Oil company’s big renewable energy buy in Texas highlights risks for merchant generators

Exxon Mobile Corp.’s decision to purchase some 250 megawatts of renewable wind- and solar-generated electricity in the heart of Texas oil country highlights the economic risks facing traditional coal- and gas-fired merchant generation plants, Liam Denning writes in Bloomberg Opinion. In the energy-only wholesale power market in Texas, merchant generators rely on significant price swings for earnings. But these price spikes are damped by growing wind and solar generating capacity in the Electric Reliability council of Texas market. “Blunted peak pricing is a risk for merchant generators, which aim to capitalize on those windfall hours. That’s one reason the likes of NRG Energy Inc. and Vistra Energy Corp. have built up their retail power businesses as a hedge,” Denning notes. “Looking ahead, gas-fired capacity . . . is better positioned than coal to withstand the threat. The latter should bear the brunt of expanding solar capacity, with more closures likely. But solar power’s expansion represents a structural challenge to all merchant generators in Texas. This goes back to how the power market works there, eschewing things like capacity payments to reward generators in favor of the lottery of scarcity pricing. Solar power, like wind, is aimed squarely at those lucrative peaks and ultimately flattens them once capacity gets large enough.” Plant closures initially will bolster returns for the merchant plants left standing, but the pending onset of energy storage in concert with growing wind and solar output ultimately poses a threat to continuation of an energy-only market with such tamped-down pricing volatility, Denning concludes. With Texas facing another summer in 2019 with even thinner reserve margins and generators complaining of the lack of scarcity pricing, stakeholders are weighing changes to the Texas market.