How Texas Became the Hottest Grid Battery Market in…

While generally a mystery to anyone outside of the network operations industry, system services have given the storage industry an entry point ERCOT. They do not require large throughput because they are very fast and short-lived operations. This means developers can ship them with slim, short-lived batteries, keeping construction costs down. And ancillary services complement the growth of renewable energy, as the variability of solar and wind energy production creates frequency fluctuations that ancillary services address.

“Aid is like an insurance policy for your power grid,” says Rhodes from UT Austin explained. Batteries are a large part of our insurance policy, but you only need a limited part of the insurance.”

In other words, the markets for ancillary services are not very extensive, so returns start to crumble as soon as storage developers enter.

This has happened elsewhere: in the mid-Atlantic PJM Market created the modern battery storage market a decade ago with a fast frequency service. But the boom was followed by a bust; When a crowd of profit-hungry developers stormed in, the profit was no longer enough. California was able to avoid that fate by giving battery developers another way to make money—by allowing them to win utility contracts to deliver power over a four-hour period; This required larger batteries but made storage a more central player in California's solar-heavy power grid.

Texas is already moving in that direction, just without the utility contracts. The early Texas market had batteries that could only discharge their full power for about an hour, meaning they were designed for auxiliary services. More and more developers are assuming that the upfront costs of building batteries that can discharge their full capacity over several hours are worth it.

Today you see a lot of value in the ancillary services,” said Ken McIntyre, vice president of plant operations and performance for Plus Power, which operates there 775 Megawatt hours of storage in ERCOT and adds another 800 Megawatt hours this year. But as more and more batteries come online, the natural result of market competition will shift this value into energy arbitrage.”

Modo Energy noted that the share of battery revenue from energy has more than doubled in the past year 6 percent in 2022 To 15 Percent. It's no coincidence that the specific batteries making the most money from energy shifting belong to Jupiter Power, which from the start has built two-hour batteries that provide the firepower to pump more energy into the grid during times of high demand to feed in.

“We have always wanted to advocate for the longest possible funding period,” said Caitlin Smith, vice president of policy and corporate communications at Jupiter.

Batteries come online 2025 or 2026 You may need to pack in four-hour durations to keep up with shifts ERCOT Rules, noted Zubaty of Eolian Power.

Building longer-life batteries initially came with risks: They cost more upfront, and no one had demonstrated the market returns for longer-life systems. But the move paid off ERCOTThe great need for reliable capacity has become clear. Between extreme weather conditions driving record electricity demand and more recent concerns about unexpectedly strong demand growth AI When it comes to computers and manufacturing, Texas needs more power plants that can pump out hours of electricity.

As this shift unfolds, batteries will play a role that more obviously serves the transition to clean energy: shifting cheap wind and solar power generation from times of abundance to times of scarcity. We are beginning to see the necessary incentives and market signals to value this capability,” McIntyre said.

Can the ERCOT Is the storage bubble continuing to grow, or is it about to burst?

Texas' history has unfolded through a series of energy booms and busts. Meanwhile, energy storage is increasing so quickly that its predecessors are wondering whether the wings will soon melt away.

Texas jumped to about 5 gigawatts of storage capacity last year. According to federal forecasts, there will be a doubling this year. When markets double in a year, strange things can happen, and the conditions that motivated the fast followers may no longer be there by the time they finish building.

There are two schools of thought on this, said Wesley Fuller, North American sales manager for Powin Energy, a leading provider of battery storage systems to developers in Texas and elsewhere. That's what one camp says The gold rush is over, all volatility will be gone in the end '25,” he explained. The other school of thought is that as long as there is volatility, you can make money.” Fuller finds the latter compelling, which is good news for someone who sells the core equipment for battery storage projects.

“It’s a state with a growing population, growing energy needs” and staggering solar growth. It seems like the volatility is here to stay.”

Others, like Zubaty, expect a bloodbath as the Texas storage market doubles almost overnight.

“A lot of new energy storage capacity could get swamped chasing last year's results and end up failing if their thesis is to hope history repeats itself every year,” Zubaty said.

The markets for ancillary services have already evolved from ATMs to ATMs “Feast or famine” situation, he added. To survive, you have to have the courage of an anaconda and be careful to grab the big prizes when they appear, because you could starve for a few months before you get your next filling meal,” he said.

Hanley agrees that ancillary service revenues for battery factories are declining, but expects this will lead to a shift to other business models. We don’t see a cliff – we see the dynamics changing,” he said.

The diversity of how batteries generate revenue is so great that people will adapt and change the way they work,” Smith said. Maybe energy will generate more revenue, and that is good and necessary. Maybe it comes more from another fringe benefit.”

New Risk to Storage: Politics in Texas

Beyond the market risks inherent in a rapidly growing competitive environment, storage investors must now consider a range of new and uncertain political risks.

As much as 52 Gigawatts ERCOTAt the height of winter storm Uri in February, the fleet of generators was not used 2021 – Millions of Texans lost power for days and hundreds died. Since then, the state has desperately sought ways to prevent a repeat of that disaster, at times introducing politics into its famously free energy market. In 2023Texas lawmakers have put forward a flurry of proposals that used the urgency to prevent the next URI from enacting policies that would favor gas generators over renewable energy.

In the end, the most market-distorting plans failed to become law. The legislature passed a $10 Billion-dollar fund for lending state money to private gas power plant developers. In addition, state regulators were directed to introduce new products such as the Dispatchable Reliability Reserve Service and the Performance Credit Mechanism to finance the deployment of power plants in times of great need. Critics deride this as a betrayal of the basic principle of ERCOTThe design of the energy market assumes that scarcity drives up prices, enticing new investors to emerge with more capacity.

Despite these legislative pushes, some analysts say ERCOTThe free market will weather the political storm.

The political coalition fighting anti-clean energy policies includes not only the clean energy industry, but also many large electricity buyers who no longer have to pay to subsidize dirtier energy.

“Political rhetoric has not translated into policies that truly prevent this transition,” GridStor’s Burwen said. Large-scale interests are influential and have historically been averse to non-market approaches.”

The pro-renewable coalition also unites urban Democrats with many rural Republicans who value the economic development they bring to their districts, Rhodes noted.

But Zubaty warned. Because the Legislature isn't meeting this year, the next wave of post-Uri rule changes won't become apparent until next spring. This could have a chilling effect on investment in new storage, he said.

“In the recent past, any market design construct in Texas that is seen as helpful for anything other than developing more gas is third-rail political kryptonite,” he noted. As these political and market risks now become more apparent, the effective cost of capital is likely to rise and financing and building additional energy storage sites will become increasingly difficult.”

If future policies make it more difficult to build storage, Texas could lose a valuable resource to respond to the next URI. A battery drain for an hour or two obviously won't save a network struggling through a multi-day crisis. But the power plant outages during Uri wreaked havoc on grid frequency, and immediately correcting frequency is where grid batteries are most effective. Timely intervention to correct the grid frequency can prevent other power plants from automatically shutting down to avoid mechanical damage resulting in cascade problems.

Additionally, Texas needs more and more capacity, and storage is providing it quickly. This year, storage developers could equip Texas with an equivalent battery fleet 13 percent of ERCOT's record-breaking peak demand. The longer the energy duration, the more useful batteries become to support the power grid in times of crisis.

Texas' storage boom is laying the foundation for the continued rise of clean energy ERCOT. But it also makes the current system run more smoothly and efficiently. As Powins Fuller put it: A smarter, more powerful grid is good for everyone.”

Anna Harden

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