Distributed energy resources can help provide Texans with a resilient grid but need real-time access to energy markets to reach their full potential.
By Jaden Crawford, Leap
Of the energy markets in the United States, the Electric Reliability Council of Texas (ERCOT) stands out for its energy-only construct where there are only payments for the amount of power actually produced — not for the capacity capable of producing power. This can lead to extreme real-time price volatility for energy retailers, while most customers are protected from high prices because they purchase energy at fixed-flat rates.
The existing system works in normal conditions. But if reserve margins shrink and prices rise, retailers can quickly find themselves underwater. For example, during winter storms in February 2021, Texas retailers were exposed to wholesale electricity prices at $9,000/MWh for four days, but were still selling to customers at closer to $90/MWh. When we realize the disconnect between the price retailers pay for energy on the wholesale market and the price at which they sell it to customers, it is clear that there is a need for a service that reacts to real-time pricing to maximize grid reliability whenever needed.
The omnipresent threat of outages in Texas is an unpleasant reminder of the all-too-real blackouts of February 2021 and also February 2011. These widespread grid outages were ultimately caused by extreme cold temperatures that left unweatherized energy assets — including natural gas, coal, nuclear and wind generators — unable to operate.
Since then, proposed energy market reforms aim to avoid such a crisis from happening again. Many potential solutions were crafted with a focus on protecting consumers from high prices. But the fact of the matter is that Texans already enjoy some of the lowest rates in the country. In reality, the risk of high prices falls on the retailer, while the more pressing risk to Texas consumers is loss of power in its entirety.
At the end of the day, the lights went off due to a lack of grid reliability, not ERCOT’s market structure. Prices were only as high as they were for as long as they were because Texas’ energy infrastructure isn’t winterized. Solving high prices is fundamentally addressing the wrong problem. We should be prioritizing how we can ensure reliability in the face of extreme weather by using grid-connected assets we already have.
Suppliers, retailers and customers
End-use customers contract with retailers who supply them with electricity. Retailers sell electricity to the customers and are obligated to serve their energy demand no matter how much they use or when they use it. ERCOT retailers aren’t allowed to own generation, so they buy all of the electricity that they sell in two primary ways. First, they contract with suppliers for specific amounts of energy over specific periods of time. Second, to ensure that they cover all of their customer load, they buy power from ERCOT wholesale markets to cover the portion of their customers’ demand that exceeds the amount specified in existing supplier contracts.
ERCOT maintains the reliability of the bulk electricity system, including managing transmission and scheduling all of the energy that suppliers sell, regardless of whether it’s sold via contract or through the wholesale market. Through this system, ERCOT dispatches generation assets to cover system demand in real-time, and also operates the wholesale markets that suppliers sell into and retailers buy from.
These established roles have been muddied in recent years because an increasing number of customers are now producing electricity themselves or are capable of changing their demand in real-time via distributed energy resources (DER), such as rooftop solar, battery storage, EV chargers, and more. In addition to their intended functionality, DER can provide even more value to asset owners, operators and the grid, with real-time access to energy markets.
Untapped potential
DER can support the grid in situations where energy supply struggles to meet demand. Individual DER are much smaller than the resources the grid typically relies on — but when combined in resources ranging from tens to tens of thousands, DER can be a more responsive, flexible resource. Additionally, electricity customers across the state could save $5.47 billion by using DER to reduce the need for more costly peak power generation, transmission and distribution investments.
With real-time access to the market and automation, for example via a single API, DER can immediately react and help to fill the void when the grid needs flexibility — without customers having to take any action. Without a capacity mechanism, ERCOT pricing signals are the only signals that will incentivize new generation and more DER participation. And, those prices must be sufficient to overcome the opportunity cost of building generators and curtailing. In this way, price volatility in the energy market is not a bug, but rather a useful feature for a transactive grid edge solution.
For example, a sudden increase in market prices could trigger an automated response from EV chargers. Aggregated together, these grid-connected devices lend precious capacity back to the grid, and earn money in doing so. In fact, one of the first residential EV aggregations to participate in ERCOT’s Emergency Response Service program launched last year.
The complexity of energy market programs may deter individual DER asset owners from contributing, especially in ERCOT where direct participation is daunting due to a slew of hefty rules and the need for complex on-site equipment. This is why the goal of new regulations and technologies should be to build a dynamic market that enables aggregators to simplify access to energy markets, making it easy for DER owners to become active grid participants, earn money and help avoid blackouts.
It’s clear that the ERCOT’s current energy mix, with natural gas responsible for nearly half of electricity generation last year, isn’t guaranteed to meet demand at all times. As such, we must leverage innovative ways to allow new players to participate, contributing supply when needed so that the lights stay on.
About the Author
Jaden Crawford is the Director of Policy at Leap and a frequent contributor to energy policy and regulatory discourse. Leap is a global platform for generating new value from grid-connected resources and devices through integration with energy markets.
