When a deep freeze closed half of Texas’ power generation capacity this week, the wholesale price of electricity exploded 10,000 percent, with the financial consequences now being felt from individual homes to huge European energy companies.
Astronomical accounts face customers who have opted for floating rate contracts linked to wholesale prices in the state’s liberal electric market.
The organization that manages the wholesale market is getting participants to place more guarantees to cover what could be a wave of defaults.
And RWE, the German dealership, reported a loss to Texas’ frozen wind farms that could reach 15% of its forecast for annual operating profit.
While the lights are flashing back this weekend, the monetary cost is just beginning to count.
The wholesale energy price was at the maximum allowed of $ 9,000 an megawatt hour for five days from last Sunday. For a home, that translates to $ 9 an electricity charge per kilowatt hour, compared to a normal cost of 12 cents.
In Burleson, a Fort Worth suburb, Valerie Williams received more than $ 6,000 from her electricity retailer Griddy to supply her 1,400 square foot home in the past few days. As the storm approached, Griddy told his customers to switch to more common flat-rate plans from other providers, but not all did, since there was little indication of how extreme prices would become.
Griddy was charging his credit card several times a day, Williams said. She struggled to find a new provider during the crisis before finally identifying one who would switch services on Friday.
“I am guessing it will be close to $ 7,000 when we move,” she said of her account. Griddy did not respond to requests for comment.
Pressure on electricity retailers
Some energy retailers who sell to customers whose neighborhoods have been spared blackouts are now facing financial pressure, having been forced to buy extra energy in the spot market to meet unexpected demand.
Their credit has run out with energy dealers who give them access to the market, such as BP, Royal Dutch Shell, the French dealership EDF and Macquarie, the Australian bank, industry executives said.
The pressure is suggested in data provided to the Financial Times by the Electric Reliability Council of Texas (Ercot), which manages the wholesale energy market and acts as a central counterparty for transactions.
He demanded that companies provide more guarantees as prices soared. Cash held in its guarantee fund reached $ 4.2 billion on Monday, up from $ 600 million two weeks earlier, as its credit exposure calculation soared.
$ 50 billion
Wholesale energy sales in Texas this week
Ercot declined to provide more recent data, but the value is likely to have grown sharply over the week, as it is based on a formula that covers average prices from previous days, traders said. Ercot had a record $ 50 billion in sales during the week, said BloombergNEF, a research group.
On Friday, the city council of Denton, Texas, met to approve an emergency loan to cover $ 300 million that the city utility would pay Ercot this week – more than quadrupling its purchases in 2020.
If demands for guarantees have pushed any group to the brink of financial abyss, it will only emerge in the coming days and weeks.
On Friday night, Ercot announced that it would adjust guarantees for trading counterparties on a case-by-case basis, “in an attempt to protect the overall integrity of the Ercot market by mitigating the disruption of standards.”
Some energy retailers have been forced to buy extra energy to meet an unexpected demand © AFP via Getty Images
‘You can have super winners’
In addition to financial losses, there will also be winners.
Retailers whose customers were among the millions that were interrupted could have made money if they had bought energy ahead of time when prices were lower, said Trent Crow, chief executive of Real Simple Energy, a Houston-based residential electricity broker. They may have sold supplies they didn’t need back to the wholesale market this week at a huge profit.
“You may have retailers that go bankrupt, but perversely, you may have retailers that turn out to be winners. We won’t know about that for a few weeks, ”said Crow.
7%
NRG Energy share price drop this week
Some companies have electricity dealers and power plants, balancing the risks. Stock market investors have been paying special attention to Vistra and NRG Energy, large commercial energy producers that together own the majority of Texas electricity retailers.
Irtra-based Vistra has 18 natural gas, coal and nuclear plants on the Texas market, accounting for nearly 19 gigawatts of production. He said that plants with a total capacity of 1 GW “were not able” to produce electricity and others had “limited capacity” due to low fuel supply. But investors, optimistic that the company was still able to sell enough electricity in the tight market, caused Vistra’s shares to rise 6 percent this week.
NRG, which has a dozen gas, coal and nuclear generating units in Texas with a capacity of 12 GW, said that “the generation of energy from fossil, renewable and nuclear sources has been affected by the cold”. NRG shares fell 7 percent in the week.
Victims in wind energy
Some wind power producers were among the financial victims of the crisis. The turbines accumulated ice as they spun in cold, hail-free skies – without standard heating kits further north – and their electricity production dropped.
This was a particular problem for wind farms that have contracts with Wall Street banks that require them to deliver a certain amount of energy every hour, said Joan Hutchinson, managing director of Marathon Capital, an energy and infrastructure investment bank. Those who fail to generate it need to buy it on the open market.
RWE said that part of its Texas wind fleet was shut down on February 9 due to ice and grid problems. Having sold part of the energy production in advance, the interruptions meant that “the company had to buy these volumes to meet its supply obligations” at prices up to $ 9,000 per MWh.
The estimated cost of € 100 million to € 500 million would represent a large part of the gains, which RWE predicted in the range of € 2.7 billion to € 3 billion for 2020, according to S&P Global Market Intelligence.
Canada-based Innergex Renewable Energy has warned of a C $ 44mC $ 60m impact on its wind farms in Texas due to “contractual obligations to provide a predetermined daily generation”. The company was exploiting force majeure, a clause that could break a contract by invoking extraordinary circumstances, such as natural disasters.
Wind projects typically have bank credit lines to allow them to cover unexpected expenses, said Hutchinson, but for many companies this is now stretched. “They are really stuck in a credit crunch,” she said.
Some ordinary Texans also felt tension. As Valerie Williams said, “Now we have to find out how we can pay this bill.”