The Electricity Market in Texas: A Backgrounder
In Texas, the energy markets started to be liberalized in the 1990's, and were entirely put in place by 2002. With this deregulation of the energy markets, customers can now choose their energy supplier, and benefit from competitive rates.
Deregulated retail electricity and gas
Previously, in the United States, energy utility companies were monopolistic. This means that consumers could not choose where they got their electricity from. The price of electricity and gas was determined by the state's Public service commission. Today, many IPPs (Independent Power Producers) produce electricity competitively, and the price of electricity and gas are decided by the law of supply and demand. This has required the creation of Wholesale energy markets (as well as Over-the-counter transactions). Also, many customers from the large TX utility companies can now purchase electricity and gas from various retail REPs (Retail Energy Providers), at a competitive price. To find out more about this, go to our Suppliers page. To find out more about the history of the energy markets deregulation, go to our page Texas' Electricity Market Deregulation: How Did it Happen?
ERCOT - wholesale electricity trading platform
A wholesale market is where the IPPs (Independent power producers), other power generating companies, power traders, suppliers, large customers and other entities can buy or sell electricity publicly. Their activity can be monitored by the US Energy Regulatory Agency: FERC. There are several of these trading platforms in the US, and the one located in Texas is ERCOT (Electric Reliability Council of Texas). To find out more about what a wholesale market is, and about the other wholesale markets in the US, visit our, "What is a wholesale electricity market?" article. To find out the difference between retail and wholesale electricity, read our, "What is the difference between wholesale and retail electricity?" page.
Over the counter electricity trading
Over-the-counter (OTC) transactions are an exchange of electricity for payment between two consenting parties. Like wholesale electricity transactions, they are also usually deregulated, but contrarily to wholesale electricity, OTC transactions are anonymous and are cannot be monitored by market authorities.
Energy Prices in Texas
While the price of natural gas per therm or cubic meter is around the national average in Texas, the price of electricity per kilowatt-hour in Texas one of the highest in the country.
The deregulation in Texas has received nuanced critics. In the years following the deregulation, the average retail electricity price for residential customers has increased in Texas compared to the whole US (as seen in the graph above). Nevertheless, in the past 5 years, the price has decreased, and reached a level lower than the average US, which is a positive point for the deregulation in Texas.
On must keep in mind that the increase in electricity prices is mainly due to inflation, and not only to the negative effects of deregulation. For more information on inflation and it's effect on energy prices, please visit our page Evolution of the prices of electricity.
Deregulation of the energy markets in Texas
In order to allow competition to thrive after the deregulation, incumbent utility companies (the traditional suppliers) must be forbidden to undercut the energy prices, in order to give the time for the new suppliers to enter the market and be profitable. During a certain period of time, the retail prices of electricity sold by incumbent utility companies must be fixed at a Price to Beat (PTB); they must remain at a certain level. After this period, the new energy suppliers will be profitable and their chances of being overpowered by the utility companies will be decreased. Once this is accomplished, the Price to Beat is withdrawn, and the retail price of electricity is once again competitive.
This is what we can observe in the graph above. After the deregulation in 2002, the retail price of electricity increased. New companies entered the market, and retail prices were increased to enable their profitability. Once this is accomplished, energy prices decrease (starting in 2008) when the Price to Beat is suppressed, and the market becomes competitive (in 2010, when the average price in Texas in inferior to the US average). For more information, please visit our analysis of the deregulation of the Texas energy markets.