The Texas electric grid failure in the severe winter storms last month brought a windfall for the Bank of America in hundreds of millions of dollars in trading revenue from the Texas energy market.
The electric grid failure led to power prices surging across Texas as private suppliers were forced to buy power in the open market to meet their obligations. The bank’s Houston-based energy trading group had electricity contracts that soared in value when wholesale Texas power prices rose 10,000 percent to a cap of $9,000 a megawatt-hour in the third week of February.
Rebecca Babin, a senior equity trader at CIBC Private Wealth, noted that Texas’s unregulated market exacerbates the price swings as energy producers are forced to buy megawatts in the open market.
Power sold on Texas’s main grid likely totaled $10 billion based on extraordinarily high prices and demand, according to Wade Schauer, research director of America’s power and renewables at Wood Mackenzie. The Electric Reliability Council of Texas tried to regulate the prices in order to bring some relief to the chaos.
Bank of America is a part of the Texas energy market and trades in power and gas, selling products to electricity providers and others to help hedge against fluctuating prices. This resulted in BofA with an inventory of power contracts that surged in value during the blackouts. “The volatility of the energy market has heightened the value of risk management,” the bank’s website says.
Almost half the state’s capacity could not operate as the arctic freeze blocked supplies of natural gas, froze coal piles and iced wind farms.
The Texas electricity market is unique in the sense that it is the only one with its own stand-alone electricity grid. The state’s deregulated power market is fiercely competitive. ERCOT oversees the grid, while power generators produce electricity for the wholesale market. Some 300 retail electricity providers buy that fuel and then compete for consumers.
Before the storm, the state’s average retail price for electricity was at 8.6 cents per kilowatt-hour; around one-fifth lower than the national average and about half the cost of California’s.
There is not much information about how much the banks participating in the energy market have benefitted. But Macquarie, the Australian bank with Houston-based energy business, reported gains of A$300m (US$234 million) related to natural gas trading, raising its annual group profit by 5-10 percent. “So far we’re only hearing from the losers, and furthermore, we’re only hearing what the losers have chosen to tell us,” said Ross Baldick, an emeritus professor of engineering at the University of Texas at Austin.
