Background

  • Capstone has followed the Texas power market (ERCOT) since the 2014 Energy Future Holdings (EFH) bankruptcy and subsequent restructuring process.  As part of our work analyzing the restructuring, we became experts in market design and supply/demand dynamics in the ERCOT market.

Process

  • We analyzed ERCOT market power supply dynamics, assessing what we viewed as flaws in ERCOT’s capacity, demand, reserve (CDR) report that we believed understated the amount of likely coal retirements and overstated the amount of likely wind generation due to transmission constraints and likely gas generation due to the lack of appetite for financing new Texas power plants. During a time when power prices were historically low—in the low $20/MWh range at some points—and the market view on ERCOT was incredibly bearish, we took the then-contrarian view that the supply/demand dynamic in the ERCOT market was likely to tighten, benefiting incumbent generators.
  • We have held seven policy days in Austin, Texas examining the outlook for the ERCOT market since May 2014, meeting with ERCOT, commissioners and staff at the Public Utility Commission of Texas (PUCT), and fossil fuel and renewable energy industry groups to gain an on-the-ground understanding of how stakeholders close to the market think about evolving policy and market dynamics.
  • When the merchant generation portion of EFH emerged from the restructuring as Vistra Energy in late-2016, we initiated coverage of the company and soon became convinced that Vistra’s integrated retail/generation portfolio and attractive positioning in the ERCOT merchant generation space made it particularly well-positioned to not only withstand—but benefit from evolving ERCOT market dynamics that we had identified the previous year.

Outcome

  • We concluded that Vistra was well-positioned to benefit from its exposure to the ERCOT market, both because of its ability to strategically retire assets, in addition to its attractive portfolio of efficient natural gas assets ready to quickly take advantage of scarcity pricing arising from tightened market conditions.  Since we published our June 2017 note recommending Vistra, the company strategically retired nearly 5,000 MW of coal in ERCOT in October 2017, which played a substantial role in driving ERCOT’s reserve margins to historic lows.  This, along with rising demand, growing transmission constraints, and a lack of new-build gas plants led to our January 2016 ERCOT market tightening thesis playing out.  Since then, and particularly during Summer 2018, the Company has benefited from the substantially tighter market conditions in the form of higher power prices and scarcity pricing.  Since our June 2017 note, Vistra shares are up 47%, compared to 16% for the S&P 500.
- Capstone LLC -

Washington DC

-Capstone Research Limited-

London