ERCOT supply tightness, strong PJM capacity market boost NRG earnings: CEO
Houston — Tight supply conditions in the Electric Reliability Council of Texas and disciplined capacity market bidding in the PJM Interconnection contributed to significant NRG Energy year-over-year earnings growth in the second quarter of 2018, CEO Mauricio Gutierrez said Thursday.
In NRG Energy’s second-quarter earnings call on Tuesday, Gutierrez and Kirk Andrews, chief financial officer, said the company’s performance is tracking above the mid-point of its 2018 adjusted EBITDA guidance of $2.8 billion to $3 billion, but declined to revise its guidance higher during the hottest, most volatile part of the summer. In Q2, NRG’s adjusted EBITDA totaled $843 million, compared with $686 million in the same period of 2017.
“Our business performed exceptionally well during the quarter with earnings up 23% from the same period last year,” Gutierrez said. “Our portfolio is demonstrating once again the value of integrating between retail and generation during the volatile summer months, particularly in Texas.”
In ERCOT, NRG’s retail operations have priced load fully hedged, and volatility has afforded opportunities to acquire customers from competitors, while NRG’s expanded spring maintenance outages have allowed the company to keep its fleet available for scarcity pricing periods, Gutierrez said. While power demand in ERCOT “has not disappointed” so far this summer, “it took nearly perfect systemwide reliability to meet this summer’s peak demand,” Gutierrez said.
ERCOT’s final Seasonal Assessment of Resource Adequacy projected that generation outages would total 4.3 GW this summer, but on July 19, when ERCOT hit its latest record peakload of 73.3 GW, outages totaled just 3.3 GW, according to the earnings presentation. Similarly, the SARA projected wind generation to deliver 4,194 MW during that peak, but in reality, it was producing more than 4,229 MW.
2019, 2020 SUMMER FORWARDS
NRG has also been able to exploit opportunities to sell power in ERCOT’s forward market for the summers of 2019 and 2020 at attractive prices, Gutierrez said, which gives the company greater revenue stability and enables it to invest in generation reliability.
NRG has sold 72% of its Texas coal and nuclear capacity for the balance of 2018 at $42.47/MWh, 71% of its capacity in 2019 for $51.41/MWh and 59% of its capacity in 2020 at $42.17/MWh, according to the presentation.
While forward prices have offered hedging opportunities for existing generation, they “remain below newbuild economics,” Gutierrez said, and the development of new generation in ERCOT is frequently being postponed by three to five years, adding that “we … don’t anticipate that dynamic to change any time in the near term.”
“So, the bottom line and for the foreseeable future, we expect tight reserve margins in ERCOT, with a higher probability for scarcity pricing and greater volatility, as the system works to stay in balance,” Gutierrez said. “These conditions create opportunities for both sides of our business and highlight the longer term value of our integrated approach.”
FERC’S PJM RULINGS
In PJM, Gutierrez said 85% of NRG’s generation portfolio is in the Commonwealth Edison zone, which tends to price capacity at a premium to other PJM zones.