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Issues and Insights – Understanding ERCOT Power

Galway Energy Advisors, LLC and ArrowHead Economics invite you to a Houston presentation and discussion.

Meeting and Discussion Overview

Our market experts will present:

  • An analytically based view of the state of ERCOT power markets
  • Actions in that market that:
    • Have the prospect of being profitable and therefore pursued
    • Are not likely to be profitable and unlikely to occur
  • How the market functions and is likely to evolve
  • Forward market views
  • Why forwards are not sufficient for making decisions in ERCOT

Additional details on the content below.

Meeting Logistic Details

Location: 3050 Post Oak Boulevard, Suite 1300, Houston
Date: Tuesday, November 19, 2013
Time: 3:00 PM to 3:15 PM CT – Arrival and refreshments
3:15 PM to 4:15 PM CT – Presentation and discussion

Meeting Content Details

If you are a power generator, a power distribution company, a wholesale or retail power trader, or a large industrial power user, then understanding the future of ERCOT is critical to successful decision-making. Moreover, the future is unlikely to be anything like the past or present as ERCOT has been undergoing considerable (subsidized/mandated) renewable entry, load has been growing, and entry of thermal plants has stalled. Coal plants are exiting while new coal and nuclear plants are too costly to be profitable under current market conditions. Entry of renewables has driven up retail electricity prices, but it has not driven up current or forward wholesale energy prices or the value of capacity (whether traded independently or coupled with energy) sufficiently high to attract thermal plant entry. Well-reasoned answers to these questions are enlightening.

Reserve margin has declined both because of peak load growth as well as intermittent reliability and lower than sufficient transmission access from renewables generation to the market. Transmission pricing has changed from the days in which we developed the highly profitable, early plants in ERCOT that exploited alternative pricing.

Energy only markets have been capped, so peak and super-peak prices have not been sufficiently high to generate the revenues that can secure new entry. Environmental regulation within ERCOT is in a state of uncertainty. Federal regulation is in a state of flux while state regulation has focused primarily on NOx. However, federal SO2, mercury, particulate, and CO2 regulation is already affecting ERCOT (we will see why), and the impacts could either accelerate or diminish depending on the direction of environmental policy.

There have been no traded capacity prices in ERCOT, which operates as an energy-only market. (Any capacity value is de facto bundled into the energy price. In ERCOT and elsewhere, regulators want to control capacity to secure capacity value for chosen customers, and this can be very distortionary in capacity markets. We will see why.)

Gas simple cycle, combined cycle, and cogeneration are marginally competitive, but gas price, capital cost, and subsidy risks remain high. Entrants have balked because of low energy prices relative to the capital cost of entry.

The linkage from wholesale to retail pricing is becoming more transparent with time, but the degree of future market transparency, the range of future actions, and the range of wholesale market impacts resulting from the actions of retail traders and customers are not yet entirely clear (we will discuss why). Is it realistic to believe that discoverable, exposed, hedgeable markets will emerge within the retail power sector, as they have within the wholesale sector, in ERCOT? Is it realistic to believe that they will be backed by sufficient credit to be functional?
We will present an analytically based view of the ERCOT market and the actions in that market that have the prospect of being profitable and therefore pursued. We will also present a number of actions that are not profitable and therefore unlikely to occur.

You will hear an internally consistent and economically coherent view concerning how the market functions and how it is likely to evolve, including insight on why traded wholesale market forwards are not sufficient to guide making good decisions in ERCOT. Market participants need an understanding of prices, quantities, capacity additions, and retirements, that is internally consistent and economically coherent and this briefing will show you how that understanding can be delivered. The one-hour talk (with questions) will bring powerful new insights to the way you look at and understand ERCOT.

Our Presenters

Dr. Dale Nesbitt, President of ArrowHead Economics, LLC, a Stanford University professor in Economics and Decision analysis, and one of the top energy market experts and modeling innovators, will talk about the fundamental issues and insights facing ERCOT. Dr. Nesbitt has worked with the top energy companies for over three decades helping them to make correct decisions through better understanding of future markets. He has continuously improved his modeling capability over that time, which is unique in its ability to: accurately represent market competitive and operational behavior under assumptions about market drivers and to integrate probabilistic and deterministic modeling.

Mr. Robert Stibolt, Senior Managing Director at Galway Group, LP will provide additional commentary on the current state of ERCOT power markets, including forward traded market views. Mr. Stibolt has over 30 years’ experience providing economic evaluation/risk analysis for upstream oil/gas exploration and development opportunities, merchant power and LNG project development, long-dated structured energy transactions, energy trading, and risk management. He has been CRO/Senior VP at companies including Southern Natural (Sonat), Suez/Tractebel, Bear Energy, and JP Morgan Energy.

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