What Determines the Electric Price in Texas

A number of factors govern the electric price that retail electric providers in the State of Texas charge per kilowatt hour. For five years after deregulation of the energy market, one major factor was the floor price, or "price to beat" of energy, as determined by the Texas State Legislature.

Included in Texas Senate Bill 7, which came into effect in January of 2002, was the idea of a "price to beat," a regulated rate that would govern the pricing behavior of the incumbent electricity providers. Legislators feared that the former utilities would try to undercut the prices of the fledgling entrants into the new deregulated energy market, discouraging competition and perpetuating their monopoly on the electricity market in the state.

Fostering New Competition

In order to foster competition in the Texas energy market, legislators included a phase-in period in SB7, during which a price floor would be enforced for the former electric providers, to give new market entrants time to get established. During this time, new electricity providers in Texas could set their prices below this price floor, or price to beat, while incumbent utilities could not.

The price to beat was set low enough not to completely price incumbent providers out of the market, yet high enough to allow the new market entrants to make a modest profit while charging a slightly lower price. The phase-in period was established for five years, from 2002 to 2007. This strategy proved effective, and a large number of competing retail energy providers are now doing business in Texas, offering competitive pricing to their customers.

With the price floor, or price to beat no longer in effect, the former utilities are now free to compete with the new market entrants, driving the average electric price even lower. Add to that, natural gas prices are at some of the lowest levels in a decade, thanks to a glut on the market due to the increased practice of fracking, or fracturing rock to get at reservoirs of natural gas.

According to the U.S. Department of Energy, Americans get 22 percent of their energy consumption from natural gas. In Texas, that number is closer to 38 percent. Additionally, Texas is getting an increasing amount of energy from wind power, as much as 8 percent, which is more than three times the national average.

The combination of deregulation of the energy market, low natural gas pricing, and increasing use of free wind power have conspired to drive the electric price in Texas to record lows, and market analysts don't see a major increase any time in the near future. Learn how Energy Deregulation made TX electric rates go down and helped you get affordable Texas Electric Rates.

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