Thread by @gregstevens

I see some misunderstandings going around about how Texas energy pricing works based on people’s cold-reads of this story. It isn’t the article’s fault—but I’d like to go through a couple of details for anyone who wants to know more about this....

nytimes.com/2021/02/20/us/…

1) The “deregulated” market in Texas operates by having a large number of retail energy providers who buy energy wholesale from generators and resell that energy to you (the customers). They all have different strategies for how to determine the price ($/kWh) they give YOU.

2) Most of these retailers offer different “plans” you can sign up for, to shape the way your own price ($/kWh) changes: is it cheaper evening? Is it cheaper in the summer? Is it fixed for 12 months? And so on. Retailers “compete” by crafting plans to appeal to customers...

3) How do the retailers make money? For some, one component is hedging: they buy blocks of energy on the futures market to get the best price they can. The better they predict future need, the more accurately they can purchase IN ADVANCE, avoiding last-minute price fluctuations.

4) If you look across these retailers right now, theres a wide range of statements. Some retailers are saying “don’t worry, you won’t be impacted in the short term by the storm”. That is because those companies price their products by pre-purchasing anticipated customer usage...

5) ...which allows them to offer a fixed price to the customer. They are still at risk, because if they need to purchase last-minute wholesale energy to cover the usage of their customers, they (the retailer) are hit with the rocketing wholesale prices. Now, HERE’S THE THING...

6) In the scenario I’m describing, the RETAILER absorbs the hit from wholesale price changes; they must recoup their costs in the long run by strategically shifting prices over time. But this gives them time to spread it out and not hit individual customers with absurd bills....

7) So what went wrong in the lede story, above? Griddy is a retail provider who appeals to their customers by saying “we give you wholesale prices! We are cheaper (on average) than the others because we will just YOU the price we pay the wholesaler!” Which sounds dandy, except...

8) In the energy market, wholesale prices can fluctuate wildly. This is one of those situations where talking about “averages” can fuck up the world. Averages don’t help you when there are p<0.01 events. Wholesale prices went insane, and customers of Griddy got THOSE PRICES.

9) My message in this is NOT “buyer beware” or “gosh I guess those consumers should have known better”. I think that retail pricing strategy shouldn’t be allowed.

In my opinion, someone SHOULD go bankrupt in this situation... but it’s Griddy, not the end consumer.

10) Here’s the thing about the “free market”: the way it’s SUPPOSED to work is that energy retailers are encouraged to get creative in how they manage wholesale-to-retail purchase and pricing strategy... and when they fuck up, they should go down. That’s “free market” here.

11) I can’t speak to Griddy specifically, I don’t know enough about the facts and circumstances of their situation. But broadly speaking, in Texas, when an energy retailer can’t smartly and safely manage their procurement and pricing, THEY go bankrupt... NOT the consumer.

12) I’m not going around applauding the virtues of energy deregulation, BUT I think it’s important to recognize the locus of the problem. There is always a “price v stability” trade off in systems like this. Many retailers offer more stability by being a tiny bit more expensive..

13) ...and other say “our rates are cheaper than the others on average!” or “our prices are cheaper 99% of the time!” Those are not lies. But they obscure the magnitude of risk when there is a p<0.01 event.

14) So what’s the solution? Total regulation is one possible answer. But, there IS a way to solve this within the deregulated framework: have greater control on pricing strategies the retailers are allowed to use. Block pricing strategies that pass large risks on to the customer.

15) In conclusion, I want to emphasize again: I’m not trying to cheerlead energy deregulation. I just want to be clear that the problem we are seeing isn’t an inevitable consequence of deregulation.....

16) There are currently regulations limiting pricing models so consumers don’t get mislead—those should be strengthened. And when an energy retailer makes a bad bet in an “innovative” pricing model, the RETAILER should face the consequences.

/end