Texas’ unique deregulated energy market

By Ben Delman on January 21, 2019

Texas’ electric market is unlike that of any other state. It is the only state where the electric grid is fully deregulated at the state level. This makes for interesting challenges and opportunities for growing rooftop solar in the Lone Star State.

Texas’s electricity markets were first deregulated in 1999. Texas Senate Bill 7 (SB7) unbundled the state’s vertically integrated public utilities and introduced retail competition into the state market. This move to full deregulation split the power sector into three buckets: generation providers (entities that generate electricity), transmission owners (entities that maintain the transmission infrastructure to deliver power to customers), and retail companies (that sell electricity directly to customers).

In most markets, vertically integrated utilities carry out all three roles and publicly chosen commissioners (either by election or appointment) determine the rates they can charge. Texas’ energy market welcomes retail electric providers (REPs) to compete in an open marketplace for customers, retailing power they purchase from the generation and transmission providers.

In most other states that have undergone some degree of deregulation, incumbent utilities still provide the majority of retail energy supply. Customers may have the option to switch to a competitive retail supplier, but can also retain service from the incumbent utility. In Texas, this is not the case. The retail market is fully deregulated. This means customers must choose a competitive REP.

Texas’ competitive electricity market serves nearly 70% of electricity users. The remaining 30% of Texans are split evenly between rural electric cooperatives (nearly 70 distribution co-ops in the state) and municipal utilities (72 “munis” across the state). Both were allowed to remain vertically integrated after 1999. This means these utilities can still own generation assets, set their own prices, and bill their customers directly.

The central principle of Texas’ energy deregulation was one of free market enterprise: Customers could choose their retail provider. The state Public Utility Commission still regulates transmission providers, but it does not regulate REPs. The rates REPs charge their customers are based on the market price.

One result of this is that Texas has no statewide net metering policy. The lack of statewide net metering in Texas means that most solar homeowners will receive little to no reimbursement for any excess generation they share with the utility. This forces Texas solar homeowners to leave money on the table, having paid for solar systems that generate free electricity for others to use without compensation. Texas solar homeowners only receive credit for the excess solar they generate if their REP offers a solar buyback plan — essentially, an approximation of net metering with terms set by the REP.

The competitive structure of Texas’ electricity market makes its participants extremely price sensitive. (As of 2017, nearly 92% of all electricity customers had switched their retail provider at least once.) The state has seen steadily rising demand for electric power. This is especially true in summer months, when 28 million Texans crank their air conditioners to combat high temperatures. More electricity is being used in the state, and the concentration of peak consumption in hot summer months is becoming more severe.

This isn’t just a planning headache for those who manage the electric grid. It will have a tangible effect on monthly electric bills, especially the 70% who purchase power from competitive providers. Responding to the predicted boom in summer demand, the average rate of a one-year fixed-price competitive electric plan has increased more than 20% in the past year.

Predictability is key motivator for going solar. It allows solar owners to lock in their electricity prices for 25-30 years. As the market for battery storage grows, Texas a particularly attractive opportunity for pairing solar and storage because of its robust smart meter infrastructure and free-market ideology.

To date, most of the growth in solar has remained on the utility-scale side. Of the 1,970 MW of solar installed, less than 150 MW are distributed rooftop installations. This will change the cost of rooftop solar declines and more homeowners learn about the benefits of going solar.

(This is part one of our series on energy and solar in Texas. Part two looks at unique challenges and opportunities in Texas for rooftop solar, and part three makes the case for rooftop solar in Texas.)