What businesses can do to prepare for ‘peak net load’
When it comes to renewable energy, ERCOT stands out. The market, which encompasses most of Texas, was number one for wind capacity installations nationally at the end of 2019, and is number three for total annual production of electricity from renewable energy across its system.
This achievement is a source of pride for Texans. But the renewables boom means far more to the ERCOT energy market than many people realize. You could say it’s creating a new world of energy pricing, one that’s starting to have a significant impact on customers’ total energy costs, and opens new opportunities for energy management. This is due to a condition known as ‘peak net load,’ which will be important to understand as you prepare for the summer.
In Texas, demand for power peaks in the summer, which puts upward pressure on electricity prices. And notably, the peaks appear to be trending higher. (See chart below.)
What is peak net load?
Even under ‘normal’ circumstances, it’s important for businesses to prepare for summer by managing their electricity use wisely. But now, peak net load adds a new wrinkle to planning for summer prices. To explain, let’s start by talking about how the world of energy planning worked until a few years ago, before signs of peak net load began surfacing.
Back then, forecasting supply and demand was relatively straightforward. Most of our energy came from generating plants running on fossil fuels or nuclear power, which operate in predictable ways. Forecasters could rely on historical precedent to make good, educated forecasts about how much power would likely be available at any given time. This information allowed them to set a reliable reserve margin, the cushion between supply and demand.
With the introduction of more wind and solar energy — intermittent resources dependent on the weather — the predictability of the old world disappeared. Starting around 2017, signals emerged that the amount of renewable capacity and the volatility of renewable production were beginning to have a pronounced effect on ERCOT pricing. Then in 2019, it became apparent that the ERCOT grid was relying on renewable energy during peak conditions to meet market demand.
For those that participate in the market, this shift has major implications. Forecasters must consider a wider variable range of outcomes and risks as they schedule the dispatch of power. It’s hard to know if the wind will blow or the sun will shine when the energy is needed, heightening supply uncertainty.
That’s why it’s become important to consider peak net load, defined as peak load — how much power is needed — minus how much energy is expected from intermittent resources. This equation nets out renewables to make clear to grid operators how much non-intermittent power the grid needs to maintain electric reliability.
This new grid reality changes the principles of market pricing. In the past, high pricing was correlated with high demand. In other words, peak load drove peak pricing. That’s still true, but renewables add a new variable. Their level of production during periods of peak demand can now drive price volatility.
Below we show two hot days in August 2019 that illustrate the new reality. Note that demand for power was highest on August 12, but that was not the day when prices were highest. Instead, prices peaked on August 15, even though demand for power was significantly lower than it had been on August 12. What happened? More wind energy was available on August 12 to serve the higher demand, which therefore dampened prices.
So, what will this summer bring?
In mid-May, ERCOT forecasts that this summer will bring a record peak demand for power due to hot weather and the state’s growing population and economy. Meanwhile, conventional, baseload power plants are not being built to replace those that retire. This makes intermittent renewables a larger part of the mix, reinforcing volatility.
Why is price volatility a concern? Volatility describes the percentage difference in the price of wholesale power at certain increments in time. Dramatic variations can significantly and quickly escalate costs for energy customers who contract for energy at spot-market prices, which is why these programs are not meant for the risk averse. But even those on fixed-price contracts eventually feel the repercussions of market volatility — although not as quickly or dramatically. Their rates are based on average costs; an escalating market raises the averages.
How, then, should customers prepare for summer?
Customers can exercise choices to make this new world work in their favor.
First, renewable energy offers a great deal of value to our electric grid. And as its prices continue to drop, more will be added within ERCOT to meet the demands of a growing population. As a result, consumers will have more energy choices available than any generation before them — in fact, they already do.
Second, pronounced benefits become available for customers who manage their electricity in this new energy reality. A whole suite of systems and services now exist that allow for direct participation in grid programs that provide end-users with revenue — such as demand response — or offer opportunities to save money and reduce costs through responding to market conditions. Effective management of total energy costs will require effective management of load.
Your company may already employ tools to prepare for summer energy use. But with the advent of peak net load, it may be time to re-evaluate your strategy. We can help customers like you navigate these changing times.
