How has the Texas unregulated electricity market led to excessive electricity bills?

“I felt almost guilty that these people weren’t getting electricity, so I complained to my bill,” CNN said Monday. – However, my complaint is this: How will I pay for this?

Those familiar with the Texas energy market say these electricity costs are less flawed than the features of a state-deregulated system.

While the vast majority of Texans pay a fixed price for electricity and receive predictable monthly bills, some Texans choose to pay based on the spot price of electricity at that moment. And like anyone who has taken the Econ 101, they know that when supply declines and demand booms, those prices can reach astronomical heights.

“It worked very well because, in theory, capitalism should assume this until it does,” said Anthony Shaw, energetic and founder of Progeneration Energy, a company that makes energy solutions. “And when it breaks, it breaks very, very badly. In that case, we’ve seen that.”

Prices have risen due to supply and demand

Last week’s winter storm rattled the system so consumers knew it was possible but didn’t expect it.

With the onset of the storm, demand for electricity increased as cold Texans increased heat. At the same time, power supplies have plummeted as a winter storm and an unprepared infrastructure have knocked out natural gas, coal, nuclear, wind and solar power generators.
This is how a week of frosty weather and disaster unfolded in Texas

Immediate electricity prices therefore rose in response.

On a given day, the price of electricity is usually around a few cents per kilowatt hour. Last week, the price rose to a high of $ 9 / kilowatt-hour set by the Texas Utilities Commission (PUCT).

This in itself is not particularly rare. The price of electricity sometimes peaks for an hour or two on the hottest days of summer. Last week, however, the price sat at this maximum number for several days, given the prolonged cold.

“Businesses and consumers haven’t noticed that prices have risen so high in the winter, and what’s really extraordinary about this situation is that prices stay that long,” said Daniel Cohan of Rice University.

Some customers pay market prices

The vast majority of Americans, and even Texans, do not pay the direct market price of electricity at any moment.

Instead, most pay a retail energy provider — essentially a middle man — who buys electricity years in advance and then sets a fixed fee for the customer. This costs a little more overall, but makes the electric bill more consistent.

Some Texans, such as Tanner, use a service called Griddy, which connects customers directly to the wholesale electricity market for a monthly fee of $ 9.99.

This setting can be cheaper and makes logical sense. When prices go up, the customer is encouraged to use less energy. Other times, the price of electricity can even become negative, meaning you can actually pay for the use of electricity. Griddy says on its website that the wholesale price of electricity is below the Texas average, 96.9% of the time.

Texas officials are investigating outrageous energy bills in the rise in storm prices

But as we saw last week, there is a risk that we will rely directly on volatile market prices. And this incentive structure doesn’t quite work when downtime raises life-threatening issues. How much should the client use for the possibility of hypothermia?

“(This) usually means you’re doing a better deal because you don’t pay a profit margin to the retailer, but prices go up so high and for a period of time that no one expected, it really made people vulnerable,” Cohan said. .

“Some people were caught inside the system with dropped pants,” Shaw explained.

This happened to Dallas resident DeAndre Upshaw, who also uses Griddy. He said it was “very shocking” when he opened his latest electricity bill.

“As I try to get gasoline and groceries and make sure my pipes don’t explode, the last thing I think about is a $ 7,000 bill from my utility company,” Upshaw told CNN on Saturday.

On its website, Griddy has published several articles explaining the high prices and says it has sent emails to customers trying to switch to another fixed-rate service. The company tried to blame PUCT for setting the price of electricity at $ 9 per kilowatt hour.

“We want to fight this for and with clients for the sake of capital and accountability – to find out why such price increases were allowed when millions of Texas went without electricity,” Griddy said.

The PUCT said on Saturday it had “launched an investigation into the factors that, along with the devastating winter weather, are disrupting the flow of millions of Texas houses.”

What officials are doing against it

High electric bills are not just a problem for Griddy users.

Although most Texans were not directly exposed to these high prices, their retail energy suppliers were likely to be so. This cost is likely to be passed on to customers future interest rates will rise.

“A lot of retailers go bankrupt if they don’t turn off the power enough,” Cohan said. “When you pay someone ($ 9 / kilowatt-hour) and most consumers pay ($ 0.10 / kilowatt-hour), someone breaks.”

With Griddy, individuals have borne the cost, but in other parts of the market, retail providers, cities or municipal utilities may also get in trouble, he said.

For example, the city of Denton, in the Dallas-Fort Worth subway area, is one of the few cities in Texas that buys electricity directly. On Monday, the city received an energy bill for $ 207 million accumulated in just four days, a total of three times the energy cost for fiscal 2020.

Denton’s deputy mayor and deputy chief financial officer, David Gaines, said the “unprecedented” bill will be gradually passed on to residents in the form of higher fees.

Due to the freezing, Texas electricity prices will rise by 10,000%

Preparing energy supply systems to prevent such a situation will also cost money and is likely to raise prices for the average consumer, Shaw explained.

“Preparing contingency plans comes at a cost,” he said.

Texas Gov. Greg Abbott said he would convene an extraordinary meeting last week to look into the situation, he said in a statement.

“It is unacceptable that Texans who have suffered for days in the frosty cold without electricity and heat will now be hit by burning energy costs,” Abbott said. “To protect families, I am actively working with the lieutenant governor, the Speaker of the House and members of the legislature to develop solutions to ensure that Texans do not stand on the hook due to unjustified increases in energy bills.”

Political leaders are debating whether to use federal emergency funds to provide aid, and some local officials have urged the state to pay the high bills.

“Because of these excessive costs, consumers don’t have to assume that,” Houston Mayor Sylvester Turner told CBS on Sunday. – The bill must be sent to the state of Texas.

CNN’s Devan Cole, Anjali Huynh, Shannon Liao, Samira Said and Konstantin Toropin contributed to the report.