Last week, when a cold front moved across Texas, it was viewed as a test to see how the state’s power grid would handle the coldest temperatures since Winter Storm Uri crippled the system a year ago.
The grid seemed to pass the test, said Fitch Ratings analyst Kathy Masterson.
“Progress has been made,” Masterson said.
What helped make a difference this year, Masterson said, was a series of state legislative reforms and improvements undertaken by the utilities to winterize equipment and infrastructure. That included weatherization, emergency coordination, new borrowing authorization and energy price caps.
But much more needs to be done, Masterson and other analysts said.
One year after the storm's severe cold and ice exposed massive vulnerabilities in the state’s unique and complex power grid, the reliability of the grid remains unclear, in part because of the lack of standards and regulation.
Texas has also not yet addressed the market dislocation that translated into huge energy bills that will take decades for ratepayers to pay off. And political fallout continues.
Last week, two more Texas utilities came to market to finance their costs related to the storm. One of the deals, brought by Rayburn Country Electric Cooperative, Inc., marked the first securitization brought by a member-owned electric co-op in the country. It’s a new structure that could become a model for other utilities that need to finance climate-related costs.
Meanwhile, litigation tied to the storm marches on, most of it targeting the Electric Reliability Council of Texas, which manages the state’s electric grid and which, during the storm, allowed electricity prices to rise more than 500 times over the usual cost.
The state’s oldest and largest electric co-op, Brazos Electric Power Cooperative Inc., which
On the political front, the storm’s fallout has become
“Since the governor is up for re-election, it has now turned into a political issue of preparedness as people look to point fingers,” said CreditSights analyst Andrew DeVries. “But the reality is both the gas companies and power companies have taken significant steps to avoid a repeat of last year, and those steps will work.”
What’s less clear, DeVries said, is how the state will stop the “clear price gouging” that occurred during Uri.
Uri brought frigid temperatures and freezing rain to Texas from Feb. 14-19, 2021.
“Grid conditions deteriorated rapidly,” said
All types of generation technologies failed, the report said.
Nearly 70% of Texans lost power amid widespread blackouts that the state comptroller said caused at least 210 deaths and cost as much as $130 billion.
Texas, which leads the nation in electricity and natural gas production and consumption, is the only state not significantly connected to the two grids that serve the rest of the U.S. and Canada.
That limits its ability to import power during times of high demand. It also means limited federal regulation even as state regulators have historically taken what Moody’s Investors Service called a “light-touch approach to reliability management.”
In June 2021, Texas lawmakers passed a package of bills to address Uri's failures and fallout. The legislation, among other things, calls for a series of short-term, "low-hanging fruit" fixes as well as longer-term reforms like mapping the state’s electricity supply chain and developing comprehensive weatherization standards.
Many power participants spent the year winterizing their equipment, most investing between $50 million to $150 million, according to Moody's analyst Toby Shea.
In a January report, ERCOT said 321 out of 324 electric generation units and transmission facilities fully passed inspection for the new winterization regulations.
“The Texas electric grid is more prepared for winter operations than ever before,” interim ERCOT CEO Brad Jones said
As of late December, ERCOT still needed to inspect another roughly 500 facilities.
“We feel like they’re definitely in a better position — there was a lot of low-hanging fruit and they were able to take care of those things,” said Shea.
But the lack of standards remains a problem, Shea said. "There's not a common standard or audit of what they've done, so we don't know if it's enough."
Implementation of the natural gas infrastructure weatherization required in the new legislation likely won’t occur until the 2023-2024 winter, said Moody’s analyst Julie Meyer.
“The state has been very oriented around summer,” which is typically when demand reaches its peak, “and now we need to think year-round,” said Meyer. “So, the utilities are trying to get ahead of that, because they don’t want their lines to trip either; it’s expensive.”
As the state considers how to better support its grid, renewable energy probably won’t play a role, said Shea.
Texas is already the top state for wind generation, which accounts for nearly 25% of its electricity generation. Solar is a fast-rising source as well.
But both are vulnerable to weather conditions, Shea says.
“Renewables are going to play a very interesting role in the way that ERCOT is going to be able to manage the expectation of reliability on its grid,” he said. “They will add volatility and vulnerability to the system.”
Meanwhile, the state is eyeing proposals, but so far has made no move, to overhaul its unregulated market to avoid the kind of price spikes that led to charges of $9,000 per megawatt hour for several days, up from an average of $22 per megawatt hour.
Uri-related legislation authorized the issuance of billions of securitized debt to ease the impact of the prices surges on utilities, many of which defaulted on their bills to ERCOT.
ERCOT is
SB 1580 allows electric cooperatives to securitize their share of the unpaid balance, currently totaling $2.5 billion, with 30-year securitized bonds.
Several utilities have hit the market to finance their bills, including the cities of Denton, Bryan, Garland and
“In the public power [sector], we’ve seen all the utilities that had storm cost financings get them in place,” Masterson said, noting some handled the costs through short-term debt arrangements.
So far, the only utility to take advantage of the new securitization tool is Rayburn. The co-op, which is owned by four members across 16 counties in northeast Texas, came to market last week with $908 million of senior secured cost recovery bonds that won a triple-A rating from Moody’s.
The borrowing was marketed as a private placement, so few public documents were available.
The final maturity in 2049 priced 120bps over the comparable Treasury maturity, according to Bloomberg.
In its report, Moody's noted that the borrowing marked the first utility cost recovery charge securitization transaction that covers costs associated with a disruption in electricity supply, and the first one associated with costs from Uri.
“It’s the first of its kind under the law in Texas but also the first time a state has allowed a member-owned co-op to do a regulated utility-like securitization,” said Joseph Fichera, CEO and senior managing director at Saber Partners LLC, who was not involved in the deal.
“If investors are comfortable with a single triple-A rating, accept the structure and it gets a good price, it could open a new funding source for co-ops and be a game-changer.”
More utility-issued securitized bonds are on the horizon, Fichera said, saying one bank has estimated $25 billion over the next 18 months. California has approved $7.5 billion of securitized bonds issued by investor-owned utility Pacific Gas & Electric for to pay for wildfires it caused — though that is still in litigation — and Oklahoma last year approved utility-issued securitized bonds to finance its fuel costs associated with the same storm that hit Texas in February. Arkansas is also eyeing the tool, he said.
“What was a trickle is going to be a waterfall in the next 12 to 18 months,” he said. “We expect to see more because of climate-related issues.”
It remains to be seen whether Brazos is able to shed its $1.9 billion ERCOT tab, which would mean spreading out the cost to the other utilities. That likely wouldn't be a credit factor for other utilities, analysts said, but it would point to the storm's lingering costs.
In a January podcast hosted by the Center for Strategic and International Studies, University of Texas at Austin energy professor Joshua Rhodes said Uri's impact will linger for years.
“California is still paying for Enron, and now Texans will be paying for Uri for the next 20 to 30 years,” Rhodes said.
