Winterizing power plants pays off for risk-neutral investors in Texas

Considering the probability of occurrence of an extreme cold event similar to that in February 2021, winterization of the Texan power system pays off for risk-neutral utilities in the medium term. Risk aversion can cause under-investment, and policymakers should therefore take into account extreme event risks in decision-making and implement measures that increase winterization efforts.

Messages for policy

• Severe cold events such as the one in 2021 can occur again, even under a warming climate, and the Texan power system infrastructure is currently unable to guarantee power supply under such conditions.

• In principle, scarcity pricing in Texas provides sufficient incentives for extensive investment into winterization for risk-neutral investors, taking into account the frequency of those events derived from climate data. However, investment risk is high, explaining a lack in investment.

• Older power plants have a lower incentive to winterize, and higher profits at lower risk may be expected from alternative investments.

• The current incentive structure leads to market failures with severe consequences for Texan consumers under extreme events such as in February 2021.

• The ongoing transition of the Texan power system to one with high shares of renewables can be used to replace old infrastructure that is sensitive to cold events with new infrastructure that is able to cope with such events.