Power market credit crisis looms as Texas bills come due

The Texas electricity crisis last week has morphed into a credit crisis in the state’s wholesale power market, where participants have begun defaulting on a portion of the $50bn in energy purchases made during record cold weather, according to an update from the grid operator. 

The Electric Reliability Council of Texas (Ercot), which serves as a central clearing house for buyers and sellers in the wholesale electricity market, said on Wednesday that it had tapped emergency funding to cover failed payments.

Electricity prices reached the maximum allowable $9,000 a megawatt-hour last week, far above typical levels of about $25, as the winter storm shut down half the state’s generating capacity. 

The bill is now coming due as buyers — such as electricity retailers, municipal utilities and power generators — have to post collateral as a down payment on purchases. Some retailers have failed to deliver it, Kenan Ogelman, Ercot’s vice-president of commercial operations, told the agency’s board.

“Defaults are possible, and some have already happened,” he said.

If buyers are not able to cover their bills, Ercot will pay the generator and the charges will ultimately be spread out to other market participants, including other generators and traders, as permitted by regulations.

Collateral requirements soared as a result of the electricity price rise. The total amount held at Ercot at the start of February totalled about $600m, but a single company, power producer Exelon, said on Wednesday it had posted $1.4bn of collateral with Ercot. It has funded the collateral call with new borrowing, and will book losses of $560m-$710m as a result of the storm, when three of its gas generating plants went offline.

Collateral requirements would peak on Thursday and Friday this week and add “financial stress” on market participants, Ogelman said.

Ercot paused collections on Monday, a day after the Public Utility Commission of Texas had ordered the grid operator to use “discretion” on deadlines for settlements, collateral obligations and payments. 

Some retail providers facing potentially ruinous bills after having to buy power at maximum prices urged the PUCT and state officials to freeze settlement payments and retroactively reduce prices to avoid long-lasting damage to the highly competitive retail marketplace.

However, Ogelman said continuing to halt payments would lead to problems — among them for the adjacent energy futures markets operated by Intercontinental Exchange, where many Ercot participants offset their risks. ICE declined to comment.

“There are consequences to any pause,” Ogelman said. “I think it’s important to understand that there’s a train of dominoes, essentially, that flow through Ercot and into other markets.” 

The extent of the potential liquidity crisis will become clear as more invoices are sent out. “When we have several billions of dollars of invoices outstanding, then it’s a matter of how much of those get paid relative to the collateral we have,” said Sean Taylor, Ercot chief financial officer. “The next couple of days will really determine where we stand.”

To cover shortfalls from defaulting parties, the non-profit had begun to tap an almost $1bn fund supported by electric transmission contracts, Taylor said. 

Governor Greg Abbott has called consumer bills that surged to thousands of dollars for the week “unacceptable”, and the state legislature is due to take up Ercot reform in a legislative session starting on Thursday. But so far there have been no proposals made to deal with the threat of a short-term liquidity crisis in the electricity market. 

Chicago-based Exelon said its final tally of Texas losses would be influenced by factors including “the impacts of customer and counterparty credit losses” and “any state sponsored solutions to address the financial challenges caused by the event”.

Fitch, the debt rating agency, placed all Texas municipal and co-operative electric utilities on a negative outlook, citing the “potentially severe, but uncertain, financial impact of operating challenges, market dislocation and winter weather on the sector last week”.

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