For most of my life, music recordings had been played through mechanical devices that spun, from the phonograph to cassettes to CDs. Today, music is purely digital and the advances toward digitalization have radically changed how music is played and distributed. We no longer go to the record store to buy music and the number of artists with recordings that can be easily purchased has increased dramatically. Moreover, my CDs have become a stranded asset.
A similar transformation is underway with power supply, where generators that spin to produce electricity are being replaced by digital systems of solar plus batteries. The costs of digital power supply technology will continue to decline and displace conventional generation with technological advances. While future power systems will likely involve a significant portion of hydro and wind generation that still turn generators to produce electricity, the digital transformation of power supply has taken root. The continued advances in in digital power supply systems will provide more compelling and often unavoidable economic merit over traditional generation. This will continue to cause disruption to the power industry as inflexible thermal generation fall prey to technological advances of digital power systems and become stranded assets much like my CDs.
ERCOT summer forward curves have crested toward $160/MWh for July and August in the wake of an ERCOT ISO report that reserve margins could be below 10% http://www.ercot.com/news/releases/show/144305. ERCOT President and CEO Bill Magness said, “A growing economy and retirements of generating units will tighten reserves available on peak summer days.”
Historically, tight reserve margins indicate a power market where generators can earn scarcity rents far above their variable cost of generation. In the past, Texas heat waves resulted in sustained price spikes near the market ceiling price for several days. However, this traditional thinking does not account for the new dynamics of renewables, which have a relatively small capacity contribution compared to their expected contribution toward energy. Yes, the ERCOT ISO is right that the capacity contribution of renewables can be small under extreme meteorology’s, but the expected energy production of renewables make the odds of ERCOT generators realizing scarcity akin to previous regimes, where reserve margins dipped below 10% a statistically extreme event. While the summer may produce select hours with high prices, the odds of having these prices persist for a sustained period such as a heat wave become a statistically extreme event.
The implications of the market fundamentals suggest that the realized average spot energy prices will fall below the monthly summer forward marks of this late spring and early summer. At the same time, we expect the volatility in day-ahead and real-time prices to continue to increase as a greater portion of the energy supply is derived from intermittent renewables.
Here is a great article on “Navigating The New Energy Market Dynamics”. There is a fundamental change happening in energy markets with more intermittent renewables coming online. This article does an excellent job of explaining what these new dynamics are and how utilities should plan for them.
For the second year, Ascend Analytics is bringing together energy industry experts, senior energy executives, and the broader energy community to discuss the latest trends and best practices in portfolio management and planning. We’d love for you to join us! The Ascend Analytics Summit will take place in beautiful Boulder, CO in October.
This year’s user summit will address decision analysis concerning the most pressing challenges facing the energy industry, including changing market dynamics. The summit will provide a platform for sharing practical insights into the latest approaches for planning and portfolio management. You will learn new approaches to data visualization and how these approaches can concisely communicate complex modeling results.
Discounted Early Bird registration is available through September 14th. To register, go to ascendanalytics.com and click “REGISTER NOW” or look to the last page of the attached agenda. Please don’t hesitate to reach out with any questions or if you need additional information and we would be glad to help out.
We look forward to seeing you at the Summit this year!