Texas electric customers continue to enjoy the lowest electric rates in a decade due to the revolution in shale natural gas, which has depressed both natural gas and power prices, but investment analysts continue to anticipate an inevitable increase in power prices, meaning customers need to shop for a low rate while they are still available.

Texas electric rates continue to be below rates seen before the start of competition in December 2001, but that has made generators hesitant to invest in new capacity, which Texas needs to keep pace with its population and economic growth, and, more urgently, to meet expected power plant retirements due to federal environmental rules.

As SaveOnEnergy.com has noted over the past few months, the Public Utility Commission of Texas (PUC) is trying to forestall any power shortage by ensuring that Texas' electric market works correctly.  The PUC is resisting calls to pay generators solely for their capacity (regardless of whether they turn on and produce energy), as occurs in some Northeast states, but the PUC is tweaking its current, "energy only" market rules to make sure that they reflect true market conditions, and not administrative interference.

Most of these efforts are designed to ensure that when electricity demand approaches, meets, or exceeds the available supply, these shortage conditions are reflected in the wholesale energy price through "scarcity pricing."  In other words, when electric demand peaks and there are no more power plants available to meet additional demand, the wholesale price should reflect customers' value in avoiding rolling blackouts.

What this essentially means is that wholesale prices, going forward, will be more likely to hit the price cap, which is currently $3,000 per megawatt-hour.  The price cap equals $3 per kilowatt-hour, or nearly 3800% higher than the current retail price of power (about 8 cents per kilowatt-hour for residential customers).  Furthermore, the PUC appears ready to increase the wholesale price cap, further raising prices.

These higher wholesale prices will eventually be reflected in retail electric rates paid by customers, either because retail electric providers will pay these wholesale prices directly, or will hedge against them but will still incur a premium above current costs to hedge this risk.

In either case, market analysts are expecting retail electric rates to rise in Texas, to account for the market changes at the wholesale level.  During several recent earnings calls with some of the larger Texas electric providers, investment analysts have asked the companies how they will adjust their retail pricing to account for the increased risk in the Texas electric market.  Although the companies have declined to reveal their pricing strategies, it is clear that investment analysts covering the Texas retail market expect Texas retail electric providers to increase their electric rates in the near future, particularly for the summer, to protect the retail providers against exposure to any wholesale price spikes that hit $3,000 per megawatt-hour.

Faced with the prospect of higher prices in the future, Texas customers need to shop now while electric rates are still at historic lows.  By shopping for a low electric rate now, customers can ensure that they benefit from today's low prices for the maximum period of time, and avoid the price hike expected in the Texas market.

Recent Articles