How Texas Electricity Pricing Works

As the old saying goes, “Everything is bigger in Texas.” Unfortunately, that may also include your electricity bill. But, why is electricity so expensive in Texas?

In this no-nonsense guide, we’ll cover everything from the historical background and deregulation of Texas electricity plans to the roles of entities like ERCOT and the Public Utility Commission to help you understand Texas electricity pricing and choose the most cost-effective electricity plan for your energy usage.

Understanding the Texas electricity market

To fully understand how Texas electricity prices work, it’s essential to recognize that the Lone Star State takes a unique approach to power distribution. Since 2002, Texas law on electricity pricing has hinged around the concept of deregulation, meaning residential customers can choose their retail electricity providers — a departure from the traditional utility model.

Texas electricity pricing is partly overseen by the Electric Reliability Council of Texas (ERCOT), a non-profit organization tasked with ensuring the reliability and efficiency of the state’s deregulated energy market. Currently, the deregulated ERCOT region covers over 90% of Texas residents.

Who sets electricity prices in Texas?

Electricity pricing in Texas is set by each individual electricity company.

However, the Public Utility Commission of Texas (PUCT) works alongside ERCOT to implement and enforce regulations that promote fair competition, ensure utility infrastructure remains in good working condition, and that electricity plans adopt transparent pricing strategies that safeguard the interests of consumers.

In addition to its role in regulating Texas electricity pricing, the PUCT also sets standards for telecommunication, water, and sewerage companies. However, there are a few exceptions. For example, municipal electric companies are regulated locally, and natural gas providers are regulated by the Railroad Commission of Texas.

What affects electricity prices in Texas?

Texas electricity pricing involves a complex interplay of factors, each with its own influence on energy market dynamics and costs. The way these factors play together determine the prices that retailers are financially able to offer to new customers.

Customers that are signed up for a fixed rate plan are shielded by the impact of these factors during their contract because they are guaranteed to pay the same rate throughout their contract. When it comes to sign up for a new plan, that’s when the customer is impacted by these factors again as they will be shopping the new rates offered by retailers.

Let’s delve deeper into how Texas electricity prices work by examining each factor in more detail.

Power source

Your choice of power source plays a fundamental role in how electricity pricing works. The state’s energy portfolio encompasses a mix of fossil fuels and renewable energy, and the availability, cost, and environmental impact of each contributes to the overall pricing structure. For example, the abundant supply and relatively low production cost of natural gas coupled with increasing government support, technological advancements, and economies of scale in distribution utilities transmission make it one of the cost-competitive power source options.

Supply and demand

As with most other industries, the bedrock principles of supply and demand wield significant influence over Texas electricity providers, with prices fluctuating based on energy availability. From a consumer perspective, the bottom line is that prices increase in times of high demand.

Understandably, unpredictable power generators like solar and wind installations are more susceptible to peaks and troughs than more stable energy sources.

Environmental considerations

Weather conditions play a pivotal role in how Texas electricity prices work. Extreme events like heat waves and storms strain the electricity grid, pushing up demand and prices. For example, there was a spike in energy consumption and electricity prices during the winter storm of 2021 when temperatures plummeted.

Unfortunately, Texas is particularly prone to thunderstorms that can cause pricing volatility. So much so, the central part of Texas has been dubbed “Flash Flood Alley,” and the area around Lubbock and Amarillo in the north has been nicknamed “Tornado Alley.”

Regulatory policies

As we’ve established, PUCT and ERCOT policies can be instrumental in shaping state-level pricing policies. But what determines electricity prices on a more national scale? The US government has set a net zero emissions target for 2050, including a 65% reduction by 2030. This strategy incorporates several actions that have impacted Texas electricity pricing. Primary examples include:

Financial incentives, tax credits, and mandates encouraging power generation companies to incorporate more renewable energy into their portfolios.
Stricter emissions standards and the promotion of cleaner technologies, leading to increased costs for power producers.
Requirements for grid modernization, infrastructure investments, and contingency planning to enhance the overall stability of electricity systems.

Infrastructure and transmission

The efficiency and reliability of transmission networks and infrastructure directly impact electricity pricing. Texas utility companies (like Oncor, Centerpoint, AEP North, AEP Central, Texas-New Mexico Power, and Lubbock Power & Light) regularly spend hundreds of thousands of dollars updating and replacing aging, outdated, and inadequate infrastructure like pipelines, cables, towers, transformers, and more to prevent transmission losses and disruptions.

These investments are often passed on to customers in the form of price increases.

Consumer behavior and efficiency

Some energy consumption patterns are difficult to change. For example, most Texans run AC in the summer due to the hotter climate. Plus, the average Texan home is bigger than in many other states, and therefore requires more energy.

However, there are proactive steps households can take to conserve energy and drive down monthly bills. Examples include investing in energy-efficient technologies like smart thermostats, LED lighting, and energy-efficient appliances, and participating in voluntary demand response programs that reduce grid reliance during peak times.

What charges are included in my electricity rate?

Regardless of whether your supply relies on fossil fuels like oil, renewable energy like solar power, or transition fuels like natural gas, the total amount of your electricity bill derives from the same four factors:

Energy Charge – This is the cost of the actual electricity you consume, typically measured in kilowatt-hours (kWh). This represents the core component of your bill. The average rate across Texas is 14.63 cents per kWh.
Transmission and Distribution Charges – This charge covers the cost of delivering electricity from the power plant to your home, including the maintenance and operation of power lines, transformers, and other associated infrastructure.
Taxes and Fees – Additional costs imposed by government authorities include state and local taxes, franchise fees, and other regulatory charges.
Additional Charges – Your energy company might impose additional charges in specific circumstances. Examples include late payment fees and connection/disconnection fees.

Straightforward energy plans from BKVE

Learning how Texas electricity prices work is an essential step toward selecting an electricity plan that aligns with your budget and values. At BKVE, we recognize the importance of transparency and simplicity, and our range of straightforward electricity plans ensure both reliability and flexibility.

Our Bluebonnet plan comes with a 30-day risk-free trial, during which you can cancel for any reason and we will not assess an early termination fee. Plus, with our simple fixed rates, you’re locked into the same price per kWh for the duration of your contract.

Written by Graham Lumley

Graham Lumley is the Growth Product Manager at BKV Energy, a retail electricity provider in Texas' deregulated market, where he has worked since 2023. He analyzes customer usage and billing data, helps develop BKV's fixed-rate plans, and creates tools to simplify Texas electricity shopping. He has written over 200 articles on Texas electricity rates, delivery charges, plan types, energy generation, and more to help Texans understand their bills and pay less. With over 10 years of experience in consumer products, marketing, and energy, he explains the Texas electricity market in plain language.