NRG Posts Loss, CEO Sees ERCOT Market as the “Most Attractive”

NRG Posts Loss, CEO Sees ERCOT Market as the “Most Attractive”

May 3, 2017

by Margarita Fournier; Copyright 2016 by Competitive Assets, LLC.  All rights reserved

On 5/2/17, SeekingAlpha published a transcript of NRG’s recent earnings call, showing a loss for the quarter, caused by “lower capacity revenues in the East,” mild weather, and certain other items. Among the CEO Mauricio Gutierrez’s observations captured in the transcript are these points about the ERCOT market:

“Total generation was down 9% compared to the first quarter of last year,” mainly in the East. “This was partially offset by increases in production from our coal units in the Gulf Coast due to higher wholesale prices.” The growth in the retail business has continued. “Our sales were up in both our retail mass and C&I segments, where we acquired an additional 14,000 retail mass customers over the quarter, bringing us up nearly 87,000 customers year-over-year. Although margins were down slightly due to mild weather and changing customer mix, our growth in customers and customer count helped us maintain volumes.”

Strong growth continues in the Gulf Coast, and “we are encouraged by the fundamental dynamics, particularly in ERCOT. Given the energy-only market structure and integrated platform of Generation and Retail, it’s necessary to mitigate price volatility and deliver sustained value. From a market perspective, given the persistent low commodity prices in ERCOT for almost five years, we do see a heightened risk of both new generation being delayed and accelerated retirements that could tighten the market sooner than expected.”

The company sees ERCOT market fundamentals as strong. “Load growth continues to outpace the rest of the country. On a weather-normalized basis, it has averaged over 2% over the past 12 months…. ERCOT has achieved higher peak loads with lower temperatures over the past few years. The new forecast by ERCOT for 2017 puts peak demand 2.5% higher than last year and a high demand case close to 8% that is 5,000MW higher. At the same time, we’ve experienced energy prices for the past five years with little-to-no scarcity premium.”

According to the CEO, the “market dynamic is putting significant pressure on both new builds and retirements…. There have been a number of delays or cancellation of projects, as developers fail to justify new investment at current prices. For example, the three thermal projects slated to come online for the summer of 2018 have not yet indicated that they have begun construction and are unlikely to achieve commercial operations prior to next summer.”

Considering retirements, “ERCOT has historically understated the actual number of megawatts leaving the system, as you can see, from the period between 2009 and 2016. Looking forward, we see the same anemic estimate for retirements in the reports, assuming only 840MW between 2017 and 2022. In April, we announced that Greens Bayou 5 will go into mothball status, thus 371MW alone leaving the market. And we believe that there are close to 5 to 6GW of already identified generation at risk today in the market.”

The CEO expects future reserve margins in ERCOT to be “in the high-teens,” but also higher loads, fewer new builds, and more retirements, which will tighten the market and create scarcity conditions. “In our view, ERCOT remains the most attractive market in terms of market fundamentals, but we need to see significantly better priced signals before we can start deploying additional capital.”

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