The current pandemic has occurred at an interesting time in the electricity markets. After several decades of regulation, electricity jurisdictions are now increasingly deregulated. Retail Electricity Providers (REPs) have multiplied and play an increasingly important role in providing electricity to customers. The flipside to this arrangement is that REPs are exposed to market forces. As often happens in free markets, small players could tumble into bankruptcy, if disaster (natural or manmade) strikes, and disrupt the entire market.
In that context, the current crisis could set a blueprint of sorts for the functioning of deregulated electricity markets in the future.
The Texas Way
Consider the case of Texas, one of the biggest deregulated markets in the country. The Lone Star state introduced the Electricity Relief Program immediately after the pandemic struck. As part of the program, the Public Utilities Commission of Texas (PUCT) did not allow REPs to disconnect electricity for low-income or unemployed individuals and families. They were also asked to offer payment deferral plans to customers who requested it. In return, PUCT said it would reimburse up to 50% of costs that REPs had to bear due to the exercise.
Such a program has the potential to tip REPs into defaults and bankruptcies because they already operate on thin margins due to competitive markets. Changes in market configuration in the past have resulted in REP defaults. For example, Breeze Energy, a limited liability company, defaulted in 2018 during a summer of high electricity prices. But the chances of defaults or bankruptcies occurring during the current crisis are dim. This is primarily due to two reasons.
The first one is the market’s composition.Even though their share has decreased over the years, large firms still dominate the market for retail electricity providers in Texas. Smaller and more nimble players have either been acquired or eliminated from the market because they were unable to scale their operations.
At first glance, the names of top players in the retail electricity market may seem new. But these firms are backed by large and well-established companies. For example, well-known retail player Ambit Energy was acquired by Vistra Energy, a Fortune 275 company and a power generation company, in 2019. Beyond Power, another big player in the Texas retail electricity landscape, is owned by Australian company ERM Power, a local subsidiary of oil giant Shell. Cirro Energy has access to the deep pockets of NRG Energy, the world’s biggest renewable energy company, and Constellation Energy is a subsidiary of Exelon. Even if they suffer losses due to the disaster, there is a good chance that these companies will be able to survive the downturn because of the cash available to their parent companies.
The second reason for optimism about Texas’s retail electricity market is its structure. Defaults can be perilous situations where customers may be left without a provider. Hower, PUCT has named six backup providers, also known as Providers of Last Resort (POLRs), who step into a given service area in case of problems. These providers are large retail electricity companies that function as a backstop to smaller outfits serving a given area. Breeze Energy’s default freed its 9,800 customers to choose another provider or default to a POLR.
Not Complete Deregulation
This neat arrangement, however, may not always safeguard consumer interests or billing rates. POLRs usually “charge the highest simple average hourly real-time settlement point price for the customer’s load zone for the 12 months ending the previous Sept. 1, plus 25%”, meaning that the likelihood that their charges are higher as compared to the customer’s previous plans are greater. Besides, POLR plans are generally short-term and vary from month-to-month. A term plan offered by regular providers is more likely to have cost savings injected to its design as compared to a monthly plan.
The other important thing to consider in this setup is the role of utilities. They are still responsible for transmitting and distributing electricity. As such, their charges are reflected in the final amount of the bill presented by REPs to the consumer as non-bypassable charges. Changes to the utility’s cost structure for transmission and distribution are cascaded down to the REP’s bill to its customer. This means that the utility backstops are essential not only to their own bottom line but also to the well-being of retail providers. The deregulated market depends on regulated utilities to make its market work.