Why Does the Price of Natural Gas Affect the Price of Texas Electricity?

By Vernon Trollinger, March 23, 2009, FAQs

When the Public Utility Commission of Texas (PUCT) helped set up the rules for Texas electricity deregulation, they noted that "…the market prices of generation will likely be set by gas-fired generation, and as such, it is appropriate to apply the changes in the market price of natural gas to the entire fuel factor in order to maintain the level of headroom in the price to beat.”

This acknowleges two facts:  First, that natural gas is used by more than half of power generating plants in Texas. This is followed by coal fired plants, nuclear, and wind.  Texas produces 25% of the nation's natural gas and is the largest producer; storing and supplying natural gas via pipeline for all regions of the country.  Yet while Texas has large reserves of low grade coal, most of what is burned in its coal-fire plants is brought in via train from Wyoming and Montana.

Texas produces and consumes more electricity  than any other State.  However, according to the US Dept. of Energy, "Despite large net interstate electricity imports in some areas, the Texas Interconnect power grid is largely isolated from the integrated power systems serving the eastern and western United States, and most areas of Texas have little ability to export or import electricity to and from other States."

So, it makes sense for Texas electricity generators to rely more on the supply of natural gas in our back yard rather than waiting for the next 1,000 tons of coal to roll in from Wyoming.  Natural gas is also cleaner burning that coal and does not leave behind large amounts of cinder and ash that require proper disposal.

But here is the second fact: natural gas is an efficient and valuable fuel commodity.  It costs more to buy this fuel than coal, nuclear, and wind to generate electricity.  Since electricity is not separated in the wires according to how it was generated, the price per kilo watt hour is set to the price of the most expensive fuel used to generate it.  This is known as "the price to beat".

For more information, visit the Association of Electric Companies of Texas, Inc. and also our blog entry, "Do I Have Choice When Selecting My Electric Provider in Texas?"
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