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Business Electric Rates and the Looming Texas Electricity Crisis

January 2, 2012

The announcements from ERCOT, the Texas state electrical grid operator, of a potential Texas electricity crisis and the occurrence of rolling blackouts during the next summer cycle has raised several mixed reactions from different sectors. Many saw the threat as real and blame the shutting down of old power plants in compliance with new EPA environmental rules. Others remain skeptical that there is indeed a looming electricity crisis and could be resolved by increasing consumer and business electric rates.

The real issue behind this predicament is capacity and in an energy-only deregulated Texas electricity market there was a lack of incentives for electric companies to build new power plants due to lower price caps. To incentivize Texas electric companies to build new power plants and address the potential threat of power shortages and rolling blackouts, the Texas Public Utility Commission is considering raising the price caps for wholesale Texas electricity.

This will give electric utilities guaranteed additional payments as incentives for building new power plants. However, many are apprehensive as the raised prices will be passed along to consumers through higher residential and business electric rates. 

The Texas Energy Only Market

The state went for an Energy-Only system after the Texas electricity market was deregulated back in 1999 and had plenty of excess capacity, making residential and business electric rates affected only by market forces and not dictated by legislators and politicians. In this system, the power plant operators are only paid for the power they supply, and this price is dictated by the price caps set for wholesale power.

This is different from a capacity market wherein the generating Texas electric companies are paid an additional flat amount above the whole price, giving power plant operators an incentive and the means to recoup the cost of building new power plant generators. Texas is not the only market with an energy-only system as countries like Australia adopt the same practice.

The difference however is that Australia has wholesale market price caps that are five times higher than Texas and this price difference is enough incentive for electric companies to build new power plants. With this lack of incentives, not enough new power plants have been built and the capacity margins in the state continued to shrink while demand continued to expand.

Raising the Market Price Cap 

The deregulated energy market in Texas not only gave consumers the power to choose their electric options but also allowed consumers to enjoy cheap electricity and competitive business electric rates – the 3rd cheapest rates in the country. The wholesale price cap is also at the low end and currently sits a $3000 per MWh, far from the $12,500 per MWh market cap in Australia.

To address the issue, the Texas Public Utility Commission is working on raising the current price cap to $4000 or even up to $6000, to give new investors incentives to look into building new power plants as profitable ventures in Texas. However, there are concerns that these increases may not be high enough to incentivize electric companies to invest in a new multibillion dollar power plant facility.

There are other less drastic means that the Public Utility Commission is initiating to address the looming electricity crisis that will come to the state as early as next summer. One thing is for sure though – there will be higher residential and business electric rates that consumers will absorb to ensure that homes and business will have enough electric juice to run through the cold winters and the scorching heat of the Texas summer.

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