Panda Bear Market

Texas Power: No Country for Old Thinking

Panda Thermal's bankruptcy and Griddy's launch are two sides of the same issue.

It's been kind of a yin-and-yang week in the Texas power market. One business slipped into bankruptcy, while a brand new one launched itself into the world. Fittingly, the stories of these opposites are also intertwined -- and should resonate throughout the electricity sector.

The bankruptcy filing came from Panda Temple Power LLC, an affiliate of privately owned developer Panda Power Funds, which operates a 758-megawatt natural gas-fired generator in Temple, Texas.

Meanwhile, the new entrant is Griddy Energy LLC. With a name like Griddy, it does, of course, hail from California. But it just launched a business in Texas, selling wholesale electricity directly to customers in deregulated power markets there for a monthly fixed fee.

What unites these stories is this:

Low Power

Average wholesale electricity prices for Texas hit an all-time low last year

Source: Electric Reliability Council of Texas

Note: Average wholesale electricity prices in ERCOT's real-time market.

Wholesale power prices -- meaning what the plant sells it for, not what you pay as a householder -- are depressed despite demand hitting a record in Texas in 2016. As I explained here, a big reason for this is the proliferation of windmills in the state. Once renewable power sources get built, their fuel costs are free, so they tend to drag down power prices in general and take market share from traditional plants running on stuff like ... natural gas.

As analysts at CreditSights point out, what's striking about the Temple bankruptcy is that the plant only got up and running less than 3 years ago. It is modern and efficient, burning only 7,000 BTUs worth of natural gas to generate a kilowatt-hour of electricity (by way of illustration, a typical coal-fired plant might need 10,000 BTUs of fuel to do that).

Based on the Bloomberg Terminal's spark-spread function, a plant like that selling into Houston should make a gross margin of $14.34 per megawatt-hour (MWh) using current forward electricity prices for 2018 of $35.65 per MWh. 

Even with those theoretical economics, though, it wasn't enough to support Panda's plant. Talk about a bear market (I know, I know). A debt burden at filing equivalent to 22 times 2016 Ebitda probably didn't help.

On the flipside, Griddy aims to take advantage of the growing disconnect between wholesale and retail power prices in Texas:

House Of Pain

The spread between wholesale power costs and what households pay in Texas has been widening pretty steadily since 2008

Source: Electric Reliability Council of Texas, Energy Information Administration

Put another way, the actual cost of generation as a proportion of the average Texas household bill has plummeted:

Power Drain

Average wholesale power prices equated to only about a fifth the cost of electricity for Texas households in 2016

Source: Electric Reliability Council of Texas, Energy information Administration

Note: Average wholesale power price for ERCOT divided by average retail residential electricity price for Texas.

Under Griddy's model, a customer would pay $9.99 per month and thereby become able to purchase power at wholesale rates. Some back-of-the-envelope math indicates this could be a compelling proposition.

Say your household uses an average of 750 kilowatt-hours of power a month, paying 10 cents per unit to the retail supplier. That's an annual bill of $900.

Now say, instead, the householder pays Griddy just under $120 for the year but can then purchase their power at an average wholesale rate of $36 per MWh, based on the current forward price for the Houston market in 2018. Throw in transmission and distribution fees of, say, 1.5 cents per kilowatt-hour and local taxes and, in aggregate, the annual bill drops to about $660, a saving of 27 percent.

Indeed, based on these assumptions, in order for the homeowner to be left paying the same annual bill as before, wholesale power prices would have to average more than $60 per MWh, which hasn't happened in almost a decade.

The more interesting point is that if Griddy makes real inroads in Texas, it could shift the market there in fundamental ways. A Griddy customer also gets an app -- Californian company, remember? -- which tracks their power and, more importantly, sends alerts suggesting cheaper times to do stuff like laundry or vacuum the house, depending on what wholesale power prices are doing.

This is important. A weird thing about energy is that we use a lot of it but mostly have little understanding of what we are really paying and why at any given moment.

Sure, peak and off-peak pricing and tiered demand charges and the like offer a crude version of this. But let's face it, if someone asked you right now how those work, and at what price levels, for your household, it's doubtful you would know the answer.

Still, you might be interested in saving money if that smartphone in your pocket did most of the thinking for you. Such deep engagement may be a longer-term project; it is hard to make people care about such abstractions as kilowatts. In any case, paying for your power on a daily basis, and at lower rates, provides more control than the ups and downs of traditional monthly power bills.

What things like Griddy represent is the further erosion of the old, vertically integrated utility model. Traditional retail power providers -- which often charge a fixed monthly fee within their bill anyway -- will have to adapt to a different (reduced) set of economics, especially as Griddy's model, if it catches on, will doubtless be copied by others, who will also try to compete on price.

That's what true commodification looks like. The impacts could be profound, not merely for independent power producers and regulated utilities, but also companies selling solar systems to homeowners, which would now be up against another type of non-traditional supplier offering lower prices.

Panda's plant fell afoul of a rapid change in the economics of the supply side (indeed, the company is suing the Electric Reliability Council of Texas for issuing allegedly misleading information about the need for new capacity). Meanwhile, Griddy is taking advantage of the same thing and bringing further pressure from the demand side, especially if customers get more sophisticated in managing their power consumption.

This is one yin-yang dynamic that threatens to seriously unbalance the existing equilibrium. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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