Houston — This past week's extremely high real-time wholesale power prices in the Electric Reliability Council of Texas may have hurt some retail electricity providers that inadequately hedged their risk, industry observers say.
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"REPs who are unhedged could be having a hard time this [past] week (and this month)," Manan Ahuja, senior director of North American power at S&P Global Platts Analytics, said in an email. "[Thursday's] price action in balance of the month does seem to look like shorts feeling the pain. However, the previous month (July) was below normal heat, and that certainly did help REPs in the other direction."
The Platts M2MS Forward Curve valued the ERCOT North Hub balance-of-month contract at $261.50/MWh Thursday, up from $134.09/MWh Wednesday. Friday's numbers were not available in time for publication.
Ahuja noted in an email Thursday that Platts Analytics has "been warning our clients about the risks this summer."
The Platts Analytics April North American Electricity Special Report titled "Will ERCOT summer pricing boil over?" forecast load to peak this summer at 74,234 MW and for ERCOT's August systemwide hub to average $217/MWh. On Monday, ERCOT set an all-time peakload record of 74,531 MW, topping the previous record, set in July 2018, by about 1.1 GW. As of Thursday, the ERCOT systemwide hub real-time on-peak locational marginal price has averaged $369.89/MWh, according to the Platts power price database.
HOURS ABOVE $1,000/MWH
On Thursday, ERCOT's real-time systemwide prices topped $100/MWh about 12:45 pm CDT and exceeded $1,000 MWh about 1:30 pm. Prices hovered near $9,000/MWh from about 3:30 to about 5 pm, and finally dipped below $100/MWh around 6:30 pm.
"REPs should be ready for this, given the 'known' historical way that ERCOT July-August can explode," said Campbell Faulkner, senior vice president of Houston-based OTC Global Holdings, an interdealer commodities broker.
"But each company has a unique credit, risk tolerance, and expense sensitivity meaning that hedging is extremely varied in its execution," Faulkner said in an email Wednesday. "I would not be surprised to see a company that was trying to be cheap and 'hope for' another 2018 [summer] run into trouble. Overall if you are a retail provider and do not view the Jul-Aug cooling season with respect, a firm can get completely run over."
The Association for Retail Markets, the Texas organization that represents competitive retail electricity providers, did not respond to a request for comment.
In an email Thursday, Public Utility Commission of Texas spokesman Andrew Barlow said, "Our data indicates that the market is working as designed and that REPs are competing in the midst of these natural market rhythms."
Catherine Webking, an attorney representing the Texas Energy Association for Marketers, offered comments similar to Barlow's.
"The market appears to have worked as intended with the scarcity pricing mechanisms at work," Webking said in an email Friday. "It appears that the mechanisms established in the market, such as price responsive load and retail products, and [Emergency Response Service] have helped avoid escalation of the emergency conditions at ERCOT. I expect that most REPs have a business plan in place that was prepared for the market performance this week."
But Evan Caron, former head of power at TrailStone, an energy asset management company based in Austin, Texas, said it is likely that "retailers, due to these price spikes and higher-than-normal load, had probably short exposure."
"The question is how much they covered on the run up to this week's event," Caron said in an email Thursday. "The events over the last few days showcase how fragile the market is and how punitive it can be for the short REPs."
Customers whose rates are based on wholesale power prices, such as large commercial and industrial customers, "could see 3x or higher prices for the monthly bill than they saw for July, which would be fairly punitive and painful," Caron said.
Wade Schauer, research director for Americas power and renewables at Wood Mackenzie in Sacramento, California, said the summer forward curve provided "some expectation of high prices," but added, "I'm sure there are some customers who have real-time pricing that will be feeling some pain with their next bill."
Beau Freyou, director of IVG Energy, a Houston-based energy brokerage, said power market people are divided over the implications of this week's pricing.
"Half the people we talk to are saying that finally the market is working, the other half are saying, 'The market is broke!'" Freyou said in an email Friday. "Most of the larger REPs own high strike call options to hedge their short positions. The smaller REPs use a larger company to manage their credit and market risk and are at the mercy of their lenders at this point."
Griddy, a retail electricity provider that lets consumers pay wholesale for power plus a monthly fee of $9.99, is crediting customers their monthly fee for August, in reaction to this month's extraordinarily high prices, according to the competitive retail energy website EnergyChoiceMatters.com.
'DEEPER IMPACT ON REPS'
Michael Giberson, an associate professor of energy commerce and business economics at Texas Tech University, said this week's high prices may have a "deeper impact on REPs and energy consumers" than on generators.
"These conditions have been well anticipated, and any REP that entered August unprepared knew it was taking on significant risks," Giberson said in an email Thursday. "At the same time, REPs with energy management programs enabling them to shave off a little load at peak prices will be well rewarded."
Sean Kelly, CEO of Amperon, a New York-based grid analytics provider, said, "REPs are often caught flat-footed during high-demand events like this, which underscores the need for more accurate demand analytics on a per-meter basis."
Smart meters help REPs evaluate appropriate hedging strategies, Kelly said, but REPs "need more control over their load shape, and we anticipate smart-meter powered, REP-centric [virtual power plant] programs taking hold if ERCOT does not introduce more robust demand-response incentives at a market level."
-- Mark Watson, firstname.lastname@example.org
-- Edited by Bill Montgomery, email@example.com