Constellation Energy Considering Building New Peakers in ERCOT

The extreme summer in ERCOT has prompted Constellation Energy to consider the construction of new peaking generation, executives said on an earnings call.

Specifically, executives said that Constellation is, "at the early stages of looking at [an] analysis as to whether it might be economic to build aeroderivative peakers at our existing Navasota sites.

The effort is, "nothing further than initial pencil work and model building," executives said

"But the experience this summer definitely validates the physical value of offsetting that super-peak risk," executives added.

Although Constellation is in the very early stages of evaluating the economics of such a plant, the disclosure should augur against fundamental market design changes in ERCOT. Much of the focus on ERCOT resource adequacy has been on revenue adequacy through spot energy pricing and peaker net margin, but the exposure of load serving entities to volatility in the energy-only market means there is additional value from building load following generation other than simply market revenues, and that LSEs may be the next source for new build, rather than investors simply looking for a return on the asset itself, as opposed to how the asset helps returns in other (e.g. retail) business lines.

Indeed, combining Constellation's view of volatility discussed this morning with that of NRG Energy as discussed in early October, it appears that competitive load serving entities are deathly afraid of exposure to super-peaks. While for NRG this, at least in public disclosures, only includes additional insurance for its retail loads and not new capacity, Constellation at least sees a potential that new (and not simply acquired) assets are a potentially viable solution to protect against the super-peaks. The decision to build won't solely be based on peaker net margin, but the additional benefits from limiting load exposure to super-peaks -- both from avoiding energy prices at such time, and the attendant collateral strain associated with such scarcity prices.

It's also clear that whatever price-reversing effects that current reliability deployments by ERCOT have on scarcity pricing are not dampening enough for competitive load serving entities to not protect against super-peaks, indicating that even incremental changes (such as the $120/$180 NSRS price floor agreed to yesterday) could be sufficient to support new peaking assets as competitive LSEs seek to reduce super-peak exposure.

Constellation reported that the extreme ERCOT weather resulted in an after-tax reduction in NewEnergy third quarter earnings of approximately $32 million. Constellation said that it serves 8% of ERCOT peak load.

Additional details on Constellation earnings will follow Monday.