Frozen pipes and systemic risks
This week’s news cycle has been focused on Texas and the punishing cascade of events brought about by frigid Arctic air (in Texas). Much of the attention has been directed at Texas’ power system—perhaps only eclipsed by Senator Cruz’s poorly-timed holiday—which hit a critical threshold Sunday night when multiple electricity generation sources went offline. In response to the supply constraint and simultaneous surge in demand from people heating their homes and businesses, the state’s electricity grid operator (the Electric Reliability Council of Texas or “ERCOT”) imposed widespread blackouts to reduce demand and prevent the grid from reaching a more severe imbalance. According to ERCOT, the grid was “seconds and minutes” away from a catastrophic failure that could have left Texans in the dark for months. 
ERCOT, electric utilities and state politicians are sure to face hard questions in the coming weeks. More than lapses in planning and oversight, however, the event is a clear example of the risks posed by large, complex systems and a changing climate. For businesses, these risks may be costly. According to a new report from CDP, the 8,000+ companies that disclosed emissions in its Supply Chain program face as much as $120 billion in increased costs over the next five years from environmental-related risks. The costs come from physical environmental impacts—like pipes bursting in Texas—and addressing environmental regulation and market changes. 
There have been many examples of these risks this past year. The coronavirus pandemic is an obvious one, but the pandemic is so widespread it’s difficult to assess its impact. With over 110 million cases and almost 2.5 million deaths in essentially every country on Earth, there are few if any areas of global supply chain systems not impacted.  We are experiencing just a few of those impacts with toilet paper and cleaning products in grocery stores, with the semiconductor chip shortage and automotive production cuts, and with the container ship backlog in Southern California’s ports. While the “big freeze” in Texas was not caused by the coronavirus—though I’m sure one could find this argument somewhere online—it clearly highlights the complex risks we face with connected (and disconnected) systems. It also comes packaged with a clear, Texas-shaped boundary.
The polar vortex is the global weather pattern where air circulates counterclockwise around the Earth keeping cold air over the poles.  In the northern hemisphere, the vortex often expands in the winter pushing Arctic air south. Arctic air had already descended into Western Europe and China in early January sending natural gas prices and liquid natural gas (LNG) shipping rates to record highs.  When Arctic air descended across the U.S. Midwest and into Texas last week, almost every source of electricity generation in the state was impacted. Wind turbines froze, and so did infrastructure for natural gas, coal and nuclear facilities. This led to ERCOT’s decision to restrict demand on the system plunging many homes and businesses into the dark. The blackouts left 4 million people without power in an Arctic storm and had cascading effects on other critical systems—like water.
One unique “feature” of Texas is the electricity grid that energizes homes, business and other facilities is not connected to the rest of the U.S. (with a few exceptions). Most electricity in the U.S. is regulated by the Federal Energy Regulatory Commission (FERC). The 1935 Federal Power Act established the Federal Power Commission—FERC’s predecessor—with jurisdiction over interstate electricity sales. The electricity grid in Texas—called the Texas Interconnected System—is not connected with neighboring grids across state lines. Some argue this was done to avoid being subject to the jurisdiction of the FERC. As terrifying as the acronym sounds and regardless of the rationale, since the Texas grid is not connected to other states it is limited to the electricity it can generate within its grid. This also is why the blackouts imposed by ERCOT only affected electricity for customers in Texas. In fact, grids in El Paso and a few other border areas are not part of the Texas Interconnected System and did not lose power this week. 
Power systems in Texas are starting to recover—some 500,000 customers are still without power today—and it may be months or more before we know the full extent of what caused generation failures this week. It is already clear though that natural gas supply was a critical part of the problem. Texas is an energy rich state, and the top producer of crude oil and natural gas in the U.S.  In January, natural gas supplied 35 percent of electricity in Texas.  Natural gas also is used directly—instead of converted to electricity—for heating and many other applications. And unlike the electricity grid, natural gas is bought and sold across Texas state lines. This is how power systems in Texas are connected to the rest of the U.S. even though the electricity grid is not. The storms and frigid temperatures this past week froze valves and other gas infrastructure components closing production facilities in the region. At the same time, demand for heating surged. Just like the electricity grid, the imbalance between supply and demand reduced pressures within gas supply lines taking natural gas power plants offline.
Since most of Texas is not connected to neighboring electricity grids, ERCOT was limited to the dwindling generation capacity within its grid and came perilously close to a catastrophic imbalance that would have left the region in the dark for months. To avoid that catastrophe, ERCOT cut power to millions of customers to reduce demand on its grid in proportion to the supply it had available. After freezing energy infrastructure, the frigid weather then began freezing water pipes in buildings no longer heated by electricity or natural gas. When water pipes freeze, they often burst. This overloaded water systems and left thousands of cold, masked (and unmasked) Texans without potable water. And these are just the larger, system-level, impacts.
To a certain degree, the events in Texas this past week are not new. Hurricanes, wildfires, viral epidemics and a southern polar vortex are events humans have lived through in the past. What is new in the 21st century is the changing climate, and the complexity and scale of the systems we live in. With a changing climate these events will be more intense, more frequent and/or harder to predict. It also will be a difficult problem to tackle. Supply chain emissions from those 8,000 companies that disclosed to CDP were on average 11.4 times greater than their operational emissions.  That is more than double previous estimates due to better accounting and shows we have a lot of work to do just understanding the problem, let alone mitigating its impacts. If the past year has taught us anything, it is that turbulent times are ahead. Buckle up!
Have thoughts or feedback? Anything I missed this week? Email me at email@example.com. You also can reach me on LinkedIn and Twitter.
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What I’m Reading
Why Rare Earths May Leave Europe and U.S. Vulnerable by Joe Deaux
and Justina Vasquez in Bloomberg
Geothermal energy is poised for a big breakout by David Roberts in Vox
Inside Bill’s Brain as He Tries to Tackle Climate Change by Akshat Rathi and Dina Bass in Bloomberg Green
King of Supply-Chain Finance Expands, and Controversy Follows by Lucca De Paoli in Bloomberg
Why venture capital doesn’t build the things we really need by Elizabeth MacBride in MIT Technology Review
How to fix what the innovation economy broke about America: Across the country, small towns have been left behind. Finding a way to turn things around is crucial if American democracy is to be saved. By Brian Alexander in MIT Technology Review
 https://www.bloomberg.com/news/articles/2021-01-10/as-polar-vortex-stirs-a-deep-freeze-threatens-u-s-and-europe; https://www.freightwaves.com/news/new-world-record-set-for-shipping-rates-350000-per-day