Texas is among the states with the most expensive energy costs in all major markets. Last year, the wholesale electricity costs in Texas this month skyrocketed t o about $9,000 per megawatt-hour.
The Electric Reliability Council of Texas (ERCOT), the organization that oversees the power grid and wholesale spot market for electricity in the state, has predicted increased electricity rates this year. According to them, it’s caused by the following reasons:
Increased Demand, Decreased Supply
Like many products and services traded on an open market, any increasing cost is greatly influenced by increasing demand combined with decreasing supply. The same goes for energy costs in Texas.
Having said that, if you signed up for an electricity plan with a fixed price, rather than at the market price, it might spare you from increasing energy costs. Consumers who are using industrial energy will be impacted the most since they’re investing power at the market price. The thing is market price fluctuates very often.
The majority of residential consumers, in contrast, can avoid high energy costs due to their fixed-price contracts. If their energy suppliers increased their costs, it would not be for a long time. The providers will recover their increased costs in no time.
Moreover, for power generating companies, offering low prices makes it hard for them to stay profitable. They have to put off capital investment for their existing and new plants to sustain their slim margins.
The thing is the risk of malfunctions increases every time a power plant will perform a few improvements and less than optimal upkeep. If a plant is broken and requires to be offline for some repairs, it will cause a reduced supply of electricity. Consequently, ERCOT will be forced to implement blackouts and other emergency conservation measures.
Insufficient Reserves
ERCOT has recently faced an issue about reserves that are running short. ERCOT was aiming to have at least 13.75% in reserves, but the corporation reported having less than what’s desired in reserve during the last hot summer months. According to ERCOT, this shortfall resulted from the recent closings and delayed openings of the plants.
Conserve energy during peak demand, as ERCOT has always been advising. The most straining on the Texas electrical grid is usually in summer, especially the afternoon’s hottest hours. You can save up more if you do your dishes or laundry until the sun goes down or turn your house’s thermostat up a few degrees.
Plummeting Oil Prices
Around one-third of U.S. gas production is made up of byproduct gas (i.e., oil and gas). In other words, if oil prices drop, gas production will be impacted, and natural gas prices will be lifted.
According to the Energy Information Administration (EIA), oil production across the states plummeted to under 12 million bbls/day after global oil demand has declined. This dramatic drop has also led to a record filling of oil storage.
Forward 12-month costs for natural gas soared from $2.10 to $2.65/MMbtu from May 2020 to April 2021. In 2019, natural gas was 47% of ERCOT’s fuel mix, which sets the value of electricity for the majority of daytime hours.
As the nation’s top oil-producing state, Texas is the most sensitive to oil prices. Typically, there will be tax revenues drop, employment decline, and budget cuts when oil production slows in the state. In fact, Texas loses around $85 million every year for every $1 drop in oil prices.
The good news is several energy providers in Texas had implemented energy-related measures in response to the COVID-19 pandemic. For example, many reduced their rates, take Ohio electricity rates as an example. Other utilities, like American Electric Power (AEP), waive penalties and their policies of not disconnecting customers for non-payment, as well.
Weather
Temperatures and wind speeds had always played a crucial role in both supply and demand of energy. Specifically, as of 2019, ERCOT had ~23,000 MW of installed wind capacity only. That means daily variance in wind generation during late afternoon hours (i.e., 3:00 PM) is crucial.
There was usually a strong wind production during peak day last year, so there were no real-time prices seen. However, it was the variance of lower wind output, alongside the higher level of generation outages, in the late afternoon that caused ERCOT prices to reach the price cap of $9,000/MWh.
However, this summer 2020, forward pricing has a recent downturn from $150/MWh to $110/MWh. This good news has created good opportunities for consumers. Still and all, customers should expect higher prices if the weather will turn warmer than normal.
Takeaway
To protect themselves from possible high electricity costs, Texans should lock in a fixed-price electricity contract. With this plan, your bill won’t ride the wave of increasing energy costs this year.
