The Public Utility Commission announced it’s decision to raise the system-wide offer cap to from $3,000 to $4,500/mWh today. Although not effective until August 1, this ruling immediately affected electricity prices. Prices have shot up and any unsigned contracts are being pulled.
What does this mean for the consumer?
Index Consumers – Even though prices spike up to the cap only a few hours each year, consumers riding an index will be most affected by this cap increase due to price risk exposure. It is suggested at this time that a customer with an index-priced product convert to a fixed-price product.
Fixed Price Consumer – There is speculation around whether or not a retail electric provider (REP) can pass through any cost increases associated with the rate cap by means of the “Change in Law” provision in contracts. Due to each REP’s unique way of hedging, amounts passed through would vary – especially if a REP doesn’t hedge fixed-price contracts appropriately or even at all.
Background on the PUCT’s Decision to Raise Market Caps:
Discussions on raising the cap began when the Electric Reliability Council of Texas (ERCOT) announced decreasing reserve margins. A reserve margin is the amount of available power above the capacity needed to meet normal peak demand levels. ERCOT’s target reserve margin, used to ensure stable grid operation, is set at 13.75% and actual reserve margins are likely to fall below the target by 2014.
The anticipated goal for the cap rate increase is to spur construction of new generation facilities. More generation would lead to an increased reserve margin, resulting in fewer struggles to meet demand during extreme weather situations coupled with Texas’s continuous population growth.
Not only has the PUCT passed the cap increase to $4,500 – They have launched another proposal to set cap rates in future years: $5,000/mWh before summer 2013; $7,000/mWh in 2014; and $9,000/mWh in 2015.
We will keep you updated on any future increases.