In Texas, springtime means fields of blooming bluebonnets, but this year’s spring also brought record-breaking temperatures to 2022. If that is any indication of the weather this summer, it’s going to be a hot one. The expectation of formidable summer heat waves is splitting nerves in ERCOT. Volatile electricity pricing, power shutoffs, and reduced margins for wholesalers and retailers alike have driven forward onpeak summer energy prices to all-time highs. This blog takes a look at how adding smart energy storage to clean energy assets can help energy wholesalers offset price volatility and power outages to reduce risk and increase profit margins.
How ERCOT’s price spikes impacts users
Price volatility impacts users in much the same way you might expect: when prices go up, wholesalers sell at a higher price, and retailer customers take the hit; if not directly, then eventually. Last winter brought extreme circumstances when gas lines froze and wind turbines went offline, causing three different Texas energy suppliers to go out of business as the wholesale rate reached its $9,000/MWh cap (the cap has since been reduced to $5k/MWh). Retail customers wound up footing this bill either through bankruptcy filing by retail suppliers or in some cases, the retail customers were directly exposed to the market rates. For one Texas resident, that resulted in a $4,677 electricity bill for a single week!
Primary factors affecting ERCOT price volatility
There are four reasons why ERCOT has price volatility, including:
- (No) Capacity Market: ERCOT, by design, does not have a capacity market. The volatility in the energy markets is an intentional symptom and is driving the build of new generation on the grid.
- Wind capacity: Texas has the most installed wind power capacity in the country, but if the wind doesn’t blow, the electricity doesn’t generate, and prices go up.
- Forecasting errors: Both mid- and long-term load forecasting is difficult in ERCOT. The former being affected by changing weather patterns and the latter by a boom in population growth for the state.
- Generator outages: Generators are typically scheduled for up to two weeks of offline maintenance time per year. Recently, a combination of high amounts of scheduled offline capacity and a coincidental and unexpected heatwave resulted in sustained onpeak scarcity prices due to low supply and high demand. In similar fashion, unexpected trips (offline periods for generators) occur, which cause imbalances that promote intermittent scarcity and market price volatility.
Whenever a combination of the above occurs, the result is price volatility. And since ERCOT doesn’t have a capacity market mechanism – indicating an inherent reliance on market prices to drive supply investment decisions – ERCOT is likely to continue to experience exacerbated price volatility well into the future, as developers monitor market dynamics for supply investment decisions. Arguably, the ERCOT model works, because ‘you only pay for what you need when you need it’ – but that doesn’t jive with consumers during price spikes. Storage is the asset-class that can provide more balance to ERCOT and help create a more flexible clean power grid.
Why solar power won’t improve price volatility on its own
The solar buildout in Texas is mind-boggling, as the pace of ERCOT capacity additions is now exceeding those seen in California. But, the pros and cons of solar power are similar to those faced by wind power. Most notable, of course, is the intermittent nature of renewable power, where supply depends on the weather. Moreover, solar peak generation occurs in the mid-day when most consumers are not at home. This creates a mismatch between the solar generating hours and the high demand hours for the grid.
How smart energy storage helps stabilize price volatility
Energy storage is the solution for many of Texas’s electricity grid problems. In simple terms, energy storage allows you to save any unused electricity for use at a later time. Take solar power for example. Let’s say a site generates more solar power electricity than what is needed during the day time. Instead of letting that power go to waste, batteries store that power to be used during periods of more dire supply/demand balance.
When enough energy storage is deployed in Texas, the price volatility caused by extreme weather events and power outages will be muted, simply because the energy stored in batteries can supply the much needed power to the grid almost instantaneously. This provides significant earnings potential for project developers or EPCs with the foresight to install energy storage batteries.
Looking to ERCOT’s future
By the turn of the decade, energy storage batteries will fundamentally change the electric grid and how suppliers earn revenue. The days of hitting the rate cap will be a thing of the past due to a readily available and relatively constant supply of power. These batteries will have more of an energy market focus by then, compared to today where the ancillary value of these assets are very high. Developers who can get projects in the ground quickly will see exceptional returns.
Speed to market is key right now, since ancillary service prices, which currently provide significant economic uplift for storage, will eventually come down to a more normalized pricing once enough storage comes online.
Many of Stem’s project developers and solar EPC partners know that if they stay below a 10 megawatt (MW) threshold, the interconnection process is much faster, and they can get to market quicker. For this reason, many developers are choosing to build ten 9.9 MW projects, as opposed to a single 100MW project, for example.
Energy storage is more than just installing batteries. To make the most out of energy storage, you need software intelligence to optimize the battery and monetize its actions. This is where Stem’s Athena® smart energy software comes into play. Our best-in-class Athena smart energy software drives success by optimizing the economic and operational trade-offs necessary for successful market participation. With Athena, you can:
- Track savings and battery performance in real time
- Maximize bill savings
- Predict solar generation to optimize battery storage
- Automatically store and release energy to maximize customer savings
- Manage and optimize multiple sites
- Integrate with market operators and utilities and automate wholesale energy market transactions
- Maximize wholesale market revenues
Stem works with our developer and off-taker partners to size their energy storage projects, register their 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.
To learn more…
- Texas’s Wholesale Energy Markets (request more information)
- Webinar Recap: How to Jumpstart Better Returns in ERCOT (webinar on demand)
- Texas’s Energy Storage Gold Rush (blog post)