Reform, Don’t Ban, Wholesale Energy Pricing for Consumers – Center for Data Innovation


In February, Texas was hit with several severe winter storms in the course of 10 days, sending temperatures around the state plummeting. The cold weather pushed the state’s energy grid to collapse as energy demand rose sharply and Texans struggled to stay warm while at the same time supply fell as natural gas lines froze and wind energy sources went offline. Not only did millions of Texans lose power, but energy prices also skyrocketed, leaving consumers with certain dynamic rate electricity plans facing thousands of dollars in energy bills to survive the historic freeze. 

At the time, Texas allowed electricity providers to offer several kinds of dynamic rate electricity plans, ranging from peak-of-use plans to wholesale market plans, with a goal of creating more efficiency in the market. The latter of these plans enable consumers to take advantage of variable pricing in wholesale electric power markets in which energy prices shift throughout the day, month, and year. 

With wholesale pricing, consumers have an incentive to conserve energy, such as by adjusting their thermostats when energy prices are spiking. Moreover, consumers can use smart home technologies to automate these adjustments to maximize their energy conservation and savings. Wholesale pricing can also reduce overall peak demand, which is good for the environment since most peaker power plants are less efficient and use fossil fuels.  

In normal times, consumers often benefit from wholesale pricing, with many paying significantly lower bills than they would otherwise. One Texas electric utility, the now-bankrupt Griddy Energy, offered its customers wholesale prices with a $10 monthly fee.  However, these plans can expose consumers to astronomical prices during periods when energy prices surge. When the winter storms prompted a massive increase in wholesale prices for energy, some residents faced monthly energy bills worth thousands of dollars. In the aftermath, policymakers enacted HB 16, a law that prohibits companies from offering wholesale indexed electricity plans to residential or small commercial customers. This prevents electricity companies from passing real-time energy costs onto consumers. 

But this law may have gone too far. While the Texas freeze showed the problem of passing on the entire wholesale costs to consumers, removing this kind of dynamic pricing plan from the market, instead of reforming it, is a mistake. Indeed, one analysis found that the state would have weathered the storm much better had all residents lowered their thermostats to 65 degrees. However, since the majority of Texas residents do not have dynamic pricing, they had little financial incentive to do so.

Dynamic pricing should be encouraged. Lawmakers should focus on enacting consumer-friendly legislation that limits their exposure to huge spikes. Some states that allow dynamic pricing models have enacted complementary legislation in pursuit of this objective. For example, Oklahoma prohibits companies from increasing prices for goods or services by more than 10 percent after the governor declares an emergency. While more research may be necessary to determine the optimal rate structure, the goal should be to design a system that allows consumers to take advantage of the flexibility and cost-savings of dynamic pricing models like wholesale pricing but protects them from exorbitant rates during extraordinary circumstances. 

Texas policymakers should be proactive before the next major energy crisis hits the state by allowing dynamic pricing plans tied to wholesale prices as long as they have reasonable caps to protect consumers from bearing all the financial brunt of emergencies. 

Image credit: Flickr user alan berning



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