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The Trials of Electric Merchant Power

Why are independent power producers on the ropes?

Bloomberg -- If there’s still such a thing as an “independent power producer” in the U.S., you could argue that Vistra Energy will soon be the last one standing -- at least the last publicly traded one.

After taking over rival Dynegy in a $2.34 billion all-stock deal, the company will almost triple its portfolio of plants selling power into wholesale markets from Texas to New England. Its retail business will meanwhile shrink to just a quarter of gross margins. The only other publicly traded IPP like it is NRG Energy, but it now counts on retail for half of sales and doesn’t consider itself an IPP anymore.

Such is the state of America’s merchant power generators -- that only one publicly traded company will depend on selling into wholesale electricity markets for the bulk of its earnings. The rest, like NRG, are relying on retail sales to homes and businesses for an increasing share of their earnings as cheap natural gas and renewables send wholesale prices plunging, wiping out the profits of merchant plants across the U.S.

The way NRG Chief Executive Officer Mauricio Gutierrez put it in an interview last week: “The public IPP is obsolete.” He describes his company as an IPC now, short for an “integrated power company” that has an ever-expanding retail arm.

It’s the same reason utilities including American Electric Power and Duke Energy are getting rid of plants, and why generator Calpine sold itself to a private equity firm this year.

All of these companies are “basically saying, ‘We’re selling out,”’ Paul Patterson, a utilities analyst at Glenrock Associates, said by phone.

That is, except for Vistra.

While some are moving away from the merchant model, the Dallas-based company is doubling down. It’s, at least in part, a bet that the Trump administration will deliver on its promise to help coal-fired power plants survive. U.S. Energy Secretary Rick Perry is pushing a plan that stands to compensate coal generators more for their so-called baseload power.

Perry’s proposal “will lead to good pricing reforms in the market,” Bob Flexon, Dynegy’s chief executive officer, said Monday.

To be sure, even Vistra recognizes the value of a retail business. While the segment will account for less of its margins, the retail unit will serve 2.9 million customers post-merger, up from the estimated 1.7 million that TXU Energy had. Vistra CEO Curt Morgan said the expansion would create the leading -- wait for it -- “integrated power company” in the U.S.

“We prefer to think of this merger as a way to expand our integrated” model in Texas’s power markets, Vistra spokesman Allan Koenig said by email.

Ultimately, the company’s just looking to diversify its businesses.

If there’s any power market in the U.S. that exemplifies how deeply natural gas-fired generation and renewables have cut power prices, it’s Texas. And all of Vistra’s assets are there. In fact, it’s the largest generator in the state.

Just this month, Vistra disclosed plans to shut three coal-fired plants in Texas, totaling 4,200 megawatts of capacity, by early 2018. The company may sell 900 megawatts more to satisfy market power concerns as part of the Dynegy merger, Morgan said.

“The problem with just staying in Texas is the well is starting to dry up,” said  Guggenheim Securities LLC analyst Shahriar Pourreza. “The company needs scale, it needs liquidity and it needs a different investor base.”

Vistra will get power plants scattered across 12 states in buying Dynegy. Morgan boasted Monday that the combined company will “benefit from weather and market diversification.” It will own a fleet of about 40 gigawatts of generation, according to a statement Monday. That gives them a leg up on NRG’s fleet of 31 gigawatts.

Vistra rose 2.4 percent to $19.02 a share at 11:55 a.m. in New York after falling nearly 9 percent Monday to the lowest in more than a month. Dynegy rose 3 percent to $12.20 after a 5.6 percent gain Monday.

The merger, Pourreza said, is “likely perceived as a sweeter deal” for Dynegy than anticipated.


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