What's behind $15,000 electricity bills in Texas?
Texans who made it through February's extreme cold weather without losing power or natural gas must have felt lucky.
But for some, keeping their electricity through the blackout may turn out to be more traumatic than losing it. An undetermined number of homeowners have been shocked to receive bills running into the thousands of dollars – in some cases, over US$15,000 for a month's worth of power.
As someone who has spent the past two decades studying electricity deregulation, I know that extreme power bills in Texas result partly from the state's marketdriven approach to running the power grid. But decisions by state regulators also had a hand. Measures that were originally intended to give logical signals to the electricity market and encourage conservation during very hot spells were not up to the task of managing this cold-weather crisis.
Shopping for power
Along with 16 other states, Texas has deregulated its power generation market. The Texas market has a wholesale and a retail component, like the markets for many other goods.
In the wholesale power market, companies that generate electricity compete with one another to provide power on a market run by the Electric Reliability Council of Texas, or ERCOT. In the retail market, other companies buy power wholesale from ERCOT, add transmission and distribution charges to the wholesale generation cost and resell that electricity to households and businesses.
These resellers include Texas' five electric utilities, which offer fixed and regulated prices in the areas of the state that they serve. Hundreds of others, known as retail providers in the Texas system, are unregulated and can offer electricity to consumers at any terms and at any price.
About 85% of Texans live in areas with retail competition. They can choose to get electric service from a retail provider rather than staying with the local utility if they believe the retailer offers a better deal.
But when homeowners choose a provider online, they may not understand what they are signing up for. In particular, some plans bill customers at fixed rates, while others charge varying rates that reflect wholesale market conditions. Even with the best communications from retailers, the prospect of lower electric rates may lead some consumers to discount the possibility of high or volatile bills.
ERCOT's wholesale prices will occasionally spike to very high levels, and customers who get their power through market-based contracts have to pay those high prices. But price spikes don't normally last for very long - typically for a few hours and mostly during the summer. And they can have some benefit, since they give electric retailers opportunities to inform customers about the value of energy conservation.
That was how the Texas electricity market was supposed to work. It was not designed for the severe and sustained shortages that arrived with the cold wave.