Calpine: Choice in Texas Retail Market is "Long-Term" Issue Challenging ERCOT Build October 31, 2011 Email This Story Copyright 2010-11 Energy Choice Matters
In the latest and most brash example yet of the desire of competitive generation owners to restrict customer choice, Calpine COO Thad Hill said during an earnings call that retail choice in Texas puts negative pressure on new build in ERCOT, and lamented that there is no "serious dialogue" on this issue.
Specifically, in discussing why forward pricing signals are "just not working" in reflecting ERCOT load growth, Hill cited several "short term" issues, such as ERCOT reliability deployments.
However, Hill also offered the following as a long-term issue for forward heat rates:
"The longer-term issue is the fact that given the retail structure in Texas and their typical one-year contract with customers, there are virtually no wholesale buyers of power beyond a one-year term, which puts negative technical pressure on long-term heat rates. Although there is no serious dialogue right now on the longer-term issue, the shorter-term issues are very much in play and a resolution of any of them will be tremendously helpful."
Hill did not expand on what "dialogue" needs to occur on this long-term issue, which, to be clear, is a result of customers exercising their choice for product lengths, and eschewing the premiums associated with long-term forward purchases (whether it be in retail pricing, or in forward mandated purchases of capacity).
Moreover, the argument that price signals in ERCOT are not working was undercut later in the earnings call when Calpine said that it has opportunities for new capacity in ERCOT, "where [the] fundamental outlook is extremely bullish to invest at attractive prices."
For the projects in ERCOT, Calpine has already begun the permitting process for adding new capacity at two of its existing sites.
Furthermore, Hill also said that one of the reasons for the lack of proper price signals in ERCOT is that the definition of market power in Texas and the associated bidding rules are very unclear. "It is our view that many competitors restrain otherwise rational bidding behavior because of fear of actions [that] occurred in the past," Hill said.
Accordingly, non-structural measures, such as clarifying the capacity calculation for the "small fish swim free" rule, for example, may allow the energy-only market to produce scarcity prices as intended and required for new build, without fundamental changes to the energy-only design.
In any event, turning back to what solutions might be sought for the "long-term" problem in ERCOT, anything which requires customers to support investment other than through their free selection of retail product offerings is clearly contrary to the principle of customer choice, and the principle that investors, not customers, should be bearing the risk of new build. If investors are now balking at this opportunity, as claimed by competitive generators, the solution is not to compel load to guarantee revenues to generators to help finance new build (through capacity payments or any similar structure). Such mandated capacity purchases simply create a new class of "captive customers" -- the antithesis of choice -- with the only difference being that an auction, rather than a state regulator, selects and prices the asset.
Indeed, addressing the PJM market, Calpine executives said that the "market" needs to give a price signal somewhere between five and seven years to support new build. And by "market," executives mean requiring, by tariff, load to purchase capacity seven years forward even though the lower cost alternative might be to not forward purchase capacity for such a long period.
With no hint of irony, Calpine CEO Jack Fusco chided states for "meddling" in the PJM capacity market, lamenting that states need to, "work within the structure of the competitive markets."
Of course, the New Jersey long-term capacity contracts were undeniably permitted under the PJM market structure and rules at the time that the enabling legislation was passed, and it was generators who "interfered" with the established PJM tariff and bargain struck in the RPM settlement to increase capacity prices by changing (not enforcing) the Minimum Offer Price Rule.