Political intervention in electricity markets has prompted Houston-based Dynegy's President and CEO Robert Flexon to wonder whether the US may abandon wholesale electricity competition in favor of re-regulating the sector with a cost-of-service utility model.
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A former chief financial officer and chief operating officer at another independent power producer, NRG Energy, also based in Houston, Flexon does not mince words about the state of the electricity industry and what some consider the pernicious effects of politics on the sector.
When asked how the independent power producer business model might change over the next five years, Flexon responded with a question: "With states becoming increasingly active in policy making without considering the cost to the public, does it reach a point where the states simply re-regulate to the more expensive monopoly model, since political motivations are outweighing costs ... and hybrid markets won't work?"
Regarding the fundamentals of power generation, natural gas prices are likely to "remain range bound," Flexon said in an email December 6, and increased energy efficiency is likely to limit load growth.
"IPPs are built to deal with this and can be very successful in this environment," Flexon said. "What we have seen are First Energy, Dominion, PSEG and Exelon screaming for subsidies because they claim they cannot compete in a low power price environment and prefer subsidies that the public will pay them. That's why they continue to pursue nuclear energy tax subsidies to boost their returns to shareholders while having consumers foot the bill."
Low power prices have resulted from low-cost natural gas and efficient combined-cycle gas turbine fleets owned by Dynegy and others, Flexon said.
Dynegy's assets generate "some of the lowest-cost power in the country," he said.
Turning the 'competitive market upside down'
As a result, "traditional incumbent generators" are "unable to profitably compete," Flexon said, which is causing "large incumbent utilities that, in particular, have exceedingly expensive nuclear assets [to use] their political muscle and [put] the full-court press on state politicians to act in their own interests and not the public's interest."
"This turns the competitive market upside down, rewarding the weakest and costliest forms of generation while penalizing the best and thwarting innovation," Flexon said.
"This action of heavily subsidizing the most expensive, inflexible units works to the detriment of the consumers and the most efficient independent power generators. As a result, our competitive markets are witnessing the market being disrupted by misguided state policies that can be characterized as corporate welfare through political pork. Unfortunately, [the Federal Energy Regulatory Commission] has elected not to get involved and defend the markets it created."
Low power prices have made it tough for IPPs, as well. Dynegy's most recent quarterly earnings report showed the company lost $133 million in the third quarter, yet that was better than Q3 2016's $249 million loss.
On October 30, Dynegy and Dallas-based Vistra Energy announced plans to merge in an all-stock transaction valued at about $1.74 billion, with Vistra as the surviving entity by mid-2018. Flexon declined to discuss the proposed merger.
Flexon listed the geographical and fuel diversity of Dynegy's generation assets among the company's key strengths.
Vistra currently only has assets in Texas , while Dynegy's almost 27 GW of generation capacity spans 12 states from coast to coast, with the largest concentrations in Illinois, Ohio and Texas.
About 65% of Dynegy's generation fleet is fueled by natural gas, 34% by coal, 1% by oil.
More consolidation unlikely in 2018
Other IPPs are consolidating, shifting toward regulated utilities, shedding assets, declaring bankruptcy. For example, Calpine has agreed to be acquired by a group led by Energy Capital Partners.
FirstEnergy has been exiting its merchant business in favor of its regulated utilities. NRG Energy is spinning off its GenOn merchant unit through a pre-arranged Chapter 11 bankruptcy. Exelon's ExGen Texas has filed for bankruptcy.
"I wouldn't expect to see much in the way of consolidation in 2018 as significant consolidation has already occurred," Flexon said.
"While portfolio changes will occur, such as that which NRG has initiated, the thing to watch in 2018 is on the regulatory side. Will states continue to engage in extensive practices that disrupt the manner in which the market was designed to work? Will we see the new FERC getting involved as they should, versus sitting on the sidelines as has been the recent practice?"
Among Dynegy's significant assets is "a fast-growing retail business," Flexon said, focusing on areas around its generation assets, but the company is also "working on market reforms to improve price formation for our wholesale business and stamping out unnecessary subsidies."
"Politics at the state level are severely impacting the competitive market in a negative way," Flexon said.
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