EnergyStatewide NewsTexas Utility Regulator Increased Electricity Prices During Blackouts to ‘Accurately Reflect’ Market Conditions

As electricity demand soared and supply thinned, prices on the wholesale market spiked to alarming levels.
February 18, 2021
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Texans will likely see a sharp increase — in hundreds or possibly thousands of dollars — in their utility bill’s next pay period as a direct result of electricity scarcity during February’s winter storm and an indirect result of an order by the Public Utility Commission (PUC).

Wholesale electricity prices on the Electric Reliability Council of Texas (ERCOT) market soared to thousands of dollars per megawatt-hour (MWh) during the Texas snowstorm which shot out the lights for many.

Currently, prices are floating around $9,000 MWh.

But due to an order earlier this week, the PUC caused the already increased prices in the low thousands to jump to where they currently sit.

During normal times, electricity on the ERCOT market sells between $30 to $50 per MWh — a 22,400 percent increase in price to its current value.

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Individuals who face the sharp bill increase will be those who’ve actually had power, and even more so those whose usage has increased dramatically by hosting others who were not so lucky.

Based on average daily electricity consumption, at the current rate, a household’s utility bill may cost $270 per day through these last few days — and that doesn’t even account for an increase in a household’s use.

There is a market cap in place at $9,000 to prevent runaway prices during unforeseen events. But due to the severity of this Texas freeze, market prices could be even higher without it.

Before the order, prices were still in the thousands, but still not reflective of the actual value of the electricity according to the PUC.

“Because energy prices should reflect scarcity of the supply, the market price for the energy needed to serve load being shed in the face of scarcity should also be at its highest,” the PUC’s news release stated.

The PUC added, “The decision was spurred by ERCOT’s discovery that energy prices across the system were clearing at less than the current system-wide offer cap of $9,000 established by Commission rule.”

In addition, the PUC ordered wholesale prices be backdated to February 15 when the storm escalated circumstances in the state.

The ERCOT market is just that, a market-based system on which electricity generators are paid after-the-fact for the services they provide — similar to most other goods and services one would pay for in their day-to-day life.

Other electricity systems across the country, however, negotiate contracts up-front with generators for a certain amount of generation at a specific price, a kind of hedge against the volatility of energy prices.

The ERCOT system attempts to maximize cost-efficiency for consumers at the risk of ballooning prices during emergencies.

In all things, trade-offs reign supreme. And the trade-offs exist in this decision by the PUC, too.

At a time when millions were out of power in frigid weather, without much clarity on the situation at all from the state, the PUC was concerned enough about electricity’s price that it used precious time to deliberate over it.

The argument for the order, however, is like that of “price gouging” — not the term often thrown around as a partisan epithet but rather the economic factor it is. During a combined demand spike and supply shortage, the only way to ensure the maximum number of people have access to the supplies they need is for prices to increase, which disincentivizes hoarding.

If there is a milk shortage and its price is kept at $3.50 per gallon, its normal price, then the average consumer can purchase more gallons of milk than necessary for the same price they might purchase one at a market-adjusted $9.00. Cracking down on “price gouging” during that situation further exacerbates the supply problem.

Yet, it is no trivial difference between hundreds of dollars in increased electricity costs during a cold snap causing widespread blackouts and a modest real dollar increase in milk.

Whether the PUC made the right call or not is something to consider, but the reality is that decision came with a hit to its reputation — its trade-off.

The impact of the decision will become quite clear as the state begins to recover from this, and its aftermath drops on everyday Texans in the form of a hefty electric bill.

From Wednesday night to Thursday morning, the state made massive progress and restored power to roughly two million customers. But there remain over 500,000 customers without electricity.

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Brad Johnson

Brad Johnson is an Ohio native who graduated from the University of Cincinnati in 2017. He is an avid sports fan who most enjoys watching his favorite teams continue their title drought throughout his cognizant lifetime. In his free time, you may find Brad quoting Monty Python productions and trying to calculate the airspeed velocity of an unladen swallow.