Tuesday, March 19, 2019

Overheard at Infocast ERCOT Market Summit

Speakers Expect Strong Market Performance this Summer

AUSTIN, Texas — Infocast’s annual ERCOT Market Summit last week attracted more than 150 policymakers with utility, solar, wind and other energy executives to explore potential solutions and opportunities in Texas.

Attendees at Infocast’s 2019 ERCOT Market Summit listen to a panel discussion. | © RTO Insider

Attendees participated in discussions on an expected surge of solar capacity, living with ERCOT’s shrinking reserve margin, the benefits of energy storage and the market’s transmission needs.

Shell Energy’s Resmi Surendran delivers the keynote address. | © RTO Insider

Resmi Surendran, Shell Energy North America’s senior director of regulatory policy, keynoted the three-day event by saying the rising forward curves reflect the increased risk ERCOT faces this summer. The grid operator’s reserve margin has dropped to 7.4%, reflecting a lack of new baseload generation additions and the recent loss of yet another aging coal plant. (See ERCOT Says Emergency Conditions this Summer ‘Likely’.)

Noting the 2019 forwards are $50/MWh below 2018, Surendran said, “It may be skepticism, because so much wind is coming, or the possibility of a lot of demand response or because of the ORDC [operating reserve demand curve] changes, or just waiting for the [March 5 seasonal resource assessment] to come out and see how tight the summer will be.

“The only thing we can really say is the capacity will be really tight, and any small change can swing it one way or the other,” she said.

Speaking on a panel taking a long-term view of ERCOT’s wholesale market, Thompson & Knight’s Katie Coleman, who represents industrial customers, disputed the notion that the market “got lucky” last summer. Operating with an 11% reserve margin, ERCOT met 14 demand peaks above the previous record without resorting to emergency measures.

“My clients don’t think we got lucky. We think the market performed the way it was supposed to perform,” she said. “You have a market with a ton of risk, people will show up. When you have the type of financial risk we had last summer, it really motivates people. I think you will also see that this summer, and people should start adjusting their expectations.”

Thompson & Knight’s Katie Coleman | © RTO Insider

Coleman said “empirical evidence” revealed customers “were doing things they hadn’t done before” last summer to reduce their loads and help the market meet demand. “It’s a misconception that a low planning reserve margin corresponds to higher real-time prices,” she said. “Barring contingencies, you’re going to see good performance again this summer, and you may or may not see high prices in real time.”

Citibank’s Hugh Byrd | © RTO Insider

“You’re just going to get more continued price volatility around wind because of the renewables buildout,” said Hugh Byrd, Citibank managing director for ERCOT/West power trading. “We’ll get to the point where we almost need renewable generation to meet peak demand, which will increase price volatility.”

“Wind penetration has created impacts on pricing, where it’s hard for baseload generation to stay active in this market,” said the Lower Colorado River Authority’s John Dumas, vice president of market operations.

LCRA’s John Dumas | © RTO Insider

Dumas said changes to the ORDC’s calculation prescribed by the Public Utility Commission of Texas will increase scarcity pricing sooner, but he was doubtful those modifications will have a “dramatic impact” on unit commitment decisions this summer. (See Texas PUC Responds to Shrinking Reserve Margin.)

“[They’re] not going to be enough to drive a combined cycle [plant]. They plan to be online for the peak anyway,” Dumas said. “Potentially, you might commit some gas turbines sooner.”

“We’re moving away from a world where you can count every megawatt out there,” Coleman said. “You have to trust the market.”

Panel Debates ERCOT’s Competitive Market

Bill Barnes, NRG Energy’s director of regulatory affairs, also urged attendees to place their faith in the ERCOT market. Saying he didn’t want to reflect on the market’s shrinking reserve margin, he trained his focus on what he called a “success story.”

“The ERCOT market is really the envy of the rest of the country and the world,” Barnes said. “It should not be a surprise that we have low reserve margins. We’ve had six to seven years of low pricing; pricing drives waves of exit and investment. We’ve seen some investment funded by subsidies [the Competitive Renewable Energy Zones], and exit driven by these same subsidies and some by low natural gas prices. When you have low prices for such a long period of time, you will have financial discipline.

“It’s time for the market … to support that next wave of investment in our energy supply, and it should not be tempted to intervene with out-of-market actions or subsidies. [Low reserve margins] should not be a surprise. We’ve known for years … an energy-only construct without a capacity construct always results in lower reserve margins.”

Calpine’s Brandon Whittle | © RTO Insider

Calpine Director of External Affairs Brandon Whittle countered by pointing out that competitive electric markets “are not the perfect competitive markets we studied in ECON 101, where everything made sense.”

“One of the traits of a perfect competitive market is low barriers to entry and exit,” Whittle said. In ERCOT’s case, he said, that would be the units’ start-up costs, which become sunk costs once the unit is online.

“We’re going to need dispatchable generation to come online. To do that, they have to overcome the barrier to entry,” Whittle said. “The reserve margin will remain uncomfortably low over the next few years, depending on new entrants into this market. There are significant costs to build new generators, so significant that it takes decades to recover those costs.”

In the meantime, Barnes said the probability of an emergency event this summer is “pretty high … probably 90 percent-ish,” and that the market should be prepared.

“That’s how an energy-only market is intended to function. That’s how you increase revenues to incentivize the next wave of investment,” he said. “These events can be well-managed and organized and have very little disruption to consumers. We’re going to get a good sense of what our appetite for the real risk of reliability is. We lived it a little in 2011, but that was a weather event. This is more a lack of supply.”

ERCOT COO Cheryl Mele, sitting alongside Barnes, said, “We would expect to operate effectively.”

One audience member pointed out the only drawback with Barnes’ premise will be the political blowback from rotating outages, driven by constituent complaints.

“Hopefully, ERCOT will help manage any emergency event and explain that voluntary load reduction is not necessarily a bad thing,” Barnes told RTO Insider in response, referring to the grid operator’s emergency response service.

NRG Energy’s Bill Barnes and ERCOT’s Cheryl Mele | © RTO Insider

Wind Developers: PTC has Served its Purpose

A trio of wind energy developers agreed there was a time and a place for production tax credits, which expire in 2020. With the Dec. 31 deadline to begin construction fast approaching, they debated what to expect in a post-PTC world.

“We’ve had a love-hate relationship with PTCs,” said Tri Global Energy’s Tom Carbone, who expects to see 25 GW of wind energy come online in Texas through 2020. “Today, even without the PTC, [wind] is a very competitive solution. It’s also created somewhat of a perverse market, where you have runs with negative pricing. I’m probably one of the few guys in the room who looks forward to when the PTC is gone.”

“At least two of us are getting our feet wet in national markets. We see how they structure deals in a way they should post-PTC,” Pattern Energy’s Ward Marshall said. “[PTCs] were a necessity. It kind of leveled the playing field. It’s a great story from that standpoint, but I do believe theirs is a valiant death. I think it’s a dip, as we work on structuring on the other side.”

Originally enacted in 1992, the PTC is an inflation-adjusted tax credit of 1.9 cents/kWh for electricity generated by qualified facilities. The credit has been reduced 60% for those facilities that begin construction this year.

“We’re not afraid of a post-PTC world,” Macquarie Capital’s Thomas Houle said. “They served their purpose, and quite well, but we have a cheaper pool of long-term debt available now. It’s amazing how quickly the market adapts to these changes. We’re expecting a nine- to 12-month dip, but we’ll see what happens.”

Tri Global Energy’s Tom Carbone (left) and Pattern Development’s Ward Marshall enjoy their time on a wind energy panel. | © RTO Insider

Solar Energy a Promising Market

Asked to describe the difference between ERCOT’s and SPP’s solar markets, Recurrent Energy’s Jacob Steubing used an analogy internal to his company.

Recurrent Energy’s Jacob Steubing | © RTO Insider

“If you want to go to a market where they don’t need additional capacity, SPP is the market for you,” said Steubing, the company’s director of origination and structuring, pointing to the RTO’s 30% reserve margin. “ERCOT has a low reserve margin. SPP is the opposite end of the spectrum. … If you’re trying to sell in Texas, you’re selling to people who don’t have a car. In SPP, you’re talking to people with three 2001 Honda Accords. Maybe they will talk to you when one of those breaks down. You’re not going to find super motivated buyers in SPP.”

As Steubing spoke, Enel Green Power North America was announcing a 497-MW solar project in West Texas, the state’s largest. The day before, food distribution heavyweight Sysco said three solar garden sites in Houston and Dallas were operational. They are part of a 25-MW, 10-year renewable energy agreement with an NRG subsidiary.

ERCOT has more than 43 GW of solar projects in its interconnection queue, but only 5 GW have interconnection agreements. SPP has 26 GW of solar in its queue, according to one count.

AEP’s Brian Whitlatch | © RTO Insider

“The natural resource, the sun, is fantastic in Texas. We have to start there,” said Brian Whitlatch, AEP Energy Partners’ managing director of energy marketing. “The ERCOT market is one of the best-run RTOs, so it’s a very efficient market and it’s deregulated, so there are lots of buyers on the retail and wholesale side.”

Marc-Alain Behar, ENGIE Solar’s managing director for North America, said the Texas market’s liquidity and its “sophisticated wholesale environment … allows for financial innovation around commercial structures.”

ENGIE’s Marc-Alain Behar | © RTO Insider

“The first utility-scale solar project with a hedge is going to happen in Texas,” Behar said. “What’s new is the corporate demand for virtual [power purchase agreements], which started three to four years ago and which were mostly taken on by wind, from a price standpoint. Last year, we saw solar taking its share of that market. Here in Texas, we are seeing that the price point of solar being offered to those customers for a 12-year, 15-year PPA is competitive with wind. I see a lot of this continuing, because that demand from corporate customers is still there.”

“We’ve been watching Texas for some time. We thought there would be a tipping point, and I think we saw that last year,” Steubing said. “There were lots of transactions happening, and that’s carried forth in 2019, in Victoria, outside Houston and the greater Dallas area. It’s really exciting to see how solar has been able to avoid the pitfalls of wind and get built outside of the West.”

Is There a Place for Storage in ERCOT?

If solar and wind energy are going to increase their share of the fuel mix, energy storage could play a key role.

John Hall, the Environmental Defense Fund’s associated vice president for clean energy, is working on a comprehensive plan to increase the use of wind, solar, energy efficiency and DR in Texas. He believes the competitive market will play a primary role in driving the state’s clean-energy results.

“ERCOT projects that within the next 10 years, Texas could be on track to achieve 40 to 50% wind and solar capacity on the grid,” Hall said. “Storage is what would make that level of non-emitting capacity not just possible, but practicable. Its ability to address intermittency issues and ensure grid reliability is key to unlocking the potential of these energy resources.”

Tom Kleckner moderates a panel addressing the market impacts of coal retirements in ERCOT. Panelists include (left to right) Skylar Capital Management’s David Bellman, Association of Electric Companies of Texas’ Julia Rathgeber, ENGIE’s Bob Helton and Lower Colorado River Authority’s Randa Stephenson. | © RTO Insider

There are also market realities, Steubing and Behar said.

Steubing said Recurrent has executed on a solar/storage product in California for a 180-MW battery. But, he pointed out, California has a storage mandate, and neighboring states have capacity markets that lend themselves to solar and storage.

“I’m not saying there’s no value to storage, but not when we’ve seen customers motivated in states where they’re obligated to capacity and energy requirements,” he said.

“Between the solar and the wind, there’s a good complementarity which makes the storage proposition more difficult. You can buy cheap wind and cheap solar when you need it,” Behar said. “ERCOT is not the place we see [energy storage] happening.”

— Tom Kleckner

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