Most Texas homes have enjoyed the power to choose their electricity provider since 2002. Over the years, there has been a learning curve for both electricity providers and consumers. The most popular product in the market has been the 12-month fixed price electricity plan. Consumers seem to prefer shopping for electricity on an annual basis and not having any bill surprises during the year. However, many consumers are in for a shock when they go shopping this year. Texas electricity rates have increased by 2 to 4 cents per kilowatt-hour. What is behind this sudden increase and what is the best strategy to keep your electric bill under control?
ERCOT Plans for Supply and Demand
ERCOT maintains the electricity grid serving about 90% of Texas. As the grid operator, they make sure supply meets demand. Typically, ERCOT maintains a 13.75% reserve margin. Reserve margin serves as a backup in the event a generator breaks down or demand exceeds the forecast. To make all of this work, ERCOT needs to have an accurate forecast of electricity demand. It also needs to know which generation units are retiring and what new generators are coming online.
The problem arises when something deviates from ERCOT’s planning process. For the summer of 2018, a perfect storm of unplanned events is driving electricity prices higher. First, a number of new generation projects supposed to be completed before this summer have been delayed. Second, more existing generation units retired than expected. Finally, ERCOT is predicting record-setting demand for this summer.
Coal-Fired Generation Not Competitive
The biggest unplanned event for ERCOT was the retirement of 7 coal-fired power plants in January and February. The media often battered these power plants over their environmental impact. However, these generation units provided a significant stabilizing force for the power grid. In the end, fuel economics more so than environmental concerns shuttered the coal-fired generators. Lower natural gas prices made coal generation too expensive to operate.
It was expected that the coal units would slowly phase out in the coming years. This would give time for construction of more natural gas-fired and renewable generation to fill the void. Unfortunately, the economics of the generation industry did not allow for a smooth transition. Generation supply is going to be tight in Texas this summer but should improve somewhat in the coming years.
Impact on Electricity Shopping
Given the magnitude of the changes, our crystal ball is little foggy. However, there are several common sense approaches to protect you from bill shock or at least minimize it.
- Do not exceed the term of your current electricity plan. Your electricity company typically bills you at a market rate when you remain with them past the term of your plan. Texas is more susceptible to electricity pricing spikes this summer than usual. Not renewing or choosing a new provider could get you burned.
- Avoid month-to-month pricing plans. We are not big fans of these except in certain cases like when you have plans to move soon. Any electricity plan where the price fluctuates on a monthly basis could be bad news for your wallet.
- Hold off on long-term electricity plans. ERCOT expects summer reserve margins to improve to over 11% for 2019-2021. As that happens, prices should moderate. You don’t want to be stuck paying “crisis” rates forever.
- Look for opportunities during the market transition. As the Texas generating fleet continues to transition to clean gas technologies and renewable energy, there should be good opportunities to lock in your electricity rate for longer terms. Following this summer, keep your eye out for longer-term electricity deals (24 to 36-months) at rates that are more reasonable. The timing of lower rates depends on how Summer 2018 plays out.
The next several months will be difficult for Texas electricity consumers. The market will eventually rebalance itself and prices should moderate somewhat. In the meantime, make sure you are protected by a fixed rate plan even if it is higher than what you have historically paid.