Can current contracting structures keep pace with rampant growth in Texas-based renewables and battery storage?
February 17, 2022 | Alain Brisebois
The following text may include traces of opportunities and dissatisfaction with current market solutions. Readers be warned.
Renewable and battery storage projects in ERCOT are being installed at a staggering rate, even when incorporating supply chain headwinds. ERCOT’s resource capacity trends exhibits 11 GW of nameplate solar and wind, 3 GW of battery storage online in 2022 alone.
Tax equity, carbon offsets, low capital costs, offtake demand and robust capacity factors are drivers of continued growth in renewables and battery storage in ERCOT.
While catalysts for development are robust, increased supply in the market for renewable offtake has shifted risks traditionally worn by the buyer to the seller. Instead of buyers “housing” risk under long-term, fixed-price as-gen power purchase agreements, sellers are now being asked to wear incremental risk under short-term, fixed-price and fixed-volume PPAs or take the project completely “merchant” altogether, implementing hedging strategies on their own.
Under fixed-price, fixed-volume offtake agreements or hedges, these risks manifest in two general components: volumetric risk, when asset production quantities are mis-aligned with fixed sale quantities; and basis risk, when congestion pushes power prices at the resource node lower, resulting in increased price exposure at the settlement hub.
Developers now find themselves in relatively new territory, being asked to take on higher levels of merchant risk in a rapidly evolving landscape where those risks are both growing and changing with every new project in ERCOT. Lenders are becoming increasingly wary of the ability to achieve the desired levels of returns with increasing levels of risk posed to renewable assets, with deals reaching sticking points over who is left with basis risk, volumetric risk, or both.
As the capital funding ongoing decarbonization efforts continues to grow, these risks will only become more pervasive. With grid topology lagging renewable build, basis risks in particular will become more exacerbated, creating a barrier to further growth in renewables.
Traditional offtake agreements are poorly suited to accommodate these growing merchant risks facing developers. The key to unlocking the sticking point posed by merchant risks is a flexible, all-encompassing offering backed by market-based products that can provide further price certainty for those deploying capital.
Market participants have to take it upon themselves to adapt the market instruments list so that the evolving grid landscape can be better supported by creating new structured products and being actively involved with ISOs and RTOs to ensure their market products support the growing intermittency of production. You can't build the grid of tomorrow with yesterday's solutions.
CWP Energy Solutions is actively engaging market participants looking to mitigate volumetric and basis risks specifically. As leaders in congestion trading, the expertise driving the success of CWP Energy trading in ERCOT is the same expertise that allows CWP Energy Solutions the ability to wear or manage risk on behalf of asset owners and developers alike.
If you are interested in discussing how we can build the instruments that will support the grid of the future (or if you want to contribute to the development of such instruments), find us at ERCOT Market Summit on Feb 23rd to Feb 25th and we'll take the time to explain this big dream of ours!
