US retail electric CEOs hope for 'boring' 2023, but experts differ on volatility outlook

Shocks to US competitive retail power markets have increased frequency in recent years, but executives expressed hope that 2023 would prove to be "boring" in a good way. Experts on March 24 differed on the likelihood of less volatility.

"We have already seen volatility in energy prices this year due to the collapse of gas prices," said Morris Greenberg, S&P Global Commodity Insights senior manager for North American analytics. "Even if there were a general credit tightening and solar lending dried up (which I don't think is realistic) it would probably take a couple of years before it would affect capacity additions. The Fed can contain the banking problems. Not sure about a US government default due to the debt ceiling issue. I don't think economic activity would drop sharply but it could weaken."

During an Energy Marketing Conference panel discussion for competitive retail electric provider CEOs on March 21, ClearView Energy President Frank McGovern said the power sector's recent "exciting" period has been "an existential terrifying experience" for small REPs, "and I generally personally aspire to be in a really boring business that makes lots of money."

For most of the electric industry's existence, McGovern said, shocks happened in multiyear intervals – e.g., Sept. 11, 2001; the Iraq war in 2003; the oil price spike and recession of 2008-09; a winter storm with rolling blackouts in Texas in 2011.

However, since 2019, the power sector has undergone the coronavirus pandemic in 2020, the deadly mid-February 2021 winter storm energy emergency in Texas, and the Russia-Ukraine conflict's energy market shock in 2022.

Texas is often cited among the US' most active competitive retail electricity markets, and US Energy Information Administration average residential retail power prices generally remained stable between 2013 and 2021 – $110/MWh to 121/MWh – but then jumped $14.40, almost 12%, to $135.50/MWh 2022.

However, the Electric Reliability Council of Texas' wholesale power prices have caused substantial variation in REPs' gross margin, ranging from a high of $86.36/MWh in 2015 to a low of $11.21/MWh in 2022, using ERCOT North Hub day-ahead on-peak locational marginal prices for comparison.

"In 2023, we will have a lot of the 'spill-out' from all that craziness," McGovern said, as customers may seek longer-term fixed-price contracts that would allow REPs to reap some benefits from reduced fuel costs and, eventually, weaker wholesale power prices.

Lower power prices seen

James Carson, principal of RisQuant Energy, a St. Paul, Minnesota-based energy market consultancy, said natural gas prices drive power price levels and volatility.

"I expect that power prices will crash year over year for the rest of 2023 because the price of natural gas has cratered," Carson said March 24. "Weather will play a role as it always does, but we have no idea how 2023 weather will play out."

Greg Upton, associate research professor at Louisiana State University's Center for Energy Studies, said his center's energy outlook calls for "less volatility in the coming year than we've seen this past year with the war in Ukraine and the economic recovery from COVID becoming embedded into market pricing."

"Although natural gas prices here in the US are anticipated to climb over the next year, they are right now at very low levels," Upton said in a March 24 email. "Despite the media focus on a looming recession and the recent bank failures, the VIX has actually be fairly stable. This is not to say that exogenous shocks cannot occur (of course they can), but the indicators I am looking at currently do not suggest that volatility will increase."

VIX is the ticker symbol of the Chicago Board Options Exchange's Volatility Index, a measure of the stock market's expectations for volatility based on S&P 500 index options.

'Regulatory upheaval'

One external factor that might affect the Texas power market, in particular, is the regulatory uncertainty over long-term power market reform, said Chris Hendrix, CEO and co-founder of Demand Control 2, which enables companies to buy wholesale power, during the EMC panel discussion.

"Really, we are in the middle of a regulatory upheaval, with politicians who say they're against all of the renewables out there, that customers want – commercial/industrial customers and residential customers," Hendrix said. "There's a fundamental disconnect between what people want, what the market wants and what the politicians want."

Campbell Faulkner, senior vice president and chief data analyst at OTC Global Holdings, an interdealer commodity broker foresees little power price impact from external factors, as volatility is "already here due to the generation stack changes."

"If macroeconomics has an effect, it would be trimming peakloads due to commercial and industrial activity slowing and reducing consumption," Faulkner said March 24. "Price volatility will likely get worse due to additional shoulder time periods with exceptionally low prices in concert with the need to fast ramp dispatchable resources."