NRG expects strong ERCOT power demand growth, plans solar capacity additions

NRG Energy executives said Thursday they expect power demand in the Electric Reliability Council of Texas market to increase at the fastest rate among US regional grids amid an increasingly tight supply-demand balance, which could support medium-term power prices.

"Electric demand in ERCOT continues to grow at the fastest pace in the nation, between 2% and 3% per year, for the foreseeable future," Mauricio Gutierrez, NRG's president and CEO, said during the company's fourth quarter 2019 and full-year earnings conference call.

"The direct result of this robust load growth is a record-tight supply-demand balance, or reserve margin, that requires a tremendous amount of generation investment simply to maintain the current low reserve margin," Gutierrez said.

ERCOT power demand increased at a 2.4% compound annual growth rate from 2012 to 2019 and is forecast to grow at a 3.2% CAGR from 2020 to 2024, according to NRG's earnings presentation that cites ERCOT's long-term load forecast.

Reserve margins could decrease from a current 6.8% into negative territory by 2023 or 2024, according to the presentation citing ERCOT's December Capacity, Demand and Reserves Report. ERCOT's planning reserve margin for summer 2019 was a historically low 7.4%.

As a large market participant, NRG is looking to serve expected load growth through new-build solar power projects that can help maintain reliability and will do this by entering into medium-term power purchase agreements, Gutierrez said.

The company in 2019 signed 1.6 GW of solar PPAs in ERCOT, according to its earnings presentation.

From an overall market perspective, NRG expects ERCOT to remain tight and volatile for the foreseeable future. Gutierrez said the company's integrated platform positions it well for the upcoming volatile an emerging renewable energy new-build cycle.

ERCOT's Generation Interconnection Status Report from early February showed 73.6 GW of solar power capacity in the queue, up from 67.8 GW in the previous month's report.

PJM CAPACITY MARKET

Progress is being made in NRG's core markets with the Federal Energy Regulatory Commission, states and ISO's adapting current market designs to the evolving power grid, Gutierrez said.

And while that progress "has not been perfect," NRG supports efforts to create durable markets that facilitate transitioning to a cleaner energy future, he said.

In the east, FERC issued a ruling on the PJM Interconnection capacity market that seeks to correctly account for resources that receive state subsidies like those for nuclear power plants that "stifle development of renewable energy and distort the integrity of competitive markets," Gutierrez said.

He characterized the ruling as the latest in a series of market reforms that FERC and PJM have undertaken since 2004 to protect competitive market integrity.

In December 2019, FERC's Republican majority approved an order (EL16-49, EL18-178) that subjects most new-build resources and some existing electric facilities receiving state subsidies to an administratively determined price floor in an effort to avoid capacity market price suppression.

Asked by an analyst about the PJM decision's impact on NRG, Gutierrez said in terms of context the company's total exposure to PJM is less than 5% of EBITDA, but NRG has been actively engaged in the capacity market discussion and is "very pleased" with the FERC order.

Chris Moser, NRG's executive vice president of operations said the FERC order was positive for competitive markets and should help mitigate the impact of "handouts" to some local utilities. He added that while some states are considering leaving the PJM capacity market, such a decision could end up being "an inferior alternative" for consumers than remaining within the regional market.

When states have left the market in the past it has "consistently cost the consumer ... three to 10 times the prevailing [capacity] auction rate, shifted risk onto a captive set of ratepayers and locked in a local monopoly," Moser said.

PJM's compliance filing to FERC in that proceeding is due March 18.

NRG reported full-year 2019 income from continuing operations of $4.1 billion, or $16.81 per diluted common share. Adjusted EBITDA for full-year 2019 was $2.0 billion.

The generation segment saw full-year 2019 adjusted EBITDA of $1,069 million, $205 million higher than 2018, and Q4 19 adjusted EBITDA of $130 million, $46 million higher than Q4 2018.