Outlook 2024: ERCOT renewables surge may not ease summer price, reliability risk

Relatively scant additions of dispatchable resources in early 2024 in the Electric Reliability Council of Texas Inc. market could pose reliability and price spike risk in summer and fall, despite the grid operator's forecast for a more modest seasonal peak load in summer.

Through the end of 2024, ERCOT has a robust schedule of generation additions, totaling almost 27,100 MW of nameplate capacity and no retirements, building on the almost 147,000 MW of existing nameplate capacity as of March 7, according to S&P Global Market Intelligence data.

If these additions come online as scheduled, they would almost triple the recent high net addition of 9,500 MW in 2021. Solar tops the list of additions with almost 16,300 MW, followed by battery storage at 7,700 MW and wind at 2,200 MW.

However, only 1,100 MW of solar, 606 MW of battery storage and 307 MW of wind are slated to come online by June.

Peak demand impact of renewables, batteries

Nevertheless, increased dependence on solar and battery storage poses operating challenges for ERCOT, said Campbell Faulkner, senior vice president and chief data analyst at OTC Global Holdings, a Houston-based interdealer commodity broker.

Battery developers operate in the ancillary services market but are not required to report state of charge to ERCOT, which means "they will now have to be inventive in the upcoming tight operating environment to withhold resources" during peak demand hours so they can be available for the evening ramp as solar output plunges, Faulkner said.

ERCOT's operating reserve demand curve scarcity pricing scheme and ancillary services market design encourage battery operators "to offer at the price cap" of $5,000/MWh, Faulkner said.

Assuming normal weather, ERCOT's most recent "Capacity, Demand and Reserves (CDR)" report, issued in December 2023, estimates summer 2024 firm peak demand at just over 80,000 MW, less than the record 85,508 MW set in summer 2023. ERCOT defines summer as June 1 through Sept. 30. The National Weather Service's latest outlook for June through August indicates chances for above-normal temperatures across virtually all of Texas ranging from 50% to 60%.

ERCOT does not count any battery storage as likely to be available at peak hours in the summer of 2024, but as of the end of February had 5,600 MW of battery storage operational and another 1,200 MW with signed interconnection agreements and financial security posted with expected completion dates before June.

But even assuming all 6,800 MW of battery storage is available at peak hours in summer 2024, peak demand would still imply the need for intermittent renewable resources to be available at peak hour.

"So, if we assume dispatchable (except battery) resource outages at 5%, that would imply 68.7 GW of supply," said Morris Greenberg, S&P Global Commodity Insights senior manager for North American power analytics.

In August 2023, net load, which is load minus renewables, tended to peak at the hour ending at 8 p.m., as solar output fell at sundown, Greenberg said.

"Load during that hour was 5% to 6% below the day's peak, so we'll adjust the 80-GW peak down to 75 GW," Greenberg said.

However, to maintain reserves sufficient for reliability, especially the ERCOT Contingency Reserve Service designed to cope with the possibility of a sudden loss of renewable output, Greenberg said, would boost the supply needed to 78,500 MW of load plus reserves.

"Then supply from wind, solar, storage and asynchronous ties would have to be about 10 GW to meet system need at peak," Greenberg said. "Combined solar and wind during that hour averaged 13.4 GW last August but ranged from 4.5 GW to 20.3 GW. There is more capacity this year but the impact of more solar during that hour is small. So, what this tells me is there is some chance of tight supply under low solar and wind even if loads and outages are at expected levels. And of course, they may be higher."

Additions

Among the largest projects scheduled to come online in ERCOT in 2024 is the 600-MW Danish Fields Solar Plant in Matagorda County, being developed by TotalEnergies SE. In September 2023, TotalEnergies reached a deal for some of the solar plant's output to be supplied to France-headquartered construction firm Compagnie de Saint-Gobain SA's operations in the US and Canada under a 15-year contract.

Vesper Energy Development LLC's 600-MW Hornet Solar Project in Swisher County is set to be another notable addition to the Texas grid in 2024, as well as the 514-MW Frye Solar Project, also in Swisher County, being developed by Hecate Energy and Repsol SA, which also has a 510-MW battery component. The output of the Frye project is committed to Amazon.com Inc., while a portion of the Hornet plant's output is committed to an animal health care company under a virtual purchase agreement.

The largest gas-fired project scheduled to come online in Texas in 2024 is Texas-focused developer WattBridge Energy LLC's 484-MW Remy Jade CT Power Station in Harris County, according to Market Intelligence data.

Forward prices

Summer 2024 power prices in ERCOT were only comparable to summer 2023 in one month. As of March 7, the Platts M2MS Forward Curve ERCOT North Hub summer on-peak power numbers were: $97.98/MWh in June, compared with day-ahead on-peak locational marginal prices averaging $96.30/MWh in June 2023; $150.44/MWh in July, compared with a day-ahead average of $73.75/MWh in July 2023; $222.07/MWh in August, compared with a day-ahead average of $382.71/MWh in the prior-year period; and $110.83/MWh in September, compared with a day-ahead average of $93.97/MWh in September 2023.

NGPL South Texas wholesale forward gas prices peak at $2.47/MMBtu in August and $3.37/MMBtu in December, according to Platts data. NGPL TXOK gas prices peak at $2.34/MMBtu in August and $3.28/MMBtu in December.

Tight shoulder seasons

ERCOT's most significant energy supply event in 2023 happened Sept. 6, when the grid operator declared an Energy Emergency Alert and asked consumers to curtail power demand from 5 p.m. to 9 p.m. amid a persistent heat wave, which pushed real-time prices into triple digits. The summer of 2023 was among the hottest on record in Texas, second only to the summer of 2011.

ERCOT considers its fall season to be October and November, when thermal generation is often offline for seasonal maintenance, and power traders appear to have taken that into account in hedging their risk for October and November of this year.

"One of the major concerns that I have had is the growing scarce and potentially extremely tight reserve margin hours during the spring and fall in ERCOT," Faulkner, of OTC Global Holdings, said. "Those times of the year are the major and typical periods for heavy maintenance on the thermal fleet due to the typical pattern of 'low' and smooth demand curves."

The maintenance window is tighter now that ERCOT recognizes it faces demand peaks both in winter and summer, which limits how much generation is permitted to shut down for maintenance at various times of the year, Faulkner said.

"This means that we have moved beyond the typical generation mix and seasonal understanding of both load and generation meeting demand," Faulkner said. "No longer are the number of high-priced hours focused in July through September. There are now large swings from negative prices to high prices on otherwise typical spring and fall days due to thermal ramp to meet evening load."

In its Seasonal Assessment of Resource Adequacy (SARA) for October and November 2023, issued last September, ERCOT anticipated demand for the period to peak at 69,654 MW, but on Oct. 4 demand peaked at about 71,500 MW.

ERCOT has not yet released a SARA for this October and November, but as of April 2, forward traders valued ERCOT North Hub October on-peak power at $40.50/MWh and November on-peak power at $39.12/MWh, S&P Global Commodity Insights price data show. ERCOT North Hub day-ahead on-peak locational marginal prices averaged $38.07/MWh in October 2023 and $35.63/MWh in November 2023.

Natural gas prices are likely to influence those power forwards. As of April 2, S&P Global Platts-assessed Houston Ship Channel October gas was $2.196/MMBtu, and November gas was $2.529/MMBtu. Houston Ship Channel spot gas averaged $2.367/MMBtu in October 2023 and $2.305/MMBtu in November 2023.

"Long story short on pricing is that I think the average price paid in ERCOT will increase due to the 'barbelling' of prices," Faulkner said. "We will have lots of very low pricing hours throughout the year with a growing number of tight reserve hours that price extremely high during months and hours that formerly were much more tepid."