Renewable Energy #1 - New risks on the horizon for renewable energy aggregation, trading, and selling in North America

Welcome to Hitachi Energy’s Market Management for Renewable Energy blog series where we will do an extensive review of the market management side of renewable energy use and projects. Over the course of the next few blog posts, we will cover what you need to know about investing in energy markets, managing energy procurement in new, more effective ways, and gathering and using energy market intelligence to better plan renewable energy projects.

Let’s get started.

When it comes to aggregating, trading, and selling renewable energy in North America, myriad factors must be considered. This includes new challenges that develop as the energy landscape evolves.

Aggregators, independent power producers (IPPs), traders, and utilities must be mindful of how current and emerging trends affect three of the main risk categories – market, credit, and operational risk – so they can understand market volatility and optimize their investment strategies accordingly.

Let’s dive into the three main risk categories and explore variables to watch.

1. Market risk: Variation of future earnings due to changes in market conditions

• More renewable energy in the North American power system: The United States alone has increased its share of variable renewable energy sources (VRE), mainly wind and solar power, by 70 percent between 2010 and 2020 (EIA, 2021). With more VRE in a power system, like a specific TSO/RTO bidding zone, more balancing will be required for the system to operate reliably in that zone and at its borders.
  
  Consequently, expected revenues are increasing from balancing services, such as those provided by battery energy storage solutions [HC1] (BESS), conventional power systems with rotating masses or by flexible loads, including electrolysis plants, especially when based on flexible PEM-technology.
  
  However, the values of such balancing services vary, depending on the RTO/ISO on a shorter-term or multi-year basis. Those variations, or fluctuations, make emerging revenue streams, like balancing services, even more complex to forecast, bid, and settle. This is particularly true for IPPs and utilities that are active across various states and are therefore impacted by multiple regulations.
  
  For these groups to effectively participate in and benefit from “ancillary services markets,” software and advanced specialist algorithms are required.
  
  
• More BESS deployments beyond just the California market: BESS are a powerful way to balance VRE. After all, BESS installations “flatten the Californian duck curve.”
  
  Furthermore, annual new energy storage installations across the United States increased +1700 percent from 288 MW p.a. (mainly in California) in 2017 to 4,798 MW p.a. in 2022 (Wood MacKenzie, 2023).
  
  While BESS originally were deployed to de-risk solar PV asset investments through co-location and stabilization of power output, operators today have accumulated over 400 BESS projects in the United States.
  
  Those installations face a particularly high level of exposure to market risk as most systems target ancillary market participation to leverage grid connection investments. Projects now typically are exposed to the risk of fluctuations in renewable energy levels, electricity prices, and ancillary services values.
  
  
• More extreme weather conditions from Canada to Texas: More wind typically means more wind power, thus lower prices on electricity markets. Counterintuitively, storms typically reduce wind energy production: Whilst modern wind turbine generators (WTGs) produce power already from 2 m/s of wind speed at hub-heights of typically 100 to 150 meters, from 20 to 25 m/s wind speed, which represent typical storms far before reaching the levels of cyclones like hurricanes, wind turbine generators (WTGs) shut down into protection mode.
  
  If things get too frosty, like in Texas in 2022, wind turbines freeze. Most North American installations do not have ice detection or defrosting systems, which reduces available renewable electricity to black-out levels across entire regions.
  
  For solar PV systems on sunny days, cooler temperatures often mean performance increases of 5 to 10 percent. If things get too hot, however, PV power output reduces while demand surges for cooling. This is what happened recently in Texas, where electricity prices went up 800 percent in August 2023 during a heat wave (Bloomberg, 2023).
  
  On the hydro power side, due to seasons of droughts, Canada’s capacity factor, i.e., yield from installed hydropower plants, decreased from 63 percent in 1991 to 53 percent in 2023 (IEA, 2023).
  
  Weather swings lead to higher-than-expected fluctuations in both intraday and seasonal energy prices.
  
  
• New market designs and regulations: In addition to existing risks for renewables, aggregators, traders, IPPs, and utilities, market operators across the United States regularly update and recast rules and regulations. For example, PJM’s capacity market and adequacy concerns in the eastern interconnection grid will lead to new rules in 2023.
  
  We’ll also see new rules in ISO New England and ERCOT (for more details, read one of Hugo Stapper’s recent blogs from Hitachi Energy, 2023). Renewable energy aggregators, IPPs, traders, and utilities thus are exposed to regulatory risks on an ongoing basis, heavily impacting market risks.

2.     Credit risk: Risks associated with defaulting by a counterpart

• North American interest rates: Within only one year, we’ve witnessed one of the most dramatic increases in interest rates in North America. In the United States, the Federal Funds Rates increased 10 to 19 times from 0.25 to 0.5 percent  in March 2022 to 4.75 to 5.0 percent in March 2023 (Forbes, 2023).
  
  Renewable energy offtakers exposed to high shares of debt (e.g., industrial consumers or highly leveraged utilities) have been confronted with extremely increased financing costs. Some of those debt-exposed players have passed their risks to electricity consumers by increasing electricity prices for end users, though that practice is limited by regulations
  
  Others, like Puerto Rico’s utility in 2023, have gone bankrupt (Bloomberg, 2023)
  
  Many aggregators, traders, utilities, and other renewable energy offtakers are no longer able to pay their bills on time, consequently increasing credit risks and debt ratios.

3.     Operational risk: Possible errors in settling transactions or instructing payments

• Increasing complexity through increased wholesale-market participation: While renewables IPPs and utilities were “blessed” with stable feed-in-tariffs (FiTs) in the past and then highly attractive Investment Tax Credits (ITCs), particularly in North America, such incentives either are no longer available or have dramatically decreased.
  
  As a result, more renewable energy producers today participate in electricity wholesale markets. Sometimes they even take their complete asset base “fully merchant,” i.e. relying entirely on wholesale market revenues vs. e.g. power purchase agreements (PPAs) or long-gone FITs.
  
  Being fully merchant requires sophisticated participation processes that comply with rules while increasing revenues and decreasing wholesale market participation costs.
  
  The more such processes are conducted by humans, there is a higher risk of errors. To avoid this risk, more and more IPPs rely on automation to increase wholesale market participation among progressively more complex rules and increased risks.
  
  
• Increasing complexity increases human error: There are other human-error-related risks due to increased complexity, in addition to the ones mentioned above for renewable electricity aggregation, production, trading, and marketing. Human involvement also increases the risk of faulty settlements or payment instructions...
  
  The more human activity is used—particularly in commercial daily operations departments of aggregators, in the energy sales rooms of IPPs, the back- and middle-offices of energy traders, and the billing and settlement departments of utilities—the higher the risks become for renewable energy aggregation, selling, trading, and buying.

How Hitachi’s Energy Trading and Risk Management (ETRM) Software mitigates your risks:

Multiple-award-winning energy trading software solutions, from complete ETRMs to more specialized software solutions, are increasingly asked for by North American renewable energy aggregators, IPPs, traders, and utilities—and even industrial energy-consumers. The most important products are listed below:

• TRM (Trading and Risk Management) Tracker | Hitachi Energy: Our award-winning, highly configurable, easily integrated, and flexible (fully fledged or modular, on-premises or SaaS) energy ETRM software easing risks for front, middle, and back offices.
  
  
• RiskTracker | Hitachi Energy: Advanced risk-management software measuring and managing price fluctuations and offering customized reporting and advanced risk analytics.
  
  
• CreditTracker | Hitachi Energy: Centralized counterparty and credit risk management customized for utilities and energy companies that manage counterparty and credit exposure risks by integrating credit risk data from diverse IT environments seamlessly into a single aggregated view.
  
  
• SettlementTracker | Hitachi Energy: Complex energy settlement and invoicing solution that manages one or more bilateral project power purchase agreements (PPAs) by automatically maintaining contracts, prices, and settlements through to accounting and treasury.
  
  
• Forecaster | Hitachi Energy: Forecasting price, load, and generation, arming utilities and energy companies with data-driven insights helps to make better operational and financial decisions for short- and mid-term planning.

Feel free to reach out to the author or one of our experts if you have any questions on how to mitigate your risks in market participation with renewables. Ensure to stay tuned for the next blog in our Market Management for Renewable Energy blog series!