Aug 16

Prepaid Electricity Catching On in Texas

Pre-paid electric plans are becoming more and more popular in Texas because they work well for both consumers and providers.

Retail electric providers are in the business of managing risk.  Specifically, they must manage rate risk and default risk.  Wholesale electric rates in Texas are not fixed.  They fluctuate substantially hour-by-hour depending on the current demand for electricity and the current supply of available power in the grid.

Retail electricity providers sell fixed rate plans to consumers with terms of anywhere from six months to up to as much as 36 months.   That means if there is a short term jump in electricity rates they are not immediately able to pass the cost increase along to their customers because they are bound by the customer contracts.  They must factor in adequate margins when they price their fixed rate plans to consumers to protect themselves from that risk.  They also use hedging strategies to protect themselves against sudden jumps in electricity rates.

Another major risk is called default risk. Basically, this is the risk of electricity consumers not paying their electric bills.   In this event, not only does the electricity provider not get paid, but they still have to pay the producers of the power regardless of whether the customer pays their bill.  Because of this many electric providers require either high credit scores or a deposit.

The theory is that poor credit scores mean a higher risk of default when it comes time to pay the electric bill.  Prepaid electricity plans are often the best choice for credit challenged consumers because they require no credit check.  They also offer the flexibility of month-to-month no contract electricity.