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How Does Oil and Gas Drilling Raise Electricity Prices in West Texas?

By: Robert Fares |

In July 2012, Frontier Texas, an Old West museum located in Abilene, received an electric bill nearly $4,000 higher than expected. Oddly enough, the museum hadn’t used an unusual amount of power that month. Rather, the cause of the high bill was the fact that Abilene lies in Texas’s western power trading zone, which happens to be home to the Permian Basin, the nation’s most prolific oil-producing region. How is oil development raising electricity prices in West Texas? It all has to do with congestion on the power grid.

Since the rise of hydraulic fracturing, Texas has experienced a renewed boom in oil and gas drilling. The boom has transformed countless sleepy towns into centers for energy production, bringing economic development and rapid population growth. With the sudden growth, demand for electricity has skyrocketed not only from industrial equipment but also from new homes and businesses cropping up in the wake of the boom.

In regions like West Texas’ Permian Basin, electricity demand has increased so much that it sometimes exceeds the capacity of power lines linking the rural region to the rest of the state’s electric grid. The only way to meet the region’s power demand is to use older, seldom-used power plants that are available locally. But electricity from these plants costs more than power from the state’s grid, because older plants typically operate at a lower efficiency, meaning they have to burn more fuel to produce a unit of electricity. Furthermore, because standby plants rarely produce energy, the price at which they sell energy must include a higher surcharge to cover the initial capital cost of the plant. The result is that the price of all electricity increases in West Texas—it becomes a valuable commodity due to high demand and constrained supply.

Meanwhile, the rest of Texas has enjoyed lower electricity prices than usual thanks to the boom in natural gas production. In 2008, before the boom, the average retail price of electricity in Texas was 11 cents per kilowatt-hour, versus the national average of 9.74 cents per kilowatt-hour. Today, the average Texas price is just 8.77 cents versus the average U.S. price of 10.08 cents per kilowatt-hour, prompting Texas leaders to frequently boast about the low cost of energy in Texas. At a recent meeting of the Texas Public Utility Commission, former commission chairman Barry Smitherman boasted “Houston and Dallas have the lowest [electricity] prices of any big city in America.”

Graph showing the average price of electricity from 2007 to 2013
Thanks in part to the natural gas drilling boom, average Texas electricity prices have decreased in recent years while average U.S. prices have increased. (Source: EIA)

Despite the fact that most Texans have seen lowering energy prices since the dawn of the latest boom, those living in the state’s western power zone have faced higher electricity prices caused by the extreme electricity demands of oil and gas development. This is no market distortion. In fact, the electricity market is working exactly like it is supposed to: energy users located at a particular node of the grid are using more than the grid can handle—so the price goes up at that node, helping to stem demand and attract new investment in electricity generation. The only problem is that ordinary electricity customers, like Abilene’s Frontier Texas museum, are caught in an economic feedback loop that’s a little above their pay grade.

While the big oil companies can withstand a little dent in their return on investment from drilling a well, institutions like Frontier Texas can’t afford the hit without major sacrifices. The museum was forced to cancel its fall festival and a number of other programs when one unfortunate electric bill put it $3,300 over budget.

Like every boom before it, the latest boom is not without its busts. Can electricity transmission companies keep up with the oil industry’s thirst for electricity? I certainly hope so, for the sake of Frontier Texas and other bystanders in the West Texas energy rush.