How Businesses Should Plan for the New Grid Reality

Published on November 17th , 2020 NRG Energy, Inc.

Weather has always played a significant role in determining the cost and availability of electric power. Now, with more wind and solar energy being added to the mix in ERCOT, the influence of weather is even greater, making long-term forecasting more difficult.

This became apparent during the summer when reserve margins — the cushion between electric demand and supply — did not prove to be as tight as the grid operator originally expected. Why did this occur and what does it mean to you as an energy user?

First, it’s important to point out that wind and solar energy represent a valuable low cost, zero carbon addition to ERCOT’s energy mix. But they do change the way businesses need to think about energy planning. Wind and solar facilities may or may not produce generation when needed, which can ultimately affect power prices.

The peak that never happened

Let’s look at ERCOT’s forecast and compare it to actual events on the grid this summer.

In March, the grid operator warned in its Seasonal Assessment of Resource Adequacy that the summer could bring tight supply conditions. With a hot summer likely, ERCOT forecasted that electric use would exceed its all-time peak demand of 74,820 MW. None of this was surprising to hear. Need for power had been increasing because of Texas’ prosperous economy and population growth in certain regions. Summer 2019 saw this growth translate into a new record peak demand, an escalation of wholesale prices to the market cap of $9,000/MWh, and the calling of energy emergency alerts (EEAs) warning grid participants that the grid was experiencing low reserves.

Summer 2020 was different. Demand never reached the forecasted peak, prices did not reach the market cap, and no EEAs were called. So why didn’t the tight margins materialize? There are a few reasons.

For one, it was a relatively mild summer with July and August temperatures only slightly above normal and a lack of the extreme heat that often characterizes those months inTexas.

In addition, ERCOT added 4,000 MW of wind capacity between 2019 and 2020. That helped, although it didn’t completely account for the lower demand because wind speeds weren’t always adequate to turn the turbines when the power was needed most. Wind output actually fell below its 2019 levels at times.

Solar to the rescue

Fortunately, ERCOT also doubled its solar capacity between 2019 and 2020, and the solar generation made up for lack of other resources at key points when demand was high. Note August 12, 2019, and August 13, 2020, in the graphic below, which shows solar output in 2019 and 2020 and points out how solar performed on the days of highest demand in August.

The combination of additional wind and solar capacity helped avert the tight reserve margins. The wind blew or the sun shone at the right time. In addition, ERCOT experienced less downtime at thermal generating plants than expected, and demand was lower than the grid operator forecasted. In short, everything aligned in the grid’s favor.

That’s not to say every day was smooth sailing. In the graphic below, take note of August 31, 2020, the day reserves proved tightest. This was not the peak demand day. (August 13, 2020, actually experienced 1,500 MW more demand.) But reserves were tighter because it was cloudy in West Texas, home to a great deal of Texas’ solar capacity. In addition, outages at thermal power plants were relatively high that day.

The new grid reality

This is not the first time ERCOT has seen its tightest reserves on a day when there was not the highest demand. In summer 2019 something similar happened. The grid operator had to issue alerts August 13 and 15, 2019, even though they were not peak demand days. On those days wind production was low.

It’s also important to note that despite the relative calm on the grid in summer 2020, there were still isolated local issues. ERCOT ordered customers in the Rio Grande Valley to shed 18 MW of load for 52 minutes on September 1, 2020, a day of high demand and forced thermal plant outages.

Of course, there was another wildcard this summer: Covid-19. Its influence varied by customer class. Electric demand dropped for businesses, but that was offset by an increase in demand for residential customers.

Looking forward

What does this all mean to businesses trying to plan their energy strategy?

First, be aware that the market dynamics are changing. Highest wholesale prices no longer correlate to highest demand. The combination of renewable energy, outages, and demand now will result in greater price volatility.

Second, this is a dynamic scenario. Solar installations are on the rise in ERCOT, which will help provide a balance for wind generation. Even so, there are likely to be days when both wind and solar output are low. With fewer new thermal plants being built in ERCOT to replace those that are retiring, such days could result in tight reserves and possible price spikes or EEAs. It will be difficult to predict in long-range planning exactly when these scenarios will occur. Adding to the uncertainty, we do not know how the economic recovery will influence energy demand after society returns to normal from Covid-19, or exactly when that will happen.

For Texas businesses, that sets up the need to prepare for, or at least consider, the impact of price volatility in their energy plans.

How do you do this? Much depends on the individual needs of your facility. You may want to buffer from price risk, or position for any upside, through a supply plan matched to your operation’s risk profile and sustainability plan. At the same time, you may want to engage in demand-side management (possibly with on-site generation) to earn revenue or participate in 4 Coincident Peak (4CP) programs to manage rates. Energy efficiency programs also may help your operation limit the the impact of energy price hikes.

In short, there are many facets to good energy planning, all of which must be considered as a whole since one can influence another. For example, savings achieved through energy efficiency might be used to pay for on-site generation, which in turn can be used in demand-response to achieve further savings and perhaps pay for additional energy capital improvements.

This range of services requires a sophisticated energy provider, one that understands your operation and its needs and offers the full suite of energy services. With years of deep experience in the ERCOT market, NRG Energy is such a provider. We welcome the opportunity to work with you in creating and implementing a successful energy strategy for your operation.

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