What fixed vs. flexible retail power rates in Texas tell us about wind power in the ERCOT market

Michael Giberson

Electric power consumers in (the ERCOT portion of) Texas have many choices when it comes to the electric power retailer they wish to enroll with, and typically each retailer offers a handful of different plans.  Historically speaking, this is a crazy cornucopia of consumer choice not seen anywhere else in the world. Or, seen from another point of view, a lot of data for economists interested in retail electric power not available anywhere else. This post dissects a few bits of that data and offers a preliminary conclusion.

One choice available to many Texas power consumers, but rare elsewhere, is between rates that are variable from month-to-month and rates that are fixed for a longer term.  Typical terms for fixed rate offers are six months and one year, but terms as long as five years are offered.

The primary difference between a variable rate and a fixed rate is whether the customer or the retailer is exposed to the risk of adverse price movements.  A little simple economics leads one to expect that if the retailer is to take on the risk of adverse price movements, the customer will have to pay the retailer to take on the risk. So we’d expect that fixed rate contracts would tend to be higher than variable rate contracts.

And that is just what we see in the offers listed at www.powertochoose.com, the State’s online list (just comparing average offered fixed rate deals to average offered variable rate deals). For example, in the Houston area the average rate for fixed price offers was 14.04 cents/kwh and the average rate for variable price offers was 13.60.  In Dallas, fixed price offers averaged 13.35 cents/kwh and variable price offers averaged 13.03.

But elsewhere in north Texas, specifically the AEP North Texas distribution service territory, the average rate for fixed price offers was 12.7 cents/kwh and the average rate for variable prices offers was 12.8 cents/kwh. So, apparently in parts of north Texas, electric retailers in effect are willing to pay consumers a little bit in exchange for taking on price risk.

Crazy, right?

Well, not exactly.  A fixed rate offer transfers the exposure to both adverse and beneficial price movements.  If a retailer expects prices to fall (relative to the current market expectations), then it would want to encourage customers to lock in at current rates; if the risk of a price movement down is larger than the risk of a price movement up, and retailers are less risk-averse than individual consumers, then retailers would be willing to pay consumers to take on the risk.

And why might retailers in certain parts of north Texas expect prices to fall? Might it be access to large quantities of wind power that sometimes can’t reach Dallas or Houston due to transmission limits – sometimes such large amounts of wind that prices in the ERCOT west region go negative?

I think so.

Admittedly, simple averages of offered fixed and variable rates provide only the coarsest of indicators of what is going on. Maybe more sophisticated analysis makes the anomaly disappear. But at first glance, it looks like another market indicator of the temporary excess supply of subsidized wind power in west Texas.