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A Texas startup had big plans to disrupt the state's $21 billion power market. Now its customers face enormous electricity bills.

Submitted by Tech Insider on February 23, 2021 - 9:55am

Snow Waco, Texas winter storm

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Texas startup Griddy has a simple pitch to energy consumers: Switch to Griddy and save money on your electricity bills. 

But last week, following a winter storm that caused widespread blackouts across the Lone Star State, that promise fell apart dramatically. 

Many Griddy customers were stuck with thousands of dollars in energy bills. Some owed more than $15,000 to the Houston-based firm, the New York Times reported. 

Those steep bills stem from the mechanism that can make the company cheaper than its competitors. 

Griddy allows consumers to buy their power at the real-time prices available on Texas' wholesale market. Usually, those prices, determined by supply and demand, are low. Last week, however, natural gas plants and other generators failed and Texans cranked up their heaters, causing those prices to shoot up. Griddy passed those surging prices on to its customers. 

The startup, founded in 2016, shows the challenges of trying to disrupt a large and unregulated energy market without providing adequate protection for consumers, said Kiran Bhatraju, the founder and CEO of Arcadia, an energy broker and digital utility that competes with Griddy in Texas.   

"Variable-rate plans are dangerous, as we're seeing this past week," Bhatraju said. "A lot of these consumers who were put on these wholesale products, they got screwed."

In a statement to Insider, Griddy said that it doesn't control the price of electricity. It also took a number of actions to help customers avoid big bills ahead of the storm — at one point going so far as to encourage all 29,000 of them to switch providers.

Still, the company faces questions from state investigators in Texas' consumer protection division. And experts told Insider that the firm's high-risk energy plan may turn off customers who are seeking more stability in the wake of last week's events.   

texas weather

Griddy set out to disrupt the $21 billion energy market in Texas

Buying energy in Texas isn't that different from buying anything else. There are loads of companies making it, plenty more selling it, and everyone is looking for the best deal. 

The market is huge, generating $21 billion in annual revenues, amounting to more than a third of the US retail market, according to the research firm Wood Mackenzie.

Typically, consumers buy energy from retailers at a fixed rate — meaning, they're guaranteed a certain price of electricity over some period of time. Those retailers make money by buying wholesale energy and selling it at a profit. 

Customers at Griddy get something different: They pay for real-time, wholesale prices, or indexed prices, which the grid manager ERCOT publishes every 15 minutes. They pay $10 a month to Griddy for the service.

That model was developed by founders Nicholas Bain and Gregory Craig, both energy industry veterans. Griddy is backed by power giants Macquarie and EDF Group. 

"We thought there was a better way, and technology allowed us to implement a better way to save Texans money," Craig told Good Morning Texas in 2019.

This model is unusual in Texas and across the US, said Professor Varun Rai, director of the Energy Institute at UT Austin. While many Texas retailers offer variable pricing — which is fixed over a shorter period of time — few companies offer customers access to real-time market prices. 

The UK-based company Octopus Energy also offers Texas customers indexed pricing. Its customers experienced a surge in prices, too, the firm told Insider. Fred Anders, the founder of the website Texas Power Guide, said Octopus is likely the only other company with an index offering in the state. Octopus declined to share how many customers it has. 

Power lines are seen on February 19, 2021 in Texas City, Texas

The costs and benefits of real-time pricing

There are benefits to using Griddy. Customers get energy at the wholesale price, which is usually cheaper. Plus, because prices vary throughout the day, the savvy energy consumer can toggle their usage to suck down electricity when it's cheap and unplug when it's expensive. 

But to access those benefits, consumers also have to take on risk; if prices spike, you're on the hook to pay them. 

That's what happened last week.

Before the storm hit, wholesale energy prices were under $50 per megawatt-hour. By early last week, ERCOT set the price at $9,000 per MWh, to incentivize generators to go online, pushing daily costs for some consumers into the hundreds of dollars per day. 

In a statement, Griddy said it has some members that can "shift usage and rely on home automation" to ride out the past week's storm. 

Against its own interest, Griddy told customers to switch providers

On Friday, February 12, before spot prices topped out, the firm sent emails and texts to its 29,000 customers to encourage them to switch providers. Through Monday, more than a third of them had switched, the company told Insider. 

Griddy also says it has engaged the Texas Public Utility Commission and ERCOT to seek financial relief for its customers who are stuck with big bills. 

Texas Governor Greg Abbott and other state lawmakers have pledged to provide relief to customers hit with enormous energy bills, the Texas Tribune reported. The state also suspended disconnections. 

"We are very pleased to hear that ERCOT, the state senate, and Governor Abbott appear to be taking action to get relief to consumers," Griddy said. "If Griddy receives any relief, we will pass it through to our customers dollar for dollar."

Still, it may take customers a while to warm back up to the idea of indexed pricing, even if it normally can offer savings, said Rai of UT Austin. 

"At least for the next year there's going to be a lot of skepticism about plans like this," Rai said. 

Meanwhile, fixed-price plans and things like batteries that provide homeowners with energy security are set to become even more attractive in the wake of last week's events, Bhatraju said. 

"Our energy markets are literally going to be defined by unpredictable, crazy weather over the next few decades," he said. "A lot of consumers will be looking for protection." 

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