Indexed energy plans are a type of electricity plan in which the rate you pay per kilowatt-hour (kWh) is tied to a publicly available index or market rate. These plans can fluctuate as rapidly as every 15 minutes based on the cost of electricity in the market. Unlike fixed-rate plans, where the price per kilowatt-hour stays locked for the duration of your contract, or variable-rate plans, where the price changes monthly, indexed plans follow energy market prices in real time.
In May 2021, Texas Governor Abbott signed House Bill 16, which banned the sale of wholesale-indexed power plans to residential customers. This ban came about in the wake of astronomical bills when Texas experienced a freeze and energy prices skyrocketed, with rates of $9,000 per megawatt-hour (MWh). Customers with indexed plans were directly exposed to these excessive rates, leading to energy bills costing thousands and thousands of dollars.
Indexed energy plans could theoretically work well for people with very flexible energy usage requirements who are also willing to monitor market conditions closely. However, for the vast majority of people, a fixed-rate plan is best. They offer the highest level of predictability and avoid the stress of potentially ending up with a financially debilitating energy bill. Let’s discuss indexed rates and why they’re so risky.
Understanding Indexed Rates
Indexed energy plans set prices through a sophisticated method that tracks the wholesale cost of electricity based on a set market index. Prices per plan will vary depending on which market index the provider uses to set the price for its plans.
In Texas, indexed plans followed indicators like the Electric Reliability Council of Texas (ERCOT) Day Ahead Market (DAM) and Real-Time Market. They determine the electricity prices based on factors including weather conditions, fuel availability and generation capacity. When demand for electricity is high, the cost of generating power increases, causing the price of indexed plans to rise. On the other hand, when demand is low, prices fall.
Customers who opt for indexed plans can have highly unpredictable monthly bills when the demand for energy is high. During a cold snap or heatwave, when power generation may struggle to meet demand, wholesale prices typically rise, directly impacting customers on indexed plans and leading to much higher electricity bills.
The key difference between indexed plans and other plan types, such as fixed-rate or variable-rate plans, is that indexed plans are far more susceptible to immediate price swings in the energy market. These price swings lead to volatility and risk for consumers who need predictable costs.
Market Index Basics
The most commonly used market indicators for determining indexed electricity rates in Texas are the ERCOT Day Ahead Market (DAM) and the Real-Time Market. You can monitor the market on ERCOT’s website, which provides grid conditions, supply and demand, and real-time location-based prices.
Changes in market indicators (weather, supply, demand, etc) directly impact electricity prices for consumers on indexed plans. For example, during extreme weather events or unexpected generation outages, the Real-Time Market can see sharp price increases. When the supply of electricity is constrained — such as during a cold snap or heatwave — the price can rise to the market cap, potentially causing bills to skyrocket for customers. Because market prices determine indexed plan rates, any fluctuations in supply, demand, or generation capacity will directly influence the rate consumers pay, making it a highly volatile and unpredictable pricing structure.
Pros and Cons of Indexed Plans
If you’re considering signing up for an indexed plan, consider the pros and cons.
| Pros | Cons |
|---|---|
| Potential for Cost Saving: Indexed plans can offer lower rates when wholesale energy prices are low. | Price Volatility: Rates can fluctuate significantly based on market conditions, saddling you with expensive and unpredictable bills. |
| Market-Driven Flexibility: Consumers can benefit from lower rates during periods of low energy demand. | Exposure to Extreme Price Spikes: During events like extreme weather or high demand, prices can skyrocket. |
| No Long-Term Commitment: Some indexed plans don’t require long-term contracts, offering flexibility to switch providers. | Requires Monitoring: Consumers need to monitor market trends to avoid high costs, which is time-consuming and complicated. |
The Texas Winter Storm Crisis
In February 2021, Winter Storm Uri caused polar temperatures across Texas and covered the state in snow, causing widespread power outages for millions of Texans. The lack of power and increased demand caused by the overuse of home heating systems caused real-time energy rates to skyrocket to unprecedented levels.
While most homes experienced rolling blackouts, residents with indexed-rate plans also had to contend with exposure to prohibitively expensive energy rates when power was available.
Impact on Indexed Plan Customers
During Winter Storm Uri, ERCOT ordered the largest manually controlled load-shedding event in U.S. history, resulting in more than 4.5 million Texans losing power for days. The state’s governing bodies also increased the rate cap to $9,000 per MWh, which cost companies billions of dollars for emergency energy supply. Due to unprecedented demand and low supply, customers with indexed rates bore the brunt of these rate increases, with some customers facing bills over $9,000 for a single month.
The storm and ERCOT’s handling of the situation resulted in the ban of indexed plans and a lawsuit against Griddy Energy. The Federal Energy Regulatory Commission’s final report highlighted “the need for stronger mandatory electric reliability standards, particularly with respect to generator cold weather-critical components and systems.”
Regulatory Response
In response to the catastrophic disruptions caused by Winter Storm Uri, Texas Senate Bill 3 (SB3) introduced a series of reforms aimed at strengthening the state’s energy infrastructure and enhancing consumer protections. The bill improved coordination between the electricity and natural gas industries, including the creation of the Texas Energy Reliability Council.
One key provision was the development of a power outage alert system, which leverages highway messaging signs and coordination between the PUCT and the Department of Transportation to notify residents of impending power outages. The bill also required weatherization measures and inspections to prevent weather-related outages, ensuring that essential services continue during extreme weather events.
The bill established new rules, requiring the prioritization of critical infrastructure during extreme weather and informing customers about involuntary load shedding. It also mandated that power generation facilities prepare for weather emergencies. The bill allowed customers to apply for protections, including a “critical care customer” designation, leading to prioritization during emergencies.
Overall, these regulatory changes enhanced the reliability and stability of Texas’s power grid while reducing the risk of prolonged power outages in the future.
Comparing Energy Plan Types
Since Texas banned indexed plans, you can now pick between several alternatives, including fixed-rate and variable-rate plans.
Fixed-Rate Plans: A Stable Alternative
If you’re a high-energy user or just want a predictable bill each month without the hassle of monitoring energy markets, a fixed-rate energy plan is the way to go. With a fixed-rate plan, the price per kilowatt-hour remains the same for the duration of your contract, whether it’s 12, 24, or 36 months.
Unlike indexed plans, which fluctuate constantly with the wholesale price of electricity, fixed-rate plans shield consumers from market volatility. This stability makes fixed-rate plans especially attractive for households that prefer consistent budgeting and want to avoid unexpected spikes in their electricity bills.
With a fixed-rate plan, you may face early termination fees (ETFs) if you end your contract early. Still, the predictability, competitive rates and protection against market fluctuations make fixed-rate plans the best choice for most people.
Variable-Rate Plans: Middle Ground Option
A variable-rate plan has a flexible pricing structure where the rate per kilowatt-hour changes month-to-month based on market conditions. You don’t have to sign a long-term contract, and you generally won’t owe a deposit. While you may occasionally benefit from low rates when demand is down, you’ll almost certainly face high rates most of the year. And because prices change on a month-to-month basis, it may be difficult to predict your monthly energy costs.
While indexed plans change in real time based on market prices, variable-rate plans typically change only monthly. Although variable-rate plans have less volatility than indexed-rate plans, we still typically don’t recommend them. Variable rates inevitably lead to unpredictable costs, and our research indicates that the inconsistent pricing structure may undermine any potential savings.
Making an Informed Choice
If you’re signing up for an energy plan, do your homework. Take stock of your energy usage patterns and household needs. You can do this by looking at previous energy bills for a full year to account for seasonal changes in usage. You can also pull your precise historical data from Smart Meter Texas.
After you do this, consider how important it is to you to have a stable monthly bill. Fixed-rate plans provide bill predictability, making them ideal for most consumers. These plans are especially good if you live in an area with a volatile market or extreme temperatures.
A variable plan may suit your needs if you value the flexibility of a plan without a long-term contract. However, we suggest exercising caution before signing up for any plan.
For those who prefer renewable energy, many fixed-rate plans offer green options, while most variable-rate plans don’t offer renewable energy. Whatever plan you choose, make sure to review the terms carefully to understand any additional fees or charges that might impact your overall cost. You can assess a plan’s contract terms, cost and total value by reviewing the electricity facts label (EFL).
Frequently Asked Questions About Indexed-Rate Plans
What happens if market prices spike with an indexed plan?
If market prices spike when you have an indexed plan, try to immediately curb your energy usage. If you use energy during a spike, you will likely experience a significant increase in your pricing and it will reflect in your bill at the end of the month. Because the rate changes based on market prices, sudden demand surges like extreme weather events will result in higher charges.
Are indexed plans still available in Texas?
No, indexed energy plans were banned in Texas in 2021 following the extreme price spikes during the February 2021 Winter Storm Uri. The Federal Energy Regulatory Commission released a comprehensive report on the situation that led to Governor Abbott banning indexed energy plans.
How can I switch from an indexed plan to another type?
To switch from an indexed plan to another plan, you should find the plan you want to switch to and then contact your light company to review the implications of canceling your indexed plan. If your contract with your existing light company has expired, you can easily switch providers without any issues, but if you’re still in contract, you may be responsible for an ETF.
What protections exist for consumers on indexed plans?
If you sign up for an indexed plan, regulations may require energy companies to clearly disclose your rate calculations and the potential for price fluctuations. However, these laws vary by state, so be sure to double-check your protections based on where you live. Some plans may have caps or safeguards to prevent prices from rising beyond a certain level, though these protections vary based on the details of your plan.
