It continues to surprise me that the competitive power suppliers appear to hedge little or none of their supply. They either are in denial that there will ever be days that LMP prices go appreciably over average or they think they can pass it on to their customers, who in reality just won't pay $9,000 monthly power bills. They then go bankrupt en masse whenever an event like this happens (same with PJM in the "polar vortex" a few years ago). Merchant power has been a crappy business for a decade or more now because they can't lock in their forward power prices, while the natural forward buyers inexplicably aren't buying. Tangentially related, I'll be interested to see how the spinoff of Exelon's merchant fleet trades once they split. Didn't go so well with FirstEnergy/FirstEnergy Solutions.
I'm not at all convinced that these competitive power suppliers necessarily have the financial bona fides to legitimately hedge in either the bilateral OTC market or in the financially settled exchange market. As you know, that is a substantial financial commitment. If they get caught out, it's just another LLC structure that goes out of business.
You're right that most of them are significantly undercapitalized. Given my experience working with them I'm not sure it would necessarily be a bad thing if those who couldn't hedge at least a month ahead just weren't allowed to play. Interestingly it's sounding like some of the big boys got hit pretty hard this time as well.
The other piece is correct FASB Hedge Accounting. My strong sense is that many of these firms would distribute the hedge profits to firm partners and distribute hedge losses to clients.
Another point to consider here is that generally speaking, southern utilities and power providers would be much more inclined to hedge the summer months than the winter months. Even in the Midwest, our winter loads would stay modest during the day, go up considerably in the evening and taper off by about 10pm. You'd have some 6am load come in that tapered off by about 9am. We did quite a bit of scheduled power plant maintenance during the winter so we bought quite a bit of forward firm blocks to cover for that. We bought less for the summer and quite frankly that was for spec . We liked to buy firm blocks and piece it out on spec. As a side note, because I traded physical for a utility that was an ISO member - I was able to buy Emergency Power for $100/MW-hr back in the 90's. The power merchants were up shit creek having to pay several hundred or more. So, if I lost Byron Unit 2 and was looking for 1200 Megawatts in five minutes and for all I knew I'd need it for 2 hours or 12 hours or who knows - I'd buy Emergency from AEP. No way I'd ever go to Enron or Coral for that.
Always insightful background, thanks. Not sure if anyone else appreciates it since it's pretty inside baseball but I certainly do!
so boner, you were the guy who directed Texas utility companies to shut down the system for two days during the winter storm? •you're competing against Uncle Buffett; he also invested in solar farms. MAY 11, 2020 6:26 PM PT "The Trump administration on Monday approved the largest solar installation in U.S. history, giving its blessing to a Berkshire Hathaway Inc. subsidiary’s 690-megawatt project just north of Las Vegas". Berkshire Hathaway Energy owns the following companies: MidAmerican Energy Company MidAmerican Renewables[5] (Renewable Energy/Wind Energy) PacifiCorp for $9.4 billion in 2005[6] Northern Powergrid (formerly CE Electric UK) Integrated Utility Services UK CalEnergy Generation, 350 MW geothermal power plants[7] Kern River Gas Transmission Company[8] Kern River Pipeline Northern Natural Gas Company (Omaha)[9] HomeServices of America (Real Estate, in 47 states)[10] BYD Company (10% of outstanding shares) NV Energy (electricity and natural gas in most of Nevada) Metalogic Inspections Services[11] (Oil and Gas, Power Generation, Fabrication, Pipeline, Services) Intelligent Energy Solutions[12] (Heat Pumps, Solar Panels, and Biomass Boilers) AltaLink (Electric Utility in Canada) for C$3.24 billion in 2014 [13] In 2017, BHE's proposed acquisition of Oncor Electric Delivery Company LLC[14] was terminated after BHE was outbid by Sempra.[15][16] BHE investigates producing up to 90 thousand tonnes of lithium carbonate per year (and other minerals) from its 350 MW geothermal power plants in California (Salton Sea).[17][18]