Why Did Consumers Pay $100 Per Day for Electricity in Texas?
Variable pricing may seem like a deal but has hidden risks for consumers.
Posted Aug 26, 2019
“I had a $125 electricity cost for that one day.” – Michael Lemay.
Unlike many states, the electricity market is deregulated in Texas. Consumers can choose their retail electricity provider. While everyone gets electricity through the same infrastructure, the prices of consumers vary considerably depending on their retail provider.
Most providers are “retailers” in the sense that they buy from electricity producers at a lower price with long-term contracts and then resell the electricity to consumers with a markup. Consumers, in turn, have to sign a contract, say, for a year, to receive a reasonable price that remains fixed for the contract’s duration.
One company, named Griddy, uses a different variable pricing-based approach. It links consumers to producers directly, allowing them to pay the wholesale price of electricity in real-time. There are no contracts and no markups. Consumers pay the going rate for their electricity, which changes every five minutes, plus a monthly $9.99 subscription fee to the company.
What Happened in August 2019
Most of the time, buying directly from the source with variable pricing results in substantial savings. Griddy customers bypass the markup earned by retail electricity providers. For example, they may only pay 2.9 cents per kWh during a period when most customers of retail providers are paying 8.7-15.7 cents per kWh (depending on provider).
However, the wholesale price of electricity fluctuates considerably. When demand is high, as, during hot Texas summer days, prices increase. This August, electricity demand spiked and wholesale prices shot up. On several August afternoons, because of peak demand, prices reached the $9 per kWh maximum stipulated by law. They were routinely $4-$6 per kWh. In effect, Griddy customers were paying 60-90 times the prices paid by others for hours at a time, day after day. Many customers paid $100 or more for a single day’s electricity consumption. (To see how the company responded, see the video below from its social media manager.)
To make prudent buying decisions, what can we learn from this incident?
1) Contracts are not always bad for consumers.
Many of us have had bad experiences with contracts with our cell phone companies, cable providers, gyms, and others. Many contracts are long, complicated, and difficult to understand. They lock the consumer in and lead them to pay for things they don’t use or don’t want. They lead to situations where the consumer is over-paying for the item. Because of these and other reasons, contracts have a terrible reputation, and many consumers hate them.
However, one positive aspect of contracts is that they help to make prices predictable to consumers. For example, if you sign a one-year contract with an electricity retailer in Texas, you know you will pay 9.7 cents per kWh throughout the year. This predictability lets you consume with certainty. It can also be helpful for other things like making a budget and choosing what else to buy and what to forgo to achieve your financial goals. This is an important reason why may consumers like signing on to lengthy leases when renting apartments or cars.
2) Buying direct is not always good for consumers.
Many consumers believe that if they avoid intermediaries and buy directly from the producer, they will get a better deal, and pay a lower price. In some cases, this is true. For example, going to a farmer’s market and buying your salad greens directly from the farmer may be cheaper (and fresher) than purchasing them in a supermarket. As a general principle, every intermediary – distributor, wholesaler, agent, retailer, etc. – adds costs and increases the final price.
However, intermediaries also add value. For example, a local farmer may not have salad greens available year-round. A distributor will source salad greens from geographically distant farmers and make them available throughout the year. In the case of electricity, retail intermediaries lock their supply for the entire year by signing supply contracts with electricity producers. Because of this, they can offer a fixed price to consumers, even on the hottest summer days when it would cost an arm and a leg to buy electricity on the wholesale market.
The main lesson for consumers is not to throw the baby out with the bathwater. Where purchase decisions are concerned, deciding whether to buy direct or to use an intermediary requires thinking through what types of value you want and then go to intermediaries who provide that incremental value. Buying direct often means forgoing value that may be essential to you.
3) Variable pricing is associated with increased risks that consumers often overlook.
When a company uses variable pricing instead of a fixed price, it introduces risks that many consumers fail to appreciate. Consumers often register the lower than average prices generated by the variability (e.g., during periods of low demand). Griddy’s customers enjoyed significant savings during the winter when wholesale prices were low. However, variability also allows prices to spike to abnormally high levels, often without any upper limit. Many consumers are caught off guard and experience anxiety.
This risk is not unique to electricity prices. We have seen this in other cases as well, where sellers use variable pricing. The prices of ridesharing companies like Uber are significantly lower than those of taxi-cabs most of the time; but on a busy weekend night or New Year’s Eve, many people may end up paying hundreds of dollars.
When you choose to buy from a seller that uses variable pricing, it is essential not to get influenced by the low end of the variable price range. Instead, it is more useful to understand exactly how prices will vary, how high they could potentially go, and what this will mean to you, financially and psychologically. We will let a Yelp reviewer named Christopher have the last word about Griddy’s high prices:
“Well I liked the concept initially but moments like [this] changed my mind and fast. Per the Griddy strategy, I turned off all my A/C during price spikes but still logged a couple of $50 a day charges. A consumer not being vigilant could get wiped out in moments like this. The advertised savings get erased and then some during the days with these INSANE price spikes!!! …This concept works during milder temperatures otherwise it's Fleecing at it's best! No thank you.”