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Blog Jul 28, 2020

Understanding the Texas Electricity Market

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A simple economic principle states that the foundation of an efficient and well-organized free-market is openness and a conducive environment that enables participants to have equal access to information to make an independent but informed decision on what to sell or buy. This principle applies to currency markets, oil, and stock where all the important information is made accessible to all. This was the primary idea behind Texas energy deregulation.

Energy Deregulation in Texas

Electricity deregulation in Texas has been in existence since 2002. Although no state has been fully deregulated, Texas came close with about 85% of the state having the freedom to choose their energy provider. Texas is essentially a primary market for brokers, but how to survive, let alone succeed in this market, is quite a challenging task. To understand how this deregulated electricity market works, you will first need to know who the major players are and what their roles in this market are.

So, who are the players in this market?

There are five key players: the Electricity Reliability Council of Texas (ERCOT), Retail Electricity Provider (REP), Public Utility Commission of Texas (PUCT), Texas utilities, and power generation companies.

What are their roles?

ERCOT’s role in this market is basically to manage and supply the people of Texas with reliable electricity. The Public Utility Commission is an enforcing body whose role is to enforce laws and regulations on various utilities – electricity included. The REP, on the other hand, is essentially an electric company that has been authorized by PUCT to sell electricity to the people. 

The utility companies are tasked with the responsibility of distributing electricity from the generation point to the final consumers in a given service area. These are the companies that own meters, wires, and lines in a given area. Lastly, the power generation companies are the ones that own and run the facilities that generate energy. These include natural gas, coal, and nuclear power plants.

How are they connected?

Well, the power generation companies produce and sell the energy to the Retail Electric Providers e.g. Gexa Energy who in turn corporates with the Transmission and Distribution Service Provider (TDSP) to distribute power to a consumer in a given service area. It is actually a complete network with a beginning and an end (the end being the power consumer).

Why does Texas have so many electric companies?

As stated earlier, the deregulation of electricity in Texas has given Texicans the right to choose their electricity providers. This subsequently led to the emergence of several electric companies and the freedom to sell has led to stiff competition. Additionally, the process of registering the Retail Electric providers is quite simple and therefore, most people are venturing into the electricity selling business. In order to remain competitive, these REPs offer various rewards and offers including indexed rate, variable rates, fixed rates, and prepaid electricity. There are also some that offer extra consumer rewards e.g. air mile rewards and free power on weekends or evenings.

Is Texas electricity regulated?

Before 1975, all cities in Texas were responsible for regulating their electric rates and utility service. Afterwards, in 1975, the Texas Legislature passed the Public Utility Regulatory Act also referred to as PURA. The main purpose of PURA was to give the state the powers of regulating certain aspects of the service and rates of its electric utilities. However, this act did not fully address all the issues as it still permitted cities to continue controlling electricity rates.

During the same period, electric utilities began to involve themselves in every point of the electricity process – right from power generation to customer service. It appeared that the utilities were beginning to monopolize the market. It is these issues that led Texas, in 2002, to deregulate its electricity market. Deregulation forced utilities to change their entire business structure. Instead of controlling the entire electricity process as was the case before, they opted to subdivide the business into three parts: transmission and distribution, power generation, and retail Electric providers.

It is also during this period that ERCOT was appointed by the Public Utility Commission as an independent organization and was tasked with the responsibility of managing and monitoring competitive retail and wholesale electricity markets.

How does the ERCOT market work?

The Electric Reliability Council of Texas also referred to as ERCOT, has the sole mandate of managing the supply of electricity to over 22 million Texas electricity consumers. These totals up to about 85% of the entire state electric load and approximately 75% of the whole Texas land coverage. ERCOT is essentially the Independent System Operator (ISO) whose role is to schedule power on the state grid. They also ensure that the grid is capable of handling different types of energy at all times. It connects 40,000 miles of electricity lines and over 550 generation units.

The key function of ERCOT is basically to maintain grid reliability. They do so by ensuring that electricity is always available irrespective of how low or high the demand is. If a region is experiencing regular power outages, it is ERCOT’s responsibility to notify and coordinate with the relevant electric generators and electric utilities to ensure that the problem is solved.

Additionally, ERCOT is responsible for managing financial statements for the competitive wholesale power market. It also oversees consumer switching for the 6.5 million people living in the competitive choice parts of Texas. For instance, when a customer selects a retail electric provider, the council ensures that all essential details of the purchase are relayed to the relevant companies as soon as possible.

Who regulates electricity in Texas?

Electric, water, and telecommunication industries in Texas are governed and regulated by a number of autonomous, state, and federal agencies. These regulatory bodies are each given unique responsibilities to ensure enough protection for and service to Texans.

When it comes to electricity, there are a number of bodies that are charged with the responsibility of regulating it. This includes the Public Utility Commission of Texas, Electric Reliability Council of Texas, Texas Reliability Entity (Texas RE), and the Federal Energy Regulatory Commission (FERC).  

FERC is an autonomous agency that has been tasked with the responsibility of regulating the interstate transmission of electricity, oil, and natural gas. There is also the North American Electric Reliability Commission, a non-governmental organization that helps in regulating bulk power system operators, owners, and users.

What are the benefits of deregulations?

One of the major benefits of an electricity deregulated market is that the cost of electricity decreases in the long run. For instance, after the deregulation came into effect, there was at first a slight increase in residential electricity rates; however, in 2010 to around 2015, there has been a significant decrease in electricity rates.

Deregulation has also brought about an increase in competition (no more monopoly) which in turn has led to a satisfied customer.

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