Wind-Solar Group: Retail Market "Flaw" Of Allowing Insufficiently Creditworthy Retail Suppliers Harms Long-Term Contracting To Support Renewable Development

Says Regulators Should Ensure Retail Suppliers Are "Sufficiently Creditworthy" To Execute Long-Term Contracts

March 17, 2020

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Reporting by Paul Ring • ring@energychoicematters.com

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The Wind-Solar Alliance published a report entitled, "Retail Electric Market Structure Reforms In Support Of Resource Adequacy And Clean Energy Deployment," which states "insufficient creditworthiness standards" for retail electric providers in non-ERCOT states, "affect the ability of retailers to procure supply," and therefore discourages long-term contracts needed for generation development

"We identify two key flaws in retail market structures that hinder resource procurement: rules around default service provision that undermine retail suppliers’ incentive to sign long-term contracts, and insufficient creditworthiness of retail suppliers," the report said

The report says that states can improve retail structures by:

1. "leveling the playing field between default and competitive service;"

2. "ensuring retail suppliers are sufficiently creditworthy to execute long-term contracts."

The report states, "An important yet under-appreciated aspect of the clean energy transition is to make sure the market structure includes entities with the ability and incentive to sign long-term contracts. In the 13 states with retail competition outside of Texas, there is some degree of a market flaw where responsibility for resource procurement has not been clearly assigned to customers or their load-serving entities. These states have 'hybrid' competitive retail structures where there is a monopoly default service provider offering rates that are subsidized to varying degrees and some form of a free option for customers to move in and out of competitive service. This dynamic reduces the incentive for retailers to procure supply. In addition, these hybrid retail states generally have insufficient creditworthiness standards that affect the ability of retailers to procure supply. Finally, wholesale markets in these areas lack some of the essential features of the ERCOT wholesale market that drive efficient incentives for retail providers to prudently manage risk. Each state, including the three we evaluated here — New Jersey, Pennsylvania, and Maryland — have improvements to make sure the structure incentivizes and supports effective long-term contracting. We have identified a number of specific reforms that would improve the operation of the retail markets and enable broader wholesale market improvements."

Regarding retail supplier credit standards, the report states, "It is debatable whether the creditworthiness standards in restructured states are high enough, but they do exist and are enforced. In theory, state regulators could simply require reporting for customers of retailers’ credit-worthiness, allowing consumers to factor that into their choice of supplier, but credit analysis is likely much more complicated than customers can be expected to handle, at least retail customers."

"The Texas level of financial assurance, while high relative to the other states analyzed, may still be too low given experiences with supplier bankruptcies there. A future area of research should evaluate whether bankruptcies were a function of improper management and whether more stringent creditworthiness standards would help. As shown below, however, relative to the other markets analyzed, Texas receives a grade of 'A' for its credit standards because they are significantly greater than those implemented in other states. While low credit standards may facilitate market entry from REPs, they don’t necessarily facilitate prudent management practices, including long-term contracting to support contracted load obligations. For example, Texas requires either net worth standards or letters of credit for REPs to be licensed. The other states reviewed require only a surety bond for licensing. The difference between the approaches is stark, with the Texas market more fully incentivizing prudent management approaches. A surety bond is essentially an insurance policy that costs from 1 to 3 percent of the total bond requirement. As described in the appendices, the $250,000 surety bond requirements in Maryland, Pennsylvania and New Jersey can be met for as little as $2,500 per year (or only $7,500 in higher risk circumstances). A letter of credit, on the other hand, is secured by company assets, in addition to a premium paid for the letter. The $500,000 letter of credit requirement will cost the REP about $5,000 out of pocket, but the REP will also have to pledge $500,000 in assets to the bank that issues the letter. In other words, in Texas, the REP has the full value of the security at risk," the report states

Regarding default service, the report recites previously reported third-party claims that costs related to default service are not fully recovered in bypassable SOS rates. However, as previously reported, in certain of the cited cases (notably BGE), the situation is more nuanced, with much of the debate being the level of the cost assigned to SOS (for various shared overhead), rather than whether such costs are assigned to SOS at all (as opposed to other utilities such as PECO)

Apart from the alleged cost advantage, the report cites other biases in favor of default service, such as its requirement at service initiations

The report generally finds that, although there is no mandate, the ERCOT retail market supports long-term contracting by REPs due to load service risk management practices. In contrast, the report faults capacity markets and utility default service in other retail markets as inhibiting incentives for REPs to enter into contracts for generation

See the report here

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