Investors would be wise to look past the “hot” takes to try to learn some deeper lessons from the situation in Texas electricity markets. Lessons that can be applied to their investments in other regions as well.

 

Market design matters, so know your region well

One thing this episode highlights is how different the grid regulatory schemes are across the United States (and of course, elsewhere around the globe). In the ERCOT region, deregulation in the electricity markets has been more significant than in other regions. That has its pros and cons too detailed to go into here, but that proves the point: Before investing in any power-related project development, it’s important to be confident that the developers do know the region well. The drivers of profitability for energy storage projects, for example, vary across Cal-ISO, PJM, NE-ISO, and ERCOT. Developers who get their revenue arrangements wrong could face significant downside or miss significant upside. 

 

Be wary of how much-naked risk you are exposed to in wholesale markets

Last month spot market prices for electricity all across the ERCOT region were “bright red”, approximately 10 times higher or more than they typically would be. As the cold receded, these prices did drop quickly. But in the meantime, anyone exposed to spot prices as an input is probably suffering. Remember, with Texas deregulation, there’s been a proliferation of retail electricity providers with differing pricing models. Some of them are being squeezed today as they were forced to purchase wholesale power at those high prices. Others are passing along those high costs directly to their customers — and in fact, have even been attempting to get customers to quit their service. Any energy storage or microgrid operators who are forced to purchase at high wholesale prices may also suffer as well, given such a prolonged price spike.

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So project developers, investors, and even end-consumers really need to be aware of how much-naked exposure they will have to future such price spikes. If “renewables” is the new normal, this will happen again.

But what I see regularly as an advisor into these types of markets is that a lot of project developers are still happy to take on merchant pricing risk both on the input and the offtake sides of their projects. Investor beware.

 

Resiliency should once again get a boost as a value proposition

Once again Texas businesses are having to come to grips with what an unreliable power grid means for their bottom line. I just received an email from one entrepreneur in Austin who’s had to deal with almost 36 hours of outages. That’s directly hitting her bottom line.

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The reliability of all power generation options, as mentioned above, is being sorely tested in this extreme weather. This could in theory give a boost to anyone investing into reliable on-site power systems... if these systems are not themselves suffering from supply problems today and are indeed proving to be reliable.

Unfortunately, as I’ve written about recently too many behind-the-meter project developers have yet to figure out how to sell resiliency. Here’s yet another case study to draw from... 

Also unfortunately, a lot of the utility-scale powergen system failures this week could have been avoided with more investment into hardening their facilities. After all, this is definitely not the first time Texas has faced a tough cold snap, and after the last time the strong recommendation was for powergen facilities to make these necessary investments. But few have a financial incentive to do so. Such requirements may become stricter now, after this week’s experience.

 

Expect even more support for automated demand response programs

Besides reliability, flexibility is also key for dealing with the ups and downs of electricity markets. And the most cost-effective and flexible form of capacity remains “demand response” (or: getting customers to reduce their own electricity consumption), especially when it can be automated through the use of cloud and software approaches. 

California has had good experiences with demand response programs in their own recent power shortages. There have definitely been some hiccups, but these types of programs hold a lot of promise and can prove to be attractive investments as well — if the regional regulatory scheme is a good fit, and that varies as discussed above. 

I suspect one lesson drawn from this week in Texas and other such episodes is that more of the regional grid operators will be pushing autoDR as an option, which will open up more such investment opportunities.

 

Expect even more of a push by developers of long-distance transmission projects

One thing these episodes of power shortages always highlights is how the U.S. electric grid is really a collection of separate regional grids with some capacity-constrained transmission between them. To be clear, they’re not grid islands, but there’s a reason why Texan spot electricity prices are spiking even while up in New England (just as an example) the real-time prices are less than a tenth of those in ERCOT.

Transmission has always been a project finance opportunity that is both fascinating and really, really hard. Getting all the necessary permits, approvals and rights of way takes years, and most developers don’t have the patience or the capital. Nevertheless, every once in a while a serious developer takes on an ambitious transmission project, and it becomes the talk of the private markets investment community. I would expect even more of these efforts over the coming years. 

For those interested in a really good read related to such efforts, Russell Gold wrote a great book about the topic a couple of years ago. 

 

Even if you’re not investing specifically in power projects, you still need to care

Anyone investing into companies that are expanding their manufacturing or other operations in Texas and California (and elsewhere) now need to be worrying about the potential business disruptions in these regions. 

What are their plans for prolonged power interruptions? How can they create resiliency onsite? How can they create flexibility in their operations? If this becomes a norm, how will it impact recruitment? On the margin, this kind of thinking may affect whether or not investors want to be placing their capital into these regions at all.