December 17th, 2021
Index prices are under threat in Texas — here's why they're worth saving
Right now, California regulators are enabling real-time index rates — rates where consumers choose to pay the wholesale price of energy rather than a standard overall monthly price — as part of their efforts to ensure grid reliability after 2020 blackouts hit parts of the state during a heat wave. At the same time, however, the existence of those same index rate products are being threatened in Texas. It’s a move that could potentially kill energy innovation and competition in the state.
In contrast, ridding the state of index-price products comes as part of The Public Utility Commission of Texas’s (PUCT) new market design proposal, which was born out of this past February’s unprecedented winter storm that left millions with surging electricity bills. On Thursday, the PUCT filed a draft proposal that would ban these indexed products from residential customers. If this proposal were to be passed, the ban on indexed products would be effective on February 1, 2022. The removal of wholesale index products would not solve the problems that led to the statewide blackout: in fact, it would only do greater harm to the Texas energy market.
Understandably, there has been hesitancy around real-time energy rates after energy providers, most notably Griddy, left customers financially vulnerable during Winter Storm Uri. But this type of pricing can be used to effectively protect customers and drive low, competitive costs in the market. Moreover, fixed-rate products drive demand response by helping to balance supply and demand on the grid, which in turn keeps the grid fully functioning.
Rather than a fixed, often-high price rate, the index pricing structure goes hand in hand with delivering a more efficient energy market for regulators. For instance, under an indexed structure, consumers are incentivized to use energy when it is cheapest, which often means during off-peak hours when energy use is low overall. We call this “demand response,” which results in taking pressure off of the grid in peak times — when energy is in high demand — and ultimately increases the stability of the electrical grid for all.
To truly strengthen the grid and its resilience, instead of eradicating indexed products that help balance the grid through demand response, Texas regulators should focus on customer protection policies that have been sorely missing from the latest energy market redesign. Customer protection initiatives would not only benefit customers and their pocketbooks, but they would also set up structural solutions to the energy market that still relies on outdated practices.
To hedge against potential price spikes, energy retailers that offer indexed products should be required to cap prices. As the effects of increased temperature extremes continue to materialize, we will only see more extreme weather and accompanying energy price fluctuations. Setting a cap protects customers from unanticipated and drastic changes in energy supply.
For the over-60 consumers, retailers can set in place additional disclosures noting that this product may not fit well for people on a fixed income. Private companies should also be held responsible for finding solutions for customer protections, even when the unexpected occurs. At Octopus Energy US, while many energy providers charged customers astronomical prices during the storm — in some cases, upwards of tens of thousands of dollars — we enlisted a one-time Bill Forgiveness Plan for all of our customers in Texas, knowing that we needed to protect customers, especially during such a tumultuous time.
Furthermore, if indexed products were available to consumers, energy retailers that offer indexed products should be required to also offer fixed-rate plans to their consumers. By providing a full suite of products, energy retailers empower consumer choice, as well as the ability to easily migrate from one option to the other should a consumer’s financial situation or lifestyle change.
Finally, indexed products encourage healthy market competition and can drive greater innovation within the energy industry. Suppliers would be compelled to think more creatively about the products they offer consumers, and really push the boundaries of what energy plans could look like or incorporate. One example is our smart product, MyOcto, which uses historical energy data to create a customized energy rate. Customers with higher off-peak energy use get a greater discount as a reward for helping stabilize the grid. This gives customers a greater incentive to keep an eye on electricity use, which also results in a more balanced grid for everyone.
Building future-focused energy solutions that center around customer protection and demand response can strengthen the grid and improve its reliability. At the same time, this provides an extra layer of protection for consumers in situations of extreme weather, such as in Texas early this year. If indexed products are wholly banned throughout the state, further opportunities to innovate are stifled, leaving Texans behind the curve. We need change, but regulators must first see the value of indexed products and their potential to make Texas the strongest energy market in the country.
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