Yes, Texas’ Deregulated Electricity Market Has Problems, but It Can (and Should) Be Fixed

The severe winter storm that knocked out Texas’ electricity grid in February, plunging millions of people into a cold, dark ordeal, has led to a number of takes about what went wrong. The state’s deregulated energy market has been frequently singled out as the root cause. But, while a contributing factor, it wasn’t the only one.

Thirteen states have similarly deregulated energy markets, which enable consumers and businesses to buy competitively priced electricity from Retail Electricity Providers (REPs) rather than their local utility. However, only Texas has its own, isolated electrical grid. As the storm shut down mostly unwinterized energy generation and distribution facilities, there was no way for Texas’ electricity providers to get power from other regions of the country. Although nearby states impacted by the same storm saw rolling brownouts, none experienced outages as dramatic and long lasting as Texas.

Texas is heavily reliant on natural gas for the majority of its electricity supply, especially in the winter months—when just 10% comes from renewables such as wind and solar—and much of it is produced and delivered “just in time,” rather than being stored. As temperatures dropped, natural gas pumps and pipelines froze, taking a lot of the state’s energy generation capacity offline. Coal and nuclear plants also had to shut down as water supplies froze, leaving them unable to produce steam to spin turbines. It was a comprehensive, system-wide failure.

Adding to the horror stories, some consumers who didn’t lose electrical service received massive five-figure bills. Most had signed up for seemingly low-cost, indexed-rate electricity plans (made possible by deregulation) that exposed them to the massive price swings of the wholesale electricity market. At the peak of the crisis, spot prices for wholesale electricity reached $9,000/MWh versus a more typical $25/MWh.

So, has electricity deregulation been a failure in Texas? Not exactly, though it hasn’t lived up to the promises made when it was initially proposed and passed into law.

Our analysis of the U.S. Energy Information Administration’s 2019 data for Texas found that more than 700,000 consumers actually paid less than the average regulated rate from the incumbent utility in Texas. In the last five years, the least expensive REPs have sold electricity at an average of $0.047/kWh, which is less than half of the $0.107/kWh charged by traditional utilities. However, 32 of the approximately 70 REPs in the Texas marketplace actually charge rates higher than traditional utilities. What’s more, just nine of those REPs service 75% of the state’s electricity customers.

Consumers can find savings under deregulation—if they know where to look. In fact, had all of the state’s 6.45 million residential REP customers received rates like those of the cheapest supplier, they could have saved more than $7.2 billion in 2019 alone. Making deregulation work for the majority of consumers requires giving them better access to the information and tools they need to make wise electricity decisions—not to take that choice away from hundreds of thousands of customers already saving money as a result of deregulation.

By contrast, commercial customers—with staff dedicated to finding operational cost savings—are more likely to take advantage of lower cost electricity, paying an average of $0.078/kWh versus the average of $0.092/kWh from traditional providers. While that might seem small, it quickly adds up for businesses that are large users of electricity.

While the current system of deregulation in Texas has its flaws, it can be fixed both to make it easier for consumers to lower their average bills and to protect them from wild swings in wholesale energy prices. Here’s how.

Provide Consumers with Better Data About Rate Plans and Their Own Usage Patterns. Power to Choose, the Texas Public Utility Commission (PUC)-endorsed rate plan page, offers consumers options based on three tiers: 500 kWh, 1,000 kWh, or 2,000 kWh of usage. Most plans offer great deals at 1,000 kWh. But to choose wisely, consumers must know their average usage, accounting for both spikes during hot summer months and dips during cooler ones. Better leveraging smart meter data—by expanding Smart Meter Texas and the use of the Green Button Standard—would make it easier for consumers to know their exact electricity usage so they can choose the right plan. In addition, requiring rate information to be presented in a common format would make it simpler for consumers to do an apples-to-apples comparison of rate plans.

Prohibit Fully Indexed Electricity Plans and Door-to-Door Marketing. Fully indexed rate plans, in which retail prices move with the wholesale market, expose consumers when there are black swan events like the recent storm. Partially indexed plans, with a built-in hedge against outlier price swings, give consumers the best of both worlds. Furthermore, prohibiting door-to-door marketing eliminates the potential to lure customers into plans that promise big savings without informing them of the risks.

Reward Consumers Who Generate and Store Their Own Energy. Texas should adopt federal guidelines, such as Federal Energy Regulatory Commission (FERC) Order 2222, to help customers with rooftop solar panels, home energy storage batteries, home generators, or next generation electric vehicles to take advantage of wholesale prices when they can contribute electricity to stabilize the grid. In a freak event like the recent storm, they might actually make money.

End Texas’ Energy Isolation. The small benefit that Texas gets from going it alone isn’t worth the cost when so many consumers and businesses find themselves without power. Strengthening ties with neighboring states improves resiliency.

While it’s tempting to say Texas’ experience provides a universal warning about the dangers of energy deregulation, it’s important to look a little deeper. When properly implemented, deregulation can help consumers and businesses save money on their energy costs. The Texas system can be fixed and effectively established to live up to its original ambitions.

—Naman Trivedi is the co-founder and CEO of WattBuy, an energy intelligence service that provides businesses and consumers with comprehensive data on electricity usage and costs. A 2020 Forbes “30 Under 30” honoree in the Energy category, Trivedi has a B.S. in International Economics from Georgetown University.