One of the lessons that we’ve all learned and been taught to expect is that electricity rates will always go up, sometimes way up, during the summer heat season. The notion of the rate increasing and the bills increasing seems almost intuitive. And frankly, why wouldn’t it? Since the days before deregulation, Reliant’s rates jumped each summer from May – November.
Was the seasonal rate increase a product of additional expenses during that period? Greed? State mandate?
The reality of it is that it was almost exclusively a product of the companies incurring additional expenses in the summer time. But shouldn’t the cost of generating electricity more or less remain constant between the winter and the summer? The simple answer is usually “no”.
Why?
Given that it is much hotter in the summer within the state of Texas, more air conditioners are run, for both homes and businesses. It takes more A/C power to heat the same room at the same temperature as the outside heats up, too. The A/Cs have to run longer and later to keep homes and businesses cooled off. As more electricity is needed on a household by household basis, and a business by business basis, more electricity has to be generated and placed onto the state’s electricity grid. As that happens, more electricity generators need to be run to keep up with demand than in other times of the year. The generators that are forced to come on line during this period are usually more expensive to run for the provider – which is why they’re not the first generators online each day. When the generation becomes more expensive, the price increase is spread down the supply chain. The Retail Electricity Provider has to pay more and the customer, ultimately, has to pay more as well.
That makes it seem as though electricity rate increases really should be part and parcel to each year’s heat season. But should this always be the case? Perhaps not.
Often times, experts will speak about this cause and effect relationship and then divert on a tangent in regard to natural gas prices. Natural gas prices affect the price of electricity in a place like Texas because many of the less-used generators run on natural gas as fuel for generating the electricity. Natural gas, as opposed to coal, nuclear, or various other products also used to generate electricity within the grid, is a much more expensive and volatile product on the price side. As a for instance, last summer saw record electricity prices that correlated almost symmetrically with record natural gas prices. Heading into this summer, however, we find that as a market, natural gas prices have basically collapsed to points that we haven’t seen in more than half a decade. With that as a given, can’t we basically assume that prices won’t rise significantly? Yes, as part of the equation, as long as natural gas prices are lower, electricity prices will be lower. This is a foundational principle to how the market functions.
But that’s not the entirety of the story. Another variable within the equation is often ignored and typically, by the average trader and forecaster within the Texas market, dismissed as relevant because it is assumed to be a relative constant, is market demand for electricity. And why wouldn’t it be? It’s always a hot summer in Texas, right? Homes will always need to be cooled, right? Businesses will always be booming and consuming more and more Reliant Energy to create more products, right?
Well, the truth to one of those questions is, it’s often a hot summer in Texas, so that assumption is ok.
On the question about home being cooled, well, homes always do need to be cooled, too. And so do apartments. But what happens if the mix of homes using electricity versus apartments using electricity ever dramatically shifts? Can less people living in homes drive the overall demand for electricity within the market down? Let’s think about it.
On average, home dwellers use about 1.5 times the amount of energy that is used by apartment dwellers. Overall, the residential demand within the Texas grid, in aggregate, is roughly 40% of the total electricity used. If the mix of home dwellers to apartment dwellers is historically 55% to 45% of the population within Texas, this would indicate that almost 70% of the residential electricity demand traditionally comes from home dwellers. That also means that home dwellers generally impact about 27-30% of the total demand within the Texas electricity market as whole. Let’s assume the 27-30% consumed by home dwellers within the market works for the summer, which is the most likely.