A snow-covered street in Austin, Texas, on Monday. Temperatures fell to single digits.
Montinique Monroe/Getty Images
The polar vortex is wreaking havoc on the middle of the country. The Texas power grid, in particular, is struggling with iced-up wind farms, shut-down pipelines and natural-gas wells, and more important for consumers, power outages.
What happens to power utilities with Texas capacity amid the weather chaos is anyone’s guess. There is the potential for windfall gains as well as big losses. Determining which, however, requires some business details that investors don’t usually have. A look at how the power-generation system operates makes clearer what is going on.
The U.S. electricity grid is made up of roughly 7,300 power plants, 160,000 miles of high-voltage power lines, and distribution transformers connecting 145 million customers. At the highest level, local grids are connected to three main interconnections: the Eastern connection, the Western connection, and Texas’s system, run by the Electric Reliability Council of Texas, or Ercot.
Ercot, one of several independent system operators in the country, is in charge of organizing the flow of electricity for Texans. The job is particularly difficult right now: Some power-generation capacity has been taken offline due to the cold, and demand is through the roof because temperatures are so low. People want to stay warm.
Some utility stocks could be affected by the aftermath of the vortex. “ERCOT power prices have seen the most explosive moves in power prices with real-time prices surging past $5,000 [per megawatt hour] during certain hours as Texas contends with the coldest winter temperatures since the polar vortex of 2013-14,” wrote BMO analyst James Thalacker in a Sunday research report.
Many U.S. residential customers see 12 or 15 cents a kilowatt hour on their electricity bills. That is $120 to $150 a megawatt hour, making what is going on in Texas highly unusual.
Thalacker pointed out that Vistra (VST) and NRG Energy (NRG) have a lot of Texas exposure relative to other utilities he covers. Those stocks were moving on Tuesday. Vistra stock closed up 2.7% to $21.91, while NRG Energy shares fell about 5.7% to $40.59. The S&P 500, for comparison, ended the day flat.
It’s tough to figure out if the market has it right, but the moves imply investors believe NRG has more risk than Vistra. That makes some sense to Thalacker.
“We view NRG as having a greater relative risk to rapid increases in spot prices during the polar vortex,” wrote the analyst. The problem is that NRG doesn’t have as much power-generation capacity as it needs to meet its commitments to households, he said. It may be paying those huge megawatt hour prices to deliver its promised power at previously contracted rates.
Still, it is hard to know what the final impact will be. “It is important that NRG’s short position in ERCOT may not have grown as much as some think,” added the analyst.
An NRG spokeswoman referred Barron’s to recent filings. NRG’s third quarter earnings presentation refers to the company’s integrated position in Texas with both power generation assets as well as retail customers. The company has some balance as well as an ability to hedge.
Vistra, for it’s part, has more than enough power-generating capacity in Texas, according to Thalacker. It could benefit from others’ problems. But even Vistra has added risk. Natural-gas prices are up in the Midwest and Vistra has to buy some gas on the spot market to generate electricity. Vistra wasn’t immediately available to comment on the polar vortex.
Thalacker rates NRG share at Hold and has a target of $45 for the stock price. He rates Vistra stock at Buy and has a $27 price target for those shares.
His views on Vistra align closely with those of his peers. More than 80% of analysts covering Vistra rate shares Buy. The average Buy-rating ratio for stocks in the Dow Jones Industrial Average is about 57%.
But the rest of the Street likes NRG just as much. More than 80% of analysts covering that stock rate it at Buy as well. Both stocks are up year to date, and are beating the market.
NRG’s next earnings disclosure is Feb. 25; Vistra’s is on Feb. 26. Expect talk about the weather on the conference calls.
Write to Al Root at [email protected]
