Griddy ‘wholesale’ pricing model iced over during the perfect storm; but there’s a way to fix it

March 4, Michael Davis, economics professor at SMU Dallas Cox School of Business, for a piece analyzing what went wrong with the Griddy electric retailer during the cold snap and how “dynamic pricing” models could actually work. Published in the Houston Chronicle with the heading Griddy ‘wholesale’ pricing model iced over during the perfect storm; but there’s a way to fix it: https://bit.ly/3wDuI6N

Griddy, the Houston electricity retailer that sent those massive bills to customers after the big snowstorm, has had a bad few days. On Feb. 26, ERCOT shut them down for non payment of bills. On the following Monday the Texas Attorney General filed legal actions accusing them of things like price gouging and fraud.

Maybe Griddy is the most corrupt business since Al Capone’s bootlegging empire or maybe they’re just a victim of unprecedented bad weather. The lawyers can sort all that out. But whether Griddy somehow survives or fails, we should all hope something very similar to the Griddy business model lives on.

By Michael Davis

Here’s why.

The basic economics of electricity are actually not that much different than lots of other consumer goods. For many of the things we buy, most of what we’re paying for is capacity. I spent $100 for a decent coffee maker last month but I use it for about 10 minutes a day. I didn’t pay $100 for a cup of coffee, I paid for the capacity to make coffee whenever I feel like coffee.

And so it goes. Unless you’re a teenager, your bed goes unused for two-thirds of the day. Your car sits idle for hours and hours even though you are making the payments and spending money for insurance. We’re not wasting money on bedrooms and garages, we’re buying welcome capacity.

Electricity is no different. In Texas during a heat wave or as we now know, a record-breaking cold, we can demand over 75,000 megawatts of electricity. Other times we can get by with one-third that amount. This means that our grid needs to have tremendous capacity. That’s expensive but it’s worth it.

But here’s the weird and wonderful thing about electricity. The demand for capacity varies minute by minute. This means that if we can just shift demand by a few minutes, we can reduce the overall demand for capacity.

Since 2010 about 62 percent of the houses built in Texas have electric heat and as temperatures fell on that fateful Sunday night, hundreds of thousands of homeowners cranked up the heat and turned on the weather report. Now some experts who’ve looked at the usage data have suggested that if everyone had just turned down their thermostats to 65 degrees before going to bed, ERCOT might have been able to handle the surging demand.

So how do we get people to shift their demand over the course of a day? Easy. We encourage people to sign up for “dynamic pricing,” a system in which electric prices vary over the course of a day. That way when they see prices go up, they’ll have every incentive to conserve.

Griddy’s pricing scheme was the ultimate form of dynamic pricing. As demand for capacity spiked, the wholesale prices they passed through to their customers spiked.

Paying a fixed fee for the right to buy power at wholesale prices can be a great deal provided two other things are in place.

First, there has to be an economic circuit breaker that caps the maximum charge. That means, of course, that the monthly fee will be higher but for almost every household it will be worth it.

Second — and this is critical — customers need to know what they’re paying in real time and they have to be trained to pay attention. Fortunately, transparency is easy. Every electricity retailer should do what many are already doing: put the current prices up on an app or some other digital display. (Between the oven, microwave and who know what else, we’ve got plenty of clocks in our kitchen. How cool would it be to have one that displays the current price of power?) Information is power — or in this case, the conservation of power. Reform Griddy or let the angry mob drive them out of the village. But let’s promote dynamic pricing. It will help us all reduce the need for expensive capacity.

Michael Davis is an economics professor at the SMU Dallas Cox School of Business Bridwell Institute.