|The sun sets behind transmission lines operating outside Sweetwater, Texas. |
Source: Associated Press
With summer approaching, all eyes are on Texas and the performance of its power market.
Industry stakeholders at the S&P Global Platts Global Power Markets conference in Las Vegas observed April 11 that the prospect of elevated pricing in the Electric Reliability Council of Texas market is likely to significantly impact the strategies of two key, and potentially competing, segments of the market: those advocating existing baseload assets be compensated for resiliency attributes, and those with a keen eye on developing new capacity, with access to large pools of untapped capital.
For a market most recently associated with bankruptcies, ERCOT appears to be cycling back into the good graces of wholesale generators and project sponsors, at a time when forward price curves indicate the potential for scarcity pricing in the near-term. The absence of capacity pricing in ERCOT may never give investors the same low-risk cash flows offered in PJM Interconnection, but with slimming reserve margins and a price cap of $9,000/MWh, the returns on offer in the Lone Star State may be hard to ignore. Conversely, should prices rise precipitously, industry proponents of compensation for large baseload assets, namely coal-fired and nuclear plants, may frame such volatility as evidence for the benefits of preserving existing assets on the basis of fuel diversity and reliability.
Increasing forward curves in Texas are likely to draw additional players into the market, thereby driving liquidity and the probability of wide intra-day price swings. Such volatility may help uncover pressure points across the system, a phenomenon that has yet to be play out in earnest across competitive markets, outside of extreme weather events.
"If you have volatility, you get more players in the market, more hedge funds, traders, banks, so more liquidity," PSEG Energy Resources & Trade LLC President Shahid Malik said, noting a broad absence of pricing volatility recently in Texas and PJM markets. "When you start seeing volatility, that's when you start to see the market takeover, and you'll see more depth in the market."
"ERCOT and the [Public Utility Commission of Texas] seem more willing to take on volatility, and with that comes higher prices and lower prices," Competitive Power Ventures President and Chief Commercial Officer Sherman Knight added, noting the lack of a capacity pricing construct in Texas.
With upside seen on power prices, stemming largely from recent retirements of large baseload coal-fired generating units earlier in 2018 by Vistra Energy Corp., scarcity pricing, should it occur, could provide additional rationale for resiliency payment constructs at the state or federal level, like those lobbied for by Exelon Corp., FirstEnergy Solutions Corp. and Public Service Enterprise Group Inc.
"Either scarcity pricing will print, or it won't, but either result is pretty staggering," S&P Global Market Intelligence Director of Energy Research Steve Piper said, speaking on ERCOT. "If we see a lot of scarcity print, it might just be a market pricing outcome, or it might tell us something about the value of these resources from a resiliency standpoint and whether they're being compensated adequately."
Even without capacity pricing in Texas, an improvement of the forward curve is likely to draw developers' attention. If summer 2018 is tamer than expected, and tighter reserve margins transition into 2019, the persistence of market conditions with the potential for dramatic swings in summer pricing could be too hard for developers to ignore.
"There seems to be pretty good interest from the institutional market now in ERCOT, and I think you'll see deals before long in Texas, but with slightly different terms than in a more established Northeast market," Michael Proskin, Credit Suisse Securities (USA) LLC managing director for power and renewables, said. "I wouldn't be surprised to see a very under-built market with low barriers to entry."
"I do think it's catching people's attention," Proskin added. "I don't know if it's this year or not, but anecdotally, developers are taking a hard look again."
So what will it take to drive the first thermal project? Beyond capacity prices, the answer may depend on who is once again willing to shoulder the risk of uncertainty in long-term pricing.
"ERCOT is an interesting place to invest, but it's so highly volatile that you would have to look at a higher rate of return, and that does drive the supply margin lower," Knight said, noting the improvements in forward pricing. "With those types of prices, it feels like the football has been hiked, and it's sitting there, and someone wants to kick it, but everyone's asking 'Who's holding the football?'"