Opportunity despite uncertainty: Innovative strategies in commodity markets

The Federal Energy Reliability Council’s recently released 2022 summer assessment outlook for energy markets and electric reliability[1] sets out several concerning predictions.  Among them:

• Higher than average temperatures are expected for the coming summer.
• Natural gas prices for summer 2022 are expected to rise at major trading hubs across the US, including an 88 percent increase in Henry Hub futures contract prices for June 2022 through September 2022.
• Wholesale electric markets expect to see higher prices because of hotter temperatures, slightly increased demand, and higher natural gas prices.

Furthermore, electricity experts and officials warn that states may not have enough power to meet demand in the coming months, and the Department of Energy recently published a report in which it concluded “state regulatory reforms are needed to encourage adoption of new technologies to support evolution of the nation’s power systems.”[2]

In other words, there is an immediate likelihood that power grids may not be able to satisfy power demands for the 2022 summer, and there is a future likelihood that the regulatory landscape might not be flexible enough to allow new technologies to become integrated in power systems, thereby blocking additional capacity that could satisfy growing demand. 

In either the current or future scenario, demand would outstrip supply, and current structures, both physical and regulatory, could prove inadequate to handle this.

Yet the world needs more energy

Even if uncertainty exists on how regulations may be changed to satisfy the power demand, the need for investment in energy remains – Reuters recently estimated the world needs to find $1.3 trillion of incremental investment by 2030 to boost all types of energy output and infrastructure.[3]

Actors in the energy space are becoming increasingly creative in how they engage with power markets. One strategy for becoming involved in power markets at a potentially large scale is to seek certification as a Retail Electric Provider (REP) in Texas’ electricity system. REPs buy electricity wholesale from generators and sell to retail customers.

This alert reviews the application process of becoming a REP.

What REPs do

A REP sells electric energy to retail customers in the areas of Texas where the sale of electricity is open to retail competition. Texas deregulated its energy market relatively recently, in 2002, meaning its experience in this realm is still evolving.  There are currently 138 actively registered REPs.

REPs largely operate under the jurisdiction of the Electricity Retail Council of Texas (ERCOT), which services 213 of the 254 Texas counties and provides electricity to more than 26 million customers. REPs provide power to these customers.[4]

A REP is able to sell electricity to retail customers after it has registered with both the Public Utilities Commission of Texas (PUCT) as such and at least has registered as a Load Serving Entity (LSE) with ERCOT. These are two distinct application processes. Here, we look at  the PUCT process.

Among other responsibilities, the PUCT regulates electric utilities in Texas, implements respective legislation, and offers customer assistance in resolving consumer complaints.

An applicant attempting to become a certificated REP is asking the PUCT to allow it to perform the following functions required of them:

• Buy electricity at wholesale
• Buy delivery service and pay charges for the transmission and distribution service to a transmission and distribution utility (TDU)
• Serve as the direct contact with the customer for electric service issues
• Bill customers and collect for its charges
• Provide a 24-hour toll free telephone number for customer calls
• Develop electronic interface systems to communicate with ERCOT and other market participants relating to customer switches and meter information
• Understand and follow PUCT’s rules, including its customer protection rules.

Ultimately, the PUCT will award a REP certificate to an applicant that demonstrates:

• The financial and technical resources to provide continuous and reliable electric service to customers in the area (or for whom) the certification is sought – guarantors are allowed
• The managerial and technical ability to supply electricity at retail in accordance with customer contracts
• Resources needed to meet customer protection requirements and
• Ownership or lease of an office in Texas for the purpose of providing customer service, accepting service of process, and making available in that office, books and records to establish the REP’s compliance with Texas rules.

Conclusion

Seeking certification as a REP allows actors in the energy space to leverage the growing electricity market in Texas and then to use this Texas activity to hedge exposure to other commodity price changes.   DLA Piper’s Commodities group has the knowledge and experience to guide you through your entry into new commodity markets as well as how to expand the scale of your existing activities.  Find out more by contacting us via DLAPiperCommodities@dlapiper.com.