The City Hall building in Austin, Texas
Texas’s X Factor: Part 2: How the Lone Star State Is Poised to Integrate Distributed Energy Resources in Innovative Ways
This post is the second in a series describing the opportunities that abound in Texas’s energy system and how e–Lab Forge: Texas 2019 can help realize them. The first post is available here.
While Texas has long been synonymous with oil and gas production, it has also become a leader in utility-scale renewable energy deployment in the past decade. As the state faces growing energy demand, tightening generation reserve margins, and transmission congestion in the west, it’s now approaching a key decision point in how it wants to orient its grid to meet these challenges.
While local, decentralized distributed energy resources (DERs) are widely recognized for their flexibility, resilience, and ability to defer or obviate large system infrastructure upgrades, markets across the United States now face the challenge of creating a level playing field that allows DERs to be systematically evaluated on their merits. Texas—in particular, the competitive retail regions of the Electric Reliability Council of Texas (ERCOT), which covers 90 percent of the state—stands out in the United States for its robust competitive approach to electricity and its lack of capacity market, which helps keep electricity prices low. The ERCOT market structure creates both opportunities and challenges for innovation in accelerating deployment and integration of DERs.
DERs: A Small Portion Poised for Outsized Growth
Texas is a recognized leader in utility-scale wind energy. Strong wind resources and land availability in the Panhandle region attracted high levels of wind farm development that, in turn, motivated the creation of Competitive Renewable Energy Zones (CREZ) and the buildout of critical transmission infrastructure. Although solar comprised only 1.3 percent of the state’s generating capacity in 2018, strong solar resources, a high solar coincident peak, and rapidly declining power-purchase agreement prices have elevated Texas as one of the hottest emerging markets for utility-scale solar in the United States.
As illustrated by the booming utility-scale renewables sector, the fully deregulated market in ERCOT favors the integration of least-cost generation at size and scale. Although DERs are still a small player in the ERCOT market in comparison with utility-scale wind and solar, they are growing in importance: between 2015 and 2017, DERs in ERCOT grew 62 percent, and small DERs under 1 megawatt (MW) more than doubled from 2016 to 2018.
DERs present a compelling opportunity to help Texas meet its near-term generation shortfalls amid record-low reserve margins and growing energy demand. Although ERCOT expects to manage the state grid without resorting to outages, accessing additional resources (such as demand response and additional distributed generation) will remain a key determinant of ensuring system stability and keeping Texas’s economy growing if current market trends continue. Because DERs can be developed and deployed much more quickly than other wholesale generation assets, they are well-suited to respond to market needs and help ensure resource adequacy.
Beyond contributing to reserve margins, from a system-wide perspective DERs provide a cost-efficient alternative to traditional investments in legacy poles and wires infrastructure. For example, DERs offer a stack of value beyond avoidance of wholesale energy costs, such as the deferral or avoidance of system upgrades, increased grid resilience, congestion management, and—of particular value in Texas—avoidance of transmission demand charges. Although current market rules constrain some uses of DERs’ non-wires solutions, efforts are ongoing to update market rules while ensuring competitive practices as detailed in this report.
Unique Market Conditions for Adequately Valuing Distributed Generation
The uniqueness of the ERCOT market creates discrete regulatory and political challenges in adequately and appropriately valuing distributed solutions, particularly for storage, distribution-scale solar, and rooftop solar.
Storage currently makes up a small portion of Texas’s generation mix, with only 89 MW registered. Material regulatory and political barriers create a suboptimal environment for storage deployment: there is no capacity market, and distribution utilities are unable to own storage resources because they are classified as “generation.” In addition, given consistently low wholesale market prices, arbitrage alone doesn’t currently create a strong enough economic rationale for investment at scale.
The flexibility of siting distribution-scale solar provides value through avoided transmission line losses, the deferral of infrastructure upgrades, and increased resilience. Notwithstanding the high solar coincident peak and associated ability of distribution-scale solar to avoid transmission demand charges, it is difficult for market participants to capture the transmission demand charge savings and associated non-wires benefits in the competitive retail electricity market.
With the exception of a small group of municipal utilities and retail electric providers, net metering is not available in most of ERCOT. For rooftop solar to compete against low ERCOT market prices, other incentives will be required for these installations to be worth the upfront investment.
An Opportunity for Innovative Business Models
This seemingly complicated situation makes Texas a potential laboratory for testing different models of DER integration. Given low barriers to start-ups and new business ideas, the Texas market is primed for piloting innovative strategies that target the challenges of accelerating DER integration.
An innovative approach to serving low- and moderate-income (LMI) households through community solar won the Kerrville Public Utility Board the Department of Energy’s “Best LMI Program” for the Solar in Your Community challenge. The 3.72 MW alternating current project was spread over three sites and introduced a virtual net metering program. The energy produced is split between three nonprofit hosts and the tenants of local LMI housing, at a solar rate of 7.1 cents per kilowatt-hour (a 14 percent savings from the existing utility rate, driven by the high solar coincident peak).
Encouragingly, we are starting to see cutting-edge valuation methodologies and innovative business models to support the growth of battery storage, community solar, and distribution-scale solar programs in Texas. A recent announcement by GlidePath for a stand-alone 10 MW/ 10 MWh battery is a notable development, for example. The battery, which will operate on a merchant basis, demonstrates an emerging opportunity for developers to drive business model innovation.
New frameworks and contract structures that leverage the purchasing power of multiple businesses are increasingly enabling small to medium-sized corporates with lower energy consumption and risk tolerance to procure renewable energy. This year, Starbucks signed a portfolio deal with Cyprus Creek Renewables for two 10 MW solar farms to support distributed operations, powering 360 stores across Texas. Similarly, last month, Akamai Technologies began commercial operation of their 8 MW wind project, a portion of the 30 MW Seymour Hills development. Texas currently leads the United States for corporate renewable energy deals, and as more small to medium-sized corporates strive to meet sustainability goals and reduce their electricity costs, the demand for custom-made contracts that support smaller, local offtake is expected to continue.
Accelerating Distributed Clean Energy Solutions
The advancement of distributed clean generation has reached a systemic inflection point and is now a least-cost, flexible, and equitable energy solution for customers, electric utilities, and grid operators across the United States. Under the right conditions, Texas has the potential to be a national leader in driving innovative business models and solutions that advance the deployment for DERs while still preserving its deregulated market structure.
Leveraging Texas’s position as a leader in utility-scale renewable deployment, RMI is convening e–Lab Forge: Texas 2019 to further accelerate the adoption of DERs in Texas. Scheduled for mid-September outside Austin, the event will bring together teams working on high-impact, scalable ideas and projects in distribution-scale solar energy, community solar, battery storage, and other distributed clean energy solutions.
We hope this event will help speed the advancement of distributed clean energy technologies in Texas and spread their economic, environmental, social, and technological benefits to more residents of the Lone Star State in the years to come.