Summer revenues for BESS in ERCOT with Brandt Vermillion (ERCOT Market Lead @ Modo Energy)

Last summer was totally remarkable. I mean, the, one of the hottest Texas summers on on record, lots of tightness in the power system, exceptional revenues for battery storage. But this summer, things have been quite different.

Most of that revenue was made, at least in twenty twenty three, over those summer months. I wanna say around seventy five percent, maybe even eighty eighty five percent of revenues last year came during those summer months. And even more importantly, I mean, you have rev I think around fifty percent of revenues came from just thirteen days last year, and most of those days were concentrated across June, July, and August in ERCOT. And basically, that's just been the complete opposite of what's happened this year.

Hello, and welcome back to Transmission. Revenues for battery energy storage in ERCOT for June twenty twenty four were eighty five percent lower than the previous year. But what's been driving these lower earnings? In today's quick take episode, MODO Energy's ERCOT market lead, Brent Vermillion, joins Quentin to discuss battery revenues over the summer months.

If you're enjoying the podcast, please hit subscribe so you never miss an episode, and give us a rating wherever you listen. Let's jump in.

Hello, everybody. I'm sat here with Brandt, Modo Brandt. Hopefully, you all know him by now from previous podcasts. And we're gonna talk all about battery energy storage in ERCOT, because there's been a lot that's changed. And, there were high hopes for this summer, and things haven't played out exactly as, many were expecting. So we're gonna dive into that, dive into how much revenue batteries have been making and all the other stuff that's been going on. But before we get there, Brent, can you just explain what you do at MODO Energy?

Sure. Yeah. So I am our ERCOT market lead. So that mostly just entails, kinda coming up with and putting together the research that we put out on what's happening in ERCOT, what's changing from a policy perspective, basically, how batteries are impacting the market and how the market is impacting batteries.

So can we just take a stop for a second?

So when you and I last sat together, which was last November, something like that It's been a while.

It has been a while.

At that point, there was three gigs, something like that, of batteries on the system in ERCOT. Mhmm.

And things have moved quite a lot on since then.

So, could you just give a state of the market? How many how many batteries are there installed in Texas? How many megawatts, and, what kind of size are they, and what kind of stuff are they doing? And then we're gonna dive into, some of the specifics around this year.

Definitely plenty to dig into just on that note. Right?

So I guess the first thing to start with really is we're as of today, we're right around seven gigawatts of commercially operational storage.

And we should time stamp this. This is October twenty twenty four.

Yeah. Right. And that number, commercially operational or the definition of commercially operational, is a little bit different to, like, what ERCOT typically defines as being online and operational. So we usually define that as effectively having been fully approved and fully gone through the commissioning process. So you might look at ERCOT's website and see that there's, like, nine gigawatts or something like that. Actually, installed and operational. And a lot of those are just kind of in that final bit of the commissioning phase where they've synchronized to the grid, but they're going through some of those final tests with their car to ensure they're able to perform voltage control, stuff like that.

So, you know, that's a good sign in the sense that there's quite a bit more storage that's not too far away. You know, it's only a few months away from being Well, it fully commercially operational.

But It's massive. Right? So a year ago, there was three gigawatts. And then this year, ERCOT's numbers, there's nine.

But of the batteries that are actually in the market making money, there's seven. Even seven from three is a monumental Yeah.

Build out and a big change to the system here.

That yeah. It's been pretty remarkable to watch. And, I mean, it's really kinda still just the beginning of it. I mean, I think we're kind of expecting similar growth in terms of that number next year, potentially, again, doubling. Even if it's not quite a doubling, it's still quite a bit of storage coming onto the system.

So yeah. I mean and as we'll kinda get into, it's it's had a big impact on how the market's played out this summer. I mean, that's not exclusively limited to batteries entering the market, but that they've played a big role this summer in changing how price formation really has happened both in ancillary services and energy.

The big question we need to answer on this podcast is what happened this summer. And to set the scene, last summer was, totally remarkable. I mean, the, one of the hottest Texas summers on on record, lots of tightness in the power system, exceptional revenues for battery energy storage, high prices, ancillary services. You know, the the stars aligned for owners of energy storage, and some of the price spikes were were just huge.

But this summer, things have been quite different. In fact, before we talk about summers, why does summers matter so much in Texas? It might seem obvious, but let let's let's do that question. Why summers in Texas?

Yeah. So, obviously, being in Texas, it gets quite hot here in the summer. And, ultimately, when it gets really hot, you have quite a bit of demand on the power system. And, you know, when there's more demand for power, obviously, that requires more supply to meet that demand, which typically means higher prices. Right? So when you have higher prices, that can generally mean more revenues for, asset, like a battery and storage system.

And, ultimately, that's what we saw last summer, where there were a number of days where energy prices were quite high, both in the ancillary service and, the actual energy markets themselves. And that translated to quite a bit of revenue for batteries and hasn't necessarily played out this way, in the summer of twenty twenty four.

And let's let's put some numbers on it. So if we use the the Modo Energy, battery revenue index, what for our listeners, how how different has this summer been versus last summer?

Yeah. So, I mean, if we look at last year, the average battery in ERCOT made around two hundred dollars a kilowatt or two hundred thousand dollars a megawatt, obviously. And this year, that's tracking to be more in the, you know, sixty to seventy dollars per kilowatt or, again, sixty thousand, seventy thousand dollars per megawatt.

And a lot of that difference is in the fact that most of that revenue was made, at least in twenty twenty three, over those summer months. I wanna say around seventy five percent, maybe even eighty eighty five percent of revenues last year came during those summer months. And even more importantly, I mean, you have rev I think around fifty percent of revenues came from just thirteen days last year. And most of those days were concentrated across June, July, and August in ERCOT. And, basically, that's just been the complete opposite of what's happened this year where, like I said, revenues are are down, you know, probably around sixty, seventy percent from what they were last year. And a lot of that has to do with the fact that there really was not the same volatility that we saw in twenty twenty three here in twenty twenty four.

So on that, it was still a really hot summer. Right? It was, like, the sixth hottest summer in Texas on record.

So surely batteries would make a lot of money.

Yeah. So, I mean, depending on the different months that you look at, there's actually still pretty substantial difference between, you know, the hottest summer in the last twenty years or even really going back a hundred years or so, compared to, you know, the sixth hottest summer in recent record.

And a lot of that's reflected in the number of those extreme days that you're just referencing where, a lot significant amount more, a hundred hundred five degree plus days, which which really stretch the the demands of the power system, the, ultimately, the peak demand that is observed. In addition to that, one of the other big differences from this summer to last summer is the addition of nine gigawatts of solar generation, Like, we were just talking about before, around four gigawatts of battery energy storage that are participating in the energy markets here in Texas. And that's that's really played a large role in terms of both driving those average prices down.

I mean, that's what solar often is obviously doing. If you look at the price shape, between twenty twenty three and twenty twenty four, you'll see those peak demand hours of the day, really, from, you know, around noon to into the early evening, like, you know, five, six PM when the solar generation is still, you know, kinda at its height.

Average prices are significantly lower during those hours, this year to last year. And then, again, as you move into the evenings, you have the batteries kinda coming into play their part. Whereas last summer, they're generally more sitting just entirely in ancillary services. I think last year, it's around eighty five percent of battery revenues coming from ancillary services.

Whereas this year, you've started to see more and more participation in those real time energy markets. They're actually dispatching and helping do some of that, load shifting for bringing some of that excess solar generation that's driving those midday prices down into the evening periods. And, ultimately, that's also been, again, suppressing some of those prices in the evening. So that's why even if weather is even if you still had a fair number of pretty hot days, even on those days that are relatively extreme, you have a lot more supply on the system that's able to kinda combat that, which has driven prices down.

Ten no.

Did you say nine gigs of solar? Ten it's another?

Yeah. I think, yeah, July twenty three to July twenty four, around nine gigawatt difference in terms of installed capacity. Isn't it? It's pretty remarkable. The solar build out has been pretty insane. I mean, I think twenty nineteen, ERCOT had around three or four gigawatts of solar installed, and we're if we're not approaching thirty, I think we're above twenty five gigawatts installed now. It's, I mean, it's remarkable how much is getting added every single month.

Oh, I love it. It's absolutely awesome. So are we gonna get the duck curve?

Yeah. I mean, I think that is kind of the direction we're heading in. I think they've started calling at the Canyon curve in California now where, you have prices kinda fall off the cliff at the beginning of the day and, obviously, kinda rising off rising back up in the in the evening again as as the sun comes off.

But, yeah, I mean, I think that's kind of potentially where we're headed here in in Texas, especially and maybe we can get into a little bit, if you start adding some of that, more baseline off peak demand in the form of things like data centers and stuff like that that are maybe not gonna follow a traditional demand shape and may maybe be more so, like, flat consumers that are kinda consuming at all points in time of the day. So that might kinda push those prices up in the earlier morning period before you get, the sun coming up. And that, you know, kinda falls off into that canyon or off the back of the dock, in the middle of the day, and has so as the sun comes up. And then, again, you know, again, it's really all centered around the sun. If you have all the solar, as the sun goes down, you kinda see prices again rising in the evening. And that's that's generally been the most challenging part of meeting demand for for ERCOT in the last couple of years.

So in summary, the sixth hottest summer, but still not that hot in compared to the extreme bond from last year Mhmm.

A lot more solar on the system, a lot more battery on the system.

Is that is that it? Is that is that what's driving this, the the reduced revenues for batteries, or is there more to it? Because last year, we spent a lot of time looking at net load ramps, you and I and the rest of the mod modo team. And it was from the perspective of the the control room has got this problem at the end of every day, which is when, in simple terms, the sun goes down pretty quickly, and, that that that looks like a net impact of more demand on the system, and they have to turn generation on quickly to deal with it.

And so these net load ramps present quite a problem for the control room, and this is a great opportunity for batteries.

But what we haven't seen this year is these big spiky prices around the evening peak. So why is that? A few different reasons. And, ultimately, a lot of them are centered around batteries.

One, you just have a lot more, lot more batteries installed at this point. And two, they're participating more in the energy markets. So we've seen a shift from participating primarily just in ancillary services to doing more and more energy dispatch. A lot of that is just competition in the AS markets pushing them into performing more energy arbitrage.

And three, as they're performing more and more energy, that market's also becoming more more and more competitive. And batteries are beginning to lower the price at which they're offering some of that capacity into the markets, particularly during those peak hours, in the evening. And batteries are so effective at kinda combating this net load ramp issue, obviously, because they're able to respond effectively instantaneously. So if ERCOT has, you know, two, three more gigawatts of of batteries at relatively low offer prices participating in your real time market or in the day ahead market, then they're they're able to kinda rely on some really fast responding resources to kind of combat some of the challenges of having a significant amount of solar generation coming off and effectively increasing the, I guess, visible demand or the net demand that is seen on the system.

So yeah.

Now let's move on to ancillary services. And a bit of a cheeky question here. Yes or no, are ancillary services saturated with batteries?

So it can get a bit convoluted, but, you know, just with the binary answer, we'll go yes here in the sense that in most hours of the day, honestly, ancillary service prices relative to energy are basically at all time lows. A lot of that has been batteries pushing ancillary service prices down and, you know, getting more and more competitive as more participants are in the market. You're seeing more and more competitive offers pushing those prices down. There is a bit of a caveat to that in the sense that batteries aren't exactly providing a hundred percent of ancillary services.

In reality, it's more like sixty or seventy percent of the volume that's procured by ERCOT. And Who's providing the others? So a lot of it is honestly still from it's in particular in ECRS and non spin, which have less stringent, duration requirements to be able to provide them. So, basically, you can take a little longer to start up and actually be online to provide those services to ERCOT.

So that provides room for, you know, natural gas peaking plants and, generation technology of that type to provide those services. And so some of them are pricing in competitively to batteries to provide them. And I guess the the where the caveat ultimately leads is there is still some room for revenue opportunity in ancillary services whenever there's kind of an anticipated scarcity condition. So if overall energy prices are relatively high, even if ancillary service prices are a little lower than energy prices, overall, there's still some revenue opportunity there.

So it's it's not quite basically, there's nothing to be gained from participating in ancillary services. But with that being said, they are generally, most hours of the day and most days of the year, relatively saturated. Yeah.

So if you're saying that batteries have mostly saturated ancillary services markets, then they have to move into other things. Right? And, I wanna ask you what DART is all about. And very aware that there'll be people listening to this, and we could get really technical very quickly.

I'm gonna try not to. We should probably put a link in the show notes to some some articles we've done about this. But, Dart, which is day ahead and real time, d a r t Mhmm. What's this new type of trading strategy in a nutshell?

Yeah. So, I mean, at the end of the day, it's still about capturing a spread in one form or another. So if you think about the way the daily price shape looks where it's, you know, low as the sun's rising, usually peaks in the early evening hours. That's kind of the spread that is still trying to be captured by a battery.

In the case of historically, like you were saying, that's generally done the day of in real time. And now what we've seen is some operators or some market participants are doing that via the day ahead market because they think that that spread might just be larger in the day ahead market. So they're buying low in the day ahead and selling high in the day ahead. But that also provides them another option where if they sell energy in the day ahead market, if prices are significantly lower in the real time market, they can actually decide not to basically deliver on that obligation, and they end up capturing the spread between the day ahead price and the real time price. So it's it's almost like it's like a derivative or something like that.

But it it provides a bit of an interesting flexibility where, basically, just only participating in the real time market. You don't necessarily have that same level of flexibility.

And you have a bit more revenue security as well if you have an idea of what the day ahead spread will be. You capture that as well.

So And we we're very used to this in Europe.

It's we sometimes it's called buybacks or churn or nonfees or loads of other things.

But it's got a new word now, dart dart trading. Okay. So to finish up talking about revenues then, in a nutshell, last year, batteries made a fortune in a really hot summer. This year, batteries made much less. It's still a hot summer, but not that hot. And that's a big change for owners of battery. There's a big change to all all sorts of there's all sorts of ramifications from that.

So what are what's changing in the market? And I'm sort of leading you to something here about tolling agreements.

What's going on with tolling agreements?

Yeah. So one of the big things with summer twenty twenty four being lower ultimately in terms of the revenues that batteries were able to earn is that that means that some parties are looking to probably divest some of their risk in that investment. Right? They want more secure returns year to year.

I mean, if you think about the gap between twenty twenty three revenues and twenty twenty four revenues, it's pretty insane. Right? I mean, it's we're talking again, like we said it before, sixty, seventy percent difference year to year. It's it's very volatile.

Right? So some parties might say, you know, we we want something a little bit more down the middle. We wanna make things a little bit more straightforward in terms of how much revenue we're seeing year to year. And, ultimately, revenue is also getting harder and harder to capture too as we move away from ancillary services where there's less participants in the market, market's not saturated.

Now we're getting into, like, we just talked about with something like Dart Trading, something that's a little more complex in terms of how you're capturing revenue. You know, it's it's something where, I think, some parties, again, like I was saying before, just want a little bit more of that revenue security. And others are potentially looking to say, hey, we'll take some of that risk off your hands, and we'll do more of this complex optimization to try to capture more of that revenue. And, ultimately, what that looks like is what we've kind of been seeing called a tolling agreement, where the party that actually owns the asset says, hey.

We'll just take a flat fee and let you operate this asset. And, basically, whatever you make, is yours to keep. And then, ultimately, you'll pay us effectively a lease to basically use the asset to try to earn as much revenue as they can in the market. So, yeah, I mean, when you think about twenty twenty three to twenty twenty four, it's a significant drop in revenues.

And, ultimately, that kind of highlights some of the volatility of operating a battery in particular in Texas. So I think that has started to motivate some people that are owners of assets to to just lock up some of that security in terms of the revenue they're seeing year to year, and just kinda basically just have a more secure idea of what that revenue is gonna look like rather than saying, you know, things might be great one year and then really down the next. Right? So that's essentially what a toll on the agreement does is they allow another party to basically pay them a a fee to effectively lease the battery and take that risk off the table for them and just say, hey.

We'll take a flat fee. You try to optimize that battery and earn as much revenue as you can with it.

And so that is a quick whistle stop tour of what's happened this summer versus last summer. If you wanna find out more about this stuff, we'll put some links in the show notes. You can read some of Brant's and the team's excellent work on ERCOT. And if you're interested in other states too, like Kaisa and PGM, watch this space. They're coming really, really soon. Thanks for listening, Ivor.

Thank you for listening to Transmission, a MODO Energy podcast. Transmission delivers conversations from industry leaders and experts exploring energy markets and the operations and technologies related to grid scale battery energy storage. Check out our other episodes by searching transmission wherever you get your podcasts.

Check out the Energy Academy, our video crash course on how markets in Great Britain and Eircot work, or head to motoenergy dot com to see our written research. Thanks for listening.