How the wholesale electricity market affects Texas, and why it matters

The Choose Energy Team
By The Choose Energy Team
For business
High demand plus low reserves lead to wholesale electricity price increases.

Recent weather conditions in Texas have triggered volatility in the wholesale electricity market. A heatwave, with heat index numbers in the hundreds, combined with low operating reserves for the Lone Star State’s grid, has led to skyrocketing prices for wholesale power.

In some cases, prices have reached more than $9,000 per megawatt hour (MW). That eventually could affect retail electricity customers. But for now, the spike has affected customers in the 85 percent of Texas with a deregulated energy market who have signed up for plans tied to those wholesale prices.

The most prominent of those services that sell wholesale electricity directly to consumers starts off with a $9.99 subscription fee per month. Then it adds the wholesale price plus a fee from the Electricity Reliability Council of Texas, which operates the state’s electricity grid, and charges from the Transmission/Distribution Service Provider (TDSP) or utility for that customer.

On Aug. 12, wholesale prices surged past $9,000/MW, averaging $6,537.45/MW across the state. That means hefty bills for the day for customers whose rates are tied directly to wholesale prices.

The making of low operating reserves

ERCOT warned last year that higher demand would make for tighter operating reserves during the summer of 2018. The reason: The closure of some coal-fired plants and delays in getting gas-fired plants online to replace them.

The grid operator issued more warnings heading into this summer, and last week those warnings came to fruition. The heat combined with another complicating factor to stress the system. That factor was winds that weren’t as robust as usual. Texas produces by far the most electricity from wind of any state, and that electricity makes up about 20 percent of the state’s energy mix.

The effect of the spikes right now

Customers of services that tie prices to the wholesale market face higher bills immediately.  One consumer of such a service reported he was charged more than $350 for eight days of service.

Experts predicted large commercial and industrial users would see August electricity bills that are three – or more – times as high as July bills.

Temperatures have eased a bit in Texas this week but are expected to remain in the mid-90s or above through the end of the month, meaning there could be additional pressures on the electricity reserves.

The effect of the spikes down the road

Retail electricity providers (REPs) such as those in Texas purchase electricity from wholesale markets for use later. That allows them, in many cases, to hedge by purchasing more power when prices are low and backing away when the wholesale price skyrockets.

The U.S. Energy Information Administration notes that the cost to supply power varies minute-by-minute. However, it says, “Most consumers pay prices based on the seasonal average cost of providing electricity, so they do not experience these daily price fluctuations.”

That said, the recent spikes, at some point, will work their way into rates set by REPs in Texas. Rates today (Aug. 20) ranged from 6.8 cents per kilowatt hour (kWh) to 15.7 cents/kWh. Those rates are inclusive of the additional fees mentioned above.

What Texas electricity customers can do about it

In fairness, the wholesale price can be lower than the retail price – but fixed rate plans offered by REPs for up to three years offer much more price stability. Nor do you have to pay $120 per year just to sign up for service.

Most wholesale pricing plan providers do not require customers to pay an early termination fee to end service.

That means customers have the option to sign up with REPs if they find a plan that offers great prices and stability. Texans who don’t want to monitor the wholesale market constantly can check out the marketplace for these more stable plan options.