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Why haven't we seen more ERCOT retail energy provider (“REP”) mergers and acquisitions given February prices?

PRESTON OCHSNER's picture
MANAGING PARTNER OCHSNER INTERESTS

Ochsner Interests is the market leader in retail energy M&A advice, including sell-side advice. We provide advice on a full range of transactions, including mergers, sales, acquisitions...

  • Member since 2021
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  • Mar 9, 2021
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Why haven't we seen more ERCOT retail energy provider (“REP”) mergers and acquisitions given February prices?

1) Many providers with a credit/supply facility went so far negative that they owe much more than they are worth. 

We have one small client with Shell that was losing $2 million a day. Pulse Power said they may have lost as much as $2,000 per customer on over 100,000 customers. That is over $200 million if I did the math right. Keep in mind, these are small providers. Imagine what some of the bigger ones lost. 

Typically the credit/supply provider requires a lien on all of the REP’s assets. They also agree to settle with ERCOT on the REP’s behalf. So, this means the credit/supply provider owns those REPs now. My sources tell me that this issue has gone to the very top of Shell, and they have decided to stick it out. 

People like to call this a black swan to help ease the wounds. While I have empathy for those that suffered financial losses, this was certainly not a black swan. A black swan is an unknown unknown. Everyone in the market knew that prices could go to $9,000 per megawatt hour and beyond (for ancillary services). But, if you can convince your boss it was a black swan, maybe you can keep your job. 

I switched the very first customers that every switched in the ERCOT market when I was at Enron in 2001. You know what the price cap was then? $300 per megawatt hour. People thought that was high then. Someone said that if the cap was $30,000 per megawatt hour it would have gone there and stayed. That is 100% correct. 

A more interesting topic is who called the unelected commissioners and influenced them to artificially increase the price to $9,000 per megawatt hour for their benefit. I have the answer to that, but beyond the scope of this article. 

2) Several providers that were hurt but not killed are throwing good money after bad. I am the biggest advocate for retail competition; but until we know what the new rules are in ERCOT, I would be hard pressed to put a dollar into a provider.

This is outside the likes of NRG and Vistra which have the necessary generation and balance sheet. Excellent article by Jinjoo Lee in the Wall Street Journal today on this topic. Look at the graphic in the article and read between the lines. 

I have actually been approached by more “buyers” than sellers in the last 30 days. These “buyers” include out of state REPs that want to enter ERCOT now. Private equity groups. Energy technology companies, etc. Blood in the water, but I have learned you find out who is really a buyer when they write a check. None of these new “buyers” have. 

Generators have historically made the rules in ERCOT at the end of day regardless of whatever optics around team decisions you put around that. 

3) There are several deals pending that will make a go-no go decision this week.

So stay tuned...

 

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Bob Meinetz's picture
Bob Meinetz on Mar 9, 2021

Preston, I have never seen a better argument for re-regulating electricity under the SEC.
Watching speculative wolves hungering for scraps of captive-ratepayer meat conjures images of electricity in the 1920s. We've been there, done that.

Matt Chester's picture
Matt Chester on Mar 9, 2021

 Several providers that were hurt but not killed are throwing good money after bad. I am the biggest advocate for retail competition; but until we know what the new rules are in ERCOT, I would be hard pressed to put a dollar into a provider.

Will they have enough resources to keep afloat until those new rules happen, though? Despite the urgency needed, I could see this being a long and drawn out process

Rakesh  Sharma's picture
Rakesh Sharma on Mar 12, 2021

Interesting post, Preston. I agree with you re: the big generators in Texas as well as consolidation among REPs. The dip in the share prices of generators was a blip. It will, probably, be business-as-usual after all the furore has died down. Based on your experience, do you think the outage events will lead to significant market reforms at ERCOT? The key word here is "significant", of course.

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