Electricity Service Price Based on Fuel Costs

by jsgs45 on April 12, 2010

I know many of you like me always considered the monopoly electricity service companies a bit of a scam. I remember when I first moved into an apartment when I was younger having to pay an electricity service deposit to the monopoly energy company in my town. There was no recourse as I couldn’t shop elsewhere and the electricity utility acted more like a bureaucratic government agency than a competitive electricity supplier. This type of attitude I had was familiar to many but now things are different.

In many states you have what is known as electricity deregulation. Having electricity service companies deregulate is nothing new as Europe has been doing it for years. Canada has deregulated electricity markets in some areas and so the idea is not necessarily an anti-socialistic idea as you can see from our neighboring country adopting the practice.

Still even after we start eating grass on the other side of the fence you begin to hear opposite arguments. Not but a couple weeks after Texas deregulated the electricity market did electricity prices skyrocket. This price spike started back in 2002 and lasted all year. Since than prices have plummeted, skyrocketed again, and plummeted.

In many energy sectors prices are skyrocketing all over again. Using the state of Texas as an example you will see that because they use natural gas to create their electricity many times rates stay low. In fact even while a barrel of oil has gone up to almost approach $90 a barrel again natural gas has remained low. Last year natural gas followed a barrel of oil up in price all the way to $13 – $14 mmBTU while oil went above $100.

Many now assume that because natural gas has been going down that Texas electricity service rates will also come down. The problem now is heat rate. Heat rate is the cost of converting natural gas to electricity. Very large turbines are turned using steam created from natural gas power. These turbines rely on a large supply of oil to keep these components moving.

Even though natural gas may have a low price it can be offset if oil becomes very expensive. This heat rate factor confuses many a Texas energy consumer. Some people downright call electricity service energy consultants liars for saying that electricity rates have gone up despite a drop in natural gas prices. This unlikely scenario does happen from time to time and it is related to heat rate and the balancing market for energy.

This new market called balancing market for energy is also known as the Market Clearing Price and it is basically an energy exchange for the price of electricity that is bought and sold among power marketers and retail electricity providers in Texas. The balancing energy market is governed by the Electric Reliability Council of Texas and can occasionally have some weird anomaly’s of its own. Their are things such as shame caps that discourage larger power marketers from bidding when their are not enough bidders. If a power marketer bids anyway it can cause electricity rates to dramatically go up even though market conditions wouldn’t normally justify such a price increase.

A scenario like the one mentioned above does not happen very often because of the artificial shame cap put in place. This shame cap discourages power marketers from bidding and selling but at times may be broken as there are not many alternatives. The shame cap over time causes an artificial price increase that effects every Texas energy consumer although it is meant to keep the occasional outrageous price spike that has occurred in the past. Texas has seen electricity rates double and triple in price because of there being no caps in place.

Fortunately these high prices eventually came back down. The argument than is whether to have an artificial governed cap regulated and managed by ERCOT and the PUCT or let market forces do their thing. The continuous concern if there was no shame cap would simply be a worry that large power marketers may manipulate the MCPE market so that prices increase. Since these same power marketers own the raw fuel itself it could cause them to make additional profits off this market in their raw commodity holdings.

So this whole thing is tricky but there are good ideas and suggestions constantly be thrown around and hopefully the Texas government will come up with something that pleases everybody. I kind of doubt a please everyone resolution will ever by achieved but hopefully something in the middle.

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