NEW YORK (S&P Global Ratings) Feb. 17, 2021--On Feb. 15 the Electric Reliability Council of Texas (ERCOT) implemented widespread rotating outages to protect the electric grid from an uncontrolled blackout after frigid temperatures and freezing moisture across Texas caused outages to 34 GW of power generation, or roughly 42% of its planned operational generation capacity in 2021. As of now, ERCOT's controlled outages continue to affect almost three million retail customers throughout the state as generation struggles to come online.
- We do not anticipate immediate credit impacts from ERCOT's recent rotating outages because we expect the effects on revenues to be modest relative to annual revenues. However, we believe the customer ire utilities might face after implementing the rotating outages (or load shedding) could challenge their rate-making flexibility;
- We understand that several public power utilities and electric cooperatives were unable to rotate their outages among their customers, which caused some customers to be without power much longer than expected and exposes the need for better market logistics;
- The scale and duration of ERCOT's generation outages due to extreme winter weather exposes the need to fund capital investments to winterize generation assets and equipment; and
- While ERCOT's rotating outage events have been infrequent to date, we believe that in the absence of additional capacity or market reforms, load shedding may become more than an isolated response to ensure grid reliability.
We do not anticipate immediate credit impacts from ERCOT's rotating outages because although even an hour's outage is unacceptable to customers, from a revenue perspective, relative to the annual revenue stream, the duration of the outages is short. Also, public power and electric cooperatives benefit from several key credit attributes including rate-setting autonomy, serving a captive customer base that facilitates cost recovery even when units aren't dispatching, and widely used power cost adjustment mechanisms.
When outages cause customer frustration, often customers do not look past their utilities to ERCOT for accountability. We believe the dissatisfaction some customers feel toward their utility could challenge the extent to which customers are amenable to future rate increases. Most utilities maintain discretionary or automatic power cost adjustment mechanisms which allow the utility to pass along changes in commodity costs, purchased power costs, and power supply costs to customers. However, utilities regularly adjust base rates to recover fixed costs associated with capital investments in generation, transmission, and distribution, which can require approval by a city council or publicly elected body. Therefore, we believe future base-rate increases, particularly for utilities in ERCOT, could be challenging, depending on the extent of customer dissatisfaction.
Austin Energy (AA/Stable) as of today reported 35% of its customer base was without power. Management reports it is unable rotate its outages because it cannot drop any additional load on pre-identified critical load providing essential services. Some customers have been without power for more than 48 hours; rotating outages are meant to last roughly 15 to 45 minutes. Extremely cold temperatures compound the frustration of powerless customers. We also note public power utilities are 24/7 operations with employees working in extreme weather conditions to restore power as soon as possible. CPS Energy (AA/Stable) reports 33% of its customer base is without power. Both Austin Energy and CPS Energy have very strong credit ratings, credit supportive cost recovery mechanisms, and very strong operational management profiles. However, these utilities along with many others are susceptible to the challenges of operating in ERCOT and are not immune to potential challenges to its rate-making flexibility.
We understand ERCOT's generation outages are across all fuel types although natural gas accounts for the majority of installed capacity (51% in 2021). Utilities report constraints on natural gas infrastructure and supply as they compete with their customers using natural gas to heat their homes. In addition, freezing equipment at power plants, ice on wind turbines, and snow on solar panels, contribute to the delay in returning generation online. Because of prolonged frigid temperatures throughout Texas operators of ERCOT's generation capacity have not made significant inroads in bringing generation back on line. As of now, generation capacity is 46 GW or roughly 58% of planned operational generation capacity for 2021, and wholesale power prices remain at the whopping $9,000 MWh system-wide offer cap. ERCOT and public power utilities are asking customers with power to conserve their energy usage as ERCOT maintains about 1 to 2 GW of emergency operating reserves in the event of additional generation outages.
While ERCOT's rotating outage events have been infrequent to date, we believe that in the absence of additional capacity or market reforms, load shedding may become more than an occasional and isolated response to avoid damage to the grid to ensure overall reliability. In recent years, extreme weather events in Texas have highlighted ERCOT's unique market features. ERCOT is an energy only-market, without capacity prices. This contributes to low power costs but also creates a disincentive to build generation and results in thin reserve margins. Although ERCOT last implemented system-wide rotating outages on Feb. 2, 2011, due to weather, the extreme winter weather didn't cover the entire state of Texas. In addition, Texas' high temperatures in mid-August of 2019 caused price spikes over two days. However, the ERCOT market's scarcity pricing signals have not encouraged building conventional generation in a market that does not compensate generation owners with capacity prices.
This extreme weather event reveals ERCOT's need for an "all of the above" generation approach to providing reliable power to the grid, and highlights additional capital investment utilities need to winterize generation. Natural gas remains ERCOT's leading fuel source and accounted for 46% of total energy in 2020. Although natural gas is in abundance at relatively low prices, we observe supply and infrastructure restraints particularly during winter weather events can challenge its reliability. Wind generation continues to flood the ERCOT power market, with wind accounting for 23% of energy in 2020 while coal has declined to 18%. This makes for a more intermittent fuel mix and presents challenges to utilities whose conventional generation is asked to ramp up and down to meet peak afternoon demand when renewable production declines. While there is a cost-benefit analysis for any capital investment, we expect utilities will be increasing their winterization capital investments in the near term to better position their power plants to operate during extreme weather conditions.
This report does not constitute a rating action.
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|Primary Credit Analyst:||Scott W Sagen, New York + 1 (212) 438 0272;|
|Secondary Contacts:||David N Bodek, New York + 1 (212) 438 7969;|
|Jenny Poree, San Francisco + 1 (415) 371 5044;|
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