How Renewables and Storage are Changing Energy Market Pricing Dynamics

How Renewables and Storage are Changing Energy Market Pricing Dynamics

Republished from Voltility | By Andrew Cavenagh

The proliferation of renewable sources of generation is fundamentally changing the drivers of pricing in US power markets and energy storage developers need to adapt quickly to these new realities when evaluating their project economics, specialist consulting and software firm Ascend Analytics cautioned last month.  

Brent Nelson, Ascend’s Managing Director of Markets & Strategy, told a webinar that the energy transition process had not only created much more competitive markets – with large numbers of small generators rather than relatively few large ones – but had also crucially seen weather become a key determinant of pricing on the supply-side of the power sector (in addition to its historical impact on demand).

Price Setting Dynamics

These trends are increasingly seeing renewables and energy storage set prices in markets for energy, capacity and ancillary services, while policy decisions – at the corporate as well as the political level – are also boosting demand for clean energy resources beyond the straightforward economic considerations.  

As a result, Nelson said traditional methods of projecting prices – which relied on optimizing generation assets based on their production costs against known load levels – were no longer valid.  

“We have to rethink the way we model price formation,” he explained. “We need different tools in the current environment.”

Out-of-Market Returns

Nelson added that it was important for developers to recognize that in the highly competitive, renewable-dominated markets that are evolving across the US – albeit at different speeds in various states – it was not realistic to think that “out of market” returns were a sustainable long-term proposition.  

That is because high levels of competition will ensure that the premium nodal locations that currently deliver such returns will not do so for long – save in circumstances where there are meaningful geospatial barriers to new entry – and that this will produce a new equilibrium in overall power pricing in the medium to longer term.  

“That trend towards equilibrium is really critical,” Nelson confirmed. “We’ve seen a lot of forecasts where the new asset classes are earning super-normal returns indefinitely, and that’s not justifiable.”

Merchant Tails

He pointed to investments in energy storage assets that were proceeding on the assumption that the projects would enjoy a profitable merchant “tail” after their relatively low-return power purchase agreements (PPAs) rolled off and said this was almost certainly a flawed belief. “It’s very unlikely that a merchant tail will have a lot of merchant value in the energy markets, although it might still have some REC value.”

Balancing Effect

Renewable sources of generation and storage will also have a natural balancing effect on pricing dynamics, which will help to create and sustain the longer-term equilibrium. Any over-build of storage within a region will limit its price volatility and reduce surplus renewable generation. That in turn will improve the economics of solar and wind projects. If it does so to the extent that it spurs excessive deployment of those renewable resources, however, pricing spikes will come back and enhance the value of storage assets. “That dynamic will help balance out any over-exuberance in one asset class that you might otherwise see,” said Nelson.  

Ascend consequently models its forecasts for project economics based on revenues that are consistent with this long-term pricing equilibrium rather than the “super-normal” returns that developers are currently achieving in some ISO and RTO markets, notably the Electric Reliability Council of Texas (ERCOT).  

Declining Energy Prices

The company also predicts that as ever more renewable generation comes on stream, overall energy prices will inevitably decline as increasingly less use is made of thermal generation (and its ability to set prices).  

Capacity prices, by contrast, are likely to rise, as weather-induced price volatility becomes a more frequent feature of power markets across the US.

For the full article, click here.

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How Renewables and Storage are Changing Energy Market Pricing Dynamics

October 21, 2024

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News

Republished from Voltility | By Andrew Cavenagh

The proliferation of renewable sources of generation is fundamentally changing the drivers of pricing in US power markets and energy storage developers need to adapt quickly to these new realities when evaluating their project economics, specialist consulting and software firm Ascend Analytics cautioned last month.  

Brent Nelson, Ascend’s Managing Director of Markets & Strategy, told a webinar that the energy transition process had not only created much more competitive markets – with large numbers of small generators rather than relatively few large ones – but had also crucially seen weather become a key determinant of pricing on the supply-side of the power sector (in addition to its historical impact on demand).

Price Setting Dynamics

These trends are increasingly seeing renewables and energy storage set prices in markets for energy, capacity and ancillary services, while policy decisions – at the corporate as well as the political level – are also boosting demand for clean energy resources beyond the straightforward economic considerations.  

As a result, Nelson said traditional methods of projecting prices – which relied on optimizing generation assets based on their production costs against known load levels – were no longer valid.  

“We have to rethink the way we model price formation,” he explained. “We need different tools in the current environment.”

Out-of-Market Returns

Nelson added that it was important for developers to recognize that in the highly competitive, renewable-dominated markets that are evolving across the US – albeit at different speeds in various states – it was not realistic to think that “out of market” returns were a sustainable long-term proposition.  

That is because high levels of competition will ensure that the premium nodal locations that currently deliver such returns will not do so for long – save in circumstances where there are meaningful geospatial barriers to new entry – and that this will produce a new equilibrium in overall power pricing in the medium to longer term.  

“That trend towards equilibrium is really critical,” Nelson confirmed. “We’ve seen a lot of forecasts where the new asset classes are earning super-normal returns indefinitely, and that’s not justifiable.”

Merchant Tails

He pointed to investments in energy storage assets that were proceeding on the assumption that the projects would enjoy a profitable merchant “tail” after their relatively low-return power purchase agreements (PPAs) rolled off and said this was almost certainly a flawed belief. “It’s very unlikely that a merchant tail will have a lot of merchant value in the energy markets, although it might still have some REC value.”

Balancing Effect

Renewable sources of generation and storage will also have a natural balancing effect on pricing dynamics, which will help to create and sustain the longer-term equilibrium. Any over-build of storage within a region will limit its price volatility and reduce surplus renewable generation. That in turn will improve the economics of solar and wind projects. If it does so to the extent that it spurs excessive deployment of those renewable resources, however, pricing spikes will come back and enhance the value of storage assets. “That dynamic will help balance out any over-exuberance in one asset class that you might otherwise see,” said Nelson.  

Ascend consequently models its forecasts for project economics based on revenues that are consistent with this long-term pricing equilibrium rather than the “super-normal” returns that developers are currently achieving in some ISO and RTO markets, notably the Electric Reliability Council of Texas (ERCOT).  

Declining Energy Prices

The company also predicts that as ever more renewable generation comes on stream, overall energy prices will inevitably decline as increasingly less use is made of thermal generation (and its ability to set prices).  

Capacity prices, by contrast, are likely to rise, as weather-induced price volatility becomes a more frequent feature of power markets across the US.

For the full article, click here.

About Ascend Analytics

Ascend Analytics is the leading provider of market intelligence and analytics solutions for the energy transition. The company’s offerings enable decision makers in power development and supply procurement to maximize the value of planning, operating, and managing risk for renewable, storage, and other assets. From real-time to 30-year horizons, their forecasts and insights are at the foundation of over $50 billion in project financing assessments. Ascend provides energy market stakeholders with the clarity and confidence to successfully navigate the rapidly shifting energy landscape.

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