Texas freeze creates energy mix debate

Recent events in the US have brought to the fore issues surrounding diversifying energy sources globally. Photo: Le Toan

During the recent extreme winter weather in the United States, surging electricity demand in Texas collided with falling generation, forcing the state’s grid operator to implement rolling blackouts. In many cases, blackouts lasted for over 24 hours, causing fuel and electricity supply shortages and disruptions throughout the gas supply chain.

At least 4.5 million Texans were at one point without electricity and more than 30 deaths have been attributed to power losses, though the final toll could be much larger.

Nations such as Vietnam, the Philippines, and Bangladesh are considering import of US liquefied natural gas (LNG). But the events in Texas have highlighted the risks inherent in LNG imports for both energy transition and climate change adaptation.

Five main lessons can be learned from the crisis for emerging markets in Asia. First off, volatility in gas and LNG is here to stay. It has been a tumultuous year in global markets. The COVID-19 outbreak sent global LNG demand plummeting and Asian prices hit an all-time low of $1.85/MMBtu (million British thermal units) last May.

LNG export facilities in the US remained idle for much of the summer, oil and gas drilling fell by 40 per cent internationally, and bankruptcies in North American oil and gas soared to their highest level since 2016.

Starting in the fall, a combination of production shut-ins, shipping delays, and cold weather caused Asian LNG prices to spike to a record high of $32.50/MMBtu.

The Texas energy crisis is another sign that volatility in global gas markets is likely to continue. High electricity demand combined with supply chain disruptions sent wholesale natural gas prices skyrocketing. At Texas’s Waha Hub, for example, prices jumped from $2.77 to $219, while spot prices in Oklahoma’s Oneok hub jumped to over $1,000/MMBtu.

For gas producers able to keep wells operating, the Texas freeze was like hitting the jackpot, but for LNG exporters, outages disrupted liquefaction trains and feed gas pipelines.

Several related export terminals scaled back production, while Corpus Christi LNG and Cameron LNG went offline completely. Overall, 10 cargoes amounting to one billion cubic metres of gas were likely delayed from the already-volatile market.

Reducing vulnerabilities

Lesson two is that volatile prices can cause LNG-fired power plants in Asia and associated infrastructure to go under-utilised. Volatile prices create an increasingly challenging environment for price-sensitive emerging markets. High prices and difficulties sourcing gas can cause gas-fired power plants in importing countries to go underutilised.

In turn, all the associated infrastructure – ports, regasification facilities, and pipelines – are also at risk of being stranded. The Institute for Energy Economics and Financial Analysis recently estimated that volatile LNG prices put over $50 billion of natural gas projects at risk of cancellation in Vietnam, Bangladesh, and Pakistan.

Since the value of associated infrastructure is dominated by fixed costs, per unit natural gas prices depend largely on total gas demand. This means to realise any economic benefits from imported gas, costs must be spread over a wider consumer base than currently exists in many South and Southeast Asian countries. The decision to import LNG is therefore not an incremental one.

Thirdly, LNG imports come at the cost of domestic energy security. By importing greater volumes of LNG, Asian countries become more vulnerable to supply disruptions in global gas markets and geopolitical dynamics beyond their control.

With increasingly severe and frequent weather events caused by climate change, Asian importers are not just assuming the risks of climate-related disruptions in their own country, they are also assuming risks of climate-related weather events in exporting countries.

In Texas, generators were not required to invest in cold weather safeguards, leaving them vulnerable to unpredictable weather events. The LNG import infrastructure in Asia is also highly vulnerable to extreme weather.

Emphasising transition

Fourthly, grid expansion and modernisation must take the centre stage. Some commentators have suggested the solution to climate-related blackouts is to build more generation capacity, but all power sources are susceptible to outages when weather events occur.

In Texas, 30,000MW of thermal capacity was forced offline, as well as 17,000MW of wind capacity. As a result, wholesale electricity prices skyrocketed to the state’s $9,000 per MWh cap, up from the $30 average.

Along with generation capacity, grid reliability depends largely on transmission infrastructure and interconnections to other areas. The Texas grid is highly isolated from surrounding power systems, limiting power imports from nearby markets.

Finally, the energy transition is a humanitarian issue. In Texas, electricity blackouts disproportionately affected low-income and less fortunate communities, while electricity bills for some households that maintained power spiked into the tens of thousands of US dollars.

For Asian countries already grappling with high prices, the risks of LNG imports and associated infrastructure lock-in are simply too high. Instead, reliability and resilience are the main focal points to keeping expenses down and the lights on.