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Texas to raise energy prices and suspend price cap amid winter storm

By JP Casey 18 Feb 2021 (Last Updated February 18th, 2021 15:10)

The Electric Reliability Council of Texas (ERCOT) has announced sweeping changes to the state’s energy pricing structure amid the ongoing winter storm, including higher energy prices and the suspension of a spiralling energy price cap.

Texas to raise energy prices and suspend price cap amid winter storm
“It would make little sense to expose consumers to prices that are higher than the usual maximum price after a generator revenue threshold has been achieved,” said the Public Utility Commission of Texas. Credit: Montinique Monroe, via Getty Images

The Electric Reliability Council of Texas (ERCOT) has announced sweeping changes to the state’s energy pricing structure amid the ongoing winter storm, including higher energy prices and the suspension of a spiralling energy price cap.

The storm, which has killed at least ten people and trapped millions more without power as energy infrastructure has frozen solid across the state, has led to Governor Greg Abbott declaring a state of disaster across Texas. ERCOT has also come under fire for failing to provide reliable power to the citizens of Texas and this week, the Public Utility Commission of Texas (PUC) ordered the council to take action to cut state-wide power demand by 10,000MW, in order to alleviate the crisis.

The commission’s first order will see energy prices raised to better balance supply and demand, with the former dramatically outpacing the latter amid the crisis. The current Texas offer cap, the highest price available for power, is set at $9,000 per MWh. However, the storm has caused energy prices to plummet as low as $1,200 per MWh, a discrepancy that PUC described as “inconsistent with the fundamental design of the ERCOT market, [where] energy prices should reflect the scarcity of supply”.

The news has been greeted with dismay by many in Texas, with Austin-based radio station KVUE reporting that this would translate to higher bills for Texans, both during and after the current crisis.

However, the PUC’s second order could help protect customers from potential exploitation of these raised prices. ERCOT’s energy prices are capped by two thresholds, known as the low and high system-wide offer caps. The lower figure is set at $2,000 per MWh or 50 times the price of natural gas, whichever is higher, while the higher cap is the figure of $9,000 per MWh.

This two-tiered system is designed to take into consideration fluctuations in energy demand, such as the summer months when high temperatures lead to greater demand for products such as air conditioning, and protect Texans from price-gouging, while ensuring the market retains some flexibility.

The PUC has ordered that ERCOT suspend the use of the lower cap, the one currently in place, as collapsing demand and spiralling gas prices could push this cap higher than the supposedly higher cap. On Wednesday, Natural Gas Intel reported that the price of Henry Hub, considered a benchmark for gas prices, had increased by $6.65 per MMBtu to an average of $23.61 per MMBtu, a sudden and dramatic rise that threatened to push the lower price cap above the higher one.

“This outcome would be contrary to the purpose of the rule, which is to protect consumers from substantially high prices in years with substantial generator revenues,” wrote the PUC in its order. “It would make little sense to expose consumers to prices that are higher than the usual maximum price after a generator revenue threshold has been achieved.

“Given the need to ensure appropriate energy prices to both consumers and generators during this system emergency, the Commission finds that, in accordance with [the relevant laws] a public emergency exists and good cause exists for granting an exception to [those laws].”

These seemingly contradictory approaches highlight the impossibility of ERCOT’s position, as it is simultaneously responsible for delivering power to the people of Texas and protecting market interests in one of the most deregulated energy markets in the US.

Texas is the only state to use its own grid management system, with the other US states each governed by one of two national-scale companies. While this approach had granted Texas a degree of independence, the current crisis has exposed the weaknesses of such a grid management process.