Texas electricity prices rose in 2019 as costs elsewhere decline

Jordan Smith
By Jordan Smith
For business

Electricity prices in Texas rose 13 percent last year.

Average electricity prices in Texas rose by 13 percent during 2019, a trend that sets the state apart from all other areas of the country. The figures, reported in statistics from the Department of Energy, reflect the sharp spike in prices that occurred last August during the major heat wave, which saw wholesale electricity prices hit the $9,000 per megawatt hour cap on several occasions.

In other parts of the country, wholesale electricity prices dropped by between 15 and 30 percent. But in Texas, average prices climbed to a staggering average of $162 per megawatt hour for the month of August, more than four times higher than the $38 average from August 2018.

The high prices last summer were caused by a shortage of supply and unprecedented levels of demand. Going into the hot summer season, the Electric Reliability Council of Texas (ERCOT) was already predicting that supply could get tight due to the fact that its reserves amounted to just 8.6 percent of total power production. Typically, ERCOT aims for reserves in the region of 13.5 percent.

As prices spiked in August, ERCOT was forced to implement emergency measures to prevent brownouts. Although the regulator expects summer 2020 to be demanding, it will have larger energy reserves. Thanks to new solar and wind projects coming online, reserves are expected to rise to 10.6 percent.

High prices should boost investment

Advocates say the high prices are a natural part of Texas’ deregulated energy market. They help power generators boost earnings, which they can then invest in additional production facilities to prevent similar shortfalls in the future, so the argument goes. ERCOT approved regulations earlier in 2019 to allow power generators to increase prices more, known as price adders, during periods of energy shortages.

The benefit of high prices for power producers appears to be backed up by the results of last summer’s price spikes. Large power generators, such as NRG and Vistra, saw a significant boost to their earnings in the third quarter of 2019.

Below, see numbers from the Energy Information Administration on how residential retail electricity prices increased during the year:

Texas rates (cents/kWh)
January 11.51 July 11.76
February 11.68 August 11.8
March 11.67 September 11.85
April 12.09 October 11.97
May 12.06 November 12.21
June 11.87

Action needed to boost investment

To critics, higher profits don’t necessarily mean that a larger number of new projects will be built. Moreover, they point out that since the high prices are limited to just a few days each year, some companies can miss out on the bonus if their gas plants or other generating facilities aren’t running due to maintenance or other issues.

Matt DaPrato of Wood Mackenzie Power and Renewables describes the ERCOT system as “playing chicken with blackouts.” He worries that the expansion of low-cost renewables, particularly solar power, could undermine ERCOT’s model of using power pricing to send investment signals to the energy market. “Texas’ peak price is immensely fragile, even today. Removing the top 10 highest-priced hours from the year reduces Texas’ typical daily power price spread by over 40 percent,” writes DaPrato. As prices for wind and solar continue to drop, and higher levels of battery storage allow intra-day variability to be balanced out somewhat, DaPrato doubts whether the extremely low prices will prove effective in ensuring the required investment in power generation.

More investment is needed, because energy demand in Texas is set to rise. ERCOT projects that Texas will require 100 gigawatts of additional power over the coming 15 years to keep up with demand.

Bernard Weinstein, associate director of Southern Methodist University’s Maguire energy Institute, says regulators need to intervene with measures to combat low prices if the necessary investments are to be made. “To ensure long-term grid resiliency for our fast-growing economy, ERCOT needs to adopt a pricing mechanism, such as a capacity charge, that acknowledges the value of base-load power plants,” argues Weinstein.

Will renewables make power generation and prices more unpredictable?

Others worry that the increased share of power capacity made up by renewables could further exacerbate price instability. According to projections for summer 2020, 12 percent of ERCOT’s total capacity at peak times will come from solar and wind power generation. That’s up from just 6.9 percent in 2018.

Bill Peacock, with the conservative Texas Public Policy Foundation think tank, is less than convinced by the higher reserve margin available to ERCOT. “While the reserve looks better, a lot of that is going to be dependent on whether the wind is blowing or the sun is shining,” he argues.

The regulator maintains it has an effective monitoring system to cope with power generation fluctuations. “ERCOT has operational tools in place to maintain system reliability, including with large amounts of intermittent resources on the system,” ERCOT notes in a statement. “We use historical data to determine the capacity contribution of renewable resources during peak times.”

 

Jordan Smith is a freelance journalist and translator covering issues related to energy, the environment, and politics. His work has appeared on the independent news site Opposing Views, and at the Canadian Labour Institute.

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