The financial default of a competitive retail electricity provider in the Electric Reliability Council of Texas market has prompted the grid operator to start transitioning 9,800 customers to providers of last resort.
Some ERCOT market experts said other retail providers might run into similar troubles given this summer's expected high prices. At the ERCOT North Hub, August on-peak forwards averaged almost $220/MWh in May.
"The market certainly expects uplifted power prices in ERCOT this summer, driven by a combination of generator retirements, increased underlying load growth expectations, and a hot summer," David Cherney, an energy and utilities expert at PA Consulting Group, said in an email May 31. "To the extent that extremely high power prices materialize, it increases the default risk for retail electric providers that are either not appropriately hedged or lack significantly liquidity."
Mark Burlingame, managing director at the Energy Guidance Group, an energy market consultancy, said he expects "a few more defaults."
"It will not be a serious problem, since most well-established REPs are well hedged," Burlingame said in an email May 31, referring to retail electricity providers. "The risk of price spikes due to ERCOT's lower-than-usual reserve margin should not be a surprise to any market participants. I'd be surprised if we see more than three or four more defaults."
On May 31, ERCOT confirmed that Breeze Energy, a limited liability company that has been licensed as a competitive REP by the Public Utility Council of Texas since October 2012, had defaulted with respect to a financial aspect of "the Standard Form Market Participant Agreement with ERCOT." According to a June 1 article in The Houston Chronicle, the company, though headquartered in Dallas, was active in the Houston area.
ERCOT had issued on May 30 a notice to market participants — not a public notice — that the default had occurred the day before, stating that ERCOT had initiated the process of moving the 9,800 customers to providers of last resort, or POLRs.
Last-resort rates designed to prompt customer switching
The move theoretically exposes those customers temporarily to the risk of real-time power prices, but an industry official said that is unlikely to happen.
The PUCT names backup providers, generally known as POLRs, for each utility service area, and further delineates different POLRs within each service area by customer classification: residential, small nonresidential, medium nonresidential and large nonresidential.
Currently, Texas has six POLRs: Centrica PLC unit Direct Energy LP's CPL Retail Energy LP and Direct Energy Business; EDF Group's EDF Energy Services; NextEra Energy Inc.'s Gexa Energy LP; NRG Energy Inc.'s Reliant Energy Retail Services; and Vistra Energy Corp.'s TXU Energy Retail Co. LLC.
Of these, Direct Energy Business, EDF Energy Services and Gexa Energy only serve nonresidential customers in a POLR capacity. Some serve multiple customer classes and multiple utility service territories.
Texas rules allow POLRs to use a formula that incorporates the average hourly real-time settlement point price for each residential customer's load zone for the billing period plus a surcharge, but Direct Energy Director of Government and Regulatory Affairs Ned Ross said no POLR is likely to charge that rate because a customer's real-time consumption calculation would be cumbersome and the bill might be too high and conceivably go unpaid.
Under PUC Substantive Rule 25.43, a POLR may instead charge the highest simple average hourly real-time settlement point price for the customer's load zone for the 12 months ending the previous Sept. 1, plus 25%.
"The rule is designed to allow POLR providers to charge competitive rates less than the POLR formulaic rate and give them the opportunity to win the customers' business and transition them off of POLR service as soon as possible and on to a competitive product with that REP or another REP of the customer's choosing," Ross said.
Health of retail providers sector unknown
Ross said "there's no way for us to know" how many more REPs may end up defaulting this summer.
"We simply don't know which companies are struggling," he said, adding that while some retailers may exit ERCOT, others may enter.
The Texas Energy Association for Marketers encompasses 10 competitive retail electricity providers, and its general counsel, Catherine Webking, a partner at the law firm of Scott Douglass & McConnico, said, ERCOT has recently revised credit calculations to include forward curves in collateral calculations, which may affect REPs' financial strength.
"Particularly for REPs who have not entered into bilateral contracts to fulfill their power supply obligations, these credit calculations are expected to have an impact on some REPs who have limited access to capital," Webking said in an email May 31.
Ross said he visited PUC Chairman DeAnn Walker May 31 on another matter, "and I can tell you with great confidence that she is monitoring this market very closely."
Webking said, "I do not think the defaults will [be] common at all," partly because some mothballed generating units have come back online.
"In addition, the extent of distributed generation deployments have increased and will be able to respond to price," Webking said. "The price signals sent this summer are likely to expand load response products."
If the number of customers involved in mass transitions expands substantially, regulatory changes may result, she said.
"If it becomes apparent that the credit calculations have caused REPs to default that can otherwise demonstrate that they would have been able to meet their financial obligations in the market, there may need to be some additional review of the credit calculation formula," Webking said. "If there is a circumstance where uplift to the market as a result of the defaults is significant, the credit calculations may also be revisited."
Mark Watson is a reporter for S&P Global Platts which, like S&P Global Market Intelligence, is owned by S&P Global Inc.