Constellation: Retail Business Challenged By Lack of Volatility, Competitors' (Lack of) Pricing of Risk

A lack of volatility, and competitors' pricing in response to this lack of volatility, are challenging Constellation's retail business, Exelon CFO and Executive Vice President Jonathan Thayer said at the Wolfe Research Power and Gas Leaders Conference yesterday.

"I would say there are two meaningful elements that are challenging that retail business. Number one is ... at its core, the absence of volatility."

Although PJM saw a few hours of extremely high pricing this summer, "we just haven't seen a lot of that," Thayer said.

"So that's inducing our customers," Thayer said. "This is really an insurance product against energy volatility. [Customers] have learned that when their bills come due, there's a better price [available], and they get to save money on the next one. And that's now happened for the last three to five years. Well, we're at the bottom, or at least I hope we're at the bottom. So they're waiting for a lower price that's not going to come, but there's not that volatility that's inducing them to see the value of locking in a fixed price for an extended period of time."

"The flip side of that is market participants have been able in this slow volatility environment to not fully cost the risk they are insuring. I believe and it's our fundamental view that with the retirement of the coal assets that you're going to see, volatility has to go up. You're going to see more of those high price days. You're going to be calling demand response more frequently, so that it's not a free option. And we think all of that will be good for retail margins returning back to say the $2 to $4 megawatt hour [range], which would be an improvement from where we are today," Thayer said.