How Texas’s deregulated market for power led to exorbitant electric bills

Katrina Tanner typically pays around $120 a month for her electric bill during the winter. But last week, as a winter storm caused power outages for millions of fellow Texans, her power stayed on — and she saw online that her bill was $6,225.

“I felt almost guilty with these people not having electricity that I was complaining about my bill,” she told CNN on Monday. “At the same time, my complaint is: How am I gonna pay this?”

Tanner is just one of a number of Texans who now face exorbitant electric bills after last week’s widespread power issues, which caused life threatening blackouts and shortages of water, food and medicine.

How exactly did these customers get such high bills?

Those closely familiar with Texas’s energy market say these power costs are less a bug than a feature of the state’s deregulated system.

While the vast majority of Texans pay a fixed rate for power and get predictable monthly bills, some Texans choose to pay based on the spot price of electricity at any given moment. And as anyone who has taken Econ 101 knows, when supply drops and demand shoots up those prices can reach astronomical heights.

“It has worked really well, as capitalism kind of, in theory, is supposed to, until it doesn’t,” said Anthony Shaw, a power engineer and founder of Progeneration Energy, an energy solutions company. “And when it breaks, it breaks really, really bad. In this case, that’s what we’ve seen.”

Supply-demand sent prices up

Last week’s winter storm rattled the system in ways consumers knew were possible but didn’t expect.

As the storm hit, the demand for electricity increased as cold Texans turned up their heat. At the same time, the supply of power sharply decreased as the winter storm and an unprepared infrastructure knocked out power generators for natural gas, coal, nuclear, wind and solar.

The spot electricity prices therefore shot way up in response.

On any given day, the price of electricity generally sits around a few cents per kilowatt hour. Last week, the price shot up to the legal maximum, set by the Public Utility Commission of Texas (PUCT), of $9 per kilowatt hour.

That in itself is not particularly rare. The price of electricity sometimes hits that maximum on the hottest days of summer for an hour or two. However, last week, the price sat at that maximum number for several days given the lengthy cold snap.

“Companies and consumers were caught off guard to see prices spike so high in the winter, and what was really extraordinary about this situation is for prices to stay that high for so long,” said Daniel Cohan, associate professor of civil and environmental engineering at Rice University.

Some customers pay market prices

The vast majority of Americans, and even Texans, do not pay the direct market price of electricity at any given moment.

Instead, most pay a retail energy provider — essentially a middle man — which buys power years in advance and then sets a fixed rate for the customer. This costs a bit extra on the whole but makes the electric bill more consistent.

However, some Texans, like Tanner, use a service called Griddy, which connects customers directly to the wholesale electricity market for a monthly fee of $9.99.

This setup can be cheaper and makes some logical sense. When prices go up, the customer has an incentive to use less power. At other times, the price of electricity can even go negative, meaning you can actually get paid to use electricity. Griddy says on its website that the wholesale price of electricity is below the Texas average 96.9% of the time.

But as we saw last week, there is risk to relying directly on volatile market prices. And that incentive structure doesn’t quite work when the outages create life threatening issues. What dollar amount should a customer put on the potential of getting hypothermia?

“(It) usually means you’re getting a better deal because you’re not paying a profit margin to your retailer, but prices spiking like this to a level and duration that no one anticipated, it really left people vulnerable,” Cohan said.

“Some folks inside the system got caught with their pants down,” Shaw explained.

That’s what happened to Dallas resident DeAndre Upshaw, who also uses Griddy. He said it was “very shocking” when he opened his latest electricity bill.

“While I’m trying to get gas and groceries and make sure that my pipes don’t explode, the last thing I’m thinking about is a $7,000 bill from my utility company,” Upshaw told CNN on Saturday.

On its website, Griddy has posted several articles explaining the high prices and says it emailed customers to try to switch to a different service with a fixed rate. The company attempted to cast blame on PUCT for setting the electricity price at $9 per kilowatt hour.

“We intend to fight this for, and alongside, our customers for equity and accountability — to reveal why such price increases were allowed to happen as millions of Texans went without power,” Griddy said.

PUCT said Saturday it has “launched an investigation into the factors that combined with the devastating winter weather to disrupt the flow of power to millions of Texas homes.”

What officials are doing about it

The high electric bills are not just an issue for individuals who use Griddy.

Although most Texans were not directly exposed to these high prices, their retail energy providers likely were. That cost will likely be passed on to customers in the form of future rate increases.

“You’re gonna have loads of retailers going bankrupt if they didn’t lock in enough power,” Cohan said. “When someone’s getting paid ($9 per kilowatt hour) and most consumers are paying ($.10 per kilowatt hour), someone is getting crushed in between.”

With Griddy, individuals took on that cost, but in other parts of the market, the retail providers, cities, or municipal utilities could be in trouble, he said.

For example, the city of Denton, in the Dallas-Fort Worth metro area, is one of the few cities in Texas that buys power directly. On Monday, the city got an energy bill for $207 million accumulated over just four days, a total three times more than its energy costs for all of fiscal year 2020.

Denton Assistant City Manager and Chief Financial Officer David Gaines said the “unprecedented” bill will gradually be passed on to residents in the form of higher rates.

Preparing power systems to prevent another situation like this will also cost money and likely raise prices for average consumers, Shaw explained.

“In order to have contingency plans, they’re going to come at a cost,” he said.

Texas Gov. Greg Abbott said last week he was convening an emergency meeting to look into the situation, he said in a statement.

“It is unacceptable for Texans who suffered through days in the freezing cold without electricity or heat to now be hit with skyrocketing energy costs,” Abbott said. “To protect families, I am actively working with the Lieutenant Governor, the Speaker of the House and members of the Legislature to develop solutions to ensure that Texans are not on the hook for unreasonable spikes in their energy bills.”

Political leaders are debating whether to use federal emergency funds to offer relief, and some local officials have pushed for the state to pay the high bills.

“For these exorbitant costs, it’s not the consumers who should assume that costs,” Houston Mayor Sylvester Turner told CBS on Sunday. “The bill should go to the state of Texas.”