HOUSTON — The price tag for the crisis last week that almost forced operators to shut off power to parts of the Texas grid isn’t likely to show up on your next electric bill, but traders say the close call produced market conditions that eventually could hit consumers.
The cold spell pushed wholesale electricity prices to the regulatory cap of $5,000 per megawatt-hour for about an hour and a half — the first time the price has reached the maximum since the state’s Public Utility Commission increased the cap from $4,500 in June 2013.
State regulators have authorized incremental increases in the cap to encourage the availability of power plants called peakers that come online as demand challenges the state’s generation capacity.
That typically happens on the hottest days of summer, but last week’s event was driven by a combination of increased demand for heating combined with a supply problem: unexpected outages in generation capacity scheduled to run the morning of Jan. 6.
“If all the facilities that were supposed to running had done so, we would not have had the higher prices,” said Michael Harris, CEO of Unified Energy, a Houston-based energy procurement and management company.
In 2012, the state Public Utility Commission introduced a series of increases in the wholesale price cap, with two hikes still scheduled that will raise the cap to $7,000 this June and to $9,000 by June 2015.
“You can’t keep all the generation available all the time. It is not economic to keep them sitting around and doing nothing because the demand isn’t there, or you think it isn’t there,” said Bill Hogan, a global energy policy professor at Harvard University. “That is why you want an incentive for generators to come on quickly when needed.”
Most of the time, electricity wholesales for a fraction of the cap, well under $100 per megawatt-hour.
Campbell Faulkner, the chief data analyst for energy broker OTC Global Holdings, said some generators position themselves to take advantage of higher prices by idling some of the capacity in plants they run to provide for the expected round-the-clock demand called baseload. The practice, called reserve spinning, gives these plants a jump because they can crank up quickly if prices spike.
“It is providing someone with first mover advantage. They are going to get paid for keeping that excess capacity available,” Faulkner said. “If you can get your power plant online, you are going to be the one to capture the huge contract prices for those intervals.”
That’s the incentive intended by the Utility Commission and the Electric Reliability Council of Texas, which operates most of the state grid.
The record wholesale price during the Jan. 6 event won’t affect most electric bills in the short term because the generators that produce the electricity and the retailers that sell it to consumers usually contract in advance to lock in prices.
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Working through traders that broker the deals, retailers estimate customer demand and buy contracts for power at a specified price, typically dodging the price spikes like last week’s.
Still, someone paid top dollar for a while Jan. 6, and those costs eventually can reach customers.
Generators that contract to sell power at a certain price and then can’t produce it — as occurred when two plants went down unexpectedly last week — have to buy electricity at higher prices from other plants to meet their commitments. Similarly, retailers whose customers use more power than the retailers have under contract have to pay whatever wholesale price the generation market demands at the moment the power is needed, even if it costs $5,000 at that point. And that pushes up average prices over time.
The state last ordered rolling blackouts during a February cold spell in 2011 that knocked several plants offline unexpectedly. Months later, record-high heat pushed the grid near its limits.
Wholesale electricity sold for the top price for a total of 24.5 hours that year, and the annual average wholesale price was $53.23 per megawatt-hour, according to Utility Commission data.
The following year, by contrast, prices hit that cap for just 1½ hours, and the average price for the year was $28.33.
The first retail customers who could take a hit from last week’s price spike are those on variable rate plans that fluctuate month by month along with electricity prices. It will take more time, if it happens at all, for the higher average prices to affect customers on longer-term fixed-price contracts.
“Variable rate plans are typically good products, but on this day, it is not going to be a great product for customers,” said Faulkner of OTC Global. “If you don’t understand how the market works, you can choose a product that has far more risk than you would otherwise take on and be severely financially exposed.”
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