On April 13, 2023, Stem hosted a webinar featuring Regis Energy Partners, an independent developer, owner, and operator of energy storage systems. The webinar explored ways to develop viable, high-performing standalone and hybrid battery energy storage system (BESS) projects at scale and speed in the Electric Reliability Council of Texas (ERCOT) market.
The speakers included Cody Guidry, director of sales at Stem. He has spent over a decade focusing on bringing storage to its full market potential, reducing energy costs, and decreasing our carbon footprint. Amit Gohil, the senior director of product marketing (front-of-the-meter) at Stem, has over 20 years of experience working in the renewable energy and financial services industries, specializing in optimizing energy storage portfolios and de-risking renewable energy projects. Daniel Senneff, a co-founder of Regis, leads the company’s corporate strategy and operations. Nathan Vajdos, another co-founder of Regis, explained Regis’ overall business development strategy. Both bring over 15 years of experience in energy and power investing, finance, and delivering renewable and storage projects across various ISOs nationwide.
During the webinar, these experts shared insights into the ERCOT storage market and how Stem’s front-of-the-meter (FTM) offerings can help capitalize on market opportunities. They discussed the market fundamentals that support attractive project returns for large-scale energy storage, such as growing loads, transmission constraints, the explosive growth of solar, strong ancillary service markets in the near term, and energy market volatility supporting energy arbitrage value.
The webinar delved into the market fundamentals and outlook of ERCOT and then explored how the growing load, solar, and retiring fossil share trends present opportunities for the development of BESS.
The following is a quick recap of the webinar. Click here to view the Webinar On-Demand.
Growing Load Base
ERCOT is an islanded system with almost non-existent import capacity, meaning that it must generate all of its power within its boundaries. The latest peak record of 80GW was set in the summer of 2022, a significant increase from the previous peak of around 75GW in 2019. Since 2018, ERCOT average hourly load has grown at a 1.4% CAGR, driven by the immigration of people and corporate headquarters to the Texas area. There is also a growing commercial and industrial load base with large LNG facilities coming online as well as the explosive growth of “crypto-mining” facilities in Texas. This growing load is one of the essential factors contributing to the attractiveness of ERCOT for BESS development.
Growing Solar Capacity and Need for Fast-Ramping Capacity
Solar is growing faster than wind in ERCOT, and the need for fast-ramping capacity is growing with it. It’s noteworthy that Texas outpaced California, the nation’s leading solar state, in installations in 2021. The influx of solar to the ERCOT grid is likely to create future storage value similar to that which we see in CAISO today. ERCOT has already started to witness a duck curve similar to CAISO and the growth of solar coupled with unavailability of wind during evening peak hours may even lead to a super steep ramp. This presents opportunities for BESS to provide fast ramping capacity to balance the grid and ensure system reliability.
Scarcity Pricing and Long-Term Energy Price Volatility
ERCOT does not have a capacity market, which means that generators must rely on robust energy and ancillary service (AS) prices to incentivize them to be available during periods of stress. In the absence of a capacity market to provide viable compensation to generators for providing capacity to meet peak demand, ERCOT utilizes “scarcity” pricing, in which reliability adders to real-time prices reflect the availability of reserves. This scarcity pricing leads to price spikes and higher levels of energy price volatility, which is another factor that supports the development of BESS in ERCOT. Furthermore, the longer-term trends of retiring fossil share taken over by renewables will further support long-term energy price volatility.
Renewable Generation / Load Geographical Separation
The geographical separation of renewable generation resources, which are primarily in the ERCOT West zone and ERCOT’s primary load centers, which are in the rest of the ERCOT’s 3 zones, has led to transmission congestion constraint issues throughout the state. The result of these constraints and heterogeneous distribution of generation types leads to severe price gradients between east and west. Thus, Houston, which is the most constrained zone, and is projected to remain so in the future, experiences elevated levels of DA and RT energy prices and volatility.
ERCOT Phase 2 Market Redesign
Following winter storm “Uri” in February 2021, the Texas Legislature unanimously passed Senate Bill 3 (SB 3), which initiated the first redesign of the ERCOT after the state implemented a sweeping restructuring of its wholesale and retail energy markets in the 1995 – 2001 period.
With the rapid and continued rise of renewable generation, it became evident that there is no longer enough money in the Texas Energy Only Market to incentivize the building of new, dispatchable generation. It was concluded that a new, unique tool is needed to incent more dispatchable generation in the Texas Energy Market. To achieve this objective, several options were floated via a 3rd-party study commissioned by the PUCT including a PJM style forward capacity market, a California style bilateral Resource Adequacy market, along with a few other options. In January 2023, the PUCT recommended to the Texas Legislature that a novel wholesale market mechanism, referred to as the Performance Credit Mechanism (PCM), be added to the existing energy-based, competitive wholesale market structure. The PCM retroactively rewards generators based on availability during high reliability risk hours with payment determined by an administratively set curve. While the implementation of PCM is uncertain and rules applicable to PCM are not defined yet, it should be noted that energy storage is a firm dispatchable resource that may qualify to receive the PCM revenues provided it performs during periods of grid stress. And the premise of the market redesign effort is to create an incremental source of revenue available to dispatchable resources that the current market has failed to provide. If this hypothesis holds true then any market product, if it is not PCM, will need to provide additional revenues to dispatchable resources like energy storage.
Conclusion
ERCOT presents attractive opportunities for the development of BESS due to continued energy volatility driven by its energy-only market design, growing load and solar generation, and retiring fossil generation resources. The effects of these dynamics largely support merchant storage so if you are a developer considering energy storage, ERCOT could be an attractive market to explore.
Why Partner with Stem?
Stem works with our developer partners – like Regis – to size their energy storage project, register the systems with ERCOT and to develop and submit optimized bids into day-ahead and real-time energy markets as well as ancillary services markets. We’re playing a key role in helping developers get these projects to the finish line through our extensive experience in storage development efforts, our supply chain strength, analytical support around technical and economic analysis, construction and permitting support, and ultimately operating the projects in the market to achieve optimized revenues. Our best-in-class Athena® platform drives success under this framework by optimizing the economic and operational trade-offs necessary for successful market participation.
Fill out the Let’s Talk form below and learn more about how to maximize merchant revenues in the ERCOT wholesale market. Stem’s AI-driven clean energy solutions and services can help you capitalize on market opportunities and deploy high-performing energy storage systems at scale and with speed.
