Record Cold and Electricity Grid Strain

The recent extreme cold weather conditions across Texas and Alberta, Canada have had a profound impact on the electricity grid, leading to a plea for conservation from operators. The freezing temperatures have introduced what is known as "grid uncertainty," resulting in a decline in utility stocks.

Customers Respond to Conservation Request

The Electric Reliability Council of Texas (ERCOT), the governing body responsible for managing the grid in Texas, commended its customers on Tuesday for their cooperation in reducing energy consumption during peak periods, particularly in the early mornings. One of the suggestions provided was to set thermostats to 65 degrees or lower when nobody is at home.

Unprecedented Temperature Dips and Expected Recovery

In Dallas, temperatures on Tuesday were projected to range between 12 and 26 degrees, which is considerably lower than the usual range of 36 to 55 degrees. However, relief is anticipated as the mercury is expected to rise to a high of 52 degrees by Thursday.

Record-Breaking Demand

The Arctic blast caused an unprecedented surge in demand, setting a new record for ERCOT in January. On Sunday, between 8 p.m. and 9 p.m., energy usage peaked at 70,982 megawatts, surpassing the previous record of 65,915 megawatts set on January 17, 2018, between 7 a.m. and 8 a.m.

The Unique Nature of Electricity Supply

Unlike other goods, electricity cannot be stored on shelves and sold when demand increases. This poses unique challenges for utility companies when managing high demand periods.

Lessons Learned from Previous Extremes

In 2021, Texas experienced severe cold weather conditions that resulted in numerous issues. The freezing of wind turbines and a decline in natural gas production caused substantial power outages throughout the state. Currently, Texas relies on natural gas for approximately 60% of its electricity generation, with renewable sources, including wind, contributing 20% to the energy mix.

Current Generation Capacity and Dependency on Wind

Presently, Texas has a total generation capacity of approximately 94,000 megawatts. However, this capacity may be reduced if there is insufficient wind to generate electricity.

Low-Wind Conditions and Cold Weather Test Electricity Capacity

Low-wind conditions and frigid temperatures are presenting a challenge for electricity utilities such as CenterPoint Energy and American Electric Power (AEP). However, despite this, these utilities are currently not shutting off customers' power.

Recently, CenterPoint Energy asked its customers in Minnesota to conserve electricity due to the low-wind conditions. Similarly, in Alberta, where temperatures dropped below minus 40 degrees, the Alberta Electric System Operator (AESO) made a plea for conservation.

Fortunately, Albertans responded positively to the call for energy conservation. Within minutes of the notice, the demand for electricity dropped by 200 megawatts. The peak demand during that time was roughly 12,000 megawatts, and without any response from customers, it could have been approximately 2% higher.

The electricity generation mix in Alberta consists of 60% gas and 20% wind power. The rest is made up of coal, solar, and other energy sources. The province has a total generating capacity of around 16,000 megawatts, with approximately 3,200 coming from wind power.

Due to the extreme weather conditions and potential for weather-related power outages, the stock prices of AEP and CenterPoint Energy have experienced declines. Investors may be concerned about the reputational damage these utilities could face. As of early trading on Tuesday, AEP's stock has dropped around 4% since the onset of the cold weather, while CenterPoint Energy's stock has decreased by approximately 3%. In comparison, the S&P 500 index has remained relatively unchanged during the same period.

However, if both the electrical grid and the utilities are able to withstand this deep freeze without major disruptions, it is likely that the stocks will rebound and recover from these losses.