Posted on: 08-10-2011 at 1:13pm
By Stream Energy Chairman Rob Snyder
Upon my return from Houston last evening, I was directed to this post via an email by one of our Ignite associates. I do not know the identity of the author of this blog, but I have in the past read some posts at the Texas Electricity Ratings blog — and found the views of this blog owner highly insightful, if not always 100% accurate.
Anyway: our blogger friend is about 90% correct in this post, which is the first public realization that I have thus far seen that appreciates what is now happening in the ERCOT retailer sector.
However, I am fairly certain that the blogger misunderstands the perspective and manner by which most of the market’s bigger players procure their wholesale energy: and can assert in any case that he is completely off-base in respect of any perceived dangers, difficulties or hardships to Stream Energy – as the only thing that has been making us sweat at the InfoMart is when we exit the building to walk to our cars at the end of the day.
Posted on: 06-08-2011 at 1:55pm
By Stream Energy Director of Market Research Mike Rowley
A prevailing issue in the move from regulatory compact to competition is overcoming the paranoia of losing reliability without all of the regulation-required redundancy that is built into our electricity grid operations. As long as electricity consumers see our product as being in the same class as air and water, they will be willing to pay for 99.9999% reliability. But with near real-time energy markets, the need for ancillary service capacity markets will dwindle, and I predict that other than the ever-present need for the “regulation” capacity market, and the ability to buy energy-only products in near real-time, the responsive and non-spinning reserve markets will be done away with.
Second point, ERCOT showed in the extreme freeze of 2011, that the current system works like clockwork. ERCOT should be lauded for its success in maintaining grid reliability by using rolling black outs. The cost of being any more reliable, not just in ERCOT but in any region, would quickly reach the point of diminishing returns and cost consumers billions more than the current system.
Now, there is a marked difference in how Stream Energy currently does business in Texas and in the Northeast. In Texas, Stream Energy does the billing in a manner called Supplier Consolidated Billing, where Stream has possession of the customer relationship via the bill and a large portion of the customer contacts.
– 65% Smart Meters, 100% by 2013
– ERCOT settles Imbalance Market with Suppliers based on Load Profiles, settlement process disconnect from smart meter data
– Supplier Consolidated Billing Model
In the Northeast we are privileged to be a virtual subcontractor to the incumbent utilities, while they maintain the billing and usually the first contact with the customer on most issues that require the customer to ask a question. Some retail electricity providers are very satisfied with this process because it simplifies their life and places issues like credit management and bad debt as minor or non-existent issues.
I do not see the long-term benefits of a utility consolidated billing model outweighing the risks. It is imperative to maintain the customer relationship through the billing and customer service channels in order to become the “lifestyle products” vendor in the future.
– 95% Smart Meters
– Smart Meter Actual Use Data used for determining supplier’s exposure to the PJM Imbalance Market
– Utility Consolidated Billing Model, Supplier loss of contact hinders customer relationship
Currently, there are operational disconnects in both Texas and the Northeast that must be overcome to allow AMI/AMR to become a driving force in the creation of an efficient smart grid.
In Texas, our imbalance market is settled using by ERCOT-generated customer profiles and not the reality of our customer’s real-time energy usage. 99.999% of the time, in a steady-state environment, the error generated using this method is acceptable; but a few of our smaller retail electric providers had issue with this process in the massive freeze ERCOT experienced in 2011.
One retailer in South Texas saw a huge number of power outages for its customers – they were not consuming power at all; some even had empirical data from smart meters that verified their non use. But ERCOT’s profile-driven process stated that there was consumption in every 15-minute settlement period of all the settlement periods where the empirical data showed no usage.
On top of that issue, 1) the ERCOT weather-adjusted profiles showed excess usage over and above the supply hedges the retailer had in place, and 2) the imbalance market clearing price was pegged at the maximum of $3000 per MWh. So, that retailer paid a premium for energy that was not actually consumed, instead of being compensated for the difference between the supplier’s actual load, which was lower, than its scheduled load.
Lower Prices and Innovative Products
As for deregulation and lower prices, with the assistance of a former PUCT manager turned consultant, I was able to piece together this slide. The question for Stream’s Chairman Rob Snyder from the Dallas Morning News on a panel of experts which included PUCT Chairman Barry Smitherman was, “Has the ERCOT region of Texas seen a drop in residential electricity prices since state-mandated deregulation occurred in 2001?”
|Inflation 2001 to 2009
| 2001 actual TXU Rate before deregulation
| TXU actual 2001 rate adjusted for 9 years of inflation
| TXU’s 2001 rate with fuel cost adjustment reflecting 2009 $6 gas market
| TXU 2001 rate reflecting 2009 $6 gas market adjusted for 8 years of inflation
| 2009 Actual TXU Rate (Product: Fixed Rate12 month with ETF)
As you can see, we needed to take into account two things in our conversion: 1) the cost of Natural Gas, which is the fuel source for electricity at the margin 100% of the time in Texas; and 2) the Consumers Price Index stating actual inflation over those 8 years. The answer is a resounding “YES.”
And if you look at 2011 data, you can see gas prices have gone down, inflation has gone up and we have seen another 10% decline in the electricity rate TXU Energy currently offers.
May 2011 TXU Published Rate
- 10.2 Cents per kWh
- January 2010 to March 2011 Average Inflation Rate = 1.83%
- Natural Gas Price $4.30
I use TXU Energy data because they still serve three million residential meters. If a consumer is willing to do some research, they can find more and differing products at lower costs from reputable suppliers.
The original question was, “Has deregulation lived up to its promise of lower prices and innovative products?” I believe that the inefficiencies that the regulatory compact has perpetuated have been squeezed out of the deregulated markets (with market power issues being the remaining issue) and that the “still regulated” markets are taking notice and doing their best to eliminate the inefficiencies in order to stave off being deregulated.
Has deregulation offered innovative products? I think yes, mostly in the renewable offerings and payment options. Now, look at telecom! 20 years ago (1991) I was paying about $25 a month for all of my telecom services and long-distance calls were an additional incremental charge. Today, my monthly telecom costs exceed $175 a month, but the innovations that I have the choice of using are astronomical and almost unbelievable to a 1991 mind. As for the future of electricity, to quote Frank Sinatra, “The best is yet to come … we ain’t seen nuthin’ yet.”
Lastly, the fate of the DR Companies
The DR companies that have sprung up all over North America are taking advantage of the ability to aggregate customers into blocks of negawatts (thank you, Jim Rogers, for such a descriptive term) that are bid into the capacity and imbalance energy markets of the ISOs. I personally believe that these companies are “stop-gap” entities that are taking advantage of the limitations of the DR marketplace where, even with smart meters, customers cannot directly participate in the selling of their negawatts.
With the advent of a fluid and unconstrained DR market where every entity is a participant, as described in Dr. Cazalet’s white paper, the need for aggregators of negawatts will disappear, energy suppliers or “lifestyle products” suppliers will develop their own methods of assisting/aggregating their customers in taking advantage of DR markets. The best move I have seen in the DR Company environment is when Constellation purchased CPower in anticipation of the future needs of even their smallest customers, of which they just collected 650,000 more with the announcement of the purchase of MX Energy and StarTex Energy.
As kind of an afterthought, because I read something interesting in Restructuring Today recently …
Jim Rogers, CEO of Duke Energy, again introduced a new term into the industry’s vocabulary - DISINTERMEDIATION. It’s a term that has been used in financial circles for a while, and when I broke the word down, I discovered it means “no bilateral problem solving.”
Jim pointed out that if DR market participation and conservation by the consumer is done without the suppliers cooperation or coordination, there may be issues as to long-term planning and real-time load following, as well.
At first blush, I think Jim has something here; but, my second thought is that conservation and DR market activity would follow the same patterns, based on economics, whether the supplier manages the customer or a 3rd party manages the customer. I think those patterns could easily be deciphered and planned for.
My colleagues at Stream Energy asked me two great questions, based on the fact that the Smart Grid will allow all participants to transact, and that the credit issues will be extremely manageable, if not virtually eliminated.
Question #1: Is it feasible that the DR companies could actually evolve into a supply-side entity the size of an NRG or Calpine?
Answer: Again, in reference to what the Constellation/Excelon move of incorporating a DR company into their operation, I personally believe that my sector, the retail electricity providers, will incorporate DR services into our offerings and use our relationship with our customers to eliminate the need for the customer to use a separate entity for DR. I also believe that when the ability exists that a homeowner can place a bid into a market bid stack on his own, a certain percentage of consumers will bypass all service companies and do it for themselves, bypassing even their trusted electricity supplier. However, I perceive that the total customers that play the DR markets, in the future, will never exceed 10% of the market.
Question #2: Could the demand-side entities, like homeowner associations, municipal aggregators or even consumer protection groups, become the agent buyers of a huge magnitude?
Answer: NO! The credit issues that will be mitigated in the future are the supplier’s exposure to bad debt. A supplier still has the same credit issues on the wholesale side of the house at to hedging supply for customers on long-term contracts. Besides, as municipal aggregators have experienced, there is no loyalty to their “cause” and every state that has adopted municipal aggregation has legislated that the customer can opt-out at any time with no penalty. Municipal aggregators may still be around, but I believe that the homeowner’s association would be less knowledgeable and successful in operating this kind of aggregation and the consumer protection entity would not see this as a core competency.
Posted on: 05-25-2011 at 12:41pm
By Stream Energy Director of Market Research Mike Rowley
A former British Caribbean Colony’s parliament was attempting to create efficiency by changing old policies. The fact that the populace still drove on the left side of the road, an old British holdover methodology, was brought up. The financial argument was that American cars were cheaper and that shipping from a geographically closer manufacturer, like those in the US, would also be much cheaper than the alternative. Another faction stated that they thought that a change like that was a large endeavor and should be phased in slowly. The wisest of the wise agreed and suggested that the phase-in should start with the semi-trucks.
Multiple accidents ensued.
Needless to say, even when there is no other way to do it, I don’t like any phase-in methods. And, in association with AMI, I see a variety of methods where the cart is being placed before the…semi-truck. Yes, mistakes and disconnects are abundant. This paradigm shift is feeling like a series of small earthquakes.
My resume shows that I have originated, built and operated power plants … supervised grid operations at the distribution, high voltage and extra high voltage levels … designed and implemented interchange scheduling and energy accounting systems … and even participated in the start-up of companies like Calpine Power Services Company and the Automated Power Exchange, not to mention my latest project, Stream Energy. I spent my first 20 years in the industry at the Salt River Project, Arizona’s second largest electrical utility.
Concern about the ultimate consumer is something that I am experiencing for the first time in my “almost” 38 year electricity career. I have always been on the generation, grid operations and market design side of the business and usually saw the consumer sector as a huge energy eating amoeba. I joined Stream Energy in 2004 as the wholesale supply director, never even thinking twice about the ever-present amoeba that we were serving. After building the supply procurement department at Stream Energy, I hired a new director as my replacement, who is much more intelligent than I am, and then moved into my current position. My title actually has very little to do with my duties to my Stream Energy partners. What I am expected to do is to constantly be looking in all directions, especially forward, and to keep the ship from hitting icebergs or running into sand bars. I look for opportunities and pitfalls, study how other companies are handling the changes and opportunities and generally read every industry news rag daily and discuss it with other energy professionals in my personal network. Stream Energy’s chairman Rob Snyder always seems to feel better if he never hears from me … the assumption being that there are no icebergs or sandbars in our immediate future.
I was asked to do a comparison between ERCOT and PJM as to what smart grid issues affect a retail electricity provider operating in a deregulated market. But, I need to explain more about what history has shown us, and then delve into my own fantasies about what the future holds before I can talk about what the present offers a company like Stream Energy.
I have become acutely aware of the consumer and the individual opportunity that our customers are going to have as they become players in the energy markets instead of captives of the system. Currently, the consumer has a choice of suppliers and a choice of several packaged products in the states in which we do business. But that is the tip of the proverbial iceberg. For the retail electric provider, ownership of the customer relationship will be the most important aspect of our business in the future.
Let me get historical and take a look backwards.
Mark Burlingame asked me this question, and then published my answer in anticipation of the SmartGridPoint seminar. “Has deregulation lived up to its promise of lower prices and innovative products”? My answer to that question was a question … ”Who made that promise?” If you read my whole answer, forgive me, but I want to address it again. Simply stated, regulation is a surrogate for competition. The practice of governments in capitalist countries is to protect consumers from natural monopolies by imposing regulatory constraints. Electricity utilities were deemed natural monopolies in the “post-Thomas Edison Era” after the short stint in the beginning where electricity supply competition thrived, where several electricity companies would arrive and compete for customers in a city and eventually be consolidated into a single company. With the help of anti-trust laws that were relatively new, the governments imposed a regulatory compact on these natural monopolies as competition gave way to consolidation.
Regulation was needed until technology paved the way for competition to be reinstated by dissolving the regulatory compacts with those parts of the industry that could be pushed into a competitive market, i.e. generation and customer service (with the wires companies, still being natural monopolies, remaining in the regulatory compact and acting as a common carrier of the product). So, what is happening is a return to competition after years of regulation. Technology, in the form of computers, arrived and now we see the capitalistic balance being restored. So, the surrogate is being set aside. Competition is being restored. Why? Because there is a natural balance that unconstrained competition creates that is the basis of our capitalistic economy. Bankruptcy is not a bad thing in our economy; it is a “survival of the fittest” tool to keep our economy strong and pure. Almost all of the naysayers in our sector are not saying that competition is bad; they are saying that we still live in a constrained energy economy where the largest players can manipulate the markets for corporate gain and history has shown these naysayers to be, at least, partially correct. The rudimentary tool that economists use to determine a constrained competitive market is called the HHI Index (Herfindahl-Hirschman Index). The simple equation is to take all of the market sector participant’s market shares, square those numbers and then add up all the resulting products. So, if you have 10 generation companies serving a region, and they all have a 10% market share, the sum of the squares would be 1000. The HHI says any sum less than 1600 is a non-constrained market and that no single participant should be able to artificially set market prices. In Texas, when the market deregulated, the largest generator company had an approximate 35% share, followed by a generator company with an approximate 20% share. Just these two companies created 1625 points on the HHI which determined that ERCOT was a constrained market. True competition could not occur without extreme market monitoring and penalties for market manipulation; and still, there is some manipulation that falls within an acceptable range, even for the market monitor and market participants. But, in my humble opinion, I believe that our market monitoring systems are getting better, and that the economic benefits of competition far exceed the cost of the manipulation.