Many of you are familiar with the Mission Impossible movies, where Tom Cruise and his team are given a seemingly impossible mission and ultimately do amazing things to convert the impossible to possible. While we are clearly not in the business of espionage, I humbly contend that the cooperatives’ response to February’s historic winter storm was very much like a Mission Impossible movie when you consider the difficulty of our task. Our mission, which we chose to accept over 80 years ago, is to be reliable, affordable and responsible. We have historically done very well at meeting that mission. Our 1.3 million members are served by a system with some of the highest reliability and lowest costs in the nation. However, just like in the movies, there is always that time, about halfway through, where the villain or antagonist seems to get the upper hand, and this is when the team must do heroic things to save the day.
The 2021 winter storm was our villain, and its challenge was unprecedented. Arkansas Electric Cooperative Corporation (AECC), the wholesale power supplier for Arkansas’ 17 electric distribution co-ops, set an all-time record for electric load at 2,983 megawatts (that is 2,983,000 kilowatts) at 7 a.m. on Feb. 16, an increase of 223 megawatts (MW) over our previous record of 2,760 megawatts in January 2018. Each increase in megawatts represents about 650 homes, so on Feb. 16, it was like 145,000 new homes joined the grid on the same day, at the same hour.
While the load was historic, more significant was the fact that the extreme cold weather extended so far south that gas wells froze in Texas and Oklahoma, limiting production. Meanwhile, the newly added generation from wind and solar farms was on the sidelines for the winter power Super Bowl because the wind was not blowing, and the sun was not shining. Our coal-based generation was also limited because some units were down for regular maintenance, and those operating were also impacted by the cold weather. Add in record demand for natural gas for heating homes and fueling power plants, and the result was astronomical natural gas prices.
One week before the storm, AECC’s natural gas prices were about $3 per dekatherm, and wholesale electricity prices were $25 per megawatt-hour (MWh). In contrast, at the peak of the storm, AECC’s natural gas prices were $220 per dekatherm, and wholesale electricity prices in our market to the west (Southwest Power Pool-SPP) were more than $3,000 per MWh, while prices in our market to the east (Midcontinent Independent System Operator-MISO) were about $300 per MWh. These are cost increases of 10 to 100 times normal. Conditions were even worse in Texas where wholesale electricity prices were above $9,000 per MWh for most of the week. To put that into context, it would be like driving home from work and seeing $2 per gallon gasoline at your local gas station and then stopping in the next morning to find the price at $200 per gallon. It happened about that fast. What would have been a $40 tank of gas would now cost you $4,000.
Who got rich?
One question I have been asked is, “Who is getting rich off of all this”? My answer is: “Not your electric co-op!”
Because we are member-owned and not-for-profit, AECC does not profit on high fuel or power prices; those costs are passed through to our members, at the price it costs us. Essentially, those who profited from this storm are companies that had more generation than load in the market, because they could sell their generation and receive high market price payments.
AECC was not in that position, and neither were most utilities. Even if we had been able to sell to the market at peak pricing, any excess revenue we earned would have gone back to reducing our members’ power cost. As part of the cooperative business model, we do not earn “profits.” The real profits were made by gas suppliers whose wells did not freeze, allowing them to sell natural gas at 100 times normal prices for a week.
AECC sustained about $100 million in fuel and power costs that are well above historical costs for similar time periods. AECC is spreading the cost recovery over the next nine months to reduce cost impacts to our members.
Keeping the lights (and heat) on
I am proud to say that all AECC-operated plants ran reliably during this winter storm.
When natural gas prices spiked, our power plant operators quickly and brilliantly shifted our two plants capable of running on either natural gas or diesel fuel to run on diesel.
It took heroic acts, under trying circumstances, to run these two plants on diesel fuel and to refuel them during operation, all while the state had nearly two feet of snow on the highways.
By burning diesel at $15, compared to gas at $200, these operators burned 1.8 million gallons of diesel fuel and saved our members more than $37 million. Special thanks to Central Arkansas Petroleum, Star Transport and Magness Oil trucking companies who supplied trucks and drivers to brave the tough conditions and get fuel to our plants. I also want to thank the Arkansas Department of Emergency Management and Arkansas Public Service Commission staffs for their support during this entire event. Finally, I gratefully acknowledge Andrew Lachowsky, AECC’s vice president of planning and marketing operations; Steve Metcalf, AECC’s vice president of power production and delivery; and their employees, all of whom did what was required, and more, to keep the lights on during this storm with a minimum of curtailments.
Despite our best efforts, for the first time in AECC’s
history, we were forced to open breakers to reduce load to ensure the reliability of the statewide electric grid. Simply put, the energy markets from which AECC buys power to serve you ran out of sufficient supply to meet the demand. AECC is connected to two large power markets, SPP and MISO, that balance the power supply and demand in Arkansas and other states. At the height of the storm, these markets had more demand than available generation, and they were forced to ask market participants like AECC, Entergy and others to reduce load to keep the grid up. That meant 13,081 of our members were without power for about an hour during the peak of the storm on the evening of Feb. 16. We were also required to seriously curtail our industrial customers for a significant time, which impacted their businesses as well. To those of you affected by those curtailments, we appreciate your sacrifice to ensure that complete blackouts were avoided. To be sure, we know that this was a big issue, and we are intensely focused on how to prevent it in the future.
Who’s watching out for reliability?
All told, it wasn’t any one thing, but rather a compilation of many things that created this event. I am not a fortune-teller, but if you go online and read the July 2020 digital version of Arkansas Living magazine, you will find an article called “Powering the Future,” in which I talked about the “Perfect Storm.” That article is different from all of the Monday morning quarterbacking and commentators who have pontificated after this storm, because last year’s article was written well in advance of this event, yet it still predicted the conditions that caused the event and the root cause of the reliability issue.
This happened because virtually all state and even some federal energy policy, for some time, has been focused on cheap energy to the point of tone-deafness to reliability.
I served for 20 years on Navy nuclear submarines, and I learned this in that program:
“Responsibility is a unique concept… You may share it with others, but your portion is not diminished. You may delegate it, but it is still with you… If responsibility is rightfully yours, no evasion, or ignorance or passing the blame can shift the burden to someone else. Unless you can point your finger at the man who is responsible when something goes wrong, then you have never had anyone really responsible.” — Hyman G. Rickover
In the old days, each utility independently owned and operated its own power plants to serve its own load. Under that utility model, the utility CEO was directly accountable for reliability. The newer model relies on regional markets, where all utilities generate power and the markets pick which generation serves load based on a really sophisticated computer program. In this era, everyone is contributing their generation, but no single entity is accountable for reliability. Because everyone now owns “reliability,” no one owns it.
These regional markets have been fixated on price signals with cheap energy such as federally subsidized, low carbon wind and solar energy driving prices. Combine that with the shale revolution and cheap natural gas on most days, and the markets have created a place where coal and nuclear plants struggle to compete in the short term. Another example would be Arkansas’ solar energy policy where the utility is required to purchase excess solar energy at a 300% markup when it is available. Economic forces and policies like this tilt the scales heavily in favor of wind and solar generation but erode traditionally reliable generation sources like coal and nuclear. The new model is to install renewables and then back them up with natural gas generation.
In the last 10 years, over 18,000 MW of coal and nuclear generation has been shut down in the MISO and SPP markets, which equates to 11,700,000 homes, while 37,000 MW of wind and 2,500 MW of solar have been added to the grid. There are many more coal and nuclear plants scheduled to retire in the next 10 years, including 3,200 MW of coal generation slated to retire in Arkansas by 2030. During that same time frame, upwards of 100,000 MW of wind and solar additions are planned, with no coal or nuclear. Generally speaking, the only generation currently in the market planning processes are additional wind and solar for the foreseeable future.
The mix matters
Some years ago, we had a campaign called “The Mix Matters,” and it was focused on highlighting how AECC works hard to have all types of power available to serve you, our members. Wind and solar have their place, and, in fact, have a very prominent place in our power fleet. What is concerning about those resources is that they are intermittent, as in they cannot run 24-7. However, the markets treat them the same as power plants that can run when needed. The markets’ computers balance the supply-demand equation, the lowest cost resource runs, and with federal tax subsidies, wind and solar can be very low cost. The markets’ computers do not apply any bias or adjust for generation reliability, just the price in the moment. So, when the wind blows and the sun shines, these sources go to the head of the line and get funded first. At times there is so much wind on the system with so little load that it drives the entire market prices negative. How can that be? If you are getting a $23 subsidy for each MWh of wind power, then even when prices are -$10 you are still making $13. Unfortunately, all of the non-subsidized generators are actually losing $10 for every MWh. The uncomfortable truth is that, when we need all available resources, they are not always there. Peak loads can and do occur when it is really cold outside, and the wind doesn’t blow, and when the sun is down, or when demand for natural gas outstrips gas supply (all of which occurred the week of Feb. 14). The algorithm doesn’t work out anymore, extreme market prices result, and rolling blackouts can happen, just like we experienced in February. This is not just a winter phenomenon: California experienced rolling blackouts last summer for similar reasons.
Our predecessors overdesigned and overbuilt everything, and the electric grid is no different. There was a lot of redundancy and resiliency built into the grid, but as we continue to retire coal and nuclear generation that have fuel stored on-site and are considered reliable and dispatchable, and we decide to replace that firm power with intermittent renewable generation, we are chipping away at our power safety net margin and become a little less reliable every day. The moral of this story is that cheap energy does not equal available energy, nor does it equal reliable energy.
It could have been worse
I generally hate it when someone says it could always be worse; however, in this case, that is absolutely true. All one has to do is look across the state line into Texas to see the economic devastation and loss of life that occurred when capacity was replaced with cheap energy and the regulatory agencies took their eye off the reliability ball. Brazos Electric, a Texas generation and transmission cooperative similar to AECC, declared bankruptcy when they got a bill for $1.8 billion from their grid operator, the Electric Reliability Council of Texas (ERCOT). Similarly, one can look at our own state and see the same thing, only on a smaller scale. I am hopeful that, in light of what happened in Texas and what happened in Arkansas and other surrounding states, this has been a sobering event from which we are poised to learn. There are many ongoing investigations into what happened by numerous state and federal agencies, including in Arkansas, and we will inject some truth serum into the national debate on energy policy because reliability of the electric grid is paramount.
I’ve heard it said that the electric sector is only 7% of the national economy, but it is the first 7%. Without a reliable electric grid, the other 93% doesn’t show up, and there can be great economic harm and loss of human life.
The Electric Cooperatives of Arkansas have taken a firm stance on reliability, and we will continue to speak up, for the most important thing we can directly influence — the reliability of the grid to protect human life and the American way of life.
I have been the CEO at AECC for nearly 18 months, and in that time, I have not had a single document from our state or federal regulators related to reliability cross my desk. Conversely, I have seen thousands of pages of documents on wind and solar, batteries, net metering, demand response and everything considered “renewable.” AECC is a single member of MISO and SPP and, individually, we are not large enough to fix the problem. However, we will continue to be a vocal member of these markets and continue to challenge our market reliability coordinators, state and federal regulators, and our executive and legislative branches of government to make sure that we are shining both sides of the coin — reliability and affordability — and that we don’t trade one for the other in a quest to solve a single issue — net zero carbon.
I leave you with this: As CEO of AECC, I am fully responsible for our mission of reliability, affordability, and responsibility, and I do not shirk from this responsibility. We will dig into this event, extract lessons learned, and implement actions to make sure we do even better next time. We will continue to honor our not-for-profit business model and our mission to serve you all the time and not intermittently.