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By David Riester
Have you ever noticed that renewables and energy storage developers/owners are always either i) Frantically racing to get near-term ERCOT pipeline at any cost, or ii) “done with ERCOT” and deeply bearish... and never anything between?
Here's the cycle (you could start with any number):
1. There’s a “good” summer, or some other electricity market event
2. Recency Bias kicks in; the recent pattern is over-extrapolated to future expectations
3. Dollar signs everywhere! M&A activity balloons as virtually any project pencils with forward curves scalar shifted up
4. Interconnection queue submissions spike as M&A prices skyrocket for near-term projects with signed LGIAs
5. Folks start to notice (usually during the next winter) that the [PV/BESS] queue is comically large. The thermal generator community starts to make noise in Austin while offering condescending lectures on intermittency
6. Some lazy math* is performed by 100,000 ft types. Using the now-bloated queue data, projections for future capacity fuel a suddenly bearish view on future electricity prices.
7. Everyone is suddenly “full” on ERCOT, managing their risk amidst self-reinforcing bearish sentiment
8. M&A Activity screeches to a halt
9. Seeing that developers pump the brakes on greenfield activity
10. A “dead spot” in the queue (for expected PIS) forms, which later contributes to an overheated M&A market short on MW supply.
*Time and time again, this analysis is based on wildly inaccurate assumptions that underestimate how hard and capital-intensive it is to develop a project to PIS. The early barriers to entry are low, yes, but the journey to the finish line is no easier than in any other market. Obvious feedback loops (e.g. ballooning IX costs, the impact lowered curves have on project economics) are ignored. The assumed “conversion rate” of queued projects is way too high. We keep doing this over and over.
Right now we are at ~10, with early signs that folks are starting to wonder if they overcorrected. We’ve been here before – ~17', late 20' (the period leading up to uri).
Segue has invested and developed straight into the pessimism, because all recent predictions of sustained oversupply and untenable electricity prices have been wrong, and folks who planted seeds amidst the bearish sentiment were later glad they did.
It all goes back to all-too-common underappreciation for what it really takes to bring a power/storage plant to COD. For example, because IX deposits are refunded in ERCOT, IX costs are sometimes shrugged off; but developers have to cough up all that security, usually with cash, for two years! The owners of most projects in the queue are not flush with cash.
Like many things, one has to look at it more closely. ERCOT prognosticators tend not to do that.
