Texans endured extreme weather last week.

As home heating systems kicked on, power plants struggled to meet demand. Much of the state lost electricity.

Some systems managed to meet demand. But the cost of that access was higher than expected for some.

The New York Times reported on one customer facing an electric bill of \$16,752. That’s over 70 times an average month for all utilities combined. Other news sites covered similar stories.

There was a common theme in the news: All the bills were from customers of Griddy.

This small, Houston-based company sells electricity at wholesale prices and charges a \$9.99 monthly fee.

The company explains its strategy in terms consumers can understand:

The wholesale price of electricity is set by the grid operator … and can change every five minutes depending on supply and demand. When there is excess energy on the grid, prices drop and can even go negative, which means you are getting paid to use electricity (awesome!).

And when demand is high, like on hot summer days or winter storms, prices can spike. The highest the price can go to is \$9/kWh (which has only ever happened 0.005% of the time). Most of the time though, 96.9% to be exact, it is below the Texas average of \$0.068/kWh.

All this may sound like a deal for consumers. But as far as savings go, let’s do the math that 29,000 Griddy customers seemed to ignore.

## The Truth About Griddy’s Costs

Let’s say a home in Houston uses 2,000 kilowatt-hours (kWh) of electricity per month.

The average cost of electricity for consumers in Houston is \$0.122 per kWh. So, the average bill from a utility, before fees and taxes, would be \$244 per month.

Ignoring fees, Griddy may save the consumer \$176 a year if electricity usage was always 50% below average. However, that’s the best case. More likely, savings are less than \$10 a month.

Now, let’s say there are 20 hot summer days. Demand for air conditioning stresses the system.

If those days had one hour of maximum billing, then the savings are gone, even if the rest of the electricity is discounted by 50%. Again, that’s the best case.

Typical savings would be small. The risks accepted for small savings were large.

## Don’t Chase Small Rewards With Huge Risks

Some consumers ignored the risks. Now there are unimaginably large bills to pay. Consumers might get relief, but taxpayers will pick up the tab.

Griddy’s customers were making bets on complex markets. Many didn’t even realize that’s what they were doing.

Investors often make a similar mistake. They pursue small rewards without realizing it. Some may take large risks without understanding them.

When making decisions about what to invest in (or which power company to use), risks should always be a primary consideration. This requires digging deep and doing the math.

While it’s not fun to identify risks, investors can’t afford to ignore them.

Regards,

Michael Carr