Low Prices and High Volatility: Renewable Energy and Storage Development Outlook in SPP

Southwest Power Pool (SPP) presents multiple renewable energy opportunities for off-takers, developers, and utilities. With 20% load growth during the past eight years and 6 GW of announced coal retirements (reflecting nearly 25% of coal capacity), SPP has immediate capacity needs. The market also offers strong solar and wind potential, as well as low-cost, developable land. In a recent webinar presenting highlights from Ascend Analytics' SPP 4.1 Market Forecast, Dr. Brent Nelson, Managing Director of Markets and Strategy, discussed SPP's current state, the Ascend forecast for SPP, and the region's geospatial dynamics.  

Key Takeaways

• Low-capacity prices, currently around $4 per kW-month, will have to rise to reflect the cost of new entry when resources become insufficient to meet load growth. Prices are expected to rise to at least $10 kW per month, which reflects SPP's deficiency payment penalty cost and the level needed to incentivize new generation.
• To capitalize on market price volatility in SPP, new capacity resources must be able to turn on/off and ramp up/down quickly, thus putting a premium on the value of flexibility and making an obvious case for storage being the clear primary resource choice for new capacity.
• Slower deployment of storage in SPP compared to other attractive markets extends the window of ancillary value until the mid to late 2020s.
• High gas prices in SPP amplify price swings associated with net load ramps. Near-zero prices occur year-round and are mostly unaffected by gas prices, while daily highs increase with gas prices, amplifying the daily spreads.
• Ascend Analytics Market Intelligence offers ‘investment strategy’ map layers that combine nodal revenue forecasts with other geospatial data to guide siting and investment strategy within SPP.

SPP Needs New Capacity  

SPP has experienced consistent load growth over the past decade, at 5% per year during the last two years and 20% overall during the past eight years. In 2023, SPP also increased its reserve margin from 12% to 15%, creating an additional need for more capacity. According to Dr. Nelson, the move triggered concern from utilities accustomed to paying $2-$3 per kW-month for capacity, "When the reserve margin requirement went in, a lot of their concern had to do with the fact that, right now, there is excess capacity. But with the increased reserve margin requirement plus the load growth we're seeing, there is concern about how much additional capacity is available," he stated.

Dr. Nelson noted that low capacity prices, currently around $4 per kW-month, will have to rise to reflect the cost of new entry as more utilities have insufficient resources to meet load growth. Whether contracted or owned, utilities will need to pay for new capacity resources in SPP. Thus, as reserve margins shrink, prices will need to rise toward the level required to incentivize new entry, likely at least $10 per kW-month, which reflects SPP's current deficiency payment level.

SPP Hallmarks – Low Prices, High Volatility

Due to high wind penetration and available gas supply, SPP normally has low average prices. Excluding 2022, when gas prices spiked following Russia's invasion of Ukraine, average ATC power prices historically have been between $20-$30 per MWh. Negative pricing occurs year-round, even during the summer, with variable wind generation driving surplus conditions throughout the year. Thus, new capacity resources need to be as economic as possible even when prices are frequently low, which places a premium on flexibility. Dr. Nelson pointed out that this need for flexibility points toward storage being the clear resource choice for new capacity and undermines the value for thermal generation with limited flexibility.

Price volatility serves as another SPP hallmark. Historically, SPP price volatility has been on par with or higher than that seen in CAISO and ERCOT. It occurs year-round, without relying on infrequent severe weather events. Dr. Nelson noted that this volatility helps SPP to stand out relative to other U.S. power markets, especially for developers and off-takers interested in profitable opportunities for storage. "The best nodes in SPP are significantly better than what we see in Texas. Most ERCOT nodes are in the bottom tier of SPP, and the top tier of SPP is better than CAISO or ERCOT," he stated.

As shown in Figure 1, which includes two metrics developed by Ascend Analytics to assess revenue potential, SPP exhibits the lowest volatility concentration and distortion among US markets, making it the least exposed to monthly and annual variability in revenues, as well as a low risk of missed revenue from outages, SOC mismanagement, and suboptimal market participation.  

A Need for Storage

Multiple factors point toward storage as the clear new capacity resource of choice in SPP. First, gas prices are a force multiplier on SPP volatility, and switching from renewables to marginal gas, coal, or oil yields large price spreads. Given year-round negative pricing and highs amplified by elevated gas prices, price swings can be large in SPP even when prices do not appear volatile. In 2022, for example, SPP saw $200+ same-day price spreads, driven by high gas prices. Additionally, concurrent wind and solar ramps will bring the ERCOT 'Superduck' phenomenon to SPP; as solar buildout grows, the potential will arise for severe net load ramps with coincident negative wind and solar ramps, leading to high price volatility​. These enormous net load ramps illustrate the need for and value of storage. Finally, coal retirements in SPP, which currently has about 25 GW of generation, will amplify the need for additional capacity. Like elsewhere in the country, coal generation is economically challenged​. Low prices in SPP mean that coal is getting even less margin, while rural electric co-ops are under pressure to maintain low retail rates, which increases sensitivity to uneconomic generation and reduces the ability to self-schedule​. Storage is a clear choice for new capacity in this context, though Dr. Nelson noted that a case might also be made for a flexible gas resource such as a reciprocating internal combustion engine (RICE) unit with high ramp rates, low startup costs, and low minimum generation levels. He also observed that due to abundant and complementary solar and wind resources, SPP serves as an ideal location for organizations trying to operate 24/7 with renewable energy, as shown in Figure 2.

Looking ahead – renewables in, thermals out, prices stay low

As he presented in the Ascend Analytics SPP 4.1 Market Forecast, Dr. Nelson noted that the energy transition is well underway in SPP. Renewables dominate the interconnection queue and there have been more than 6 GW of announced coal retirements. Economic conditions and regulatory uncertainty are expected to drive further thermal retirements. Storage will start to accelerate as it makes its way through the interconnection queue, displacing thermal capacity.  

At the same time, SPP prices are expected to stay low and decline with renewable buildout. Solar deployment will drive down on-peak prices in particular. However, near-term on-peak forwards are higher despite lower gas forwards, likely reflecting scarcity concerns in the market. Between load growth and coal retirements, SPP capacity prices will have to rise to reflect the cost of new entry. The big question, Dr. Nelson acknowledged, is identifying when that price rise will occur. Either way, Ascend expects that renewable revenue will exceed PPA costs, due largely to high gas prices in market forwards through the early to mid 2030s, assuming technology costs recover as supply chains normalize and interest rates decrease.

Due to a slower deployment of storage, the window of ancillary value in SPP will last for a few years longer than in other markets attractive for storage, like CAISO and ERCOT. Growth in renewables increases ancillary requirements, and along with increased power prices, will provide initial upward support to ancillary prices. As batteries and other flexible generation enter the market to provide ancillary services or firming to wind resources, however, ancillary prices will decline as the market saturates, with real-time co-optimization forcing ancillary prices even lower.

Dr. Nelson concluded the webinar by addressing geospatial variations in generation and prices within SPP. Even though high-volatility nodes near market boundaries might be value-constrained due to low population density, potential renewable energy projects could generally benefit from siting near transmission upgrade locations at SPP/MISO seams. He noted that Ascend Analytics Market Intelligence offers ‘investment strategy’ map layers that combine nodal revenue forecasts with other geospatial data to guide siting and investment strategy within the region.  

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