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Cypress Creek CEO: ‘We’ll Be Sub-75 Cents’ per Watt by 2020

April 25, 2017

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In just three years, Cypress Creek Renewables has gone from nonexistent to managing a 1-gigawatt solar portfolio, with a total of 4 gigawatts currently deployed or in development. The Santa Monica-based company is now the second-largest utility-scale solar developer in the U.S., behind only First Solar.

That impressive growth was achieved by taking a highly disciplined approach to project development and market expansion. It’s an approach CEO Matt McGovern believes is prepared to withstand changes in the solar marketplace, including the step-down of the federal Investment Tax Credit (ITC).

“Our average fixed-tilt system we're installing today is, give or take, in the sub-dollar range [per watt]. With trackers, you're a little bit above,” he said, speaking at a recent UCLA Anderson School of Management event in Los Angeles. “My prediction-slash-hope is that by the time the ITC starts to step down in 2020, we'll be sub-75 cents.”

The 30 percent solar tax credit is currently scheduled to drop to 26 percent in 2020, to 22 percent in 2021 and to remain at 10 percent from 2022 and beyond for commercial and utility-scale projects. “If we're going to lose 10 percent or more as our ITC steps down, then I have to be able to show that [my cost savings are] more than 10 percent…and I think it's there,” said McGovern. “I think it's happening.”

In June 2015, Jim Hughes, then-CEO of First Solar, said that his company would be “under $1.00 per watt fully installed on a tracker in the western United States” by 2017. Hughes’ ambitious projection has proved more or less accurate. According to GTM Research, average EPC pricing for utility-scale fixed-tilt PV systems in the U.S. recently hit the $1.00-per-watt mark, and is expected to be around 95 cents per watt in the second half of this year and around 80 cents per watt by 2020. Tracker systems will come in a little higher at an average of $1.08 per watt in the second half of 2017.

If McGovern’s hope comes true, that will put Cypress Creek on the leading edge of the cost-cutting quest. Getting costs below 80 cents won't necessarily be a windfall, but it will provide some assurance the company can weather the incentive cuts.

McGovern added that pure cost reductions aren’t the only thing that matter in a declining ITC world. There’s a middle piece, which is: What is the PPA rate a utility is going to offer? “It’s not clean math,” he said, because different utilities in different locations have different resource mixes and unique ways of calculating avoided cost, which affects whether or not solar makes financial sense.

“There certainly is a connection between the ITC and what that value of energy's going to be,” he said. “But more importantly, between now and 2020 when we see our initial step-down, is how much daytime energy is being created and what's that worth. [That] is going to drive what the pricing is.”

Why solar developers need to lead on energy storage

Managing the ITC step-down is only part of what McGovern thinks solar companies need to do in order to be competitive in the coming years. Going forward, energy storage will be another key piece of the value puzzle, he said.

“This is, I think, the hardest question for those of us who have always been pure cleantech, or pure solar, to grapple with,” he said. “It's this moment of honest reflection that we bring an intermittent resource to the grid. Is there an upper limit to the amount of solar and penetration you have? Absolutely.”

“However, if we can get smart enough around this move into coupling storage, it's a really different analysis,” he added.

The duck curve is a real thing, so if solar companies can’t move closer to becoming dispatchable power, they’ll be in an endless search for new markets, in McGovern’s view. But if solar companies can cross the chasm and become a more stable delivery option, by allowing utilities, homes, or commercial customers to load shift and manage consumption when it’s beneficial to the rest of the grid, that completely changes the conversation.

As for who should spearhead this solar-plus-storage solution, McGovern put that responsibility squarely on the solar developers. 

“I think it's a self-preservation question,” he said. “If we sit back as an industry, and we say, ‘No, it's up to the utilities, or it's up to the grid operators,’ we're not going to like the [outcome]. I think the opportunity is for us to be thinking a little ahead, understand the pain of the utilities, and actually come forward with solutions.”

To that end, Cypress Creek is preparing to deploy its first 6 megawatts of energy storage later this year for a municipal utility in North Carolina. The company has up to 50 megawatts of additional energy storage deployments also in the works.

McGovern admitted it’s early days for the storage market, and so the use cases and financing processes aren't entirely clear. The tax treatment, for instance, is murky. The industry has two private letter rulings from the Internal Revenue Service on how to set up energy storage deals, “but at the end of the day, somebody's just got to do it,” McGovern said.

By taking a leadership role, he believes Cypress Creek will gain the real-world data and expertise needed to get more financiers and utilities on board with energy storage projects in future.

“We're having to put significantly more equity into this initial portfolio, because it's just hard,” he said. “I think that's why I say the ownership sits with us [the solar developers], if we want to ensure the highest probability of a good outcome.”

“We have to be truly humble and honest about what we know how to do”

McGovern places a high value on predictability -- he wants to understand a market inside and out, and find ways to systematize and streamline how his company operates within that market’s parameters. That’s at least how Cypress Creek has been approaching the utility-scale solar market to date.

When McGovern set out to launch Cypress Creek, no other developer was offering the type of integrated business model he had in mind, he said. One of Cypress Creek’s defining features is that it has the finance, development, EPC, sales, asset management and O&M pieces of the business all in-house, with the flexibility to partner externally.

Controlling development “enables predictability, which is actually this unbelievable resource for the rest of the stakeholders in the chain -- the utilities, the financiers, the local communities too,” McGovern said. The consolidated model not only appeals to customers, but it also creates a cost decline cycle because Cypress Creek has insight into nearly every aspect of the business. 

At present, however, McGovern doesn’t see much value in becoming a true vertically integrated company, with 100 percent of the business functions in-house. “We have to be truly humble and honest about what we know how to do, and what we don't know how to do,” he said.

“For example, I can't ever imagine a scenario where it would make sense for us to vertically integrate technology. We get such a benefit out of being agnostic,” he added.

On the development side, Cypress Creek often partners with local contractors on permitting and construction, while maintaining oversight. “It’s a local relationship that makes that stuff actually get over the finish line,” McGovern said. “I want to leverage that, not try and cannibalize that.”

The science and the art of developing 4 gigawatts of solar

What Cypress Creek has become really good at is aggregating portfolios of projects that all look and feel the same, said McGovern. This approach minimizes the due diligence a tax equity investor or lender has to do, because every lease agreement is the same.

It also streamlines Cypress Creek’s internal processes and guides which markets the company enters; the company only goes after markets where it’s possible to standardize the procedure and reach scale. “We wouldn't step into a market where we could only get one, two, three projects that are 3 or 4 megawatts in size,” McGovern said.

New York is a great example of a market that does make sense, in his view. “We have 1,400 sites in New York and they're only 2-megawatt AC interconnects, but the fact that we could step in and aggregate that at scale means that I will systematize…my development process, my interconnect and my build to make that work,” he said.

Cypress Creek is now taking this approach to the community solar market to serve retail electricity customers in Texas. Again, Cypress is looking to deploy a critical mass of solar projects to serve the market’s needs. The difference is that this time the company is also finding retail customers to offtake the energy. After launching the company with a focus on PURPA markets in North Carolina, South Carolina, Oregon and Montana, Cypress Creek is now becoming a residential solar company almost by accident.

“It’s funny -- we are now de facto active community solar developers and operators,” McGovern said. “I think community solar is a huge part of the renewable energy future, for so many reasons.”

On the other end of the spectrum, Cypress Creek is going after markets where utilities are looking for transmission system projects. The company has four projects operating today that are between 50 and 100 megawatts AC, and will probably have another 15 or 20 of those projects to install between now and 2020, McGovern said.

These new developments come as the company fights back against proposed policy reforms in North Carolina -- Cypress' most established market -- that would shorten contract terms offered under PURPA. The solar industry argues the changes would make it impossible to finance projects. 

Cypress Creek is currently operational in eight markets and developing in 20, with 4 gigawatts of solar under site control. If process and procedure constitute the science driving that expansion, the art of it is finding talented people to work with, McGovern said. “It's my job, on any given day, to make sure we can attract those people.”

All of these components factor in to McGovern’s broader view of Cypress Creek’s role in the solar market. “I think our fundamental job, and what has us motivated every day, is that we have to be able to deliver energy to consumers more cheaply and more reliably than other developments,” he said. “Whether that's other renewable developers, or developers of other energy classes -- even fossil fuels -- we have to be able to do it cheaper -- and better.”

Join GTM for the 10th Annual Solar Summit & 2nd Annual S3 Solar Software Summit in Arizona May 16-18. We’ve got the biggest names in the solar industry confirmed to attend and speak. And we've got a packed agenda of topics including solar software, energy storage, finance, community solar, corporate procurement, balance of systems, and much more. Check out the event site here.

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‘There Is No Such Thing as Baseload Power’ [GTM Squared]

April 25, 2017

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Hawaii’s Clean Energy and Oil Consumption Report Card

April 24, 2017

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Hawaii is on a mission to be powered 100 percent by renewable energy by 2045. For this remote group of islands, achieving a fully renewable electricity system also means dramatically reducing the state's dependence on oil. 

Reaching the 100 percent renewable energy target "requires us to rethink everything we do," according to the Hawaiian Electric Companies -- Hawaiian Electric, Maui Electric and Hawaii Electric Light -- which provide electricity for 95 percent of Hawaii residents on the islands of Oahu, Maui, Molokai, Lanai and Hawaii Island.

To mark Earth Day on April 22, the Hawaiian Electric Companies published several stats touting the utilities' clean energy progress. Here are the highlights.

More renewables in the mix

Hawaiian Electric Companies reached a new milestone in 2016, with 26 percent of the electricity used by customers coming from renewable resources -- up from 23 percent the year before. On the island of Hawaii, renewable electricity use surpassed the halfway mark for the first time, reaching 54 percent, up from 49 percent in 2015. Maui reached a record high of 37 percent last year, and 19 percent of electricity used by customers came from renewable resources on Oahu.

When it comes to the types of renewable resources in the companies' energy mix, customer-owned solar dominates with 34 percent of renewable energy generated last year, followed by wind at 29 percent and biomass in third at 19 percent. 

Each utility detailed its clean energy goals in the Power Supply Improvement Plan submitted to the Hawaiian Public Utilities Commission in December 2016. The goals include tripling distributed solar (of all project sizes) by 2030, and providing customers with more energy options, including community solar, demand response and electric vehicle programs. 

While Hawaiian utilities expect to see even greater amounts of distributed solar deployed in the years to come, high levels of residential solar generation have already created problems for Hawaii's grid. In late 2015, the PUC replaced retail-rate net metering with "grid-supply" and "self-supply" tariffs in order to moderate rooftop solar growth. Shortly after the limited grid-supply program reached its cap, Hawaii's residential solar market crashed

Earlier this month, however, regulators reopened the grid-supply program by removing projects from the queue that had been approved but never completed. Estimates show around 20 megawatts of grid-supply capacity is now available for customers of the three companies, representing about 2,800 private rooftop solar systems. The Hawaiian Electric Companies report hundreds of applications are already in line for processing, and will be processed in the order in which they were received and only as capacity becomes available through October 21, 2017.

Looking further ahead, the Power Supply Improvement Plan forecasts Hawaiian Electric Companies will exceed the state’s mandated renewable energy milestones, with 48 percent renewable energy by the end of 2020; 72 percent by the end of 2030; and 100 percent by the end of 2040 -- five years ahead of the 2045 deadline.

Oil consumption down 21 percent

Electricity generation and oil consumption go hand in hand on the Hawaiian islands. So as renewable energy consumption has increased, Hawaiian Electric Companies have been able to back oil out of the system.

From 2008 to 2016, all three companies collectively cut their oil use in generators from 10.7 million barrels to 8.5 million barrels -- a 21 percent decrease. On Oahu, where energy demands are the greatest, Hawaiian Electric's oil use fell from 7.8 million barrels to 6 million barrels. 

The utilities' goal is to reduce greenhouse gas emissions to 2010 levels by 2020 -- a target they're already on track to surpass. To do that, the Hawaiian Electric Companies are expected to cut emissions by 865,000 tons each year, which is equivalent to the energy consumed by 116,000 homes per year, or cutting 1.8 million barrels of oil per year.

Electric-vehicle use accelerates

In Hawaiian Electric Companies territory, the number of registered plug-in electric vehicles (EV) has broken the 5,000 mark. That milestone ranks Hawaii second in the nation for EV adoption per capita, after California.

The companies report a dozen fast chargers are now available at shopping centers, visitor attractions and on utility property across the five islands served, and more are coming. "Transactions at our companies’ fast chargers shot up in March as EVs on the road increased and drivers became more aware of the growing number of fast chargers," according to a press release. 

Hawaiian utilities have partnered with branches of government, nonprofits and private companies to accelerate the adoption of EVs. Most recently, the Hawaiian Electric Companies collaborated with Nissan to offer a $10,000 rebate for the new Leaf sedan. 

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Sonnen’s US Factory Now Open, but Eco Compact Home Battery Won’t Come Until Late 2017

April 24, 2017

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Sonnen completed its arrival on American shores by opening a factory in Atlanta.

Co-located with the company’s research and development lab, the facility began shipping the second-generation Sonnen Eco battery storage system last week. With 20 months of U.S. sales and a "solid pipeline of orders," Sonnen determined it could save money by moving the systems integration in-house.

That decision stands in juxtaposition with the fate of Aquion, which christened a large saltwater battery factory in Pennsylvania before it had a sales pipeline to fully utilize it. That company went bankrupt last month.

Sonnen, though, is not commercializing a brand new chemistry, but rather connecting lithium-iron phosphate cells from suppliers with its proprietary housing and software controls. As such, the factory investment poses less of a risk, while eliminating costs associated with contract manufacturing.

"The factory will help Sonnen bring its products faster to the market," said Ravi Manghani, energy storage director at GTM Research. "It's important to understand that the facility will carry out integration, and the level of investment is likely lower than needed for battery cell manufacturing."

Sonnen now can produce north of 200 units per month, said Olaf Lohr, director of business development, in an interview at the Energy Storage Association conference last week. The company sold close to 600 systems in the U.S. in 2016.

One thing the factory won't be doing -- at least not yet -- is producing Sonnen’s cheaper residential model, the Eco Compact.

Originally announced last July for release by the end of 2016, this model cut out the backup capabilities of the Eco to focus on the market for solar self-consumption. At the time, it was hailed as a potential competitor with Tesla's Powerwall for cost-effective home storage.

It turns out, though, most Sonnen customers want to use their batteries for backup in case of an outage. That's how 90 percent of Sonnen batteries installed in North America were being used, as of September. Meanwhile, Tesla unleashed its Powerwall 2 in October, promising higher energy density and a lower unit cost than its predecessor.

The decision to push back the Eco Compact, Lohr said, was partly due to bandwidth -- the team focused its efforts on improving the computing power and ease of commissioning of its Eco product. But the delay also came from reading the market.

"The market is focusing right now on backup, but we see more and more of a push for those products that don't require a backup component," Lohr said.

Hawaii's self-supply tariff hasn't translated into big battery sales just yet, and California's NEM 2.0 doesn't do a whole lot to improve the economics of storage for solar self-consumption. The strategic location of the factory in Atlanta, though, situates Sonnen in a region that has less favorable policies for home solar, thereby creating opportunities to consume more of that power onsite.

Sonnen also is working to create new markets by translating the vision of the German Sonnen Community to an American context. The company is finalizing contracts to install batteries in new-build housing developments, which would make it easier for customers and utilities to get on board.

For a customer, the cost of the system would appear as a marginal bump in the mortgage, removing the barriers of cost and financing that often stymie a storage purchase. And the system would already be installed by the time of move-in.

Meanwhile, a large housing development could offer a substantial aggregated storage resource to perform utility services, under the right market conditions.

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Energy Jobs: Rhodes to Replace Zibelman at NY PSC, Plus Enphase, Trina, Vivint, Moniz at Emerson

April 24, 2017

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Another week brings moves and shifts at the upper levels of renewable energy.

Jing Tian has been promoted to president of North American region at Trina Solar. Trina Solar CEO Gao Jifan was recently quoted in Handelsblatt Global as saying that European anti-dumping measures against solar companies are unfair, and that “SolarWorld is a company with no competitiveness,” adding, “It has to drop out of the market sooner or later, and it will. You cannot rely on government protectionism or subsidies forever. SolarWorld will die; the only question is when."

Vivint Solar named Maggie Heile as VP of marketing for the residential solar specialist. Prior to Vivint, Heile led marketing for the retailer brands division of Sun Products, a laundry product manufacturer.

Microinverter and energy storage system builder Enphase named Badri Kothandaraman as its first COO. Kothandaraman started with Cypress Semiconductor in 1995 and worked in process technology and chip design before becoming a VP in 2008 and subsequently being promoted to executive VP of Cypress' data communications division. He will receive an annual base salary of $350,000, with a target bonus opportunity of 75 percent of his base salary. Kothandaraman will also receive an initial stock option grant of 1,000,000 shares. According to reports, Enphase shed four VP positions and consolidated operations under the new COO role. Enphase now has approximately 344 employees.

Dr. Ernest J. Moniz, former U.S. Secretary of Energy and founding director of the MIT Energy Initiative, has been named as the first distinguished fellow of Emerson Collective, a social impact effort headed by Laurene Powell Jobs (net worth: $19 billion). Moniz will focus on "equitable access to technology, workforce development, and clean energy innovations in communities across America in support of a low carbon future." Andy Karsner is a managing partner of Emerson Collective.

Hawaii-based Energy Excelerator, a prominent energy and infrastructure accelerator that has worked with a portfolio of 53 companies, also recently became a part of Emerson Collective. Under the new name Elemental Excelerator, EEx plans to expand beyond Hawaii to California and will broaden its reach into sectors other than energy, including water, transportation and agriculture.

New York Governor Andrew Cuomo will nominate New York State Energy Research and Development Authority CEO John Rhodes to chair New York's Public Service Commission. Rhodes would fill the position left by Audrey Zibelman, who departed last month to lead a large Australian grid operator.

Powin Energy, a provider of energy storage systems for utilities, C&I and microgrids, announced that Craig Eastwood joined the company in March 2017 as CFO and Jan Jacobson joined as VP of business development. Most recently, Eastwood was the corporate controller at Erickson. Prior to joining Powin Energy, Jacobson led technical business and project development at behind-the-meter energy storage developer Stem. 

Karen Khamou was promoted to director of electric generation and load interconnection of electric asset management at Pacific Gas & Electric.

Melissa Nelson-Zucker was promoted to executive VP of people and workplace at PACE lender Renew Financial.   

Yun Lee was promoted to director of U.S. solar at renewable developer Panasonic Eco Solutions


Enertech Search Partners, an executive search firm with a dedicated cleantech practice, is the sponsor of the GTM jobs column.

Among its many active searches, Enertech is looking for an Enterprise Account Manager -- NE Operational Risk

The client is the world's leading provider of sustainability, EHS and Operational Risk Management Software. More than 1,000 global companies and 1 million users rely on the client's solutions to manage their environmental and social performance, minimize risks and improve profitability.

This client is seeking an Enterprise Account Manager who will be responsible for the sales of its software solutions. This candidate must have a consistent track record and experience with complex sales cycles and customer-facing deals, as well as possessing a strong hunter mentality.


Power Finance & Risk reports that there have been a "spate of departures" at Canadian Solar-owned Recurrent: "At least 10 senior employees who worked in areas including finance, development and procurement at Recurrent Energy have left the solar sponsor in a wave of departures in recent months."

American wind power added jobs over 9 times faster than the overall economy, according to the American Wind Energy Association's most recent annual market report. The U.S. industry installed more than 8,000 megawatts of new wind power for a second straight year, and invested over $14 billion in 2016 in new wind farms -- supporting a record-high 102,500 jobs.  

Silver Lake, a private equity and venture debt firm that makes occasional forays into greentech, raised $15 billion for its latest fund. New Energy Capital Partners, an asset management firm, raised $325 million for its most recent fund. Obvious Ventures, an early-stage sustainable technology-focused VC firm, raised $178 million for its latest fund. We recently covered Congruent Ventures' recent fundraising activity as well.

From the previous jobs column:

Jon Wellinghoff, the chief policy officer at SolarCity, left the company now that it has merged with Tesla. It makes sense that Tesla is integrating its respective legislative and policy teams with SolarCity. Letting go of a skilled ex-FERC commissioner appears to make less sense.

Wellinghoff's LinkedIn page has him now at Policy/DER Consulting. The firm "assists energy tech companies from startups to fully commercialized enterprises to get to market and expand markets by addressing critical policy barriers to business success."

Wellinghoff was the longest-serving chair in FERC's history, leading efforts to fit PV and wind into wholesale electric markets, and to ensure that resources like demand response and distributed generation could participate. Wellinghoff also served as general counsel at the Nevada PUC. He was at SolarCity for one year and one month. We've reached out to him for a comment.

Steve Case joined the board of fuel-cell builder Bloom Energy in August 2014. Today, he's no longer on the board. He was replaced by Mary K. Bush at the turn of the year. Late last year, The Wall Street Journal reported that Bloom submitted a confidential registration for its IPO with the Securities and Exchange Commission. The 15-year-old startup claims to have installed more than 200 megawatts of its Bloom boxes in the U.S.

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This Week in Batteries: The Storage Industry’s Dreams Are Coming True [GTM Squared]

April 24, 2017

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How a Cold Day in Texas Exposed the Value of Grid Flexibility

April 24, 2017

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As the sun rose over Dallas on March 3, 2014, thermometers read 15° Fahrenheit. Across the state, Texans turned their heaters on full blast as they prepared to head to work. Meanwhile, at the operations center for Texas’ electricity system, ERCOT, operators saw the price of electricity skyrocket.

Around 8 a.m. prices jumped to nearly $5,000 per megawatt-hour, more than 100 times the average price of electricity. 

Though the unusually cold weather caused electricity demand to increase well above historical levels, the power market behaved as intended. Many power plant owners, who know their capacity is typically not needed during this time of year, had their plants offline for maintenance. Thus, when a period of unusually high demand on March 3 combined with relatively low supply, prices skyrocketed, demonstrating the fundamentals of supply and demand. Power plants that were available and able to turn on quickly -- to be flexible -- were rewarded handsomely.

As the renewables transition continues apace, flexibility will become increasingly important. Policymakers and investors will need to watch carefully how flexibility is paid for. In a market design like Texas’ “energy-only” market, price spikes are a normal and important event that, assuming no market manipulation, properly reflect the marginal cost of electricity at that specific time. They provide an indication of how much and what types of resources are needed.

When spikes happen at predictable times of system needs, like during the summer when high temperatures cause increased electricity demand for air conditioning, they provide a good investment signal for peak capacity. When they happen at unusual times like on March 3, 2014, they provide a crucial investment signal to wholesale market buyers and sellers that more flexible resources are needed for times of stress, on either the generation side or on the demand side. Too many of these unusual “bellwether” events indicate that a system lacks much-needed flexibility, while too few signal a system that is oversupplied (or lucky). 

Bellwether events will grow as more renewables come on-line

Because flexible resources allow grid operators to respond to large, rapid changes in supply or demand, the frequency and magnitude of bellwether events are indicative of the need for flexible resources. In 2014, a handful of these bellwether events provided about 20 percent to 25 percent of net revenues for one typical Texas combined-cycle plant, indicating that the market was willing to pay for flexible resources. But in 2015-2016, the same plant garnered hardly any net revenue from bellwether events due to plant owners keeping their units on-line more often, the addition of new capacity, and milder weather, indicating that there was no longer any need for extra flexibility.

How is this relevant for policymakers and investors? Because of the variable nature of renewable resources, which create greater swings in the supply mix over smaller timescales, the number of bellwether events is likely to grow as more and more cheap wind and solar power enters the Texas market. With over 5,000 megawatts of solar projected to come on-line by 2021, Texas is likely to need more flexibility in the coming years. 

As the market continues rewarding flexibility, the resource mix could change substantially, which would impact the market in other ways. For example, more combined cycle gas plants coming on-line can help address flexibility needs, but will compete with baseload generators much of the year, which could increase downward pressure on already-low wholesale prices.

Alternatively, new flexible generation resources like fast-start simple-cycle gas turbines, natural-gas-fired diesel engines, demand-side resources, or energy storage could also respond to bellwether events. These flexible resources would not change the market during ordinary times because they would only be deployed in times of stress when they capture the most value. To achieve the most cost-effective solution, market operators must allow resources of all types and sizes to participate by ensuring the most transparent, accessible, stable, and technology-neutral energy market.

To a great extent, the investment signal for flexible resources is well handled in “energy-only” markets like ERCOT. As the need for flexible resources grows, an increasing number of bellwether events will occur; resource developers are likely to respond by building new resources that can capture this value on the spot market and through bilateral contracts with utilities. However, not all markets are structured to reward flexibility in the same way as in energy-only markets.

Different lessons for different types of energy markets

Most U.S. electricity markets have additional payments or requirements outside of the energy market aimed at ensuring reliability. These payments, often administered through a “forward capacity market,” are meant to improve the economics of investing in new power plants and maintaining existing ones to ensure sufficient capacity during times of peak demand. But forward capacity markets have traditionally focused on ensuring enough capacity to meet the peak level of demand over the course of the year, without giving much thought to the relative flexibility of that capacity.

The March 3 cold spell in Texas contains a valuable lesson on why looking only at annual peak demand, rather than the need for flexible resources throughout the course of the year, can be problematic. When using capacity markets to ensure long-term reliability, it is not exactly clear what capacity to pay for when procuring “reliability” ahead of time. Reliability means different things at different times, and under different resource mixes. If forward capacity markets strictly reward market participants for meeting system peak demand, as they have traditionally done, market operators may not necessarily be rewarding the type of flexible capacity needed in bellwether events.  

In theory, energy-only markets like ERCOT in Texas and markets with forward capacity markets should be equally efficient at providing an economical and reliable grid, and should roughly compensate system resources for investing in new flexibility at a similar value.  However, forward capacity markets tend to divert revenues from the energy market, diluting the strength of the energy market signal to value resource flexibility. These out-of-market mechanisms have traditionally failed to consider the relative flexibility of capacity resources.

In energy-only markets like ERCOT, after new or upgraded system resources enter the market, they capture the value of the reliability they provide when the system is stressed and prices spike, or by contracting forward with wholesale buyers to provide mutually beneficial risk management. If a resource cannot respond efficiently to short-term volatility, it will miss out on the associated opportunities and will be unable to offer wholesale buyers the risk-management services they need.  

Managing bellwether events through market tweaks

With a forward capacity market, the principal way to manage bellwether events is supplementing revenues by disproportionately rewarding resources for being available during prescribed periods ahead of time. If a resource fails to produce when called on it is usually penalized, either through forgone payments or directly through a penalty administered by the market operator.

In both cases, a system resource that fails to make itself available during periods of system stress, like a bellwether event, is taking a big gamble by missing out on a significant amount of revenue, and in some cases a large fraction of its annual revenue. Resources that can respond quickly during such events avoid the costs incurred by less flexible resources that must operate unprofitably for hours or even days before and after the events to be sure they’re available when most needed.

If capacity markets expand their scope from anticipating peak supply needs to ensuring year-round reliability indiscriminately, they run the risk of significantly overpaying for reliability. Paying all types of resources to be available at all times, as opposed to paying just those resources that can more surgically be available in times of system stress, means buying a lot of extra reliability when it is unneeded.

Furthermore, overly broad definitions of a capacity product may leave surgical flexibility providers unable to make a profit, even though they could provide significant reliability value. Consider a demand response provider being asked to be available every day of the year for up to eight hours, when the real need is to participate in a handful of bellwether events for three or four hours.

One fix involves tweaking the capacity market design to cover a broader definition of system needs, as outlined in the Regulatory Assistance Project’s Hitting the Mark on Missing Money, or by creating a more iterative Staircase Capabilities Market design to support sustained investment through an iterated sequence of long-term, small-volume requests for proposals.

Learning across markets

In order to meet the flexibility challenge of shifting the future resource mix to cleaner, cheaper sources, energy markets must learn from each other regardless of if they maintain capacity markets. If an energy-only market sees a proliferation of very expensive bellwether events and net revenues from these events exceed capacity payments in other markets, regulators and ratepayers should ask why more resources aren’t becoming available to meet the underlying need for investment in flexible supply- and demand-side resources. 

Conversely, if capacity markets are paying out relatively larger sums than those energy-only markets pay out through bellwether events, they should question their framework for compensating resources to ensure reliability. In any case, to achieve least-cost reliability in a clean energy future, all markets should be inclusive toward all possible technologies -- including demand-side options -- that mitigate the impacts of bellwether events like that cold morning in Texas.


Eric Gimon represents America's Power Plan.

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Energy Stats: Corporates Take Clean Energy Investments to the Next Level [GTM Squared]

April 21, 2017

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Energy Stats: Corporates Take Clean Energy Investments to the Next Level [GTM Squared]

April 21, 2017

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State Bulletin: Florida Advances Solar Bill, Oklahoma Ends Wind Incentive, DC Studies Value of Solar [GTM Squared]

April 21, 2017

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