The Lights Are Back On But Texas CRE Still Powerless In The Face Of Multiple System Failures

The deadly winter storm that pummeled Texas last week had a devastating impact on both people and infrastructure. Millions of people were left shivering in the dark for days as the state’s power grid failed to cope with below-freezing temperatures.

In a region unaccustomed to extended cold weather and thus ill-equipped with even basic winter tools like plows, sleet and snow made the roads too dangerous to drive on. Cell service became unreliable as backup generators for cell towers froze or ran out of fuel. And without power or heat, water pipes in commercial and residential buildings froze and then burst, adding to the collective misery.

Texas grapples with extreme weather events on a regular basis, and commercial developments are typically designed with resiliency in mind. But developers say that at the property level, there isn’t much they could have done to protect against the catastrophic failure of multiple systems across the entire state.

“I don't know what we could do, individually or at a property level, that would have changed anything,” De La Vega Development CEO Artemio De La Vega said.

The problems began when temperatures plummeted in the evening of Feb. 14, beginning to blanket Texas cities with snow and ice. That caused natural gas-fired plants and wind turbines to freeze, forcing power plants across the state offline. At the same time, demand for electricity skyrocketed. Unable to meet that demand, the operator of the state’s power grid, the Electric Reliability Council of Texas, had to initiate emergency conditions and rotating outages.

Texas legislation does not require or incentivize power generators to prepare for extreme cold conditions, also known as winterization. The deregulated and cost-competitive nature of the state’s power market also discourages operators from spending the money to winterize their equipment. 

Texas operates its own electricity grid, separate from the power systems in the east and west. That independence allows Texas to stay out of reach of federal regulators, but at a cost: The state was unable to access outside electricity when the situation became dire. El Paso and Beaumont were the exceptions, as both reside on the edge of the state and are connected to the other grids.

Camden Property Trust CEO Ric Campo told Bisnow that across his Texas multifamily properties, at least 250 apartments have water damage as a result of broken pipes, and 75% of those are in Houston. The majority of the burst pipes were connected to fire safety systems in the buildings.

“We had less damage to our properties in Hurricane Harvey than we have right now,” Campo said.

Campo said that additional insulation would not have been enough to prevent pipes from bursting, given the extreme cold temperatures and the lack of power in the buildings.

“You can't spend enough money on the front end, from a development perspective, to insulate every single pipe in every single place. What you have to rely on is not having a double failure or a triple failure,” Campo said. “If you don't have power, and you have three days of sub-20 degrees [Fahrenheit], it's going to bust pipes no matter what you do.”

De La Vega’s firm has a variety of retail and mixed-use properties across Texas, with the majority situated in Dallas. He had not heard of any significant damage to those properties as a result of the storm, but he noted that the scale of the disruption was beyond anything that a developer or property owner could protect against. 

Rice University’s Kinder Institute for Urban Research Director Bill Fulton said that the fallout from the storm has highlighted just how interconnected different critical systems are. The loss of power led to the loss of water and communication systems, compounding the disaster.

“Nobody on Monday was thinking the entire Houston region’s water system would collapse, but that was probably an entirely foreseeable event if you understand what power powers,” Fulton said.

As functioning power and water services return to households across Texas, furious residents are demanding answers, and assurances nothing like this will happen again. That pressure led to Texas Gov. Greg Abbott declaring the reform of ERCOT an emergency item for the 2021 legislative session.

One issue on the table is whether Texas power generators should be compensated to have extra standby or backup power available. In other markets, providers are given incentives to build in extra capacity. Southern Methodist University Maguire Energy Institute Director Bruce Bullock said people usually pay an extra fee in their power bill, and that is used to guarantee the backup capacity.

“We have been recommending for some time that the legislature and the public utility commission take a look at that,” Bullock said.

Campo said he agrees that changes to regulations in terms of how producers are compensated for excess capacity are a good start to improving system resiliency.

“To me, one of the most important pieces of any legislation, at least in our current system, would be to come up with a mechanism to compensate producers for excess capacity, and for resilient capacity. And the only way you can do that is to somehow pay them,” Campo said.

Building in resiliency will also mean looking at how power generators physically prepare for cold weather events. The storm showed that Texas’ winterization efforts lag behind other states that frequently experience cold weather. But winterizing costs money. 

“There will be discussion now about weathering the grid, but then the discussion becomes ‘who pays for that?’ It’s similar to the problems facing PG&E [Pacific Gas & Electric Co. in California] after the wildfires. But that’ll cost billions of dollars, who’s going to pay for it?” Fulton said.

Bullock said that at the state, business and consumer levels, people will need to decide what they are willing to pay for. Keeping costs low has long been part of the Texas mantra, but events like this are a reminder that can come with a different kind of price.

“Do we want to spend a significant amount of money to harden ourselves to something that happens once every 10 years, given the fact those costs are significant to both businesses and homes, or do we want to take that chance?” Bullock said. “We don't have snow plows either — that's kind of the analogy, there — so the discussion has to be had as to how bad are we going to prepare for."

Bond Brothers Inc. CEO Tony Bond said that similar to how states in the Northeast hardened their resiliency after hurricanes, he expects that Texas will take some steps to make the grid more resilient. His Massachusetts-based firm’s Civil and Utility division has experience in handling construction projects for power generation and transmission clients for decades.

Bond said that storm hardening efforts could lead to some changes at the property level, such as building codes. However, the core issues surrounding power grid resiliency in Texas will need to be addressed at the state level, primarily by regulatory agencies.

“I think for better or for worse, the majority of the change will still get driven by the regulatory agencies and the code of what's mandated,” Bond said.

Other measures, like a microgrid or battery storage, could also be a good option for some projects. Microgrids are expensive and unlikely to be considered by most developers, but for institutional clients like hospitals or universities, they may be an appealing option.

“There's certainly an investment aspect that goes into developing a microgrid. But we've seen them be quite successful up here in the Northeast,” Bond said.

Battery storage is another possible solution to the resiliency problem. Bond said that wider use of battery storage in Texas may not have mitigated all the challenges, but it could have made things a little easier and more predictable, from a generation standpoint. 

“I do believe that having that power source on hand, that additional backup generation capacity on hand will make things more reliable,” Bond said. “What we've seen that has been very successful, is people colocating the batteries where the assets are already generating that power.”

After the widespread devastation of the past week, including the loss of human life, hard questions are being asked of Texas’ legislative and regulatory bodies. The fact that Texas could not keep the lights on during a winter storm has shone a harsh spotlight on many aspects of its infrastructure.

Bullock said the situation has become politicized, which also adds to the complication of identifying and implementing useful changes.

“I hope that the state and the leadership will give the experts an opportunity to sit down and look at this and come up with real solutions and implement them very fast, before we march down the road of pointing too many fingers, blaming too many convenient scapegoats because when you do that, at the end of the day, nothing gets changed,” Bullock said.

Campo said that the business community, including commercial real estate professionals, needs to speak up and push lawmakers to enact changes that will actually stick.

“They need to call their state representatives, the state senators. It's a state issue, not a federal issue. They need to step up and demand that this get fixed,” Campo said. “Because this is definitely a structural issue in the way our energy system is developed in Texas. And the only group that can fix that is the state legislature.”