S&P expects continued struggles for ERCOT and Texas generators

On March 13, S&P Global Ratings released a report confirming the weakening conditions in the Electric Reliability Council of Texas, the power market that covers much of the power generation in the state

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On March 13, S&P Global Ratings released a report confirming the weakening conditions in the Electric Reliability Council of Texas, the power market that covers much of the power generation in the state.

S&P first reported on ERCOT’s challenges in April 2015, which led to several downgrades and forecast revisions. The ratings group expected power prices to increase slightly for ERCOT’s generators in 2016 and 2017, but this latest report says differently.

The duration and extent of weak ERCOT power prices now suggests a longer-term, secular challenge, which isn't likely to reduce credit concerns in the near-term, the report says.

Following are a few key points from the March 13 report:

• The ERCOT power market has weakened significantly between 2014 and 2017, with power prices dropping to unsustainably low levels and crippling profitability for generators.

• The proliferation of new renewable installations, specifically wind generation, has also contributed to lower cash flows for conventional generators in the state. With the federal extension of the production tax credit (PTC) and investment tax credit (ITC), wind power within ERCOT has grown substantially. At one point in November 2016, Texas' wind turbines produced about 45 percent of the grid's requirements. With $23/MWh in incentives, wind generators in ERCOT are able to bid in at negative pricing, hampering overall market prices.

• While there is no pressing incentive for the state of Texas to consider constructing a capacity market mechanism, bloated reserve margins (now 18 percent compared to a 13.75 percent target) and the absence of a capacity market could be troublesome for longer term stability.

The full report provides a much more detailed analysis and is available from S&P Global Ratings at its global credit portal: www.globalcreditportal.com.

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