The Texas energy market: How rates work and who does what

Given the events of the past 10 days, the Texas energy market has come under a lot of scrutiny, with confusion over how it operates, why the lights went out, why bills are increasing, and more.

Here’s a quick look at what happened in Texas, why, and which entities do what.

How things worked, before the storm

For most folks, it was as simple as you clicked the switch and your lights came on. Every month you got a bill for service and paid (or autopaid) it. There was never a concern over the power source for your lights, computer, television, refrigerator, and other stuff in your house that used electricity.

That was until this past Valentine’s Day weekend, when a winter storm rocked Texas and sent temperatures down into the teens and single digits. That’s not the norm, of course. The results were terrible, outages that lasted days, freezing temperatures, burst pipes, and more.

The power came back on this week, but now there’s a new “normal” of significantly higher prices, debate over energy choice, and finger-pointing at some invisible things: Wind, natural gas, and politics (neither side seems to be volunteering for the blame) head the list.

Why did things get so bad so quickly?

Texas doesn’t normally get so cold, so Texans normally don’t use so much energy during the winter. The Electric Reliability Council of Texas (more about it later) reduces the amount of electricity that flows into the power grid for about 90 percent of state residents, because it isn’t needed.

ERCOT said on Feb. 12 that it expected supply would get tight because of the storm and the record winter usage surrounding it. The grid manager even mentioned during that announcement the possibility of “rolling” blackouts of 45 minutes or so as soon as Feb. 16 to make sure the highest number of people had electricity most of the time.

It got colder quicker than ERCOT expected. Blackouts started on Valentine’s Day weekend and lasted through much of the following week. Plus, there were problems with power generation. Wind turbines froze, natural gas plants had trouble operating. And people kept using more and more power just to stay warm.

ERCOT said the massive outages that ensued were necessary to keep the grid operational at all while it worked to coordinate resumption of generation. That finally happened late last week. Outages since then have been due to damaged lines and poles.

Why are rates increasing?

High demand and short supply did what high demand and short supply do – sent prices skyrocketing. That’s wholesale prices, that is. Prices hit the $9,000 per megawatt “ceiling” in Texas, which meant electricity providers in the state had to pay MUCH more than usual for electricity that they resell to customers. (Prices generally range somewhere between $30 to $45 per megawatt.)

Here’s what this means for customers and their bills, depending on the type of electricity plan they have:

• Fixed-rate plans: Customers with fixed-rate plans pay the same electricity supply rates throughout the term of their contract. That goes for the past couple of weeks as well. The other parts of their rates are utility charges (to get power from the provider to their home) and some government fees and taxes. Those also haven’t changed during the past week. Any variations for these customers come from increased usage to stay warm.
• Variable-rate plans: This is where you’re hearing about energy bills in the thousands of dollars. These plans are tied to the wholesale price of electricity – when it goes up, rates go up, and the increases can be sharp. This happened most recently during the late summer of 2019, when demand during a particularly hot summer outpaced supply. And of course, customers who had variable-rate plans and had electricity last week were using more of it to stay warm. The good news is that people with variable rate plans generally can cancel them without an early termination fee. But once you cancel, that means you need a …
• New plan: Wholesale price increases mean providers have to pay more for their electricity as well, and they’ve begun reacting to it. That reaction is an increase in retail electric prices. So far, providers have increased prices by about 2.5 cents or more per kilowatt hour. The Energy Information Administration says Texans use an average of about 1,112 kilowatt hours a month. Higher rates would result in electricity bills that are nearly $28 a month more. Rates could rise or fall going forward.

What’s ERCOT got to do with it?

ERCOT manages the flow of electricity to most Texans. The rest are covered by municipal systems or regional co-ops that aren’t part of the state’s deregulated energy market. (It should be noted that power outages hit the regulated markets as well.)

Among its responsibilities are scheduling power on the grid (without wasting it). It always wants to have a reserve in case of power spikes. But both the scheduled power and reserves fell short during the winter storm.

ERCOT’s scheduling is the subject of state and federal investigations. Four of its board members, including its chairman and vice chairman, planned to resign after the council’s meeting Wednesday.

Providers and utilities – what’s the difference?

Providers are energy companies that buy power on the wholesale market and resell it to residential, business, and industrial customers according to various plans. Plans vary by term, renewable energy content, and other factors. They may be fixed rate or variable rate (see above).

Utility companies in the deregulated energy parts of Texas manage the delivery of the electricity from the provider to the customer. These utilities maintain and repair powerlines and poles and other parts of the infrastructure. They are who you contact in case of an outage. Your utility’s charges will show up on your bills as transmission and distribution utility fees or as transmission and delivery service provider fees.

That’s a brief description of how the market works (when it does), why the recent problems occurred, and who the players are.

Arthur Murray
Energy Expert
Arthur directs content strategy for SaveOnEnergy.com, taking advantage of more than 20 years of newspaper and magazine experience. His articles have appeared on Zillow.com, Business.com, Nasdaq.com, and USNews.com, among others. You may reach him at amurray@redventures.com.