Exposing Electricity Customers to Spot Prices — A Lesson From Griddy

Griddy company customers shocking electricity bills (source: DallasNews)

Difference Between Wholesale and Retail Prices

ERCOT real-time wholesale price (source:ERCOT).

The Case of Griddy

Griddy app showing wholesale price (source:TexasPowerGuide).

What Went Wrong?

When the Texas energy crisis took place due to extreme weather conditions and improper system weatherization, most of ERCOT’s energy sources went out of service’ leading to widespread blackouts to curtail load and maintain the whole grid. As a result of the extreme generation insufficiency, the spot price wholesale electricity increased by 10,000% and hit the market cap of 900 cents/kWh.

Homepage of Griddy’s website (source: Griddy)

In Griddy’s Defense..

Despite the outrage from Griddy’s customers, the economical efficiency of Griddy’s tariff model is unquestionable. Basic welfare economics indicates that pricing at the short-run marginal cost (SRMC)is a deadweight loss minimizer. Pricing at any rate above SRMC discourages consumption that was already valued above the SRMC. On the other hand, pricing below the SRMC discourages energy conservation , and behooves the customers to consume irresponsibly. Therefore, Griddy’s tariff model, by pricing at the SRMC is socially optimal compared to the usual high price markup rate design. Griddy’s tariff model is a form of Ramsey two-part tariff, which does not rely on the volumetric charge to achieve revenue adequacy (see the article below).

Last word

In addition to the optimality of Griddy’s tariff, pricing at the SRMC becomes imperative when the adoption of rooftop solar increases, which also leads to the so-called utility death spiral forcing utilities to increase their rates to maintain revenues. The higher the price markup, the more severe the net-metering subsidy issue becomes, a problem that is already taking place in many states, particularly California (see here). Despite the economical benefit, it is crucial to ensure the readiness, automation ability and rationality of utility customers, especially residential to interact with the highly volatile spot prices.

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Ahmed S. Alahmed

Ahmed S. Alahmed

Electrical and Computer Engineering PhD researcher. Interested in electricity markets, optimization, mathematical analysis and economics. https://www.ahmedsa.me