Comment by rossdavidh | Hacker News Reader

Comment by rossdavidh | Hacker News Reader

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So, it's bogus, and I (as a Texan) didn't like it, but there is a rationale. The market incentive for having excess capacity (that isn't always needed), is that you will get paid windfall profits when you are needed. Some power sources, if not needed most of the time, would not be profitable to build. The market system is supposed to reward building excess capacity (needed for occasions like this one) by providing occasional windfall profits.

The alternative, non-market way would be to guarantee revenue even in times when the excess capacity isn't needed (most of the time), by paying more than the spot market price would normally provide. Personally, I prefer that way. But, if you're using a market system for electricity, you need an incentive to build excess capacity. Then, when a non-market mechanism (the order to impose blackouts) interferes with that, you need to make up for that somehow.

Again, I'm not saying I totally buy this, but there is the rationale.

The integral of occasional short intervals of extremely high prices is not a predictable value. Thus this market dynamic is not one capable of providing appropriate investment.

The alternative market based way is to a have an additional "capacity market" for which providers offer bids for committing to provide future capacity. Thus providers who can guarantee they will provide a certain capacity are compensated for it, without needing to have a shortage of electricity to make the dynamic pay out. This is how it is done for the rest of the US.

Texas uniquely forewent the capacity market as a subsidy for wind, since wind providers are unable to supply guaranteed capacity and thus unable to bid in the capacity market. This creates a much more raw dynamic where grid capacity is fine right up until it is not.

While Texas' method was not the standard, I believe California did something similar (with similar results in the late 90's, leading to the decline of Gray Davis' political fortunes). I agree it's not the best way.

Thanks for this explanation. There should be incentive for providing excess capacity but there are issues with the approach being taken.

If I'm not mistaken, customers have little idea that a price surge is in effect and what the rate is until they get billed. It's not like going to a gas station, seeing a price, and being able to opt in to the transaction, seek alternatives, or plan to self ration your consumption, as you're prepaying for the energy. The way the Texas model works it seems to assume that customers have a financial buffer that they're able to tap into to pay the higher rates. Everyone should plan for such a buffer but for those that don't have one it places hardship on them. It's also a risk for the provider that they won't get paid their windfall. You can't send huge surprise bills and expect people to pay them.

A sensible approach is to charge a bit extra under normal conditions to build a communal buffer that is used to pay for emergency power production. As long as there's good governance, this derisks the system. Another alternative might be energy bill insurance, if such a thing exists. It's easier to plan for a fixed monthly premium than a surprise payment in an emergency.

Consumers do not buy the power on the market, they buy it from their utility at the rate they've negotiated beforehand. E.g. I've paid ~$0.05/KWh in February 2021 as same as I pay at any other time. It's the utility's problem to acquire power on the wholesale market and make arrangements for the price spikes. It's charging more than the wholesale on average, just as you suggested.

The consumers who had been hit by this were the ones who opted in to receive power at the market rate from a handful of shady businesses. They explicitly had to change their service to this model because the TikTok ads told them that the current market rate is $0.02/KWh so they are "overpaying" if they are buying at the utility's price.

> Consumers do not buy the power on the market, they buy it from their utility at the rate they've negotiated beforehand.

The utility rate was not always fixed/negotiated: there's at least one utility company (Griddy) had an arrangement to pass-through market rate + small premium. Before the storm, this mostly meant getting rates modestly lower than the competition. The same customers were exposed to the power market spikes and received bills over $10,000. IIRC, Griddy has since filed for bankruptcy as the Texas legislature was generally supportive of individual customers not paying their bills. Paradoxically, Texas's political leadership allowed the utility companies to recover their losses by billing customers over years, which seems mostly performative/hiding expense from customers, but still decoupled from market forces.

Yeah, that is one of the shady companies I've mentioned. If, for the sake of argument, we call that a "utility" then in that case every single customer had a choice to go with a capped rate of a regular utility anyways.

The great majority of end customers (like me) did not pay the spot price, it was the company between you and the producer that did. Some of them were making noises that they would have to declare bankruptcy as a result of the surge pricing, although I don't know if any of them actually did. There was at least one company that offered a "you get cheaper power normally" service, and the customers apparently didn't fully realize how bad it could get when it's not "normal".

I agree with your "sensible approach". On a side note, this issue is much like the reason conventionally taxis normally charged more than Uber did, but Uber had surge pricing. If you want enough capacity for the peak times, you need to overcharge at all other times.

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