While 20 years ago, it was Enron who made billions of dollars out of the California electricity crisis (which it sparked), a scandal that culminated in the scandalous and complicated bankruptcy of Enron, this time around, it was pristine banks like Goldman and Bank of America that made hundreds of millions of dollars in revenue while tens of millions of Texans were stuck in the dark.
According to the Financial Times, during a time when the Texas power grid failed in last month’s polar vortex explosion, which sent electricity prices to staggering levels, Bank of America made hundreds millions of dollars in business income. the chaos that has knocked out electricity and heat across the state, said industry executives and traders.
The bank’s Houston-based energy trading group – part of the FICC division of BofA which reported $ 1.7 billion in fourth quarter revenue – had power contracts that have soared in value when wholesale electricity prices in Texas rose 10,000% to a high of $ 9,000 per megawatt. -time of the third week of February, reports the FT.
The story is familiar to our readers: While record prices were ordered by the Texas utility regulator in an attempt to put more production into service, this plan imploded when nearly half the capacity of the The state went offline as wind farms froze after triggering a catastrophic chain reaction. that lead to widespread blackouts amidst stranded supplies of natural gas and frozen coal piles. The Blackouts went on for days, leaving millions of people in the dark.
Like many other electricity merchants, BofA participates in the Texas energy market by trading electricity and gas and selling products that allow producers and other asset owners to protect themselves against fluctuations in power. price. This activity has left BofA with an inventory of power contracts that have risen in value during blackouts. “The volatility of the energy market has increased the value of risk management”, the bank’s website says, perhaps in anticipation of the outrage that will follow the realization that a handful of banks have suffered huge crashes as people froze, in some cases to death.
To ease its conscience – and avoid angry populist chants outside its Texas office – the bank pledged $ 1.1 million – a tiny fraction of its energy revenues – to charities to provide shelter, l water, food and other essentials after the weather disaster.
“From the Rio Grande Valley to begging, this winter storm has hit the entire state, including our 19,000 employees in Texas, and for many, the recovery is just beginning,” said Nikki Graham, president of the market. Austin from the bank, in a final statement. month.
While BofA declined to comment on the Ft on the amount of its energy trading generated during the power outages in Texas, but he said: “The revenue from this activity will be offset by losses and reduced revenue related to investments in wind and other alternative energy providers in Texas. and other affected markets. “
And in what appears to be a seizure of struggling assets to gain further ground in the space, BofA was the lead bank on a $ 480 million line of credit to Brazos Electric Power Co-operative, the generation company. and transmission which, as we reported on Monday, filed for bankruptcy protection this week because it was unable to pay for the electricity purchases accumulated during the storm.
While most banks have been understandably low-key about their business activities during the longest cold spell ever to test the Texan grid (and certainly their profits), an exception is Macquarie in Australia, which also owns a Houston-based energy company. , and which reported a gain of A $ 300 million (US $ 234 million) from natural gas trading, increasing the group’s annual profit by 5-10%.
“So far we’ve only heard from the losers, and what’s more, we only hear what the losers have chosen to tell us,” said Ross Baldick, Emeritus Professor of Engineering at the University of Texas. in Austin.
To be sure, most of the other banks probably generated significant income during the historic woes of Texas, as BofA has a smaller energy trading business than most of its peers. Citigroup was the fourth largest seller of wholesale electricity in the United States in the third quarter of 2020, while Morgan Stanley was 15th, according to government data compiled by S&P Global Platts. Bank of America was not in the top 20.
A other bank that we do know made substantial profits from the turmoil of Texas is – who else – Goldman Sachs.
The bank, which was recently convicted of felony for its involvement in the biggest sovereign corruption scandal in history when it defrauded billions of dollars from the Malaysian sovereign wealth fund, could earn more than $ 200 million from the physical sale of electricity and natural gas and financial resources. hedges after the spot price spike in much of the United States, according to Bloomberg.
“The polar vortex has driven volatility in the energy markets and, as a market maker and provider of liquidity, we were positioned to help our clients manage their risk in this challenging environment,” said Maeve DuVally, door -Said Goldman Sachs, in a statement.
Some of Goldman’s gains resulted from hedging, a common part of risk management on Wall Street and across corporate America. Hedges are generally meant to mitigate losses in the event that prices fluctuate unexpectedly. Protection can become very profitable when rare events occur.
But, as in the case of BofA, those gains, whether in hedges or ancillary deals, can prove elusive given the increasingly political fallout from the Texas crisis that tipped over. energy companies in bankruptcy, triggering legal challenges and prompting the government to intervene. Indeed, as the FT adds, the profits could well be reduced as Texas officials plan to retroactively cut prices for some of the $ 50 billion in electricity sales made during power outages.
Morgan Stanley is also expected to profit from the Texas freeze, with its earnings just below Goldman’s at under $ 200 million. Pipeline operators Energy Transfer LP and Oneok Inc. also said they won.
The big question now is how much of this income will actually drive the cash transfer. Indeed, that money will depend on what happens to gas suppliers, power producers, utility customers and traders who have been stung by soaring energy prices. Some are faced with the default. Others go bankrupt, according to Bloomberg. And state lawmakers are considering forgiving some payments to consumers altogether.
Several traders have described the potential of a garland, in which payments are not made to sellers in one market, affecting payments elsewhere. It was a surprise to some that Macquarie had updated his forecast so early.
“People are waiting for checks that don’t come,” said Evan Caron, chief strategy officer for energy technology company ClearTrace.
The end result, according to Bloomberg, depends in part on developments in places like Texas. The director of this market, ERCOT or the Electric Reliability Council of Texas, grapples with a $ 2.5 billion shortfall as more than a dozen businesses face payment defaults. In a further complication, an independent observer told state regulators that Ercot mispriced electricity during the emergency, resulting in overcosts of $ 16 billion. If this were reversed, the adjustment would reduce the profits expected by some of the biggest winners in the market. Meanwhile, at the Statehouse, discussion of a possible bailout or other intervention continues.
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