February 24, 2021

Remember early 2021, the winter of our discontent, when Texas had its power-grid collapse? You might also recall that even when they were barely receiving any power at all, some Texans received exorbitant power bills. What’s behind a $15,000 bill for five days of almost no power? It’s a story about the complexity of electricity deregulation. As SFI External Professor Seth Blumsack* explains, the deregulated Texas power system actually combines deregulation and regulation. Texans can choose to get their power from a deregulated system in which rates fluctuate, which, in normal times, often results in rate savings. Prices spike, on this model, at high demand times, like, say, in the heat of the summer, but they usually drop quickly, and residents can choose to temper their usage to keep their rates low. During emergency blackouts like the one Texas experienced, however, regulators chose to pass an emergency restriction to keep rates as high as possible: at the maximum,$9,000 per megawatt-hour, 100 times the typical cost for that amount of power. The goal was to discourage use and decrease demand when the collapsing power grid was under immense pressure. For this reason, those with deregulated suppliers ended up with extremely high bills even when they used very little power.

As Blumsack explains, the deregulated system is designed to help reduce usage — when prices spike, the incentive can lessen demand, resulting in subsequent usage and corresponding price drops. But while this market correction may work in times of temporary scarcity, it created an extremely high rate in an emergency — and consumers, often without fully realizing what they’d signed up for, ended up footing the bill.

*Blumsack is Professor in the Department of Energy and Mineral Engineering and Director of the Center for Energy Law and Policy at Penn State.

Read the article in The Conversation (February 24, 2021)