S&P Report Underlines Financial Concerns about ERCOT Generators

Those customers who live within the Electric Reliability Council of Texas power market are blessed with low-cost natural gas-fired generation and rising, competitive wind and solar options within that regional transmission organization’s boundaries.

That’s a good thing for them. For those who do business on the Texas grid, however, it might be a pain in the pocketbook.

A new report by S&P Global Ratings indicated that falling demand and lower margins has resulted in numerous credit downgrades and forecast revisions for several generators in ERCOT. In fact, the extended softness in ERCOT power prices “suggests a longer-term, secular challenge” for the market, especially those who have to compete with gas-fired and renewables generation.

“The effects of low natural gas prices continue to fall disproportionately on coal- and nuclear-fired generation,” the report reads. “These assets have continued to be punished.. . And, with no particular emphasis on reliability in the ERCOT market (compared with caoacut markets in New England and the Mid-Atlantic), margins have compressed dramatically and the shift in dispatch cost has had a considerable impact, one that could be accentuated going forward.”

The ERCOT power market has weakened considerably since 2014 due to historically low natural gas prices, the report says. Renewable generation, meanwhile, is thriving. More than 10 GW of renewable (mostly wind power) has been connected into the gird over the past four years, according to S&P.

“At one point in November 2016, Texas’ wind turbines produced over 15 GW, or about 45 percent of the grid’s requirements at that time,” the report reads. “For 2017, of about 4,200 MW slated to come on line, wind and solar account for nearly 3,800.”

Coal still produces about 25 percent of the ERCOT power generation, but S&P expects between 7,000 to 10,000 MW stilled by plant closures by 2021. The state’s two nuclear plants, Comanche Peak and South Texas, are relatively young and vital compared to other nuclear facilities considered for closure nationwide.

S&P has lowered its ratings on numerous Texas generators recently. Its outlook at ExGen Texas Power LLC is negative, while outlooks were lowered on Panda Temple Power LLC, Lonestar Generation, Sandy Creek Energy Associates and EIF Channelview Cogeneration LLC. In October 2016,  S&P assigned a “BB-” credit rating to Vistra Energy Corp. (then known as TCEH).

“These rating actions, and, to some extent, weakening equity prices for independent power producers that do substantial business in Texas, are indicative of ERCOT’s inherently risky nature and dampened prospects,” the report reads. “Whereas projects in other markets have shown some resilience to persistently low power prices due to more stable capacity constructs, as well as power pricing that tends to be more stable because there are more (and reliable) market participants generally, ERCOT’s projects now look poised to suffer from weak cashflows until the state’s demand catches up with supply, and until renewable penetration slows to some degree (or coal assets retire).”

ERCOT is the independent system operator (ITO) which manages electric power for 24 million Texas customers, or about 90 percent of the state’s load. The ERCOT portion of the grid oversees more than 46,500 miles of transmission line and nearly 600 generation units.



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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at Jennifer.Runyon@ClarionEvents.com.

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