The proposed increase in the wholesale electric market price cap in Texas to $4,500 per megawatt-hour, previously discussed by SaveOnEnergy.com, could lead to retail electric providers going out of business, state officials have warned, with such fears privately expressed by several retail electric providers as well.
In order to ensure the state has enough power plants to serve increasing demand, the Public Utility Commission of Texas has proposed raising the wholesale energy price cap, which is currently at $3,000/MWh, to $4,500/MWh, effective August 1. The higher price cap, which is rarely hit during the year, is meant to incent the building of new generation, as current generating capacity cannot meet projected demand in the future.
However, the August 1, 2012 effective date has raised concerns that it does not give retail electric providers, who buy power in the wholesale market, enough time to prepare for the higher price cap. Aside from just the potential for higher prices, the bigger impact for retail electric providers from the higher price cap is additional collateral requirements they must post to trade in the market. These collateral requirements can strain retail electric suppliers' balance sheets, and with only three months prior to the higher price cap taking effect, some state officials are worried that retail electric providers may not have enough time to execute new credit and hedging agreements as they would normally do to mitigate the impact of the $4,500 price cap.
In a letter to the Public Utility Commission, Texas State Representative Sylvester Turner noted that in 2008, five retail electric providers went out of business because of price shocks in the wholesale market caused by congestion, while additional retail providers sold their customers to competitors to avoid default.
"[W]hat will be the impact if the cap goes to $4,500 per megawatt/hour in August of this year, as has been proposed? What happens if the cap is tripled in the years that follow, as has been suggested," Turner asked.
Several retail electric providers have privately echoed these concerns, and worry that the immediate increase in the price cap may produce a repeat of 2008, which saw thousands of customers transferred to the Provider of Last Resort when their originally chosen retail provider went of business. The Provider of Last Resort is a "safety net" provider which charges a high, volatile market-based electric rate.
Customers can protect themselves from the risk of their retail electric provider going out of business, and paying the high Provider of Last Resort rate, by shopping for a reputable retail electric provider.