wind. But I think it's going to be more and more that the market is defined by solar, kind of more similar to say California in that regard.
Okay, next, watch or ignore. It feels like the elephant in the room to me, for what is an island grid interconnectors.
Oh, it's hard to say watch or ignore because I feel like what I would say watch because it it would benefit so much from it. But I would also say ignore because I'm not sure if I actually see it happening given the politics around it. I don't know, Natalie, you may know more on this than I do.
Yeah. I think when Better O'Rourke was running for governor, that was one of his policies he wanted to do, was to connect or cut to other grids. I'm on a similar stance in which it would totally change ERCOT if it connected to the rest of the country. But I also don't see that happening anytime soon.
I think there's two factors at play. One is is that at some point, if Texas is really interconnected to the wider system more broadly than it would have to come under the jurisdiction of FIRK, the Federal Energy Regulation Commission, and politically Texas wants to remain independent in as many
ways as possible. So that's one thing, and the other is just to generally, in the US, it's hard to build transmission lines, even if you have all the political will that you could possibly ask for there's so many different barriers in sort of terms of regulation, politics, you face. So it's just that's kind of like the cavalry that is never going to come.
So interesting that you say that, Tom, because the show that's going to follow up next week is actually going to be about transmission lines.
Oh cool, so we will get to that.
Watch this space.
They might have a different perspective.
Well, we're not talking specifically about Arcott, but we will talk about some of the challenges and really the necessity of transmission lines for building out any energy infrastructure. Okay, So last in the watch or ignore space, we talked earlier about demand response in a very real way when it comes to bitcoin and servers. Are you watching or ignoring demand response and maybe other forms in other companies A watch ooh, a simultaneous watch.
Yeah. An elastic demand is kind of the fundamental part of power markets. So the fact that we're getting a sizable amount of demand that is price sensitive is a
very interesting dynamic that has developed an Arcot. It's hard to know how much more of these minds are going to come online, especially with recent news of bitcoin, but beyond bitcoin mining and just generally larger load being responsive to the men and creating that flexibility in the grid with renewables will be a very big thing to watch.
I mean, I co sign all of that, and I think that it's not just interesting from a Texas or Aircot point of view, and it's not even interesting necessarily from a Bitcoin point of view. It's that because you have this rapid infusion of flexible demand in air coop whilst at the same time a lot of renewables are being added, there are lessons that we can learn that can be applied when we think about the future of the energy transition, where it's not necessarily Bitcoin, but there
might be other forms of flexible demand. And it's just the sort of the responsiveness, and as Natalie says, the price in elasticity is, we see it in so much more of a real time and responsive way in AERCOP
that it's a little bit like a science lab. So you don't have to agree with urcot's market design or Texas politics, but at least take an interest in what's happening in ERKOP because I think that there are some important lessons for other markets about how to go about the energy transition that can be learned, and that flexible demand that bitcoin is providing is a big part of that lesson.
I think that's an excellent final thought to end on. Natalie Tom, thank you very much for joining me on the show today.
Thank you for having us.
Thank you so much, Jana.
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