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Exelon Brags About Matched Load Strategy Insulating It From Polar Vortex Retail Hit, With Power Plants Subsidized by Competitors Who Defaulted
Exelon's strategy to match load to generation, "really has played out well" during the extreme January weather, executives said during a Thursday earnings call, in a perfect example of how capacity markets provide asset-owning retail suppliers with an unfair competitive advantage.
As Exelon executives conceded during its earnings call, "While others [retail suppliers] are concerned about uncontrolled costs to serve load, with our robust asset base, our portfolio management capability on the wholesale side has allowed us to take those issues off the table and let our retail team focus on what the customers need, whether they are concerned about prices, if they are indexed or exposed at all, and how we can help them get through this."
"I think that's our advantage in our matched gen-to-load strategy. And I think it puts us well ahead of a lot of our competitors," executives said.
As a strategy, we have no problem with this.
What is a problem is when Exelon does not bear the full costs of this strategy (including all costs of owning assets which are operated solely for the benefit of its own customer base), but is instead able to pawn the costs of maintaining such generation to its competitors. That's exactly what happens with any Exelon generating assets clearing a capacity market.
Small retail suppliers, such as the recently defaulted Clean Currents, not only have to manage their own financial exposure and credit calls from extreme wholesale pricing. They are compelled, through mandatory capacity payments, to subsidize the fixed costs of assets owned by Exelon which clear the market. Exelon then dispatches these plants for the private benefit of matching its own retail load, allowing it to avoid the costs faced by retail suppliers not owning generation.
This, in turn, gives Exelon a pricing advantage in its cost to serve retail load, because it doesn't need to factor in (to the same degree) the risk of volatility, because it can fall back on its owned generation. If Exelon had to recover the full costs of these plants from the same customers for whose benefit these plants are dispatched, then there would be no problem. Under a free market, Exelon would face a decision: either (1) invest to maintain the plants' availability to manage its load, but potentially face unrecovered costs if it can't pass the costs of this strategy on to its customers, due to competitive pressure; or (2) opt to not maintain the generation, and face the same volatility risks as other retail suppliers solely dependent on market purchases.
However, the capacity market relieves Exelon from facing this decision, for any assets clearing the capacity market. Instead, for such units, Exelon can maintain the units' availability, but without having to pass on the costs of such availability directly to its customers. Instead, Exelon retail customers pay only a fraction of the costs of such generation, because the fixed costs of the power plants, for those clearing the capacity market, are subsidized by all retail suppliers in the market.
This provides Exelon with an unfair advantage it would not enjoy but for the capacity payment extracted from load under regulatory fiat. Exelon can now use its matched load-to-gen strategy to avoid the volatility risks that are putting its competitors out of business, without having to assume the majority of the fixed costs arising from this strategy.
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February 10, 2014
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Copyright 2010-13 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
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