| deregulation began within the state of Texas at the | | | | electricity used. If the mix of home dwellers to |
| turn of the millennium, Texans have learned as much | | | | apartment dwellers is historically 55% to 45% of the |
| or more about how electricity works than people in | | | | population within Texas, this would indicate that |
| any other place in the world. Some of the lessons | | | | almost 70% of the residential electricity demand |
| learned were great for the foundation of | | | | traditionally comes from home dwellers. That also |
| understanding how the market would affect | | | | means that home dwellers generally impact about |
| customers in principle. Some of the lessons learned | | | | 27-30% of the total demand within the Texas |
| could be considered more symptomatic of the times | | | | electricity market as whole. Let’s assume the |
| than as part of the bedrock of how the market will | | | | 27-30% consumed by home dwellers within the |
| always function. | | | | market works for the summer, which is the most |
| One of the lessons that we’ve all learned and | | | | likely. |
| been taught to expect is that electricity rates will | | | | Now consider the possibility that a migration within |
| always go up, sometimes way up, during the summer | | | | the marketplace occurs from people living in homes |
| heat season. The notion of the rate increasing and | | | | to people living in apartments. In recessionary times, |
| the bills increasing seems almost intuitive. And frankly, | | | | this is usually a reality and this recession is no |
| why wouldn’t it? Since the days before | | | | different. Apartment communities are nearing |
| deregulation, Reliant’s rates jumped each | | | | capacity throughout Houston and Dallas, just as |
| summer from May – November. | | | | foreclosures rise and people move out of homes |
| Was the seasonal rate increase a product of | | | | after layoffs and payroll decreases as an act of |
| additional expenses during that period? Greed? State | | | | reducing expenses. Publicly available data on this is |
| mandate? | | | | scarce, but we can use some of the information |
| The reality of it is that it was almost exclusively a | | | | provided recently by which covers Houston real |
| product of the companies incurring additional | | | | estate sales. This shows that more than 30% less |
| expenses in the summer time. But shouldn’t | | | | new homes were sold in the Houston area over the |
| the cost of generating electricity more or less remain | | | | first quarter this year and last. They’ve also |
| constant between the winter and the summer? The | | | | released data disclosing that roughly 25% less |
| simple answer is usually “no”. | | | | existing homes were sold in the same time period. |
| Why? | | | | Meanwhile, foreclosure rates continue to increase, as |
| Given that it is much hotter in the summer within the | | | | do apartment occupancy rate. Extrapolate that |
| state of Texas, more air conditioners are run, for | | | | across to Dallas as well and the numbers and demand |
| both homes and businesses. It takes more A/C | | | | within the overall market starts to look considerably |
| power to heat the same room at the same | | | | different than years past. Specifically, a shift of that |
| temperature as the outside heats up, too. The A/Cs | | | | nature on the residential side of electricity usage |
| have to run longer and later to keep homes and | | | | translates into a relevant decrease in overall market |
| businesses cooled off. As more electricity is needed | | | | demand for usage. The market clearing price for |
| on a household by household basis, and a business by | | | | electricity within the market is based on what the |
| business basis, more electricity has to be generated | | | | last electricity generator selling electricity to the |
| and placed onto the state’s electricity grid. As | | | | market has to charge to cover its costs. If the more |
| that happens, more electricity generators need to be | | | | expensive generators are impacted by that |
| run to keep up with demand than in other times of | | | | “demand destruction”, and given that |
| the year. The generators that are forced to come | | | | since those generators are the last to be used, they |
| on line during this period are usually more expensive | | | | are impacted, the prices are not going to see the |
| to run for the provider – which is why | | | | potential exponential increase that those generators |
| they’re not the first generators online each | | | | would create. |
| day. When the generation becomes more expensive, | | | | That portrays what role something as simple as a |
| the price increase is spread down the supply chain. | | | | shift in dwelling type for Texas residents could do to |
| The Retail Electricity Provider has to pay more and | | | | the market. |
| the customer, ultimately, has to pay more as well. | | | | What happens if demand destruction also exists on |
| That makes it seem as though electricity rate | | | | the business side of the market? Are businesses |
| increases really should be part and parcel to each | | | | using less electricity today than they were a year |
| year’s heat season. But should this always be | | | | ago in Texas? |
| the case? Perhaps not. | | | | The answer is that if demand destruction occurs on |
| Often times, experts will speak about this cause and | | | | the business side, the need for excess, more |
| effect relationship and then divert on a tangent in | | | | expensive electricity capacity within the market |
| regard to natural gas prices. Natural gas prices affect | | | | would see an even sharper decrease than what we |
| the price of electricity in a place like Texas because | | | | looked at on the residential end. Business usage is |
| many of the less-used generators run on natural gas | | | | demonstrably higher than residential usage within the |
| as fuel for generating the electricity. Natural gas, as | | | | Texas market, as whole. |
| opposed to coal, nuclear, or various other products | | | | So are businesses using less electricity today than |
| also used to generate electricity within the grid, is a | | | | this time last year? Well, yes. For one, any business |
| much more expensive and volatile product on the | | | | that has gone out of business is using less, to be |
| price side. As a for instance, last summer saw record | | | | sure. It is a simple fact that the market is contracting |
| electricity prices that correlated almost symmetrically | | | | right now, which means we’re experiencing |
| with record natural gas prices. Heading into this | | | | negative growth today. A classic and directly related |
| summer, however, we find that as a market, natural | | | | example of this situation is what’s occurring |
| gas prices have basically collapsed to points that we | | | | on the Houston Ship Channel. As a group, this set of |
| haven’t seen in more than half a decade. | | | | businesses uses more electricity than any other |
| With that as a given, can’t we basically | | | | specific group of businesses within the state. They |
| assume that prices won’t rise significantly? | | | | have to use enormous amounts of electricity to |
| Yes, as part of the equation, as long as natural gas | | | | create the products, such as plastics and tires for |
| prices are lower, electricity prices will be lower. This is | | | | automobiles, that they ship throughout the rest of |
| a foundational principle to how the market functions. | | | | the world. When orders for new products weaken or |
| But that’s not the entirety of the story. | | | | dry up, these businesses are forced to take action, |
| Another variable within the equation is often ignored | | | | such as extended shut downs or flat out closures of |
| and typically, by the average trader and forecaster | | | | production lines or the businesses themselves. These |
| within the Texas market, dismissed as relevant | | | | events have occurred within the last 12 months, and |
| because it is assumed to be a relative constant, is | | | | they’ve happened across multiple plants with |
| market demand for electricity. And why | | | | few plants being unscathed. |
| wouldn’t it be? It’s always a hot | | | | With business usage for electricity on the whole |
| summer in Texas, right? Homes will always need to | | | | representing a net decline within the market, coupled |
| be cooled, right? Businesses will always be booming | | | | with less residential usage for the same reasons, |
| and consuming more and more energy to create | | | | demand destruction is a very real part of the overall |
| more products, right? | | | | prices reflected within the market at the beginning of |
| Well, the truth to one of those questions is, | | | | this summer. If the demand remains depressed |
| it’s often a hot summer in Texas, so that | | | | compared to the past 7+ years, this often dismissed |
| assumption is ok. | | | | potential variable within the equation for electricity |
| On the question about home being cooled, well, | | | | prices to the public will continue to play a big role. |
| homes always do need to be cooled, too. And so do | | | | The end result may be so significant that prices |
| apartments. But what happens if the mix of homes | | | | throughout the summer don’t actually rise |
| using electricity versus apartments using electricity | | | | much at all, and could ultimately wind up lower at the |
| ever dramatically shifts? Can less people living in | | | | end of the summer than when the heat season |
| homes drive the overall demand for electricity within | | | | began. With that as a possibility, if not a probability, |
| the market down? Let’s think about it. | | | | Texans can count on continuing to see some of the |
| On average, home dwellers use about 1.5 times the | | | | lowest electricity prices within the entire country for |
| amount of energy that is used by apartment | | | | the duration of 2009. For every Texas resident within |
| dwellers. Overall, the residential demand within the | | | | these recessionary times, that should be considered |
| Texas grid, in aggregate, is roughly 40% of the total | | | | good news. |