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officials decided to bypass the market and, on Monday evening, manually set prices at the maximum of $9,000 per megawatt hour. (By comparison, the average hourl

officials decided to bypass the market and, on Monday evening, manually set prices at the maximum of $9,000 per megawatt hour. (By comparison, the average hourly price in 2020 was $25.73.) I don't understand why the max price is so exorbitantly high -- if they capped it at, say, 10X the 30 day rolling average, then they'd still incentivize everyone with energy to sell to bring it online, but without bankrupting utilities and customers who have to pay over 300 times the normal cost of energy. A family that normally pays $20 for a day of electricity in cold weather can probably manage to pay $200/day for a couple days, but probably not $7000/day.

AnthonyMouse 5y ago
With renewable energy, there is an amount of storage or peaker capacity you need to handle a typical day. The sun shines during the day, people want to use a lot of electricity at dusk, you have to be able to deal with that. Then there is the atypical amount of capacity you need for when something goes sideways. There is no wind for a week or it's cloudy and hot so there is less solar even though everybody wants to run their air conditioner. The capacity to handle that rarely gets used, but you still want to have it. So the price you have to pay to the person who can provide it is really, really high, but (and because) it's only paid for a short period of time. Or nobody will bother to build that capacity and when that situation happens there won't be enough power at any price.
- jabl 5y ago
  > The capacity to handle that rarely gets used, but you still want to have it. So the price you have to pay to the person who can provide it is really, really high, but (and because) it's only paid for a short period of time. Or nobody will bother to build that capacity and when that situation happens there won't be enough power at any price. There's a lot of economic theory pointing to the economic efficiency of marginal cost pricing. But the wholesale electricity market is a pretty "synthetic" design, and combined with the technical limitation demand must match supply exactly every second, marginal cost pricing leads to huge volatility. I'm not really sure what the solution would be, though. I'm not aware of any workable alternative (competitive) market model. There's of course ye olde regulated utility model, but, yeah, maybe we don't want to go back to that.
  - AnthonyMouse 5y ago
    One way to do it is insurance. The customer pays premiums so they never have to pay more than e.g. ten times the ordinary price no matter what the true market price is, or buys from a retailer who charges somewhat more in order to do the same. The cheapest insurance provider should then be a company that can provide emergency capacity to the grid, because the time they have to pay out claims is the same time they're making bank by selling power for >$100/kWh. The money from the premiums goes to providing the emergency capacity and then when the event happens the claims and the revenues cancel out. Another alternative is to give customers a price threshold at which they don't want electricity. If the price exceeds $2/kWh, just immediately shut off my service. For someone with their own generator this could be a good deal (they get to pay a lower rate by not buying the price insurance), and then it drops demand out of the grid when there isn't enough supply.
    - jabl 5y ago
      > One way to do it is insurance. The customer pays premiums so they never have to pay more than e.g. ten times the ordinary price no matter what the true market price is, or buys from a retailer who charges somewhat more in order to do the same. Sure, that's one way, ultimately all the way to the end user paying a flat fee, which I guess is what a majority of residential customers are in fact doing. But I wonder, if all the producers and consumers are hedged in one way or other against too low/too high prices, why have that wholesale price in the first place if it's just a fantasy number that affects nobody? > Another alternative is to give customers a price threshold at which they don't want electricity. If the price exceeds $2/kWh, just immediately shut off my service. This is in essence what RTO's are doing today, just for the whole region they are serving and not each customer separately. That is, there is a roof price, and instead of the price going over that limit in order to incentivize more generation to come online or customers to reduce demand, there will be rolling blackouts. So in general wrt marginal cost pricing, I was thinking of something along the lines of https://www.researchgate.net/publication/323378820_The_Use_of_Marginal_Energy_Costs_in_the_Design_of_US_Capacity_Markets https://www.researchgate.net/publication/323378820_The_Use_o... This is only going to get worse as more and more generation will be near-zero marginal cost like renewables and nuclear.
- maxerickson 5y ago
  Seems like it would work fine to pay like 200% of their highest sale price in the last year or whatever (if cold weather operation is more expensive, then benchmark to that, etc). It wouldn't create the hypothetical incentive to invest in capacity only used in black swan disasters, but I bet there's ~nobody doing that anyway.
- labawi 5y ago
  Problem with this arrangement was evident in Australia, where the utilities were incentivized to arrange shortages and blackouts so they can get the sweet high tariffs.
  - AnthonyMouse 5y ago
    This is the purpose of antitrust.
stefan_ 5y ago
That is not even the stupidest part. Texas grid is entirely isolated and large parts of its generating capacity had simply failed, as had say gas wells supplying them - they weren't incentivizing anyone to produce at that price point that wouldn't be already.
solatic 5y ago
The article explained why - even with the forced blackouts, demand kept rising regardless. They were this close to needing to shut down the entire grid to avoid catastrophic damage that would've taken weeks or months to recover from. Increasing costs exponentially is basically a form of exponential backoff [1]. As horrible as $7,000/day electricity is, it would be worse if the whole grid was down for a month to recover from catastrophic failure. [1] https://en.wikipedia.org/wiki/Exponential_backoff https://en.wikipedia.org/wiki/Exponential_backoff
- labawi 5y ago
  While I appreciate the free trade view, could you point to the part where they say setting the price high helped in a considerable way? ERCOT has authority to load-shed, regardless of price. From the article: > For the entirety of 2020, Texans paid $9.8 billion to keep the juice flowing. On February 16 alone, they spent roughly $10.3 billion. Costs for the month of February totaled more than $50 billion. The price reaction time is generally too slow, and judging by the bills incurred, ineffective as a control mechanism - hence the massive outrage on incurred costs. Do the costs seem appropriate? While I haven't read the whole article, blackouts mentioned were the effect of load shedding and the principal action that prevented grid failure. The price was fixed only after the critical period, by an unknown criteria and questionable need. Yes, you don't want price to drop too low after a load-shed, but do you need it maxed and do you need it for days?
  - solatic 5y ago
    > Yes, you don't want price to drop too low after a load-shed, but do you need it maxed and do you need it for days? Look, the simple answer to your question is no, of course. But, given that we understand the reason why controllers acted the way they did, these criticisms are taking advantage of hindsight, and hindsight is 20/20. The controllers needed to not just shed load, but to keep demand down until the storm passed. They weren't thinking about price/demand elasticity and how much Grandma's electric bill was likely to be. And furthermore, it's not correct to expect every public operator to second-guess every move they make, because it slows down the public sector, increases public sector bloat, increases cover-your-ass behavior, etc. If you're going to apply hindsight to arrive at a moral judgement, then it's better to apply that hindsight not at the people who were time-stressed to prevent complete grid collapse, but to the gas industry that refused cold-weatherization for short-term profit. I'm not unsympathetic to the people who got screwed with five figure electric bills. If a state employee screwed up on the pricing, the state should pay the bills. But I wouldn't throw the controller under the bus for it.
spadros 5y ago
I think it’s insane to expect any household to pay $200 a day for basic utilities.
tristor 5y ago
No family was paying this price, this is a wholesale price that utility providers paid. Individual rate-payers have various types of contractual structures that set what price they pay. In many Texas cities, the local utility is owned by the municipality and rate increases require a ballot issue, such as here in San Antonio where CPS is currently trying to get a 3.65% rate increase approved on the ballot. My utility bill didn't go up at all during last February, nor did the bills of the vast vast majority of Texans. The only individuals who had an increase to pay were customers of a company called Griddy that charges wholesale live pricing to customers, which is generally a discount, but it's customers taking a risk that a price spike may occur. Those customers entered into that agreement with a full understanding they were paying the live wholesale rate at all times for power and consequently Griddy had a very small number of customers compared to other utility offerings that use contractual set rates. It's a tiny fraction of truth blown out of proportion in the national media that Texan individuals had to pay $9k/kWh. That simply didn't happen for nearly anyone.
- sixothree 5y ago
  Seems odd choice to blame the customer here.
  - tristor 5y ago
    Why? These customers made a choice in a setup specifically designed to allow them to make a choice. Rather than take any of a number of other providers that offer contractual rates they specifically chose a provider that charges live wholesale rate. During most of the time that saves them money, but it also means during these events it costs more money. The flip side is these customers kept their power on while millions of Texans went without power for up to a week which resulted in hundreds dying. They and their families got to get through a weather crisis with power service many others didn't have, but they had to pay the going wholesale rate to do so, just as they agreed to in their contract. Considering that 99.999% [0] of Texans didn't take this deal, it seems unfair to act as if this is a "trick", it was a calculated bet this small number of consumers made and they ended up losing the bet. [0]: Lest you think I'm being sensational, here's the formula: ([1]/[2] = ~0.001, or .1%). [1]: https://www.houstonchronicle.com/business/energy/article/Griddy-texas-electricity-retailer-power-market-15974433.php https://www.houstonchronicle.com/business/energy/article/Gri... [2]: https://www.census.gov/quickfacts/TX https://www.census.gov/quickfacts/TX

AnthonyMouse 5y ago

With renewable energy, there is an amount of storage or peaker capacity you need to handle a typical day. The sun shines during the day, people want to use a lot of electricity at dusk, you have to be able to deal with that. Then there is the atypical amount of capacity you need for when something goes sideways. There is no wind for a week or it's cloudy and hot so there is less solar even though everybody wants to run their air conditioner. The capacity to handle that rarely gets used, but you still want to have it. So the price you have to pay to the person who can provide it is really, really high, but (and because) it's only paid for a short period of time. Or nobody will bother to build that capacity and when that situation happens there won't be enough power at any price.

jabl 5y ago
> The capacity to handle that rarely gets used, but you still want to have it. So the price you have to pay to the person who can provide it is really, really high, but (and because) it's only paid for a short period of time. Or nobody will bother to build that capacity and when that situation happens there won't be enough power at any price. There's a lot of economic theory pointing to the economic efficiency of marginal cost pricing. But the wholesale electricity market is a pretty "synthetic" design, and combined with the technical limitation demand must match supply exactly every second, marginal cost pricing leads to huge volatility. I'm not really sure what the solution would be, though. I'm not aware of any workable alternative (competitive) market model. There's of course ye olde regulated utility model, but, yeah, maybe we don't want to go back to that.
- AnthonyMouse 5y ago
  One way to do it is insurance. The customer pays premiums so they never have to pay more than e.g. ten times the ordinary price no matter what the true market price is, or buys from a retailer who charges somewhat more in order to do the same. The cheapest insurance provider should then be a company that can provide emergency capacity to the grid, because the time they have to pay out claims is the same time they're making bank by selling power for >$100/kWh. The money from the premiums goes to providing the emergency capacity and then when the event happens the claims and the revenues cancel out. Another alternative is to give customers a price threshold at which they don't want electricity. If the price exceeds $2/kWh, just immediately shut off my service. For someone with their own generator this could be a good deal (they get to pay a lower rate by not buying the price insurance), and then it drops demand out of the grid when there isn't enough supply.
  - jabl 5y ago
    > One way to do it is insurance. The customer pays premiums so they never have to pay more than e.g. ten times the ordinary price no matter what the true market price is, or buys from a retailer who charges somewhat more in order to do the same. Sure, that's one way, ultimately all the way to the end user paying a flat fee, which I guess is what a majority of residential customers are in fact doing. But I wonder, if all the producers and consumers are hedged in one way or other against too low/too high prices, why have that wholesale price in the first place if it's just a fantasy number that affects nobody? > Another alternative is to give customers a price threshold at which they don't want electricity. If the price exceeds $2/kWh, just immediately shut off my service. This is in essence what RTO's are doing today, just for the whole region they are serving and not each customer separately. That is, there is a roof price, and instead of the price going over that limit in order to incentivize more generation to come online or customers to reduce demand, there will be rolling blackouts. So in general wrt marginal cost pricing, I was thinking of something along the lines of https://www.researchgate.net/publication/323378820_The_Use_of_Marginal_Energy_Costs_in_the_Design_of_US_Capacity_Markets https://www.researchgate.net/publication/323378820_The_Use_o... This is only going to get worse as more and more generation will be near-zero marginal cost like renewables and nuclear.
maxerickson 5y ago
Seems like it would work fine to pay like 200% of their highest sale price in the last year or whatever (if cold weather operation is more expensive, then benchmark to that, etc). It wouldn't create the hypothetical incentive to invest in capacity only used in black swan disasters, but I bet there's ~nobody doing that anyway.
labawi 5y ago
Problem with this arrangement was evident in Australia, where the utilities were incentivized to arrange shortages and blackouts so they can get the sweet high tariffs.
- AnthonyMouse 5y ago
  This is the purpose of antitrust.

stefan_ 5y ago

That is not even the stupidest part. Texas grid is entirely isolated and large parts of its generating capacity had simply failed, as had say gas wells supplying them - they weren't incentivizing anyone to produce at that price point that wouldn't be already.

solatic 5y ago

The article explained why - even with the forced blackouts, demand kept rising regardless. They were this close to needing to shut down the entire grid to avoid catastrophic damage that would've taken weeks or months to recover from. Increasing costs exponentially is basically a form of exponential backoff [1]. As horrible as $7,000/day electricity is, it would be worse if the whole grid was down for a month to recover from catastrophic failure. [1] https://en.wikipedia.org/wiki/Exponential_backoff https://en.wikipedia.org/wiki/Exponential_backoff

labawi 5y ago
While I appreciate the free trade view, could you point to the part where they say setting the price high helped in a considerable way? ERCOT has authority to load-shed, regardless of price. From the article: > For the entirety of 2020, Texans paid $9.8 billion to keep the juice flowing. On February 16 alone, they spent roughly $10.3 billion. Costs for the month of February totaled more than $50 billion. The price reaction time is generally too slow, and judging by the bills incurred, ineffective as a control mechanism - hence the massive outrage on incurred costs. Do the costs seem appropriate? While I haven't read the whole article, blackouts mentioned were the effect of load shedding and the principal action that prevented grid failure. The price was fixed only after the critical period, by an unknown criteria and questionable need. Yes, you don't want price to drop too low after a load-shed, but do you need it maxed and do you need it for days?
- solatic 5y ago
  > Yes, you don't want price to drop too low after a load-shed, but do you need it maxed and do you need it for days? Look, the simple answer to your question is no, of course. But, given that we understand the reason why controllers acted the way they did, these criticisms are taking advantage of hindsight, and hindsight is 20/20. The controllers needed to not just shed load, but to keep demand down until the storm passed. They weren't thinking about price/demand elasticity and how much Grandma's electric bill was likely to be. And furthermore, it's not correct to expect every public operator to second-guess every move they make, because it slows down the public sector, increases public sector bloat, increases cover-your-ass behavior, etc. If you're going to apply hindsight to arrive at a moral judgement, then it's better to apply that hindsight not at the people who were time-stressed to prevent complete grid collapse, but to the gas industry that refused cold-weatherization for short-term profit. I'm not unsympathetic to the people who got screwed with five figure electric bills. If a state employee screwed up on the pricing, the state should pay the bills. But I wouldn't throw the controller under the bus for it.

spadros 5y ago

I think it’s insane to expect any household to pay $200 a day for basic utilities.

tristor 5y ago

No family was paying this price, this is a wholesale price that utility providers paid. Individual rate-payers have various types of contractual structures that set what price they pay. In many Texas cities, the local utility is owned by the municipality and rate increases require a ballot issue, such as here in San Antonio where CPS is currently trying to get a 3.65% rate increase approved on the ballot. My utility bill didn't go up at all during last February, nor did the bills of the vast vast majority of Texans. The only individuals who had an increase to pay were customers of a company called Griddy that charges wholesale live pricing to customers, which is generally a discount, but it's customers taking a risk that a price spike may occur. Those customers entered into that agreement with a full understanding they were paying the live wholesale rate at all times for power and consequently Griddy had a very small number of customers compared to other utility offerings that use contractual set rates. It's a tiny fraction of truth blown out of proportion in the national media that Texan individuals had to pay $9k/kWh. That simply didn't happen for nearly anyone.

sixothree 5y ago
Seems odd choice to blame the customer here.
- tristor 5y ago
  Why? These customers made a choice in a setup specifically designed to allow them to make a choice. Rather than take any of a number of other providers that offer contractual rates they specifically chose a provider that charges live wholesale rate. During most of the time that saves them money, but it also means during these events it costs more money. The flip side is these customers kept their power on while millions of Texans went without power for up to a week which resulted in hundreds dying. They and their families got to get through a weather crisis with power service many others didn't have, but they had to pay the going wholesale rate to do so, just as they agreed to in their contract. Considering that 99.999% [0] of Texans didn't take this deal, it seems unfair to act as if this is a "trick", it was a calculated bet this small number of consumers made and they ended up losing the bet. [0]: Lest you think I'm being sensational, here's the formula: ([1]/[2] = ~0.001, or .1%). [1]: https://www.houstonchronicle.com/business/energy/article/Griddy-texas-electricity-retailer-power-market-15974433.php https://www.houstonchronicle.com/business/energy/article/Gri... [2]: https://www.census.gov/quickfacts/TX https://www.census.gov/quickfacts/TX