Texans are spoiled for options when it comes to paying for electricity. Not only do you get to choose your own electricity provider in the Lone Star State, most providers offer multiple plans, allowing you to shop around for that perfect fit for your energy habits, budget and lifestyle.
Many Texans prefer to stick with fixed-rate plans that allow them to lock in affordable kilowatt-hour rates for a period of time — anywhere from a few months to a few years. But some customers may choose plans with a wholesale pricing model, and these are very different. With a wholesale plan, the price per kilowatt-hour is variable and changes as often as every fifteen minutes. When the demand for electricity is high or the supply is low, the rate goes up. When demand is low or supply is high, rates go down.
If you’re able to change your electricity consumption habits as quickly as market conditions can change, you may be able to save some money in the long run by choosing a wholesale electricity plan. But there are also potentially costly risks to these plans, as many customers learned during an extreme heat wave in August 2019.
Why are Wholesale Electricity Prices So High?
Over a period of a few dog days of summer, the wholesale price of electricity repeatedly reached the market cap of $9.00 per kilowatt-hour. While there have been price spikes before, this one was unprecedented for not only reaching the market cap, but staying there for a period of hours.
For comparison, the average price per kilowatt-hour in Texas usually hovers around 12 cents, and many fixed-rate plans are priced a few cents lower than that. So during those market cap rate hours, customers with wholesale plans were paying more than 75 times what many of their fixed-rate neighbors were paying for electricity, resulting in hundreds of dollars in electricity charges over just a few days.
This happened for several reasons. With temperatures soaring, many Texas homeowners had their air conditioners running nonstop, which sent the demand for electricity to a record high. Adding to that demand is a strong trend of sustained population growth in the state.
There were problems on the supply side, as well. Texas’ expansive wind farms were underperforming during this critical time, and recent power plant closures meant that the operational plants had to work even harder to keep up with demand.
High demand and low supply forced wholesale customers to make a quick and uncomfortable decision: turn off the A/C in the middle of a heat wave, or pay hundreds of dollars for basic comfort.
Fixed vs Wholesale Electricity
When wholesale electricity prices are low, it’s a great time to have a wholesale plan. Sometimes the wholesale price reaches zero and can even go negative, although this usually happens during the late night hours when demand is at its lowest. If you’re able to schedule your energy consumption around the market (by doing dishes and laundry during off-peak hours, for example), you may end up with an average kilowatt-hour rate that is a few cents lower than what you’d pay under a fixed-rate plan.
But there will also be times when the wholesale prices spike, and in order to avoid wiping out those savings, you’ll need to act quickly to reduce your energy consumption. For this reason, it’s extremely helpful to have a smart thermostat and other smart home features if you’re on a wholesale plan. If you can turn off your air conditioner with a few taps of a smartphone, you have a better chance of avoiding surge pricing than if you have to drive home first.
On top of that, there’s always the chance of an extreme price surge like the one Texas saw in August 2019. In order to be braced for such an event, it’s important for wholesale customers to have savings set aside to cover unexpectedly high bills.
By comparison, fixed-rate plans offer guaranteed electricity rates that won’t change with the market or the hour of the day. You won’t be able to take advantage of rock-bottom prices that come around late at night, but you also won’t have to schedule your energy use around ever-changing market conditions. Even when extreme price surges occur, the rate stays the same.
Commitment is also a factor when considering these two plan types. Fixed-rate plans typically include early termination fees if you decide you want to change plans before your current contract is up. Wholesale plans, on the other hand, are usually contract-free and have no termination fees and minimal service fees.
If you’re a budget planner who prefers to avoid risk and doesn’t want to plan high-energy activities around the market, you’re probably a fixed-rate kind of customer. And if you want the leanest electricity bills possible and can act quickly with smart home technology to avoid price spikes, a wholesale plan may be the right fit.
Looking for Price Stability?
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