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by Yes Energy
As we head into 2023, changes in regulation, market dynamics, and technology continue to impact the energy industry. Here’s a look at the most significant trends headed our way and how they’ll impact the North American energy industry this year.
Changing Market Dynamics
The transition to cleaner energy sources continues. In the past five years, wind and solar have substantially increased their share of electric power generation, growing from 10% in 2018 to a projected 20% in 2023. This had led to a shift away from large, dispatchable plants to smaller, intermittent power sources far from load centers. These shifts have significantly impacted wholesale power market dynamics, leading to increased price volatility, curtailment and congestion. We expect this trend to continue as intermittent electricity from renewables may lead to negative congestion pricing, and base and mid-merit generators are forced out of the market.
Moving forward, we expect to see storage resources picking up the slack where renewables can’t. According to the US Energy Information Administration, developers and power plant owners plan to significantly increase utility-scale battery storage capacity in the US over the next three years, reaching 30.0 gigawatts (GW) by the end of 2025.
Data source: U.S. Energy Information Administration, Preliminary Monthly Electric Generator Inventory, October 2022
In the meantime, most battery operators continue to function as operating merchants, trading in the markets day-to-day to optimize their revenue, and providing the electric grid with much-needed resilience.
Inflation Reduction Act
The Inflation Reduction Act of 2022 (IRA) aims to finance green power, lower costs through tax credits, reduce emissions, and advance environmental justice. The law significantly improves the economics for all renewables by making them eligible for a 30 percent investment tax credit and up to 70 percent with additional incentives. The IRA made an improvement over the earlier ITC by being "technology agnostic." Where battery storage was excluded earlier (unless it was part of a solar hybrid facility), it will now be covered. According to Peter Cavan, Director of Market Development for battery storage developer Convergent Energy and Power, “This change will likely drive up to $1 trillion in storage investments by the early 2030s.”
Although the tax credits and other incentives associated with the Inflation Reduction Act provide a major boost to the clean energy sector, ongoing supply chain difficulties, inflation, and high interest rates will likely affect many of the more ambitious goals in the near term.
Western Market Expansion
In 2014, CAISO and Pacificorp partnered on the development and release of the Real-Time Western Energy Imbalance Market (WEIM). Since then, Pacificorp and CAISO have continued development on the WEIM, which dovetails with the current development on the Extended Day-Ahead Market (EDAM). The 2014 announcement that Pacificorp would partner with CAISO to develop the WEIM was a major factor of the market's success.
In December of 2022, Pacificorp announced that they would be the first electric power company to sign on to the Western EDAM initiative, a major turning point for the future of EDAM and integrated power markets in the west. Ongoing collaboration of the western entities continues, with the announcement adding a lion's share of the western interconnection’s footprint to CAISO’s EDAM development initiative.
However, this isn’t the only market development underway. Developing alongside CAISO's EDAM is Southwest Power Pool's (SPP's) Markets+ program: a Day-Ahead market offering expanding on their Western Energy Imbalance Service (WEIS) market. Both of Colorado's investor-owned electric utilities -- Black Hills Energy and Public Service Company of Colorado, known as Xcel Energy -- will be joining SPP's WEIS market in April 2023, joining the rest of the state's municipal utilities which joined in 2021. With state legislation requiring all Colorado transmission utilities to join an organized wholesale market by 2030, this may be an indicator of their future intentions towards the Markets+ initiative.
Extreme Weather Impacts
Extreme weather, supply chain issues and plant retirements continue to pose reliability challenges for utilities. Congestion, high energy prices and power outages factor into extreme weather events as well, from California’s recent flooding to the severe cold snap that blanketed the U.S. in late December 2022 and currently has PJM facing $2B in penalties for failures during Winter Storm Elliott.
Severe weather and its ramifications in the energy industry was one of the biggest news events from 2022, and the topic continues to headline 2023 news. Managing the electricity grid during these events poses multiple challenges, from withstanding and adapting to the event to conducting intelligent post hoc analyses to avoid repeating mistakes that may have led to major grid disruptions. As electric utilities and other power providers face growing scrutiny around outages and soaring prices, we see companies continuing to make significant investments in their organizations, including increasing their access to high-quality energy data to support a resilient, reliable grid.
Changing Regulation
Changing regulation creates the backbone of these market shifts. 2022 was a significant year in the energy industry, with new incentives and emerging policy shifting on multiple fronts.
FERC Order 841
In 2018, the Federal Energy Regulatory Commission (FERC) passed Order 841, ordering regional transmission operators (RTOs) and independent system operators (ISOs) to reconfigure wholesale markets to accommodate storage resources, allowing them to provide capacity, energy and ancillary services. After lengthy legal challenges, the U.S. Court of Appeal upheld the Order, affirming that barriers to distributed and behind-the-meter energy storage participating in wholesale electricity markets should be removed. Regulators have praised FERC Order 841 as one of the most important pieces of transitioning to a clean energy future, with distributed energy storage joining wholesale markets and competing to provide services on par with fossil fuel resources.
As a result, the U.S. has been preparing for a major buildout of energy storage. According to BloombergNEF, the IRA is expected to drive the development of an additional 30 GW/111 GWh from 2022 to 2030. We’re already moving in that direction. Since the start of 2021, battery capacity in the U.S. more than tripled. California and Texas lead this shift in battery capacity, and Massachusetts (a member of NEISO) has advanced into the top five. We expect behind-the-meter capacity to remain a priority across the U.S. throughout this decade.
FERC Order 2222
In 2020, FERC Order 2222 passed, enabling Distributed Energy Resource (DER) aggregators to compete in all regional organized wholesale electric markets. DERs are small-scale energy resources either in the form of supply side resources like “behind the meter” solar or demand side resources like EV charging stations that can curtail power demand.
With heavy penetration of “behind the meter” solar energy in the US, we’re seeing more and more DERs connected to the grid. This past year, Tesla Powerwall customers in California and Texas became eligible to enroll their batteries into a virtual power plant (VPP), becoming part of an automated system that sold energy from owners’ Powerwalls to the grid and vice-versa in order to help keep the lights on during emergencies or energy shortages. Although the programs began as voluntary beta projects with no payouts, Tesla now offers Powerwall owners $2 for every additional kilowatt-hour they feed to the grid during events when the grid is stressed, including when CAISO issues an energy alert, warning or emergency. With a monetary incentive, the program could grow large enough to become a significant backup energy source in California. As a result of these beta programs, both CAISO and ERCOT VPPs have since moved into permanent programs.
Also significant is the news that California and New York are planning to ban the sale of new gas powered vehicles by 2035. These aggressive goals will force the widespread adoption of electric vehicles, which in turn will increase the total interruptible load on the grid. With vehicle-to-grid technology, we can even expect emergency regulation resources (i.e., resources used by the ISOs to maintain the grid frequency) on the grid in the near future from grid-connected EVs. However, our grid isn’t currently well equipped to handle DERs. Since the number of DERs were negligible until recently, ISOs didn’t have any tariff language that allowed these generators to properly participate.
In recent years, we’ve seen a stark increase in ISO peak loads. Since we’ll need more energy in the coming years to keep our grids reliable, the importance of DERs are at an all time high. Since different ISOs are in different stages of DER integration, the effect on regional participation of the DER aggregators also varies, and we expect to see this trend continue in 2023. In these rapidly evolving markets, updated information remains key for asset owners, aggregators and traders.
Ancillary Service Market Improvements
On October 1, 2022, FERC approved PJM changes to their reserve market, consolidating Tier 1 and Tier 2 Synchronized Reserve products and aligning reserve procurement in PJM’s Day-Ahead and Real-Time markets. PJM’s modifications were intended to make their reserve market more efficient by using a similar structure in both RT and DA markets.
As a result, faster generators bidding into the new DA primary reserve market products are seeing higher compensation on average than before – a welcome change, since generators are being better compensated for a stronger reserve product. With the addition of a 30 minute reserve product in the RT market, we’re also seeing an overall increase in PJM’s reserves, since more and more generators can now bid into the RT reserve market, which historically only allowed 10 minute reserve products.
PJM’s modifications are expected to produce more accurate reserve calculations with less operator intervention. They should also provide reliable Synchronized Reserve performance as well as consistent compensation and penalties for all resources providing the same service.
In October of 2022, ERCOT implemented structural changes to its spinning reserves market. The changes are one piece of a multi-year process currently underway to improve the ancillary services markets in order to improve grid reliability and increase the reserve margin. In October, ERCOT split the existing spinning reserves product, Responsive Reserve Service (RRS), into multiple sub-categories with the goal of better defining and compensating these services. Spinning reserves allow resources to respond quickly, within 10 minutes, to frequency deviations caused by unexpected losses of generation or ramps in load. Additionally, a new product was created under the umbrella of the RRS to bolster frequency response (Fast Frequency Response).
These changes in ERCOT come with new potential for a wider array of resource technologies to participate in spinning reserves, including Energy Storage Resources (ESRs) and Load Resources (both controllable and non-controllable). ERCOT is also in the process of creating the ERCOT Contingency Reserve Service (ECRS), a new ancillary product separate from the RRS, intended to launch later in 2023. The ECRS is an additional 10-minute ramping energy product that will allow the grid to respond to variability from increasing renewable penetration.
Interconnection Queue Reform
Renewable projects in the US are often forced to wait 3.7 years on average to receive approval to connect to the utility grid, creating uncertainty, increasing cost, and slowing energy development. Less than a quarter of projects that enter interconnection queues in the U.S. will make it through to completion. According to Utility Dive, “the U.S. currently has roughly 700 GW of solar, 400 GW of energy storage, and more than 200 GW of wind energy sitting in overflowing interconnection backlogs–just gigawatts shy of what the Biden administration projects is needed to generate 95% carbon-free energy by 2035.”
Although we can incentivize renewable generation, stagnant interconnection queues often keep these projects from connecting to the grid, creating a bottleneck that limits our energy growth. An interconnection process overhaul is long overdue and has led FERC to issue a proposal to reform generator interconnection rules.
On November 29, 2022, FERC approved PJM generator interconnection queue reforms. PJM – like other grid operators – has seen a surge of renewable energy and energy storage projects filling interconnection applications in order to connect to the grid, leading to 2,700 project delays in PJM alone. Although the process was largely designed for reviewing interconnection requests from conventional power plants, renewable generation comprises the vast majority of these projects. As such, there was a clear need for procedural improvements and tariff revisions.
The 2,700 projects in PJM’s interconnection queue represented more than 250 GW as of early May, according to PJM’s FERC application. More than 95% of that proposed capacity is wind, solar and storage facilities, or hybrids of solar or wind with batteries. The FERC approval of PJM’s tariff change will prioritize about half the pending projects, including a “fast-lane” process for projects to reduce the existing backlog. With this change, PJM is moving to "first ready, first served" from "first come, first served.” In addition to helping clear the interconnection backlog, the FERC order will also accelerate the review of new interconnection requests. PJM expects to start the transition phase in early 2023.
In January of 2022, SPP also implemented changes to augment their interconnection queue backlog mitigation plan. Before that, SPP’s queue primarily consisted of requests to add wind generators, with a growing number of requests for solar and storage. Key changes to their queue include additional site control requirements for GEN tie lines and new financial security and study deposit risks and readiness thresholds.
According to SPP in November of 2022, 78% of their GI backlog has completed or begun active study. They’re nearing a resolution on cost allocation needed to initiate transmission upgrades identified in the SPP/MISO Joint Targeted Interconnection Queue study, further facilitating interconnection of new generation.
Changing Technology
As the regulatory landscape continues to change, technology advances as well. Shifting market dynamics create new needs, and therefore new opportunities. As such, market participants are increasingly leveraging enterprise data solutions, data visualization tools and artificial intelligence (AI) and machine learning (ML) for analytical purposes.
However, since AI developers are currently in the research stage of developing an efficient machine learning algorithm, there’s limited AI adoption in the energy sector as of yet. That’s expected to change. According to Allied Market Research, the global AI in energy market size was valued at $4.0 billion in 2021, and is projected to reach $19.8 billion by 2031.
As AI permeates the energy industry, companies will use algorithms to facilitate the prediction of market prices as well as enable proper planning and scheduling. AI will also impact optimization of energy prices, assets and risk hedging, allowing energy and utility companies to improve delivery times and reduce overall costs.
At Yes Energy®, we’re dedicated to staying at the forefront of these shifting dynamics. In addition to providing the most comprehensive nodal power market data available, we deliver it as an integrated, complete data set with flexible options to ingest and analyze the data. This makes it quicker and easier for traders, power companies, and asset managers and developers to understand market developments so they can make the most informed decisions.
Our team of market experts understands how vital accurate, reliable data is for traders, power companies, asset managers and developers, or anyone who needs to analyze power markets. That’s why we’re meticulous about better data – constantly monitored and updated from public, partner, and proprietary sources, then cleaned and standardized for ease of use. We collect 750,000+ data files and 110,000,000+ rows of new data per day, and resolve 200,000+ ISO data reporting issues each year, with a team dedicated to proactively monitoring each market for new datasets or data changes that will impact you.
As part of our dedication to supporting the quickest and most accurate market information and insight available, we constantly update our products as well as actively partner with our customers to build the most cutting-edge tools and data sets available. Request a demo!
