(HOUSTON, TX) - - Texas' electricity prices have exploded in the past couple of days as failing power generation collides with soaring demand, and it’s likely that power retailers and consumers are going to be left holding the bill.
Electricity on the Texas grid has averaged about $1,137.33 per megawatt-hour so far in February, up from $18.20 per megawatt-hour in February 2020, according to data from the Electricity Reliability Council of Texas.
“Any time something like this happens, there are winners and losers,” said Bernadette Johnson, senior vice president of power and renewables for Enverus. “When you’re talking about power and gas, it’s generally the ratepayers that will have to pay the sky-high costs for this period of time.”
That generally means consumers paying utility bills. Based on some back-of-the-envelope math, Johnson said she thinks exposed consumers could end up paying hundreds of dollars more at the end of the month than what they are used to. That’s assuming they are lucky enough to still have electricity at all right now, of course.
Retail Woes
On the other side of the contract, this could be a death blow for retailers whose customers are largely on fixed-rate agreements. If such retailers aren’t well hedged, they may not be able to afford the expense to buy megawatts and turn them over to customers at a loss.
“If the retail supplier has short positions, they have to go into the market to cover those positions at the prevailing price,” said Andrew Barth. Barth is partner and co-founder of CSD Energy Advisors LLC, a Houston-based energy-management firm.
On top of that, ERCOT requires retailers to put up collateral on the cost of the electricity they purchase said Peter Selber, founder and managing partner of Infinity Power Partners LLC, another energy-management firm.
“ERCOT is basically telling them, you have to give us more money because we don’t believe that you can fulfill your end of the bargain,” Selber said.
If companies don’t have the liquidity to post that extra collateral, they’re in trouble. The problem is severe enough that companies on the losing end of this situation could well find themselves in bankruptcy court, Barth said.
Other companies might have to take to mergers and acquisition markets in a position of extreme distress, Selber said. He’s heard anecdotally that some smaller providers have already opened negotiations with larger suppliers over this issue.
“You’ve got a window of time to post this collateral. This is really nasty,” Selber said. “I think it will be pretty significant. I think you’ll see some distressed assets and distressed suppliers that get rolled up, maybe not at pennies on the dollar, but at a significant discount.”
Large companies with retail power businesses have already been consolidating in the space even before this extreme event. Houston- and New Jersey-based NRG Energy Inc. (NYSE: NRG), for example, acquired Direct Energy for $3.6 billion earlier this year.
