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Bucking popular wisdom, the relative value of solar-weighted generation in Texas’ main power market, ERCOT, reached an extremely high value in 2019 – well above recent levels for anywhere in the US. They remain relatively high in 2020, despite a much calmer ERCOT market. What’s more, ERCOT futures pricing now indicate solar-weighted power value may stay elevated for years to come.

Solar Eats its Own?

Prevailing theory, in wholesale power markets, states that as renewable power technology further penetrates a market, it drives the value of its power downward.

Under this theory, solar “value factor,” the value of the solar power versus average (simple time-averaged) market price of power, decreases, and eventually becomes worse than grid average pricing (i.e. goes below 1.0).

Opposite Trend in Texas

At one end of the penetration spectrum, there is California’s power market CAISO (~16% of power from wholesale and DG solar in 2019), but miles away lie the nation’s six other wholesale power markets (all with <4% solar penetration), albeit all growing.  With this growth, at what point will price depression be severe enough to drive the solar value factor predictably below 1.0 in ERCOT or other markets?

Data (see Fig. 1 below) from the most recent Utility-Scale Solar report by Lawrence Berkeley National Labs (LBNL) seems to indicate the cross-over point is roughly between 1% (ISO-NE in 2014) and 10% (CAISO in 2016). One to ten percent is a wide range that provides unclear guidance to investors. The two ends of this range are separated by billions, and in most markets, tens of billions of potential solar project investment.

Figure 1: Solar Value Factor in US Power Markets (excluding ERCOT)

 

In 2019, ERCOT entered into this range, at 1.4% solar market penetration, as can be seen in Figure 2 below. Yet ERCOT’s solar value factor surged to 1.74, highest of any US power market since at least 2012.

Figure 2: ERCOT Solar Value Factor, 2012-2019

 

Market observers may surmise that the high 2019 ERCOT solar value may be an anomaly due to 2019’s extreme summer price spikes. The current year’s summer has had substantially fewer and smaller price spikes, yet average 2020 ERCOT solar value factor will still be quite high, at about 1.35. Which is still higher than at any time from 2012 to 2018 in ERCOT, despite 2020 solar market penetration likely to average out at 2.6%, nearly 100% higher than 2019.

Solar Future is Looking Bright

ERCOT power futures have begun to indicate that the solar value factor might stay relatively high for many years. This is evidenced by the trend in average monthly on-peak ERCOT North Hub (most liquid ERCOT hub) for Jan. 2021 to Dec. 2030 contracts, as shown in Figure 3 below.

This significant upward trend (13% increase over past 12 months) in 2021-2030 on-peak futures is driven by higher pricing lift in the out years, 2024-2030. The futures pricing increase has occurred despite ~10 GW of solar capacity in ERCOT’s queue with both posted financial security and notice to proceed, and also without any discernible rise in natural gas pricing.

Figure 3: ERCOT North Hub (bars) and Henry Hub Natgas (circles) 2021-2030 ICE Futures Average Pricing

Texas Difference

There are five differences in ERCOT that contribute to ERCOT’s high solar value factor.

  1. Scarcity Pricing: ERCOT already had the most substantial scarcity pricing mechanism in US power markets, when it had its pricing impact increased by a January 2019 ruling by the Public Utility Commission of Texas.
  2. Sunny Summer Load Peaks: ERCOT’s highest load peaks are always caused by scorching hot, brutally sunny, summer afternoons.
  3. Wind Power: Massive ERCOT wind market penetration (26% on average so far this year) can occasionally lead to daytime pricing spikes when the wind dies down and load is relatively high.  Solar then reaps the subsequent pricing reward.
  4. Load Growth: ERCOT has averaged 2% load growth since 2010. The collective remainder of the US has experienced negative load growth over the same period.
  5. Independent Grid: The factors listed above contribute to more pronounced outcomes in ERCOT due to being its own independent grid. There’s no dampening of these effects by power outflows and inflows.
Texas Solar Boom – Years to Go

There is solid qualitative and quantitative evidence indicating neither CAISO nor ISO-NE should be the “power market postcards from the future” that some Texas solar naysayers portend. Rather, there should be plenty of opportunity to sell solar power in ERCOT at attractive pricing in the coming years, resulting in billions of dollars of solar project investments.

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