Here’s the quickest way to drive up electricity bills and ruin a competitive market
AUSTIN — Houston’s NRG will focus less on generating power and more on selling electricity, according to its CEO, part of a nationwide trend that could mean a wave of clean energy or widespread blackouts, depending on who you ask.
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Low natural gas prices and little growth in demand for electricity have the power industry in turmoil. And past proponents of deregulation and free markets are calling for a return to government dictates that guarantee generators a profit.
Texas lawmakers were among the first to break up the electricity business in 1998, dividing it into three distinct parts: generation, transmission and retail sales. Most cities sold off their assets and private firms have dominated generation and retail sales ever since.
Only the Texas transmission system remains regulated. The wholesale electricity market and grid are operated by the Electric Reliability Council of Texas, better known as ERCOT.
Independent generators bid their electricity to ERCOT, which buys power starting with the lowest-cost producer until demand is met. A traditional generator’s margins are based on fuel price, so when a fuel like natural gas is cheap, profits are also low.
The advent of hydraulic fracturing has flooded the country with cheap natural gas, and generators have installed inexpensive natural gas plants across the country that are more profitable than coal or nuclear plants. Renewable energy sources, backed by federal tax credits, have also driven down prices.
NRG, which owns large coal and nuclear power plants, lost $2.3 billion last year and laid off 3,000 employees. The losses would have been much higher if NRG did not also own Reliant, which sells electricity to consumers and generates steady earnings.
CEO Mauricio Gutierrez told investors recently that NRG is flipping the business plan, selling off power plants and expanding the retail business.
“We no longer have a model that is generation-driven,” he said. “This model will take us away from the historical feast or famine earnings of our sector and allow us to take advantage of earnings stability.”
Generators across the country are selling off power plants or shutting them down. Vistra Energy, which bought up TXU’s old power plants, shut down three Texas coal facilities this year.
The worry now is where will our electricity come from and will there be enough?
Uncertainty over future demand and the plummeting cost of renewable sources make it difficult for a generator to make 40, 60 or 80-year investments in new power plants, said Nicholas Akins, CEO of American Electric Power, one of the largest generators in the nation.
“If you look at the way the industry is changing, large central station generation facilities are the most risky investments you can make,” Akins said during the Energy Thought Summit, an annual utility conference in Austin. “It is really difficult to bet against technology.”
Ohio-based First Energy is calling on Energy Secretary Rick Perry to issue an emergency order that would blow up competitive electricity markets by guaranteeing profits for its coal and nuclear power plants. If he doesn’t act, the company said it will shut down three nuclear plants and endanger the PJM grid, which covers parts of 13 states.
Officials who manage PJM deny the closures will hurt reliability and have asked Perry to stay out of it. He should remember Texas, where ERCOT has proven that competitive electricity markets work by encouraging the lowest-cost producers and generating some of the lowest prices in the country.
Vistra’s decision to shut down its oldest, dirtiest coal plants have sent electricity futures in ERCOT for August to $185 a megawatt hour, compared to the most recent peak of $71 in 2015….
