The California Gold Rush of the 1800s brought a slew of innovation, growth, and prosperity for those bold enough to seek their fortune. While the times and circumstances have changed, there’s a new kind of gold rush taking place in Texas, and it’s focused on renewable energy and energy storage. Texas is the fastest growing market for solar – surpassing California in growth – by adding 2.5 gigawatts of solar in 2020 and 1.5 gigawatts of new solar capacity in the first quarter of 2021 (source).
Stem’s local Texas expert and Director of Business Development, Cody Guidry, recently answered the most pressing questions surrounding Electric Reliability Council of Texas (ERCOT), renewable energy, and how Stem’s intelligent energy storage solutions have helped developers increase revenue.
What changes have happened to ERCOT and Texas’s grid since February 2021?
The winter storms of ‘21 forced ERCOT to rethink its grid reliability strategy, which has created new opportunities for storage. But this has been in the works for some time – if you look over the course of the last decade, when the first pilot projects were installed. There has always been a long-term view that storage was more of a ‘not if, but when’ situation for it to experience massive growth.
In terms of the current state of the Texas storage market, the winter storms accelerated projects by a year – meaning, a lot of developers escalated projects that were scheduled for, say, 2023 and will now be built in 2022 if they have not already begun.
There is a boom happening. ERCOT had 77 megawatts (MW) of projects in operation in 2014, and it recently increased to more than 3,600 megawatts (MW) of projects under construction.
Stem is in an excellent position to be a part of this growth because we have extensive experience operating 1.4 GWh of storage projects across the U.S. Our ability to leverage our AI-driven energy storage software, Athena®, to maximize wholesale market revenues is the key to unlocking the full value of these storage projects for developers and project owners.
What is the standalone storage trend in Texas?
The proportion of solar plus storage projects versus standalone storage projects has shifted over the course of 2021. In early 2020, standalone storage projects began to have a larger proportion to be installed than solar plus storage. We think this trend will continue until at least 2024; when solar plus storage installations might start to overtake this trend again.
This is happening for three primary reasons: 1. Increased demand on the grid; 2. Retirement of conventional generators; 3. A significant influx of intermittent renewable energy coming onto the grid.
Increased demand influences energy storage projects
With an influx of companies and people moving to Texas, the demand on the ERCOT grid is also increasing at a significant rate. It is currently on pace to be the fastest growing organized energy market in the U.S.
Retirement of conventional generators is impacting ERCOT
There are a number of conventional generators that are retiring and not being replaced by newer conventional generators. These are the traditional “dispatchable” assets that ERCOT has historically been able to call-on during capacity shortfalls.
Intermittent renewable generators replace conventional generators
The retired conventional generators are being replaced by intermittent renewable assets that do not have the same dispatchability as the conventional generators.
All of this together creates a conundrum for ERCOT: when more renewables are introduced to the grid, it becomes more difficult for these same conventional generators to stay in business. This has forced ERCOT to introduce new revenue streams and market reforms to incentivize additional dispatchable resources.
There has not been a significant amount of storage online in ERCOT’s grid historically, but there is more than 3,600 megawatts (MW) being built now to provide low cost dispatchable capacity that ERCOT needs on standby daily to take it through shortfall events and bridge until larger, high-cost generators are signaled to come online.
When we add in the amount of solar that’s projected to be installed in the next few years, the numbers are quite impressive. But it’s Texas (we’re used to that) – everything’s BIGGER in Texas.
In the past, there has been a relatively small amount of solar development in Texas, especially when compared to the state’s nation-leading wind development. But that’s quickly changing. This influx of solar will compound with other factors, creating lucrative returns for storage projects that can get in the ground quickly to capture that value. There is precedence for this in other parts of the country. Similar to how California’s solar boom preceded a subsequent storage boom, we expect ERCOT to remain a prime candidate for new storage development as these trends continue.
In the longer term, there are still other value streams – like energy arbitrage – that are really the foundation of these projects over time.
What is the ‘big opportunity’ in Texas?
The most urgent opportunity is putting in the standalone full, merchant storage projects that are going to have significant market returns for project owners.
Speed to market is key right now because the ancillary service clearing prices that are providing the significant lift to project economics will eventually come down to what would be considered as “normal” pricing once enough storage comes online.
There’s a strategy that Stem suggests: if you stay below a 10 megawatt (MW) threshold, the interconnection process is much faster; you can get to market quicker with, say, a 9.9 MW project as compared to a 10 MW or greater project.
Many developers are choosing to build 10x 9.9MW projects, as opposed to 1x 100MW projects partly for this reason.
How can developers be successful in ERCOT?
You have to know where to hunt within ERCOT’s grid. In a deregulated market, from a land coverage perspective, a large area is still served by either electric cooperatives or municipal utilities and that is not prime hunting ground. It’s not to say projects cannot be built there, but there are a few more barriers to entry there. The best area is outside of those territories.
From there, it’s really drilling down to specific project sites and gauging proximity to substations, which is where they will interconnect. These variables have a major impact on construction costs, which is a key expense to manage when planning a new project. These projects are settled at the nodal-level and some nodes are going to be more lucrative than others because of the energy arbitrage play. So, finding nodes that are valuable is certainly a key advantage. Then you can site projects based on the arbitrage value. And that directly impacts return on projects.
Because these are full merchant projects, they may require a different financing strategy than what some developers are used to. These projects are going to expect higher returns but that does come along with higher risk. So, knowing where to get capital comfortable with this business model is key, and it’s not necessarily the usual solar financiers, who are used to getting a return over longer periods of time with lower risk, because of the contracted nature of those projects. The specific type of project we’re talking about here looks more like a merchant gas power plant than a solar project.
Why work with Stem within ERCOT’s grid?
Anyone can ask a consultant, ‘If I build a project at this node, what’s going to happen with the market every hour, or every 15 minutes, for the next 20 years?’ Anyone can buy that data and dump it into a very basic spreadsheet model and come up with what you think the revenue will be for that asset for the next 20 years. Or, you can work with Stem with a much more sophisticated, more intelligent, way of modeling projects and optimizing bid strategy based on how you intermix different market products together and what you choose to bid into at any given bid interval. We support our partners and customers with very sophisticated revenue models upfront and then operate the projects to that model once the projects are built – that’s a unique differentiator for Stem.
For example, one of Stem’s partners within ERCOT will use Stem’s smart energy storage services and software to ensure that its front-of-meter projects maximize multiple potential revenue streams on a granular, localized basis. As a result, the projects will co-optimize across all real-time, day-ahead, and ancillary markets.
How will the Federal Standalone Storage ITC impact ERCOT?
The market, in terms of storage for the next few years, will predominantly be the deployment of standalone storage projects. The Federal Standalone Storage ITC, if and when it does pass in 2022, certainly would help these projects. The good thing is though, these projects don’t have to rely on an ITC to pencil a project. You can make a significant return without it.
I’m not saying we don’t need ITC for the storage industry as a whole, but in this particular type of project, in this particular market that we’re talking about, the ITC would be just a boost to the economics and would de-risk projects. It all depends on the project, but a standalone storage ITC would most likely provide a nice lift, so it would be a pretty big deal.