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Reversal of Texas regulator's Feb 2021 power pricing boosts uncertainty: executive


Market roiled by pandemic, storm, war

Shell advocates incremental market reform

  • Author
  • Mark Watson
  • Editor
  • Bill Montgomery
  • Commodity
  • Electric Power Natural Gas

Shell Energy Solutions CEO David Black said a court decision that the Public Utility Commission of Texas exceeded its authority in setting Electric Reliability Council of Texas power prices at $9,000/MWh during a February 2021 energy emergency increases uncertainty and risk in a market already shaken by external events.

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For example, when the coronavirus pandemic shut down the global economy in March 2020, "Customers didn't know what was happening," Black said during a keynote interview at the Energy Marketing Conference at the Hilton Post Oak in Houston. Customers did not know how much power they would need, for example.

In mid-February 2021, one of the worst winter storms in Texas history knocked out 48.6% of ERCOT's generation capacity and cut power for about 4 million customers, some for days. Storms like that and another that struck in late December "create a lot of volatility," Black said.

As the February 2021 energy emergency deepened, the PUC ordered ERCOT to consider the widespread firm load shedding then happening in setting the scarcity pricing mechanism to the maximum, which was then $9,000/MWh, even after the market passed a threshold that should have set the maximum at $2,000/MWh or 50 times the natural gas fuel index price, whichever is higher.

On March 17, the Third District Texas Court of Appeals ruled in favor of appellant Luminant Energy, Vistra's generation subsidiary, and against the PUC in that pricing decision, remanding the case for further action.

In February 2022, Russia invaded Ukraine, which had a big impact on global energy markets, particularly natural gas, which soared to $9.50/MMBtu in the summer but have since dropped to the range of $2.50 to $3/MMBtu, Black said. In contrast, natural gas prices had in the past gone three pricing cycles of three to five years.

Navigating through storms

"It's been difficult, trying to navigate through those storms for us," Black said.

The events themselves have been disruptive, but the reactions have also destabilized power markets. For example, the PUC has rolled out a variety of ERCOT market reforms, short and long term, minor and major.

"There's a lot of discussion around long-term market constructs in ERCOT and what the market wants to do," Black said. "Markets like stability, and there's a lot of uncertainty. Without that clarity, we're in a very difficult place to be."

When asked for his thoughts about the Luminant v. PUC case, Black said the court decision "creates uncertainty in the market."

"If you're a power plant developer, you may pause for a second, right?" Black said. "You were thinking that all prices are closed after six months, and it's 18 months later, and now we're talking about price integrity. It's another example of creating ambiguity in the market. That's a lot of uncertainty for us to navigate. It will have an impact. It will permeate through all of our businesses."

Defining the problem

As a power marketer, Shell Energy Solutions tries to determine "what is the problem the customer is trying to solve?" Black said, which often includes not only price stability and reliability but also meeting sustainability goals, which might be affected by the PUC's long-term market reform proposal, known as a Performance Credit Mechanism, which has three components:

  • A central forward options market for performance credits purchased voluntarily by load-serving entities (utilities, retail electric providers)
  • Operating the market with a supply-demand curve similar to the Operating Reserve Demand Curve, in which an administrative price adder is calculated to increase as operating reserves fall to scarcity
  • Backward settlement for performance credits paid to generators based on actual performance during the 20 hours of highest reliability risk

"We understand that markets are going to evolve," Black said. "Technologies do change. People are going to migrate. ... But it's a question of how do we change? How do we have a really robust debate about what the problem is that we're trying to solve."

Royal Dutch Shell has been in business for more than a century, and it expects to be in business for the long term, and has a large customer base in Texas, Black said, which prompts Shell to "aim for incremental change, versus wholesale change."

"We recognize that what may serve today to solve a problem may have unintended consequences, and we need to think through them," Black said.