NRG devoted a portion of its earnings call on Friday to sharing its "skepticism" regarding the latest ERCOT Capacity, Demand, and Reserves report, which shows reserve margins above the target of 13.75% through 2022.

NRG COO Mauricio Gutierrez told investors:

"Currently, there are two divergent views in the market. ERCOT recently released their latest CDR report where they see reserve margins expanding by 5% in 2018 and beyond, and putting them well above target reserve margins. This outlook, from our perspective, is a best-case scenario, requiring three assumptions to happen at the same time: low load growth, incremental new supply, and zero retirements. We're skeptical about this.

"Over the past few years, loads grew at an average of 2% on a weather-normalized basis. We expect less than forecasted newbuilds, as participants respond rationally to a very depressed forward market, and we expect greater than zero retirements given the challenging price environment and stricter environmental rules. When we do see a supply rationalization, our Texas fleet of surviving coal and gas units will be well-positioned to capture additional value."

Skepticism of the CDR report is healthy; after all, it's simply a forecast that's the product of certain inputs and assumptions, or essentially, one view of potential market outcomes.

Indeed, the inherent limitation in forecasts, especially beyond the immediate term, is precisely why reserve margin forecasts should not be used to impose radical market design changes on Texans, such as the capacity market that NRG was pushing based on the May 2013 CDR. Indeed, the intrinsic flaw of the capacity market itself is that it relies on forecasts to mandate demand purchases for a period typically three years out, when such forecasts have historically proven to be wildly inaccurate.

However, NRG expressed much less skepticism of the May 2013 CDR report, which showed reserve margins falling below the target as soon as 2015

To NRG, the May 2013 CDR was dogma, which essentially guaranteed that Texans' lights would go out if Texans didn't adopt a capacity market.

Now that the CDR is showing healthy reserve margins for almost a full decade, NRG is skeptical. We're shocked.

Tags:
NRG Energy   Capacity Market   ERCOT   Texas  

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