Power Trader Opposed To ORDC Changes In ERCOT Now Concerned With Impact On Retail Market
December 07,2018
Aspire Power Ventures, LP filed comments with the Texas PUC opposing various proposed changes to the Operating Reserves Demand Curve (ORDC), and, in doing so, said that the changes could negatively impact the retail market
Aspire Power Ventures stated in its comments, "It is important to note that both Vistra and NRG are both so-called 'gentailers', i.e., they are both wholesale electric generators and retail electric providers (REP). The effect of an increase in the ORDC adder affects both of these companies very differently than for REPs who do not own generation. The increase in the forward price of power harms REPs who have entered into long-term contracts with consumers and have not fully hedged their exposure. When a REP enters into a long-term bilateral contract with a consumer it is rarely optimal for them to simultaneously fully hedge their exposure under that contract. Rather at any given point in time they will hedge a certain portion of their exposure depending on market conditions. And while managing regulatory risk is part of the job of any market participant, the more systematic, transparent and predictable the regulatory process is, the better market participants are able to manage this risk."
Aspire Power Ventures stated in its comments, "To the extent that increasing the ORDC adder was not expected, then this will, ceteris paribus, cause the price of long term retail contracts to increase and will reduce the number of long term contracts offered by the REPs. In other words, the retail market will be come more expensive and with less choices available to consumers. REPs that are not 'gentailers' will be disadvantaged and may be forced out of the market. In contrast 'gentailers' like Vistra and NRG have a physical hedge insofar as their generation capacity matches their retail exposure and the affect on prices is mitigated internally."
Aspire Power Ventures stated in its comments, "While this is not the appropriate forum to provide the specific details, should the ORDC methodology be changed to provide more revenue to generators, the Commission should expect a commensurate reduction in the efficiency of the retail market as the both number of participants and retail contract offerings are reduced. At a time when the efficiency of the retail electricity market in Texas and elsewhere has been the subject of numerous investigations and analysis, any decision that potentially reduces the competitiveness of the existing market should only be made after all the requisite facts have been gathered and understood. Only then will it be possible to know whether or not this is in the best interest of the overall market and Texas."
While Aspire Power Ventures's instant comments may or may not have merit with regard to the retail market, we note that any concern about "gentailers" have a competitive advantage due to market design would be even greater under a capacity market. As the ORDC impacts energy prices, REPs can hedge against such prices, and are not obligated to pay real-time prices, and can effectively manage against super-peak pricing with a variety of strategies, including reduced customer usage. Such hedging options for REPs are simply unavailable under a capacity market design, where future capacity obligations are unknown, the capacity tags follow the customer, and REPs cannot avoid capacity obligations in real-time (as they can in the energy market) since the capacity tag is in place for a year. The greater advantages provided to gentailers under a capacity market, who would now be paid by competing REPs for a portion of their fixed generation asset costs, cannot be more clear.
However, we cannot find any comments from Aspire Power Ventures expressing concern about the impact on independent retail providers under a proposed capacity market in Texas.
Indeed, one of the oft-claimed goals from Texas capacity market proponents, a reduction in energy market volatility, aligns with a stated goal from a separate Aspire-named company which, at the very least, shares a principal with Aspire Power Ventures.
Specifically, in a 2014 lawsuit which, in essence, attacked the Texas PUC's authority to utilize the "small fish swim free" rule in the ERCOT market, Aspire Commodities L.P. alleged that the "illegal" conduct of a small fish which took advantage of its pricing power, "has introduced volatility into the commodities markets so that on many occasions Aspire [Aspire Commodities L.P.] and Raiden [Raiden Commodities, LP] cannot reasonably participate in those markets."
Scarcity pricing is essential in making the ERCOT energy-only market, which is the best resource adequacy design for all retail provider models to compete on a level playing field, work, and the small fish swim free rule is essential in allowing generators to appropriately reflect scarcity prices without fear of frivolous, politically motivated lawsuits. As such, the concern for the retail market expressed by Aspire Power Ventures should be viewed with skepticism