ERCOT Methodology

Modo Energy generates benchmark data for battery energy storage systems across different geographical energy markets. The Indices are produced using a standardised set of procedures that is mathematical, consistent, and fully transparent.

1. Introduction

While Modo Energy fully recognises that battery energy storage assets trade in different ways (due to the particularities of each market), the approach taken when assessing revenues is consistent for each market analyzed.

The Modo Energy Electric Reliability Council of Texas (ERCOT) Methodology Framework outlines the calculation and construction of Modo Energy’s battery energy storage Indices in ERCOT. This document provides detailed insights into:

• the inclusion criteria for assets;
• the components that make up published revenues;
• and the methodologies employed;

to ensure accurate and reliable benchmarking for ERCOT’s battery energy storage sector.

1.1 Representation

Modo Energy’s Indices are designed to track the performance of grid-scale lithium-ion battery energy storage systems in ERCOT. Given that the characteristics of battery energy storage projects vary from asset to asset, Modo Energy’s Indices may be designed or configured to showcase and compare specific attributes (e.g. system duration).

2. Index Construction

2.1 ERCOT BESS IndicesME BESS ERCOT Indices

Modo Energy currently produces three Indices which track the performance of battery energy storage systems in ERCOT. These are:

• ERCOT BESS IndexME BESS ERCOT: Includes all qualifying assets in ERCOT.
• ERCOT BESS Index (1hr)ME BESS ERCOT (1H): Includes assets with a duration of less than 1.5 hours.
• ERCOT BESS Index (2hr)ME BESS ERCOT (2H): Includes assets with a duration of more than 1.5 hours and less than 2.5 hours.

2.2 Inclusion Criteria

Assets must meet specific criteria to be included in the indices:

• Commercially operational: Assets must be approved for commercial operations by ERCOT as defined in section 2.2.1 below.
  • Assets no longer included in disclosure data are considered decommissioned and excluded.
• Metering: Assets must not share a meter with co-located assets.

2.2.1 Commercially Operational

An asset is considered commercially operational on the first date of market activity following its commissioning date, which is reported in ERCOT's monthly GIS report. Market activity is defined as either the first settlement of metered net energy or the first awarded Day-Ahead contract.

Only market activity from this point onwards is used in daily index calculations, and any activity before the commissioning date is excluded.

3. Revenue Components

3.1 Revenue Components of Indices

This section details the various revenue streams included in the Indices. Each revenue component is essential for calculating the overall performance value of battery energy storage systems in ERCOT.

The revenue components included in Modo Energy’s ERCOT Indices are:

• Day-Ahead Energy Market: The day-ahead energy market involves market participants submitting bids and offers to contract to deliver or receive power the following day.

• Real-Time Energy Market: The real-time energy market operates continuously, allowing for the purchase and sale of electricity on a real-time basis. This market ensures that electricity supply matches demand instantaneously, in which power prices are calculated every 5 minutes by ERCOT’s Security-Constrained Economic Dispatch process.

• Ancillary Services: Ancillary services are crucial for maintaining grid stability and reliability, and are procured by ERCOT in the Day-Ahead Market. These services include:

  • Regulation Up and Regulation Down: Real-time adjustments to generation to maintain system frequency.
  • Responsive Reserve Service (RRS): Spinning reserves for rapid response to sudden demand changes or outages. Help bring frequency back up to 60 Hz when it falls below the deadband.
  • Non-Spinning Reserve Service (NSRS): Quick-start (30-minute) reserves for unexpected demand or generation shortfalls.
  • ERCOT Contingency Reserve Service (ECRS): Additional quick-start reserves for sudden demand spikes and rapid changes in supply. Also utilized to provide additional capacity for frequency response in the event of a large frequency event (like a large unit trip).

The index and its components are reported in terms of net revenues for each interval period.

4. Divisor

The divisor plays a critical role in the calculation of the Modo Energy’s ERCOT Indices, representing the normalization factor used to calculate the average revenues of the group of assets within the Index.

The total revenue earned across all active assets in the index is normalized by the total rated power or energy capacity of these commercially operational assets (see section 2.1.1). Rated power is determined from an asset’s nameplate capacity, not its grid connection.

5. Data Sources and Methodology

5.1 Data Inputs and Visibility

To ensure accuracy, Modo Energy only includes utility-scale battery energy storage system resources included in ERCOT disclosure reports in its Indices calculations. These resources are identified in data where the resource type is reported as “PWRSTR” (Power Storage). Data from EIA is also taken to provide further context on asset details such as energy capacity and clarification of nameplate capacity.

5.2 Revenue Calculation Methodology

Battery energy storage systems in ERCOT operate as both generation and load resources. In our Index calculations, we combine revenue data from both resource types to determine a net revenue for each market, which is then allocated to each specific battery energy storage asset.

5.2.1 Day-Ahead Energy Market Revenue Calculation

Revenues from day-ahead energy contracts are calculated based on the awarded contract volume (MW) multiplied by the settlement point price ($/MW) at the resource node for each generation resource. This revenue calculation is in accordance with the method outlined for day-ahead energy resource revenues outlined in the ERCOT protocol 4.6.2.2.

Load resources can not bid for day-ahead energy awards in ERCOT. Negative day-ahead energy revenues are attributed to energy bids at the settlement point where a system is located. Only energy bids placed by the same Qualified-Scheduling-Entity (QSE) and Decision-Making-Entity (DME) as the resource at the node are considered. Any power imported from the load side of the resource is assigned day-ahead energy revenues if a corresponding energy bid exists. If no power is imported but an energy bid is present, the transaction is considered virtual, and no revenues are attributed to the asset.

5.2.2 Real-Time Energy Market Revenue Calculation

Real-time energy revenues are calculated by using the net physical position between both the load and generation resources of an asset, comparing this to any contracted position in the day-ahead market, and then multiplying this difference by the real-time settlement point price at the resource node for each 15-minute interval period. This difference between an asset's net physical operation and its Day-Ahead position is also known as the Real-Time power imbalance, which is used by ERCOT in settlement.

The volume physically dispatched on the generation side of the resource is determined using settlement-metered net energy volume data provided by ERCOT. For the load resource portion of the battery, the telemetered net output (MW) provided in SCED load resource disclosure data is used. This net output value (MW) is multiplied by 0.25 to estimate an energy volume (MWh) value for that given interval period. This assumes the telemetered net output value (MW) provided by ERCOT is an average value for any given interval period.

The real-time settlement point price at the resource node comprises the locational marginal price (LMP) calculated by SCED and additional ERCOT price adders. For individual asset revenue calculations, the Operational Reserve Demand Curve (ORDC) is treated as a distinct revenue stream, separate from other real-time revenues. In the context of the calculated indices, ORDC revenues fall under the general category of real-time energy revenues.

The revenue calculation described is per the method outlined for Real-Time Energy Imbalance Payment or Charge at a Resource Node as outlined in ERCOT protocol 6.6.3.1.

5.2.3 Ancillary Services Revenue Calculation

Revenues from ancillary service contracts are calculated based on the responsibility (MW) reported to SCED by a resource multiplied by the hourly clearing price ($/MW) for that given service. This revenue calculation follows the method outlined for day-ahead ancillary service revenues outlined in the ERCOT protocol 4.6.4.1.

The day-ahead ancillary service revenue, as outlined in the ERCOT protocol, is settled for a Qualified Scheduling Entity (QSE). QSEs can trade and allocate their total awarded ancillary services among their resources bilaterally. Instead of using the awarded amount in the day-ahead market as per the protocol, the responsibility reported to SCED by resources in real-time is used.

This real-time responsibility can sometimes differ from the awarded capacity in the day-ahead market. This approach ensures that our Indices accurately track the performance of battery energy storage in ERCOT.

Any energy dispatch resulting from utilization in providing an ancillary service is included in the real-time energy revenue calculation. Awards from the supplementary ancillary service market are not considered.

5.3 Updates and Revisions

The Indices are updated daily to reflect the most current data. In cases, where data available after a settlement period provides more accuracy, Index calculations are backdated to include this.

6. Governance and Compliance

6.1 Transparency

Detailed explanations of calculation methodologies and revenue components are provided to ensure transparency.

6.2 Stakeholder Engagement

Feedback from stakeholders is actively sought - and incorporated into methodology updates. This includes the use of real financial and operational data for internal benchmarking purposes to validate our estimations. Reviews are conducted by a team of experts to maintain accuracy and relevance.

7. Methodology Changes

7.1 Review and Update Process

The methodology is overseen by a dedicated team of analysts to ensure compliance and best practices.

The methodology is reviewed periodically to ensure it remains up-to-date with market conditions and regulatory changes. With the introduction of new products (e.g. markets or services in which battery energy storage systems can earn revenues) and the retirement of old ones, the methodology is revised and updated to encompass all market opportunities for battery energy storage assets, provided data is available for assessment.

7.2 Notification of Changes

Significant changes to the methodology are communicated to stakeholders in advance, with detailed explanations provided to ensure understanding and transparency. Historical changes are documented and archived in the appendix of this methodology.

8. Consistency and Continuity

8.1 Quality Assurance

Rigorous quality assurance processes are in place to ensure the accuracy and reliability of benchmark calculations. This includes regular audits and validation of data sources and calculation methods.

8.2 Data Integrity

Data integrity is maintained through strict data management protocols, including secure data storage, regular backups, and robust data validation procedures.

8.3 Continuity Planning

Business continuity planning ensures that benchmark calculations can continue uninterrupted in the event of unexpected disruptions. This includes backup systems and contingency plans for data and operational processes.

Appendix I

Methodology changes

Methodology changes since Dec 3, 2023, are as follows:

Appendix II

ERCOT Battery Benchmark

The ERCOT Battery Benchmark assesses the performance of battery energy storage systems (BESS) in ERCOT, offering market participants an estimated view of battery energy storage system operations, revenue potential, and performance across key market components, including day-ahead and real-time energy markets and ancillary services. It aims to enhance transparency and provide performance estimates to bridge the gap in the 60-day disclosure data from ERCOT, to provide real-time insight into battery energy storage revenues.

Energy Revenues

To calculate energy revenues, Modo Energy estimates a system-wide battery price and multiplies this value by the aggregated net output of battery resources.

System-wide Battery Price

The system-wide battery price is determined by averaging the prices at all battery resource nodes within ERCOT. This aggregated approach reflects the collective operations of battery resources and informs the ERCOT Battery Benchmark.

Assumptions

Based on Modo's operational data, batteries typically import power when prices are low and export when prices are high. To calculate energy revenues, we average the top 50% of prices during export periods and the bottom 50% during import periods, using the corresponding MW values for each interval, then sum these values.

All energy revenues are based on real-time energy prices, as Day-Ahead market revenues have contributed only 0.62% of total asset revenues over the past three years (as of May 30, 2024).

Ancillary Service Revenues

To calculate ancillary service revenues, we estimate battery participation in each service and multiply it by the market clearing prices.

Ancillary Services Procured

The volume of ancillary services procured by ERCOT is sourced from the Ancillary Service Requirements dataset.

Ancillary Services Awarded to Batteries

Battery participation in ancillary services is estimated by taking the rolling 30-day average of service capacity awarded to batteries during each delivery hour. This battery participation rate, based on proprietary data from our ERCOT BESS IndexME BESS ERCOT calculations, is then multiplied by the total ancillary services procured.

Assumptions

Due to ERCOT's 2-day delay in publishing ancillary services volumes, we rely on the service requirements dataset for procurement estimates, assuming full capacity is achieved in day-ahead auctions. There were only 6 days in 2023 where more than 200 MW were procured outside the Day-Ahead market.

A rolling 30-day average of battery participation smooths daily fluctuations, reducing noise in revenue estimates. Despite minor errors from daily variations, our analysis shows a 99.7% correlation between ancillary service revenues in the ERCOT Battery Benchmark and the ERCOT BESS IndexME BESS ERCOT for the period between December 6, 2023, and May 30, 2024.

Accuracy

Using values from the ERCOT Battery Benchmark from December 6, 2023 - we found a 99.8% correlation with the ERCOT BESS IndexME BESS ERCOT and a median absolute daily error of $19/MW.

Disclaimer

This document, including the methodologies and indices described herein, is the proprietary work of MODO ENERGY LIMITED ("Modo Energy") and is provided solely for informational purposes. These indices are designed for use in financial analysis, benchmarking, and decision-making. However, they do not constitute investment advice or a recommendation regarding any specific financial instrument, asset, or strategy.

While Modo Energy strives to ensure the accuracy, reliability, and transparency of the indices and methodologies, all information is provided "as is," without any express or implied warranties, including but not limited to warranties of merchantability or fitness for a particular purpose. Users should be aware that the indices are derived from data that may be subject to revisions, delays, or inaccuracies. Past performance is not indicative of future results, and external factors such as regulatory changes, market conditions, and asset-specific characteristics may impact index performance.

Modo Energy encourages users to conduct their own due diligence and consult with qualified financial professionals before making any investment or operational decisions based on the indices or methodologies herein. Modo Energy disclaims any liability for direct, indirect, incidental, or consequential losses or damages arising from the use of the indices, methodologies, or related data.

It is not possible to invest directly in an index. Indices are intended to represent performance benchmarks, and exposure to an asset class represented by an index may be available only through separate investable instruments. Modo Energy does not sponsor, endorse, or manage any financial products that aim to track the performance of its indices.

All intellectual property rights to the indices and methodologies are owned by Modo Energy. Unauthorized use, reproduction, or redistribution of this document, in whole or part, is strictly prohibited without prior written consent from Modo Energy.

This document and the indices it describes are subject to updates and revisions. Significant changes will be communicated to stakeholders as appropriate. For further information, including licensing inquiries, please contact Modo Energy directly.

By accessing or using this document, you acknowledge and accept the terms of this disclaimer.

Disclaimer

This document, including the methodologies and indices described herein, is the proprietary work of MODO ENERGY LIMITED ("Modo Energy") and is provided solely for informational purposes. These indices are designed for use in financial analysis, benchmarking, and decision-making. However, they do not constitute investment advice or a recommendation regarding any specific financial instrument, asset, or strategy.

While Modo Energy strives to ensure the accuracy, reliability, and transparency of the indices and methodologies, all information is provided "as is," without any express or implied warranties, including but not limited to warranties of merchantability or fitness for a particular purpose. Users should be aware that the indices are derived from data that may be subject to revisions, delays, or inaccuracies. Past performance is not indicative of future results, and external factors such as regulatory changes, market conditions, and asset-specific characteristics may impact index performance.

Modo Energy encourages users to conduct their own due diligence and consult with qualified financial professionals before making any investment or operational decisions based on the indices or methodologies herein. Modo Energy disclaims any liability for direct, indirect, incidental, or consequential losses or damages arising from the use of the indices, methodologies, or related data.

It is not possible to invest directly in an index. Indices are intended to represent performance benchmarks, and exposure to an asset class represented by an index may be available only through separate investable instruments. Modo Energy does not sponsor, endorse, or manage any financial products that aim to track the performance of its indices.

All intellectual property rights to the indices and methodologies are owned by Modo Energy. Unauthorized use, reproduction, or redistribution of this document, in whole or part, is strictly prohibited without prior written consent from Modo Energy.

This document and the indices it describes are subject to updates and revisions. Significant changes will be communicated to stakeholders as appropriate. For further information, including licensing inquiries, please contact Modo Energy directly.

By accessing or using this document, you acknowledge and accept the terms of this disclaimer.