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Snow hit Texas

The Disaster that Shook the Texas Electricity Market

By now, the whole worlds know about the disaster that struck the Texas electricity grid when winter storm Uri struck the state in February.  There is no sugar coating it.  The debacle in February represented a failure of every level of the Texas electricity structure.  One of the world’s major energy hubs was unable to keep its citizens from freezing in their homes.

The Texas wind energy sector is one of the largest in the world but struggled to operate under the severe and prolonged freezing temperatures.  But wind was not the only or even the major contributor to the failure of the grid to supply enough power to keep the lights on for Texans.  The entire grid infrastructure was caught unprepared and under-winterized.

Texas still gets its largest portion of electricity from natural gas powered plants.  These failed in large numbers too along with coal and even nuclear power.  The winter blast affected all of these sources in different ways.  They all failed when they were needed most, leaving grid operators facing a nightmare scenario.   As the temperatures plummeted and demand for electricity skyrocketed, power plants began failing in rapid succession.  This was setting up a black swan scenario that could have resulted in a catastrophic failure that could have resulted in massive damage to the state’s electricity grid.  Residents could have been without power for months as much of the grid would have to be rebuilt.

In order to prevent the grid from succumbing to a cascading catastrophic failure, grid operators had to take the drastic step of off loading demand from the grid immediately early in the morning of February 15th.  And they had just moments in which to do it.  With snow covering virtually the entire state from Dallas to Houston to the border, they began cutting power to homes and businesses.  This action may have saved the grid from long term damage but it began a days long stretch of misery for Texans who would not be able to keep their homes warm.

 

Wholesale Electricity Rates Soar

The Texas electricity market is structured to incentivize private energy producers to build enough capacity to support the states’s electricity needs.  This is done by using the free market as a mechanism to set prices high enough in times of high demand to make it worth while for companies to invest in new power production.

Wholesale electricity rates update in real time to reflect the current demand for electricity within the marketplace.  On a typical mild spring night in Texas, the prices in the wholesale electricity market bottom out – often coming close to zero.   On hot summer afternoons, the spot price for electricity in Texas typically spikes.  The maximum allowable rate in the Texas electricity wholesale market is $9,000 per megawatt hour.  Over time the average price is around $50 per mWh.  This translates to about 5¢ per kWh.

One of the roles of Retail Electricity Providers (REPs) in Texas is to smooth out the prices by taking on the risk of volatility in the wholesale market while offering a more consistent rate to end users of electricity.

 

Shocking Electricity Bills for Some

The most sensational aspect of the misery suffered by Texans that week were the eye popping electricity bills reported on social media and evening news reports.  There were reports of electricity bills of over $16,000 for just a few days of electricity.  This however was not the experience of the typical Texas electricity consumer.  These bills reported in the media were largely, if not exclusively, from customers of the electricity provider Griddy Energy.

Griddy built their business by removing the safeguards provided by traditional electricity providers and exposing their customers directly to the prices of the wholesale electricity market.    Customers paid Griddy a monthly membership fee to gain access to the wholesale rate for electricity.

Most of the time this worked out great for Griddy customers because most of the time wholesale rates are lower than the rates one will find on fixed rate plans from Texas electric companies.  But when things went terribly wrong on the Texas electricity grid these consumers found themselves trapped.  They had no choice but to pay up to $9 kWh for electricity or turn their power off and freeze.

For some perspective, a home that uses 2000 kWh of electricity in a month may expect an electric bill of about $200 if we assume an electricity rate of 10¢ kWh.  If that same consumer had to pay $9 kWh, it would result in an electricity bill of $18,000!

For unsuspecting consumers, gambling on the wholesale electricity market was like canceling your homeowners insurance.  In most months you would save money because most of the time insurance isn’t used.  You could save money every month and could save money for years.  But when disaster strikes you could end up paying a ruinous amount of money.  Note: As of February 26th Griddy has been barred by ERCOT from participating in the Texas electricity market.  Their customers have been transitioned to other electric providers.

The vast majority of residential electricity users in Texas are on fixed rate electricity plans (or at least plans where rates are bound within a certain range).  This means that even as the wholesale electricity market shot to 180 times its typical price, electricity rates on bills stayed within the expected range.  For most Texans their electricity bill might be higher than normal to reflect higher usage during that period but will not be thousands of dollars higher than usual.  Ironically, some consumers may not see their bills go up at all since they were without power much of the time when temperatures were at their worst.

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