Texas electricity consumers are now stunned at the high electric bills they’re getting as a result of the state’s deep freeze. They are learning the hard way another climate change lesson. Extreme weather means extreme pricing risks.
Hedge Your Bets!
“Hedge your bets,” is a maxim that is defining climate change’s impact on prices. Electricity is emerging as its poster child.
Electricity is the most price volatile commodity in the world. It can be priced in time increments of minutes or hours. I led a team of experts in designing the first mass adoption real time electricity pricing system (RTP). Our first effort was to hourly price electricity over the 8,760 hours of a year. During the first year, prices jumped from as low as mills per kWh (10 mills equal a penny) to over a $1.00 per kWh.
This type of real time pricing is very efficient for buyers and sellers. For sellers, RTP allows them to encourage consumption with very low prices when supplies are abundant and discourage consumption with high prices when supplies are falling short of demand.
For buyers, RTP offers a great opportunity to buy at very attractive low prices as long as the buyer can manage the risk of high price time periods. And that is the key for business. Marginal pricing only works if your business has the ability to physically or financially manage high price risks.
Check Your Electric Bills Now!
As too many customers in Texas will tell you, you should review your utility rate structure for price risks. You need to insure you do not have a “naked risk” position. That is a situation where the buyer has no protection, they are naked, against a dramatic increase in price.
Covering a naked price risk can be done physically or financially or both.
The physical path is having the ability to self-generate during high price periods and/or to curtail use. But, critically, these physical solutions only deliver their value if your building has a smart load control system that can monitor prices in real time plus either turn on self-generation/batteries or turn off end uses.
Financial solutions can also manage extreme price risk. Your utility (or competing service provider if your utility allows competition) have rate designs that limit how much money you save on low prices in exchange for protecting you from extreme prices.
Invest to Mitigate Price and Reliability Risks
Grid electricity reliability and prices have always been volatile. Climate change is making it so volatile, in fact, that utilities cannot protect against it.
Businesses were hit by something similar in the late ‘70s and early ‘80s. At that time, businesses adopted digital processes that measured reliability in nanoseconds and were served by grids that measured service reliability in 3-second increments. The difference is known as a power sag where voltage drops but the lights stay on. People don’t notice the very short power sag, but digital devices do. The solution was surge protectors that businesses then massively introduced onto their electrical systems to protect their digital devices’ operations.
Climate change induced extreme weather is again forcing businesses to confront the need to manage their electrical supply and prices beyond utility services.
The great news is that solar, battery and smart building technologies are emerging as solutions. Their prices are falling dramatically. Their value is increasing based on their ability to deliver lower costs than utility retail prices with higher reliability.
The bad news is that they do require an investment and it is likely that your utility will have rates and rules that inhibit their economics.
But the lessons learned in Texas from the freeze, in California from the extended wildfire season, in the Midwestern states impacted by extreme storms, and in Gulf/Atlantic states slammed by more intense hurricanes is that your business is exposed to an extremely costly naked risk. However high the utility barriers are to installing solar, batteries and smart building technologies, the new payback calculus for clean technology now includes avoiding extreme, high electric bills and business crippling shutdowns.