Life is slowly getting back to normal for most Texans after last week's bitter, extreme cold which not only led to rolling power outages across the state, but pushed Texas electric prices 100 times higher in the wholesale market.
With not even a week gone by, it's still too early to tell how things will shake out, but Texas electric customers should be vigilant in ensuring that they have signed with a stable, battle-tested electricity provider that can weather market shocks like happened last week. Only by shopping for a low electric rate can customers be assured that competing electric providers have been screened against a rigorous criteria including financial capability, and that their supplier isn't exposed to market shocks.
Last week, record demand from the extreme cold, coupled with weather-related power plant outages due to frozen pipes and other equipment, meant Texans were demanding 7,000 megawatts more electricity from the grid than was available, prompting the rolling blackouts. About 50 power plants were "offline" due to the cold, and unavailable to meet this demand.
This imbalance in demand and supply sent prices skyrocketing on February 2, from the normal range of $30-50 per megawatt-hour, to the state-imposed price cap of $3,000 per megawatt-hour -- or 100 times higher.
This is the type of price shock that no one expects, but prudent electric suppliers hedge against. While cold weather might have led some market observers to expect higher prices in the $100 per megawatt-hour range, due to higher heating demand, the blowout price of $3,0000 was truly an unforeseen shock not indicated by any market trends leading up to last week.
That's why sound Texas electric providers use sophisticated financial instruments to protect themselves and their customers against these price shocks. Other electric suppliers that don't manage this risk well can end up going out of business -- leaving customers without a supplier and stranded on a "backstop" electric rate, known as the Provider of Last Resort, which charges the highest rates in the market.
While it's too early to say how last week's event will impact the market going forward, customers should remember that the last time the Texas electric market saw similar price shocks -- in the spring of 2008 -- about half a dozen electric suppliers involuntarily ceased operations -- essentially overnight -- and dropped customers to the Provider of Last Resort.
A handful of other electric suppliers exited the business in a more orderly fashion, but still ended up transferring their customers to new electric providers, often under "fire sale" transactions, with customers left to wonder who their new provider was, and whether their old electric rate would be honored.