The price cap for wholesale electricity sales in the ERCOT region, which serves about 85 percent of the state, increased to $7,000 per megawatt-hour (MWh). The price cap was $3,000 per MWh in early 2012 and increased to $5,000 per MWh in June 2013.
The price cap means just that -- it's the highest price that wholesale suppliers can charge for power. However, it does not necessarily mean that wholesale electric rates will reach that high level. (Wholesale prices are typically around $50 per MWh.)
Additionally, a new construct, called an Operating Reserves Demand Curve, could push wholesale prices to $9,000 per MWh under certain scarcity conditions -- but this higher price would be the result of administrative market rules, rather than wholesale suppliers pricing power at those higher levels.
And so far, the potential for higher wholesale electric prices has not translated into a meaningful increase in retail electric rates, according to the Houston Chronicle.
Indeed, customers in the Dallas-Fort Worth area (served by wires company Oncor) can still find retail electric providers offering fixed rates as low as 9 cents per kilowatt-hour, and variable rates as low as 8 cents per kwh.
That's slightly higher than the 7 to 8 cent fixed rates seen a few years ago when demand was lower due to the recession and natural gas was cheaper. The modest increase is more attributable to the collective impacts of continued Texas electric demand growth and changes in the price of natural gas, than the higher wholesale price caps.
Still, the potential for higher wholesale electric prices means retail electric providers need to prudently manage their exposure to the wholesale market. And this implicates higher costs to retail providers from different hedging and supply strategies to ensure they aren't paying the high price caps if such prices develop in the "spot", or real-time, market.
However, customers can actually earn money from some of these hedging strategies employed by retail electric providers. Many retail electric providers are now offering no-risk demand response programs, which will pay customers for reducing their usage at key peak times. Customers are not penalized for not lowering their usage if they decide they'd rather keep their air conditioning running at full blast.
These programs, often called critical peak rebate or peak time rebate programs, can pay customers up to 80 cents for each kWh reduction during a peak event.
Why are retail electric providers doing this? It's cheaper to pay a customer 80 cents per kWh (which equals $800 per MWh) to reduce usage than it is to buy extra power for that customer at $7,000 per MWh in the wholesale market.
It's an example of competition and innovation taking a potential cost, such as the higher price caps, and turning it into a win-win for electric providers and their customers.