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Direct Energy Now Sees Market Purchases, Not Generation Ownership, as Best Mechanism to Manage Texas Super-peaks, Weather Risk Centrica, parent of Direct Energy, said during an earnings presentation this week that it now sees market products, along with its existing Texas generation ownership, as the preferred method of managing the pricing and load following risks of super-peaks in ERCOT, rather than owning additional generation assets.
Centrica had several years ago announced an intent to further vertically integrate both its U.S. gas and electric businesses, specifically including increased power generation ownership. However, in July 2011 Centrica Chief Executive Sam Laidlaw said that owning additional power generation in the U.S. was not a "must-do at any price" proposition.
In discussing its recent first-half 2013 earnings, Centrica has told investors that they should expect Direct Energy to be less vertically integrated on the electric side, versus its continued vertical integration on the natural gas side (adding production to retail supply).
Regarding the Texas electric market specifically, Laidlaw said:
"Our general view has been, that actually, if we can cover [our] severe weather risk through market mechanisms rather than having to own assets that have relatively low utilization and high capital intensity and low returns on capital employed, that's a better thing to do, provided we can cover those exposures. And we have been successful in being able to do that through a combination of our three power stations and buying calls in the market. I think there's no plan to change that."
"I think you could expect to see us having a less integrated approach to power generation than we have to gas production for that reason," Laidlaw said.
Centrica's strategy is another rebuke to a line of thinking prevalent in the market a few years ago, in which one analyst said that Texas REPs not owning generation would get "squashed" and were "picking nickels in front of steamrollers" -- a view Matters doubted at the time (see prior story for analysis). This analyst also forecast an "inevitable" shake-out in the Texas retail market, but from the date of that fall 2011 analysis until now there have been relatively few market exits (and only one distressed deal in summer 2012) despite two increases in the ERCOT price cap.
As we've noted before, introduction of a capacity market in Texas would force a shake-out of Texas REPs, as those REPs owning market-subsidized capacity would simply dominate their competitors from a cost standpoint, but we do not see any such shake-out as inevitable if the energy-only market is maintained (see prior story: "Capacity Market Will Lead to Extinction of Independent Retail Electric Providers in Texas"). Laidlaw's comments, as we note in our related story today, (click here), actually reinforce precisely why this would occur.
Turning back to Direct Energy, Centrica said that even after the recent Bounce Energy and Hess Energy Marketing acquisitions, there remain "attractive" investment opportunities downstream in North America, but reiterated that capital will be invested only where appropriate and returns justify such investment.
Margins for the North American retail supply business are still "pretty good," but were challenged during a period during the first half of 2013, particularly when Henry Hub prices exceeded $4 (prices have since receded). Centrica said that margin challenges are seen as a "transient phenomenon rather than a structural phenomenon."
Centrica also reported improved retention for Direct Energy, but did not provide specifics.
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August 2, 2013
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Reporting by Paul Ring • ring@energychoicematters.com
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