What Are Indexed Electricity Plans?

9 minute read Graham Lumley Last update September 2023

power lines on grid

Indexed electricity plans are a type of pricing structure used by retail electricity providers where the kWh rates are tied to fluctuations in the market. Indexed electricity plans are also called wholesale electricity plans. Indexed electricity rates are different from fixed rates because fixed rates remain the same for the duration of your contract.

Should You Sign Up for an Indexed Electricity Plan?

In Texas, customers are not able to sign up for indexed electricity plans as of May 2021, when the governor signed bills banning this type of plan across the state. If you were able to, indexed rate electricity plans come with huge risk and electricity shoppers are better off enrolling in a simple fixed rate energy plan instead.

Navigating the world of electricity plans can be a daunting task, with numerous options and pricing structures to consider. Amidst the myriad of choices, how can you ensure that you’re making the best decision for your household or business? In this blog post, we’ll explore indexed, fixed, and variable rate electricity plans, delving into how they work, and their pros and cons.

  • Indexed electricity plans offer potential cost-savings but come with risks of price volatility that can lead to incredibly high electric bills
  • Fixed rate plans provide stability and budget certainty, while variable rate plans can be flexible but also have significant price fluctuations
  • The Griddy Energy debacle serves as a warning to understand the pricing model, contract terms and consumer protections when selecting an electricity provider

Indexed Electricity Plans: Tying Costs to Market Indicators

Indexed electricity plans, no longer allowed to be offered by retail electricity providers in Texas, tie costs to market indicators. This allows customers to potentially save money when energy prices are low. However, this comes at a cost, as indexed plans also expose customers to the inherent volatility of the electricity market.

Fixed and variable rate plans are much more common.

How Indexed Electricity Rates Work

Indexed rates are determined by underlying variables, such as wholesale electricity prices. This means that when wholesale prices are low, customers on indexed rate plans can potentially enjoy lower bills. However, when wholesale prices spike, as they did during the infamous Griddy Energy debacle, customers may be faced with astronomical bills.

One particular type of indexed rate plan, the “block and index” strategy, allows customers to lock in a portion of their electricity consumption at a fixed price, while the remaining portion is subject to market fluctuations. This hybrid approach provides some level of protection against price volatility while still offering the potential for savings when market prices are favorable.

Nevertheless, the potential risks of an indexed electricity plan outweigh the potential benefits due to exposure to market fluctuations.

Pros and Cons of Indexed Plans

There are a couple advantages to indexed electricity rates:

  • Potential for savings compared when wholesale electricity prices are low
  • Transparency, as customers can track market prices and directly see their impact on their bills

However, with these benefits come certain drawbacks. Here are the cons:

  • Inherent price volatility, while customers may enjoy lower bills when market prices are favorable, they also face the risk of sudden and dramatic price increases when market conditions shift
  • Lack of stability can make budgeting difficult and leave customers vulnerable to unexpected financial strain

The Griddy Energy Debacle

The Griddy Energy debacle serves as a cautionary tale for those considering indexed electricity plans. When Winter Storm Uri hit Texas in February 2021, it caused massive price surges in the electricity market, leaving Griddy customers with astronomical bills. This resulted in:

  • Public outcry
  • Bankruptcy
  • Liquidation
  • A series of lawsuits against the company

Griddy Energy’s pricing model was based on wholesale prices, which meant that customers were exposed to the full brunt of the market fluctuations during the storm. While Griddy customers typically enjoyed lower prices compared to other providers, the storm highlighted the risks associated with this type of pricing model.

The Griddy debacle illustrates the importance of understanding the potential risks and benefits of indexed plans and making informed decisions when selecting an electricity provider.

texas in winter

Winter Storm and Price Surge

When the winter storm hit Texas, it caused an unprecedented cold snap that led to a major power outage. This, in turn, caused electricity prices to skyrocket, reaching as high as $9,000 per megawatt-hour. Griddy customers, who were on indexed rate plans, experienced the full impact of these price surges, as their bills were directly tied to market prices.

The Public Utility Commission mandated the sale of electricity at the $9,000 rate for four days of frigid temperatures. This was done in an attempt to incentivize power plants to come online and restore power to millions of Texans left without it. This decision, however, had disastrous consequences for Griddy customers, who were faced with astronomical bills due to their indexed pricing model.

Griddy Energy Bankruptcy and Liquidation

As a result of the high electricity bills experienced by Griddy customers during the winter storm, the company faced financial turmoil, ultimately filing for bankruptcy. The bankruptcy process led to the liquidation of the company, leaving former Griddy customers to secure alternative electricity providers.

The Griddy Energy debacle highlights the importance of understanding and managing the risks associated with indexed rate plans. While these plans can offer potential savings during favorable market conditions, they can also expose customers to significant financial strain during periods of market volatility.

Lawsuits and Regulatory Actions Resulting From Griddy’s Failure

In the wake of the Griddy debacle, the company faced numerous lawsuits and regulatory actions. The Texas Attorney General initiated a lawsuit against Griddy under the Texas Deceptive Trade Practices Act, accusing the company of misleading customers about the risks associated with their pricing model. Additionally, customers filed class-action lawsuits against Griddy, seeking compensation for the exorbitant bills they faced during the winter storm.

Griddy has contested the legitimacy of the Public Utility Commission orders that set the electricity pricing at $9,000 per megawatt-hour and is also challenging a $30 million claim that the Electric Reliability Council of Texas is seeking in bankruptcy court. The ongoing legal battles serve as a stark reminder of the risks associated with indexed rate plans and the importance of understanding the pricing model and potential drawbacks when choosing an electricity provider.

Fixed Rate Plans: Stability Amid Market Fluctuations

For those seeking stability and predictability in their electricity costs, fixed rate plans offer an attractive alternative to indexed and variable rate plans. With a fixed rate plan, customers can:

  • Lock in a set price for electricity throughout the duration of their contract
  • Shield themselves from market fluctuations
  • Have a sense of budget certainty

While fixed rate plans may not offer the same potential for savings when wholesale prices are low as indexed or variable rate plans, they provide peace of mind and allow customers to budget more effectively.

How Fixed Rates Work

Fixed rate plans operate by locking in a set price per kWh for electricity for the duration of the contract, which can range from several months to several years. This means that regardless of fluctuations in the electricity market, customers on fixed rate plans will continue to pay the same rate for their electricity throughout the contract term.

Pros and Cons of Fixed Rate Plans

Primary advantage of fixed rate plans include:

  • Ability to shield customers from market fluctuations and provide budget certainty.
  • Customers can more accurately predict their monthly expenses and avoid the risk of sudden price spikes
  • Protection against long-term price increases, as the rate remains consistent throughout the contract term

Disadvantages include:

  • Fixed rate plans may not always offer the best value for customers if market prices fall below the contracted rate.
  • Some fixed rate plans may come with early termination fees

Choosing the Right Fixed Rate Plan

Selecting the right fixed rate plan involves carefully considering factors such as contract length, renewable energy options, and tiered pricing structures. A thorough comparison of fixed rate plans should encompass an assessment of the contract duration, the rate offered, and any additional fees or charges.

To choose the right fixed rate plan for your needs, follow these steps:

  1. Research different providers and plans
  2. Compare rates and contract terms
  3. Take the time to thoroughly investigate your options
  4. Confidently select a fixed rate plan that provides stability and budget certainty while meeting your unique energy needs

BKV Energy strongly suggests that Texans sign up for simple fixed rate plans without gimmicks to maximize their energy savings. Enter your zip code to explore our plans.

fixed rate vs variable rate electricity

Variable Rate Electricity Plans: Flexibility and Risk

Variable rate electricity plans offer a unique blend of flexibility and risk, with prices that fluctuate based on wholesale electricity costs. These plans can be an attractive option for customers who are comfortable with price volatility and are willing to monitor energy prices to ensure they’re getting the best possible deal.

Just like indexed rate plans, variable rate plans bring along certain potential drawbacks such as price fluctuations and the risk of abrupt price spikes.

Up next, we discuss the workings of variable rate plans, their advantages and disadvantages, and provide insights on managing these plans in a deregulated market.

How Variable Rates Work

Variable rate plans operate on a month-to-month basis, with the price per kilowatt-hour (kWh) changing each month based on current electricity market conditions. This means that customers on variable rate plans may see their bills fluctuate from month to month, depending on wholesale electricity prices.

While variable rate plans can offer potential savings when market prices are low, they also expose customers to the risk of price fluctuations and sudden spikes when market conditions change. This lack of price stability can make budgeting more challenging and may not be suitable for all customers.

Pros and Cons

The main advantages of variable rate plans include:

  • Flexibility, as customers can potentially benefit from lower prices when market rates drop below fixed rates
  • Variable rate plans typically don’t have long-term contracts or early termination fees

However, the primary drawback of variable rate plans are:

  • Inherent price volatility, which can lead to sudden and significant price increases when market conditions shift
  • Lack of stability can make it difficult for customers to effectively budget for their electricity costs and may be particularly concerning for those on fixed incomes or tight budgets

Lessons Learned from Griddy: Protecting Yourself in a Deregulated Market

The Griddy Energy debacle serves as a stark reminder of the importance of understanding your electricity provider and the potential risks and benefits associated with different types of electricity plans. By learning from the experiences of former Griddy customers, we can better protect ourselves in a deregulated market and make more informed decisions about our energy needs.

The upcoming sections will shed light on some key takeaways from the Griddy episode, encompassing the importance of understanding your electricity provider, keeping track of energy prices, and proactive measures to protect oneself in a deregulated market.

Always Read the Electricity Facts Label

One of the key lessons from the Griddy debacle is the importance of understanding your electricity provider’s pricing model, contract terms, and consumer protections. By taking the time to research your provider and the various plans they offer, you can make more informed decisions about your energy needs and minimize the risk of unexpected financial strain. Always review the EFL before signing up.

Additionally, familiarizing yourself with your electricity bill can help you better understand the charges and usage associated with your electricity plan. By staying informed and asking questions about your provider and plan, you can protect yourself from potential pitfalls and ensure you’re getting the best possible deal on your electricity bill.

example electricity bill

Monitoring Energy Prices

Another crucial lesson from the Griddy debacle is the importance of monitoring energy prices and market trends. By staying up-to-date on market conditions and investigating alternative electricity plans, you can take advantage of opportunities for lower electricity prices and protect yourself from potential price spikes.

Various methods for monitoring energy prices include:

  • Utilizing smart plugs or smart meters
  • Installing an energy monitoring system
  • Exploring energy monitoring apps
  • Examining real-time electricity trackers

By staying informed and actively monitoring energy prices, you can make more informed decisions about your electricity plan and potentially save money in the process.

Avoid Indexed Electricity Plans to Save on Energy Bills

The world of electricity plans can be a complex and daunting place. However, by understanding the differences between indexed, fixed, and variable rate plans, as well as the potential risks and benefits associated with each, you can make more informed decisions about your energy needs. The Griddy Energy debacle serves as a valuable reminder of the importance of understanding your electricity provider, monitoring energy prices, and protecting yourself in a deregulated market.

Remember to stay informed, ask questions, and weigh the potential risks and benefits of each type of electricity plan. With the right knowledge and tools at your disposal, you can confidently select an electricity plan that meets your unique needs and provides the stability, savings, and flexibility you desire.

Frequently Asked Questions

Is Griddy Energy still in business?

No, Griddy is not still in business. Griddy Energy filed for Chapter 11 bankruptcy protection in March 2021.

When did the Texas power grid fail?

In February 2021, Texas experienced its worst power crisis due to extreme weather, leading to failures in natural gas and coal power plants.

The crisis caused widespread blackouts and left millions of Texans without power for days. It also caused an estimated $195 billion in economic losses.

What is the difference between fixed rate and indexed electricity plans?

Fixed rate electricity plans provide stability with predictable bills, while indexed plans tie costs to market prices, allowing customers to potentially save money but also increasing their exposure to price volatility.

Indexed plans can be a great option for customers who are willing to take on the risk of price volatility in exchange for the potential to save money. However, fixed rate plans provide a more stable option for customers who want to avoid the risk of price fluctuations. Indexed plans are not available for residential customers in Texas.

What caused the Griddy Energy debacle?

The Griddy Energy debacle was caused by the 2021 Texas winter storm that led to massive price spikes in the electricity market, resulting in exorbitant bills, bankruptcy, liquidation, and lawsuits.

How can I protect myself in a deregulated electricity market?

To protect yourself in a deregulated electricity market, understand pricing models, contract terms and consumer protections, as well as actively monitor energy prices and market trends. Look for fixed rate electricity plans that provide stability.

Learn More About Other Electricity Plan Types