Michael Giberson

From the PR desk:

HOUSTON, Sept. 4, 2012 /PRNewswire/ – Direct Energy has launched New Leaf Energy, a new Texas brand that offers 100 percent renewable, air-pollution-free energy, 100 percent from Texas wind turbines. New Leaf Energy brings expanded product choice in Texas’ green energy market and a variety of plan options that ease the way for residential customers in Greater Houston, Dallas-Fort Worth, Corpus Christi and beyond to help support long-term sustainability of the region and the planet.

“New Leaf Energy is committed to renewing the future, one household at a time,” said Rob Comstock, senior vice president at Direct Energy and general manager for the company’s Texas residential business. “It meets one of the industry’s highest standards by sourcing only 100 percent Green-e® Certified renewable wind energy, at rates designed to make renewable energy easily accessible for consumers. By choosing New Leaf Energy, they are making a statement to electricity producers that they support and prefer electricity provided by renewable sources. As more people sign up with New Leaf Energy, more renewable energy is produced.”

Consumers signing up for this product are promised their power is sourced only from “100 percent Green-e® Certified renewable wind energy,” and what’s more that power is “100 percent from Texas wind turbines.”

I don’t see any asterisks tagged on to these claims where they explain – hey, the wind doesn’t blow all of the time, the sun doesn’t shine all of the time, and there is hardly any hydropower in Texas even in years without a drought, so once in a while we will supplement your power supplies with a mix of coal, natural gas, and nuclear energy and then we will buy extra wind power sometime later. Nope, in the press release and on the company website the claims are “all renewable, all of the time.”

Therefore, officially, I am amazed. Since Direct Energy doesn’t plan to cut off its “100 percent Texas wind” consumers when Texas wind power production drops off, I can only conclude that the company has solved the complex technical issues surrounding energy storage.

SOMEWHAT RELATED: “Renewable Incentives Spark Debate at Texas Hearing” from the invaluable Texas Tribune.

ADDED: In case you’re wondering, there are not a lot of ski lifts in Texas either.

Michael Giberson

Pat Wood, the former FERC chairman and former Texas PUC chairman, was interviewed recently by The Texas Tribune. Wood is surely one of KP‘s favorite ex-regulators, so of course we’re linking to the interview. Here’s just one bit:

Wood: … There is also a lot that can be done, particularly on the energy demand side. By that I mean more aggressive conservation programs where you let market signals encourage customers that have the ability to shut down for a certain small amount of hours in the day to get paid to do so.

TT: Do you mean even individual consumers can potentially do more — or be helped to do more — to save energy?

Wood: They could, but if you went from the current penetration we have today, which is focused on the largest customers, to then focus on the medium-sized customers  — and by that I mean grocery stores, shopping centers, Target, customers like that — you can pick up a whole lot more responsive load before you need to get to the residential customer. The residential customers comprise about 40 percent of the [electrical] load at peak. Industrial and commercial are each about 30 percent. That’s a lot of lower-hanging fruit to pick before you get to residential.

And in discussing this, I’m not saying that Target would have to bid to shut down a store to get paid; it would maybe curtail 20 percent of its demand from 4 to 6 pm [when electricity usage peaks].

This capacity tightening may force that day to come sooner rather than later, which I think is a great thing for Texas, to latch onto this smart-grid investment that we’ve been making statewide over the past couple of years into a level of demand responsiveness that really moves our grid to 21^st century capability well ahead of the other states.

Wood also addresses the lack of incentives to build new plants in Texas, the prospects for wind and solar in the state, energy storage, and among other things the role of the Public Utility Commission after the state “moved the dial from 10 to 4 in terms of regulation.”

Michael Giberson

Are their barriers impeding integration of variable energy resources to the electric grid? FERC wants to know:

The Federal Energy Regulatory Commission (Commission) seeks comment on the extent to which barriers may exist that impede the reliable and efficient integration of variable energy resources (VERs) into the electric grid, and whether reforms are needed to eliminate those barriers. In order to meet the challenges posed by the integration of increasing numbers of VERs, ensure that jurisdictional rates are just and reasonable, eliminate impediments to open access transmission service for all resources, facilitate the efficient development of infrastructure, and ensure that the reliability of the grid is maintained, the Commission seeks to explore whether reforms are necessary to ensure that wholesale electricity tariffs are just, reasonable and not unduly discriminatory. This Notice will enable the Commission to determine whether wholesale electricity tariff reforms are necessary.

Hmmm, “variable energy resources”?  Does that mean things like steam generation units that can be adjusted up and down over some range (but not things like a gas turbine that is either on or off, but not adjustable in between)? No, they mean “variable but not very controllable energy resources” such as wind and solar power.  They write: “For purposes of this proceeding, the term variable energy resource (VER) refers to renewable energy resources that are characterized by variability in the fuel source that is beyond the control of the resource operator.”

I wonder why they didn’t just use the term “renewable energy resources”? Were they afraid of offending hydro and geothermal interests?  Are they hoping to ease the taint of not-very-controllable from renewable energy resources?

The proceeding is “Integration of Variable Energy Resources” (FERC RM10-11-000). In paragraph 10, FERC states:

Our goal is not to adopt rules that favor one type of supply source over another. Instead, the Commission’s purpose in this proceeding is to investigate market and operational reforms necessary to achieve two goals: first, to ensure that rates for jurisdictional service are just and reasonable, reflecting the implementation of practices that increase the efficiency of providing service; and second, to prevent VERs from facing undue discrimination. These goals are consistent with the requirements of sections 205 and 206 of the FPA.

The challenge here is in separating the “due discrimination” from the “undue discrimination,” which is to say the charges and special terms and conditions applied to VERs that are reasonable given the character of the resource from the charges, terms and conditions which are unreasonable.

Michael Giberson

Seeking Alpha has begun publishing transcripts of quarterly corporate earnings calls. Typically these calls are discussions presented by the CEO and other corporate officers followed by Q&A with financial analysts.  The calls offer a more “inside look” at company operations than you get from reading newspaper or magazine stories or even trade press.  What’s more, the calls provide insight into the markets that the company participates in.  The FPL Group Inc. 3Q 2009 call provides several insights into the electric business in Texas, where FPL participates in both the wholesale and retail markets.

FPL, through its NextEra Energy Resources subsidiary, owns both fossil-fueled and wind power plants in Texas and several other places.  Currently the company is the second-largest operator of wind power plants in the world behind Iberdrola.  FPL owns Gexa Energy, a energy retailer in Texas serving about 172,000 customers (according to Wikipedia).

The earnings call spanned the range of FPL Group activities and interests.  There is much here of interest in Texas: FPL has recently completed a 200-mile self-funded transmission line linking four of its wind power plants in ERCOT’s west region directly to the higher-priced ERCOT south region, they’ve added both wind power and natural gas generation in Texas, and they are constantly trying to balance their risk exposures for their wholesale and retail obligations in the state.

I thought the call was particularly interesting for what it implied about retail market profit margins during the current low-wholesale power prices in Texas (and most other places).  Earnings from their merchant generator fleet are down:

Although we were pleased with the $0.11 year-over-year improvement in NextEra Energy Resources’ quarterly earnings per share contributions, the financial performance did not meet our internal expectations. Two factors primarily drive this: the Texas merchant gas fleet and the wind resource. Let me explain a bit further.

On the former, contributions from the Texas gas fleet were approximately $24 million or $0.06 per share below our quarterly expectations. Both spark spreads and ancillary revenues were much lower than we expected.

As for the latter, as I mentioned a moment ago, the wind resource in the third quarter was well below normal or roughly $0.06 per share below our expectations. … For the year, the poor wind resource has reduced per share results by nearly $0.13.

Elsewhere in the call:

Meanwhile, our retail business in Texas … added about $0.04 per share incrementally given favorable margins. The remaining contributions from the existing merchant fleet amounted to negative $0.02 per share, but there is nothing notable in any one category worth calling out.

Later in the call:

Just one last comment: As I’ve said before, we’re certainly not happy that ancillary revenue is down at our gas plants in Texas, but one of the reasons that [inaudible] retail business is up $0.04 quarter-over-quarter is because they didn’t have to pay the ancillary cost to our gas assets and other gas assets.

A couple of comments:

First, the ownership of both wholesale and retail assets in the Texas competitive market provides a sort of natural hedge against fuel price movements. When wholesale power revenue or ancillary service revenues are low, as currently, the wholesale business suffers but the retail side benefits. (See related discussion on wholesale-retail combination in Texas, and earlier here.)

Second, while retail prices have fallen in Texas, they haven’t fallen as far and as fast as wholesale prices, so retail margins are higher for FPL.  The call doesn’t fully clarify the reasons here.  The most straightforward explanation is that FPL likely has many customers on one- or two-year fixed price contracts, with prices that relatively high now (but presumably competitive one or two years ago.) Also, as noted in the call, costs for ancillary services were unexpectedly low, which reduced expenses for the retail side.

But margins may be higher, too, if retail prices are slow to adjust to dropping wholesale prices.  I wonder whether there is an asymmetric price adjustment phenomenon in competitive retail electricity? Do consumers shop around more and switch companies more when prices are going up as compared to when prices are falling?  Probably, and that should be enough of a force to produce a “rockets and feathers” effect on prices.

Finally, and I don’t think the call made this connection, but I wonder whether there is a link between the lower-than-expected wind resource and the low revenues/costs associated with ancillary services.  To some degree, variable wind power output increases the demand for energy balancing and other ancillary services required by the transmission system for reliable operations.  Possibly with less wind power coming on the system, fewer ancillary services were required.  Of course low natural gas prices and on-average slightly lower electric power demand would also reduce the cost of ancillary services, so the explanation may not be wind-output related.

NOTE: FPL’s 200-mile self-funded transmission line, dubbed the “Texas Clean Energy Express,” raises a host of interesting issues worthy of examination.  One of these days…

ALSO: Of course FPL Group Inc. isn’t the only company with an interest in the Texas electric power market.  Search “Texas AND electric” at Seeking Alpha’s Transcript Center for much much more.  If you find anything interesting, let me know.