Putting an End to Texas’ $4.3 Billion Electricity Tax

This was originally published in the Dallas Morning News.

With the arrival of July, Texans know to be ready for 100-plus degree weather for the next couple of months as widespread extreme heat is expected this summer. It might surprise them, though, to know that the prices they pay for electricity might rise even faster than the summer heat.

Depending on the weather, this summer could be a replay of last year, which saw electricity prices spike in Texas despite falling energy prices overall.

Last August, wholesale electricity prices in the region overseen by the Electric Reliability Council of Texas (which covers more than 80% of the state) averaged close to $130 per megawatt hour, or 13 cents per kilowatt hour, while prices in several other regions averaged around $30 or less, or 3 cents per kilowatt hour. The average homeowner uses around 1,000 kilowatt hours per month, and the bill includes a number of fees beyond the cost of electricity. 

Why did Texans pay so much for electricity last year?

The proximate cause of the higher prices was a series of decisions by commissioners at the Public Utility Commission of Texas to impose what turned into a $4.3 billion electricity tax on Texans last year.

They did this through two administrative price adders, the biggest one called the Operating Reserve Demand Curve, which kicked in when market scarcity reached certain levels last summer. Unlike a traditional tax, the revenue from this “tax” went mainly to electric generators like NRG and Vistra.

The PUC commissioner’s decisions did not come in a vacuum. They were responding to the reliability worries in the Texas electricity market caused by renewable energy subsidies.

Since 2006, taxpayers and consumers have forked over more than $19 billion to renewable generators in Texas, greatly distorting the operation of the market.

For instance, in 2019, revenue and government-sponsored benefits to Texas wind and solar farms totaled almost $5.5 billion. Of this, their sales brought in only $3.1 billion. The other 44% came from government subsidies, tax credits and other benefits. The subsidies allowed renewable generators to sell electricity below what they would otherwise charge and undercut the prices of their competitors.

In an electricity market that is largely dependent on market prices to operate efficiently, this has led to malinvestment, taking needed investment away from reliable sources like natural gas and coal.

Instead, the most investment in new generation in Texas has gone into renewables. As a result, the Texas electricity market has been struggling for several years to maintain a reliable supply of energy.

Texas regulators responded to this challenge, however, not by eliminating renewable energy subsidies, but by imposing the $4.3 billion electricity tax on Texans. To be fair to them, they had little help from the Texas Legislature, which rejected multiple bills and amendments in 2019 that would have helped reduce the harm caused by renewables.

The higher prices greatly benefited generators. They helped NRG “convert a $72 million third-quarter loss in 2018 into a $372 million profit for the same period in 2019.” Vistra Energy’s “third-quarter income from generation increased $226 million in Texas before taxes and other factors, off-setting lower generation prices in other markets.”

Texans could see higher electricity prices this year as well. The PUC ordered a second increase in the ORDC that took effect this spring. Additionally, the market’s growing dependence on wind may compound the problem. If the wind fails to blow on hot Texas summer afternoons, the price adders could kick in to raise prices even higher.

Stacking another $4.3 billion from the ORDC on top of an expected $2.3 billion cost for renewable subsidies this year means that the total cost of renewables to Texans could rise above $6 billion in 2020.

Rather than addressing reliability problems by forcing Texans to pay more for electricity, Texas policymakers could increase reliability by eliminating the ORDC and property tax abatements for renewable generation.

Texas’ traditional and renewable electricity generators are taking billions of dollars each year out of the pockets of Texans. The path forward to stopping the bleeding is simple; let consumers choose what electricity they want to purchase in Texas’ competitive market by eliminating subsidies for all generators.