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NEWS

A perfect storm for wholesale energy prices

30 Oct 2019, Posted in All Posts, Blog Posts

Summer temperatures and tensions were high across the state of Texas, at least for some. While every resident of the Lone Star State dealt with immense heat during August, some Texans found themselves with ludicrously high electricity bills as well.

This spike in price only affected a certain sector of Texas’ population—those who had opted for wholesale electric providers as opposed to the more common fixed-price electricity contractors. 

Across the United States, most electricity consumers are committed to fixedprice contracts. While these arrangements are replete with middleman markups, consumers are relatively immune to the surprise of an unexpectedly high bill. On the other hand, wholesale electricity providers attempt to provide consumers access to the wholesale power market, ultimately granting individuals similar deals to those the commercial power buyers receive. However, these big power buyers purchase a small share of their power on the wholesale electricity market, and instead receive a majority of their power through contracts known as hedges. Individual consumers of wholesale power do not possess the same market security as their larger counterparts, and these individual consumers have little protection from sticker shock 

In Texas, the entity that manages the connectivity of electricity to consumers is the Electric Reliability Council of Texas (ERCOT). ERCOT is composed of deregulated electricity markets, which breeds competition between a variety of companies in the energy market. This opens the market to such offers as the wholesale price, free nights and solar days, average billing, or standard billing. ERCOT is also the organization that sets the wholesale price of electricity for the state of Texas. 

One electricity provider, in particular, garnered attention over the summer—a Houston based company called Griddy. The only wholesale electricity provider in the entire state, Griddy capitalized on the idea that consumers can save hundreds of dollars each year by eschewing the markups charged by other electric providers. Griddy claims people living in apartments can save around $120 per year, while customers in large homes can save around $560 annually. This depends on the grid meeting demand, but when something is awry, the consequences can be expensive. 

This August, the rates for Griddy’s consumers spiked to reach the market cap of $9 kilowatts per hour multiple times. This arose out of record-setting demand on the grid. According to the Department of Energy, these rates are more than seventy-seven times what the average Texan paid just one week prior. In one instance, wholesale prices apparently surged 36,000 percent, establishing Texas as one of the most expensive places to purchase power in the United States. Consumers who paid pennies for power suddenly faced daily bills of $100 to $200 multiple times during the week. These spikes are not uncommon, but usually last a matter of minutes, when demand can be met with new power deployed. 

Fortunately for Texas’ wholesale electricity clientele, Griddy announced that it will be refunding their $10 service fee for the month of August. However, minimal refunds are not a long-lasting solution to this crisis and policy needs to be enacted to prevent a similar situation from occurring. In order to avoid another sticker shock, action could be taken by ERCOT to ensure non-renewable alternatives to wind energy exist and are accessible.

High demand on the grid is not new to Texas summers – often hitting triple-digit temperatures for multiple months. And as the population of Texas continues to grow, ERCOT has much higher demand to plan for and manage. The risk of a perfect storm, however, must also be accounted for. While Texas leads the nation in wind power, it is a fickle energy source that can simple stop blowing. If that happens, natural gas and other traditional measures must be ready to meet demand within minutes to avoid such price shocks.  

As Griddy explained to its customers in an email:

“This put a severe strain on the grid, forcing every available generation plant to run at its capacity. However, there were several units that were unable to run at capacity for operational reasons: a coal-fired unit in Houston, a combined-cycle gas-fired unit in South Texas and a steam generation unit in North Texas all failed to run as expected, straining the grid even more.” 

Griddy markets to customers that spikes are not uncommon, but last only a few minutes. Those precious minutes can be cut short if power is ready. When even one backup station is not ready to go, that spike can outlive the few minutes predicted, and last up to several days.  

Between maintenance, upgrades, and human error, not every power unit in the entire state can be perfectly functioning at capacity every minute of the day. But higher demand is predictable with population growth, and concerns over climate patterns. The wholesale price incident shines a spotlight on a bigger issue – capacity and ability to meet demand in an instant, something a 21st Century intelligent grid should be able to do. 

Texas has already embraced renewables as a supplement to its robust energy market. But August demonstrated through the wholesale spike episode that the mix needs extra attention. Market incentives could be implemented to ensure that fossil fuels are ready to be utilized if wind energy cannot be relied upon. Additionally, EROCT could capitalize on the dynamic competition that exists between electricity providers in Texas to fortify people’s ability to access reasonably priced electricity in times of surges.