How the Texas power grid failed and what could stop it from happening again

Millions in Texas are still in the dark following the deadly winter storm that caused the state’s worst blackouts in decades, leaving households without power as temperatures dropped to record lows.

While the state scrambles to restore power, questions are arising about why Texas was so ill-equipped, and what can be done to ensure this doesn’t happen again. 

A confluence of factors led to the historic blackouts, and officials are already calling for investigations into the chain of events.

Looking forward, experts say there are a number of steps the state can take to combat future issues, including weatherizing equipment and increasing reserve margins.

“We need to better realize how vulnerable our energy systems are — both electricity and the vulnerability of electricity and natural gas systems together,” said Daniel Cohan, associate professor at Rice University. “This is going to take some regrouping and there’s not going to be a single step. We’re going to need a portfolio of steps.”

The storm dumped snow and ice across the Midwest and South, taking power production offline just as consumers turned up their thermostats amid the frigid temperatures.

No power source was immune — coal, natural gas, crude, wind and solar production all dipped. Pipeline freezes impeded the flow of natural gas and crude oil. The outages were concentrated in Texas as the grid was forced to shed load, unable to keep pace with the spike in demand. At one point, more than four million people were without power.

“It was a black swan event from the demand side and supply side, and the freeze-off created this supply issue,” said Michael Bradley, managing director at Tudor, Pickering, Holt & Co. He noted that equipment freezing is not a headline event.

However, over the weekend all 254 Texas counties were placed under weather advisory warnings, which is rare. Typically if a cold front hits one area, production moves elsewhere. That wasn’t possible this time around, and icy roads meant equipment couldn’t be serviced.

Of course, power equipment operates in places that are much colder than Texas, so one step that can be taken would be to winterize equipment. The state is used to extreme heat and drought, but its infrastructure simply is not equipped to operate in extreme cold. 

“They have the infrastructure in place that meets the needs 99.9% of the time,” said Rebecca Babin, senior equity trader at CIBC Private Wealth. “On these tail events, they’re really ill equipped. They’re not incentivized to invest in the infrastructure to make those improvements.”

Texas has a stand-alone power grid that’s deregulated.

The majority of the state’s power is controlled by the Electric Reliability Council of Texas, which is known as ERCOT. It’s a competitive pricing market, meaning it trades on supply and demand. Companies are trying to bring the cheapest form of energy to the market, which can come at the expense of building out more reliable infrastructure systems.

“Texas has chosen to operate its power grid as an island,” noted Rice University’s Cohan, which means the state can’t import power from other states when it’s most needed. He added that the impacts are also felt in the summer, when Texas has an abundance of power that it can’t export.

The severity of the storm was underestimated, including by ERCOT.

Ahead of the inclement weather ERCOT estimated how much power it would need under various scenarios, but the reality exceeded even its extreme forecast. “The magnitude of the forecast error was massive,” said consulting firm ICF International. 

ERCOT does have a reserve margin — the amount of excess supply needed to meet peak power demand — but since the market is unregulated companies don’t want to shoulder the cost. Raising the reserve margin would mean that crises of this magnitude could potentially be avoided down the line. While it would be difficult to force an increase in the reserve margin, incentives could spur adoption.

Matt Breidert, portfolio manager at Ecofin, called the Texas grid a “Wild West” market designed based on short-run prices. Were Texas connected to the broader grid, “it might have a more stable resource portfolio to handle this event.”

With utilities scrambling to keep the lights on, power prices are surging across Texas as contractual obligations force companies to buy at any price.

CIBC’s Babin noted that Texas’ unregulated market is exacerbating the price swings as energy producers are forced to buy megawatts in the open market. 

Some of the heightened cost could end up on Texas consumers’ utility bills. Companies such as Griddy — which gives consumers access to wholesale electricity prices — have outlined ways for its users to switch power providers in an effort to shield them from volatile price swings.

“The power price is usually about $20, $30, $40 per megawatt hour, and because of extreme events, the price of power hit the $9,000 cap. That’s very extreme,” said Ron Silvestri, senior analyst at Neuberger Berman.

Natural gas prices jumped 3% on Wednesday, after surging more than 7% on Tuesday. For the month, prices are up 26%. While the impact on oil prices has been more muted, West Texas Intermediate crude futures traded around a 13-month high on Wednesday.

Some have pointed fingers at renewables as causing the blackouts, but in reality the vast majority of the outages stemmed from issues with natural gas production.

That said, solar and wind also went offline as frozen blades made wind turbines inoperable. 

But in the wake of the disaster the role of renewables within Texas’ energy mix will likely be reevaluated.

Tudor, Pickering, Holt & Co.’s Bradley said that he believes there will be a slowdown on the adoption of renewables in favor of more natural gas buildout. While renewables weren’t the root cause here, they’re an intermittent power source, which means they can’t ramp up operations at will. Natural gas and coal, on the other hand, can.

Energy storage is the key to making renewables a more dependable power alternative, and Neuberger Berman’s Silvestri said that the Texas blackouts could also lead to faster buildout of storage options.

“Grid-level storage adds resiliency when power generation capabilities are mitigated,” said analysts at research firm Baird. “Furthermore, both solar and storage provide grid operators with additional functionality such as peak power shedding and/or shifting.”

Demand response programs are another way for companies to monitor the grid especially as greater adoption of renewable energy impacts the available supply. Making the grid smarter can help utility companies have an accurate view of the current supply and demand picture, while demand response systems can act as a controlled way to curb usage.

“The central idea is that power consumption can be temporarily curtailed in times of peak demand, but instead of doing it disruptively as is the case with load-shedding, it is done in a controlled manner,” noted analysts from Raymond James.

As millions remain without power and with more inclement weather on the way, regulators are calling for investigations into what happened.

“The Electric Reliability Council of Texas has been anything but reliable over the past 48 hours,” Texas Governor Greg Abbott said in a statement Tuesday. “Far too many Texans are without power and heat for their homes as our state faces freezing temperatures and severe winter weather. This is unacceptable.”

Texas isn’t the only state to be plagued by power outages in recent memory.

Over the summer California was plagued by blackouts, and while the causes are much different this time around, the instances demonstrate the fragility of the grid. With extreme weather events becoming more frequent, and with more being demanded of the grid — including electric vehicles — the infrastructure is strained.

Correction: This story has been revised to correct that some power grid outside of Texas also are deregulated.

Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.