On March 1, 2021, Brazos Electric Power Cooperative, Inc. filed for chapter 11 protection in the U.S. Bankruptcy Court for the Southern District of Texas. In its first-day pleadings, Brazos cited the catastrophic weather events in Texas in February as the sole cause of the company’s insolvency. That unprecedented winter storm caused a statewide energy crisis that lasted for days, resulting in rolling blackouts that left millions without power. During the blackouts, state authorities in Texas dramatically increased the price of electricity, causing Brazos to incur more than $2 billion in charges in just one week. While Brazos is a particularly egregious case, the effects of the price hikes during the blackouts are being felt throughout the entire Texas electricity sector, particularly among wind farms.
Founded in 1941, Brazos is Texas’s oldest and largest electric cooperative. Through short- and long-term power purchase agreements, Brazos generates and procures power and energy that it then sells wholesale to its 16 member-owner distribution cooperatives. Together, the co-op members serve over 68 counties in an area spanning from just north of Houston to near the Texas panhandle. The company’s wholesale power, transmission and distribution revenues were approximately $1.04 billion for each of 2018, 2019 and 2020. The company was until recently in sound financial condition and held favorable credit ratings from both Fitch and S&P.
Texas is a unique case in that it is the only one of the 48 contiguous states with its own standalone electricity grid. Consequently, while the other two major interstate grids, or “interconnections,” are subject to regulation by the Federal Energy Regulatory Commission, the “Texas Interconnection” falls under the purview of several regional reliability coordinating organizations, including the Electric Reliability Council of Texas, or “ERCOT.” As an independent system operator, ERCOT manages the wholesale electric power market, facilitating sales and ensuring reliable delivery of energy to market participants. ERCOT, in turn, is overseen by the three-member Public Utility Commission of Texas, which enforces compliance with Texas utility laws and regulates electric utility rates.
After a winter storm hit Texas on Feb. 13, 2021, the state’s electricity infrastructure experienced a catastrophic crisis that has been well documented. Uncharacteristically cold temperatures caused an immense spike in electricity demand to heat homes and businesses. Simultaneously, the storm caused electric generation equipment and natural gas pipeline equipment to freeze over, dramatically decreasing the supply of electricity available in the state. ERCOT imposed rotating outages, resulting in blackouts that persisted across the state for days as officials scrambled to turn the power back on.
In an attempt to spur producers to generate more power, the PUC instructed ERCOT to set the price for electricity at $9,000 per megawatt hour, the maximum price permitted under the Texas rules, for more than four days straight. For context, ERCOT’s monthly round-the-clock prices for wholesale electricity between November 2020 and January 2021 ranged from $21 to $29 per megawatt hour. As a result of this price increase and other associated fees imposed by ERCOT, Brazos incurred more than $2.1 billion in charges over a seven-day period. During the same time frame, the entire ERCOT wholesale market incurred charges of $55 billion, roughly equivalent to the amount it ordinarily incurs over four years. On Feb. 22, those charges came due. Brazos initially filed a “notice of force majeure” with ERCOT indicating that the company would not be paying the charges incurred. Ultimately, however, Brazos concluded that bankruptcy was inevitable.
Brazos is far from the only electricity producer or wholesaler facing insolvency as a result of the price increases during the winter storm. On March 15, 2021, Texas retail energy provider Griddy Energy LLC also filed for chapter 11 bankruptcy. Like Brazos, Griddy was solvent prior to the price increases that were imposed during the blackouts. In its first-day pleadings, Griddy asserted that the PUC and ERCOT’s actions resulted in a “forced mass transition of Griddy’s customers,” causing Griddy to lose its entire customer base in the span of a week. Renewable energy producers have not been insulated from the fallout, either. Texas is now the largest producer of wind power in the U.S., deriving 23% of its power from wind. Approximately half of the state’s wind farms were affected by the energy crisis, and some now may be forced to choose between seeking bankruptcy protection or relinquishing control of their farms to Wall Street lenders. A recent article in the Wall Street Journal analyzed the “long-term hedged contracts” many of Texas’s wind farms enter into with Wall Street banks in order to obtain construction financing. Under these contracts, if the wind farm operator is unable to provide a steady stream of electricity to the counterparty for resale, then the operator must obtain electricity on the wholesale market.
During the February storms, some wind farms stopped running when ice built up on their fan blades. The operators of such farms subject to long-term hedged contracts were forced to purchase wholesale electricity at the maximum price imposed by the PUC. Over a four-day period, this meant that some wind farms ended up incurring more in wholesale charges than the farms themselves are worth. Efforts are currently underway by renewable energy generators to lobby the PUC to reprice energy during the peak of the blackouts, but it remains to be seen whether this will be enough to save the farms from insolvency.
We still do not know the full scope of the winter storm’s impact on Texas’s electricity producers and wholesalers. It is possible that many more entities in the state’s electricity sector will be forced to seek relief in either bankruptcy or an out-of-court workout following the cataclysmic weather event. Such results can reasonably be considered part of an emerging trend of so-called “climate change insolvencies.” Pacific Gas & Electric Co. is now widely regarded as the first such case after it filed for chapter 11 protection due to liabilities resulting from massive wildfires. Since PG&E’s filing, numerous commentators have predicted that natural disasters and extreme weather events caused by or related to climate change will continue to push companies into insolvency. Brazos and Griddy may only be the latest victims.