Background

Asset developers are companies involved in siting and building generation assets on the power grid. The primary focus of U.S. power developers is on wind, solar, and energy storage projects, which benefit from: 

1. Corporate demand for CO2 offsets 
2. Higher fossil fuel prices
3. Recently enhanced federal tax incentives (i.e., the Inflation Reduction Act) 

The development process ends when construction capital is committed to a project (the Financial Investment Date or “FID”); at that point, the project will likely proceed to commercial operation. 

Achieving FID requires a) completion of construction and operating requirements (e.g. land acquisition, permits, interconnection agreement, Energy Performance Certificates, etc.), and b) making a case for the revenue potential of the project in the local power market. In the case of projects with Power Purchase Agreements (PPAs), the revenue case is made to the long-term buyer. In the case of merchant projects, the revenue case is made to equity and debt providers. 

In either case, the asset developer needs to demonstrate that power market fundamentals are attractive at the site. Typically, the revenue case involves backcast analyses at the site as well as long-term projections of price scenarios at the site.  

A major competitive advantage for asset developers is siting projects with a better-than-average revenue case (i.e. siting their project where nodal pricing is more favorable). The effort to find the most favorable nodal pricing is complicated by the project’s operating constraints, such as wind/solar conditions, transmission capacity, land access, water rights, environmental issues, regulatory framework, etc. Therefore, asset developers must assess the revenue case for many potential site options to find the optimal overall siting solution.

Three Types of Power Market Data Analyses Typically Performed by Asset Developers

When a company is deciding where to site a power plant, they typically engage in three main analyses that deal with wholesale power market data. 

1. Market Fundamentals Analysis: Looking at historical pricing around a site, what drives those prices, and, at a high level, how prices might change in the future
2. Price Forecast: A long-term nodal price forecast typically done by Powerflow modeling that accounts for changes to the generation and transmission system, typically performed by consultants
3. Interconnection Study: A Powerflow-based study of feasibility and upgrade costs to interconnect the project, typically performed by consultants

Asset developers frequently engage consultants for a price forecast and interconnection study; however, many will leverage power market data to perform their own market fundamentals analysis. At its core, a project siting market fundamentals analysis consists of:

1. Understanding historical prices around a site
2. Drivers of those historical prices 
3. A high level understanding of how prices might change in the future

Historical Price Analyses

Finding a Proxy Node 

The first step in examining historical pricing is finding a suitable proxy node. For this, you typically want the closest node to your specific site, which GIS software with accurate price node and substation mapping can help identify. According to Jim McDowall, business development manager for Saft Batteries, “If you are two miles away from the substation … you could be losing 5% of your power between the energy storage system and the point of interconnection, and that is certainly an issue in terms of the power purchase agreement.”

Understanding Historic Pricing and Drivers 

Once you’ve found your proxy node, you can analyze historical ISO pricing and market fundamentals data (i.e., load, generation, congestion, weather) to understand historic pricing and drivers at your proxy node. Typically asset developers analyze two to three years of pricing and fundamentals data to tell the story of what prices have been and what has driven them. To give a little more context, renewables developers are typically looking for sites of high wind/ solar-weighted prices and favorable basis to an offtaker that are expected to stay that way. These developers usually utilize wind- or solar-weighted basis calculations. Energy storage developers typically look for sites with relatively higher price volatility that can reasonably be expected to stay that way. These developers typically use volatility metrics such as daily price spreads to inform their decisions. 

Future Price Trends Analyses

Once historical pricing and drivers are understood, asset developers need to understand how conditions on the grid may change in the future, and how this might impact price. This is primarily done by looking at three fundamental factors:

1. Planned/announced generation additions
2. Planned transmission additions 
3. Long-term load growth forecasts 

It’s critical to have accurate information on all three to directionally assess the future state of the grid and how it may impact your project. Planned and announced generation and transmission additions in particular can be difficult to analyze, and oftentimes require either a vendor or in-house analyst to thoroughly analyze interconnection queue and transmission planning data to understand grid change.

Using FTRs for Forward Pricing Analysis

Financial Transmission Rights (FTRs) are a tool used to hedge future congestion risk. These are typically utilized by utilities, independent power producers, and speculative traders, but they can give insight at how the market is pricing future congestion to help understand if congested areas will remain that way. 

Below is a screenshot from Yes Energy’s tool, FTR Price Map, showing all ERCOT FTRs for 2025. As we can see, the market expects South Texas to have the most negative congestion in 2025, and the Houston area to have the most positive congestion.

In the example above, developers can visualize the congestion caused by FTR constraints across longer timeframes in order to help predict future growth – a critical part of the site analysis process. 

Key Takeaways

The most critical elements of a market fundamentals analysis include finding the closest proxy node, analyzing historical pricing to see if it’s favorable, identifying the causal drivers of that pricing, then using forward looking data including the interconnection queue, long term load forecasts, and potentially FTRs to directionally assess forward pricing. All are essential to determining where to site a new generation project.

To read our in-depth analysis of how to use Yes Energy’s tools to conduct a battery sitting analysis, download our white paper here. 

For more information on how Yes Energy can help support your market fundamentals analysis click here.