Why is Texas a Volatile State in Regards to Electric Rates?
September 11, 2008
Texas is a recently deregulated electric market as of 2002. The electric rates that are available in this state come from over 50 different electric providers and these providers offer over 350 different electric rate plans when added all together. There are about 5 different regions in Texas that each have to be priced differently by the retail electric companies selling you electricity. In Houston electric rates are the highest. Trying to find an Affordable electric rate in Houston is not always easy because of a few different reasons related to its geographical location and population density. Dallas has slightly cheaper electricity prices but they too experience electric price volatility because they are a city in Texas. To name a few variables that cause Texas energy prices to be higher: Hurricanes in the oil and natural gas rich gulf of Mexico, line losses on old electric poles and wires, congestion in Houston, a high relaince on natural gas to produce electricity, an outdated spot index market managed by the Texas Electric Reliability Council and hot summers.
Natural Gas
Since Texas produces about 46% of its electricity using natural gas steam powered electric plants we find ourselves having a very volatile electricity market. Natural gas is stored in salt domes under the ground which are used for peak demand times. There are only so many salt domes and it is not always easy to keep these at capacity. These storage levels must show storage that meets or beats historical demand or electric rates will rise. As natural gas prices on the NYMEX rise based on energy trading and traders, speculators and investor trading so do Texas electric rates. In fact there is about a 90 percent correlation with natural gas and electric rates in Texas. So not only do natural gas weekly and monthly storage reports affect Texas electric rates but so do the energy commodity natural gas prices on the New York Mercantile Stock Exchange. If you compare Texas to New York electricity you will notice that in New York there is quite a large variety of power plants that produce their electricity. Because of the diversification in power fuels used to produce electricity in New York you have cheaper less volatile electric rates.
Hurricanes
The Gulf of Mexico which is where Texas gets its coast is an oil and gas rich area full of ocean rigs that extract these energy commodities out of the ground. These resources are then used to power the plants that produce our Texas electricity. If production in the Gulf must be stopped because of a Hurricane then many times natural gas prices will go up. When natural gas (symbol NG) goes up so does electric rates in Texas. As of the time of this writing their is a category 4 hurricane in the Gulf called Hurricane Ike and natural gas has remained unaffected. Part of the reason why NG has not had a price jump is due to major downward pressure on energy commodities because of other outside world events and large short positions be energy speculators as they go long on the dollar and short energy. If Hurricane Ike destroys any of the infrastructure in the gulf it will cause natural gas to go up, this however is yet to be seen.
Line Losses and Congestion Issues
Texas pole and wires infrastructure is due for a major overhaul. In Houston it takes a lot of electric lines to deliver power into the city and many suburbs. Because of the demand for energy and a large population demanding energy on outdated poles and wires and transformers we see a lot of line losses in the electric lines in the Houston and Centerpoint Energy area. These line losses make the Houston area a more expensive area to price electricity. No matter what electric company you pick among over 50 different retail companies you will pay slightly more for your energy in Houston then you would in Dallas. The demand for energy at one particular time in the day usually on a hot summer day in the afternoon also causes rates to spike up. This unexpected demand during a hotter then expected summer and the reliance on natural gas stored in salt domes for this type of occurence makes for a perfect storm scenario. On a hot enough day and a greta depletion of natural gas in storage can cause electric rates to spike to unreasonable levels. If you are coming up for renewal in the dead heat of summer during one of these unfortunate days you could have to lock in at 16 - 20 cents kWh. Fortunately energy prices have fallen to around 12 - 13 cents kWh and are much more tolerable for people then they were just a month ago.
Outdated Texas Electric Rate Spot Market
In Texas we have something called MCPE or Market Clearing Price for Energy. This is an index price managed by the Texas government and is priced differently based upon 5 different regions in Texas. The index price changes every 15 minutes, 96 intervals a day. Some areas are much cheaper then in other areas because of a less dense population demanding much less electricity. Demand charges can make up 50 percent or more of the expense in electricity prices. Natural gas is one of those resources that is very difficult to keep stored up to meet this demand for electricity during hot or cold days. The MCPE system as managed by ERCOT is in need of an overhaul. There are only 5 different areas that this pricing structure manages. Small towns, unincorporated areas around Houston, suburns have to pay for congestion and line loss issues they may have little to do with. Texas is working on updating the system to have several hundred seperately priced “nodes” They refer to this system as the nodal system. If the nodal system goes into effect it could potentially have a much more positive effect on electricity prices then the current system. It will motivate problem areas in the state like Houston to work on demand related issues while rewarding those cities that have kept their electricity congestion issues to a minimum. The nodal system is a much more complex system then the current one in placeand the debate is to whether this new pricing system will end up costing more because of bureaucratic red tape and mismanagement by incompetent politicians and elected officials with little experience but big words. The ERCOT council is not without its history of scandals, corporate bribery and other illegal activity and so the questioning of ERCOT changing things up is not completely without merit. Many people simply do not trust ERCOT and until they can restore their reputation by creating a new system that actually runs efficiently and does what it promises consumers in Texas will keep complaining of higher electric rates and a failed deregulation process. The cry right now among consumers is to go back to the old way, monopoly state owned electric utilities. We really can’t blame them as many electric companies raised their electric rates anywhere from 20 - 30 cents kWh on some of their customers the summer of 2008 when they were used to paying 12 - 14 cents kWh.
So What Should a Texas Electric Consumer Do?
If you have been worrying about what electric rate term to lock in I would recommend checking out available natural gas graphs. There is such a close relationship with Texas electrity and natural gas that you can see what electric rates have done over the course of months or years by looking at one of these graphs. We have a 1 year graph on our About page. Decide what you think NG prices will do and lock into an electric rate accordingly. No one can acurately predict what Texas electric rates or natural gas prices will do otherwise they would quit their jobs and trade energy commodities like the hedge fund managers do that make 100 million a year. ut you can atleast come up with a hunch and take your best guess. Energy.gov believes that electric rates will go up over the next 10 years but this doesn’t really help in the short term on deciding what you should do. If you are risk averse I would sign up long term, if you are ok taking on some risk just pick the cheapest rate going or sign up short term to hold out for a better rate. You can check out our affordable energy rates on our rates page to learn more about your available energy rate options.
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