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The Texas Outage's Winners and Losers in Financial Markets

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  • Feb 19, 2021 10:29 pm GMT
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In the tangled skein of discussions about the outages in Texas, accusations and counter-accusations are flowing thick and fast. Some blame the grid’s reliance on wind energy; others are pointing to its market design which circumvents capacity planning with scarcity pricing; still others say weatherization might be the culprit.

It is, of course, too early to determine causes and effects of the outages. But their repercussions are already being felt in the financial markets, where a couple of winners and losers have emerged from last week’s events.

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Winners and Losers of the Power Price Spike

Power prices reached their maximum price cap of $9,000 megawatts per hour in the ERCOT grid last week. According to most reports, a drastic reduction in production and distribution of natural gas, which supplies most of the state’s heating fuel during winter, is mainly responsible for the increased prices. The fuel’s prices spiked briefly as well freeze-offs curtailed supply.

The Natural Gas Intelligence’s spot average price rose by $21.215 per MMBtu to $86.745 per MMBtu on Monday. In other regions affected by the storm, the change in prices was even more steep. For example, at Oklahoma’s Oneok Gas Transmission pipeline, natural gas prices averaged $918.625 per MMBtu on Monday. Yesterday morning, they were down to $4 per million British Thermal Units. For context, the fuel was trading at $3 per MMBtu earlier this month.

The upshot of these wild price swings is that some natural gas producers and suppliers are making a killing in the current power markets. One of them is Comstock Resources Inc. Bloomberg reports that the Frisco-based natural gas supplier generally sold its gas for between $15 to $186 per million British Thermal units. But this week’s soaring prices are a “jackpot” for its bottom line, according to the company’s chief financial officer Roland Burns. “Frankly, we were able to sell at super premium prices for a material amount of production,“ he told analysts during an earnings call. According to Wade Schauer, research director of Americas power and renewables at Wood Mackenzie, power sold on Texas’s main grid totaled $10 billion on Monday, when prices surged.

Wind power may have also benefitted. An analyst at research firm Bloomberg NEF estimated that a 100 MW Texas wind farm operating during the storm could have made $9.5 million on Monday and Tuesday (as opposed to the regular $40,000) due to the $9,000 MW/h prices.

Remember, this was before scarcity pricing, which occurs when a shortage of supply is unable to meet demand, kicked in. The Public Utility Commission of Texas (PUCT) also did its bit to help their cause by asking utilities to shed loads. Commenting on low prices of $1,200 MWh, the commission wrote that energy prices should “reflect scarcity of supply.” “If customer load is being shed, scarcity is at its maximum, and the market price for the energy needed to serve that load should be at its highest,” it wrote in an order asking ERCOT to set a price cap of $9,000 MW/h last week.

“A lot of (power) generators will make more than a year’s typical revenue just yesterday and today,” said Nicholas Steckler, a power markets analyst at BloombergNEF, on Tuesday. “In the past five years, if generators could get several hours of scarcity in the summer, they were on their way to a good result for a year. Now we are talking days and days full of scarcity.” The power situation in Texas, by the way, has not yet stabilized and grid prices are still flashing red across the state, meaning natural gas plants and wind farms already supplying to the grid are bulking up on profits for this year.

Stocks Affected by the Outage

Meanwhile, stock prices for companies that make and sell generators are increasing. Generac Holdings, one such company, started witnessing a bump in its share price on Feb. 10. Since then, it has been on an upward trajectory, surging by 26% in the last week. “We can’t make them (generators) fast enough and we are doing everything we can to supply more product in the market,” Generac CEO Aaron Jagdfeld told CNBC yesterday.

One would presume that stocks for wind energy companies with substantial operations in Texas would be hit hard by all the negative press around it. However, several large wind farms in Texas are owned and operated by subsidiaries of multinational corporations located outside the United States. For example, Sweetwater wind farm, one of the state’s biggest farms, is owned by Australia’s Infinigen. Roscoe Wind Farm, the world’s biggest wind farm located in Central Texas, is owned and operated by a subsidiary of Germany’s RWE.

The story for utility stocks operating in Texas is different, however. Oncor is the biggest utility operating in the state and has the biggest number of customers affected by the outages. It is owned by San Diego utility Sempra Energy. Shares for Sempra mostly remained flat through the past week, except for a brief spike on Tuesday. Analysts have said that utilities with large retail customers are most exposed to the storm’s effects on their bottom line. This is because their power purchase costs will increase even as their sale costs, to retail customers, remain mostly the same or absent.

NRG Energy, which added 1.7 million retail customers to its rolls after acquisition of Houston’s Reliant Energy in 2019, is the most badly-affected. Its shares have crashed by more than 8% since last weekend, after Texas’s travails became front page news across the country. They recovered slightly this morning. The bond market has also punished the electric retailer with a selloff in its bonds. It is worth noting, however, that the utility’s stock had racked up gains of almost 50% since last September. The long term prognosis for its fortunes in the stock market also remain bright. “The integrated business model — owning wholesale merchant power generation that supplies electricity that gets used to serve customers supplied by NRG’s competitive retail arm — reduces exposure to merchant power markets and commodity prices, while increasing FCF (free cash flow) potential," writes Goldman Sachs analyst Michael Lapides.

Vistra Corp., an Irving, Texas – based energy company, is at the other end of the spectrum. Its shares have risen by approximately 7.5% since news of the Texas power outage broke. The company’s power plants have not been affected by the outage and it has bolstered its energy mix with renewable energy and battery storage in recent times. At a time when peaker natural gas plants are receiving bad press and battery storage mandates are becoming more common across states, Vistra’s strategy spells innovation and novelty to investors in a legacy industry.    

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