Study points to shortcomings in the hedged financial structures, with asymmetric price risk leading to significant losses for wind farm operators and gains for counterparties. Significant implications for future wind farms and ERCOT planning are described in the study.
Golden, Colorado, April 26, 2021
ArcVera Renewables, a leading international provider of consulting and technical services for wind, solar, and storage projects, today publishes its report “ERCOT Market Cold Weather Failure 10-19 February 2021: Wind Energy Financial Losses and Corrective Actions”.
The study set out to quantify the lost energy production and calculate the financial impact of the rare Texas winter weather event. It is focused on wind farm outages reported by the Electric Reliability Council of Texas (ERCOT) grid operator for the period 14-19 February 2021, when the grid experienced extensive wind farm downtime, lost energy production, and high hub-settled electricity prices. Three repricing scenarios are evaluated using market pricing before the imposition of $9000/MWh prices by ERCOT.
“Given that the market demand was decreased by ERCOT with blackouts so that production balanced that reduced demand with market prices high but not near the $9000/MWh imposed value, we consider that the $9000/MWh ERCOT mandate could have imposed large, and quite possibly artificial, financial impacts (windfalls and losses) on wind energy power plant operators and investors”, said Dr. Gregory S. Poulos, ArcVera Renewables CEO, Principal Atmospheric Scientist, and author of the report.
“With more installed wind capacity than any other state in the United States and its projections for renewable energy capacity to dominate ERCOT generating capacity within a decade, we believe that ERCOT must now more stringently apply atmospheric science-based risk assessment, particularly concerning extreme weather operational scenarios. Renewable energy production is governed by the weather. Peak electricity demand scenarios are also governed by weather, such as high and low-temperature events. As such, there is a clear need for restructuring electricity system resilience to account for weather-driven production and demand, concomitant with the pace of the transition to renewable energy-dominated production,” explained Dr. Poulos.
The icy weather conditions and an unprecedented period of below-freezing temperatures caused extensive wind farm downtime. The study analyzes the outage periods documented by ERCOT for 191 wind farm units, with a nominal capacity of 21,888 MW, of which 57% (12,495 MW) is subject to a hedged financial structure.
The findings of the study show the lost energy production from wind farms, aggregating individual wind farm results, was 629,700 MWh with a financial impact of this lost production, whether the financial loss to the owner or gain by others, estimated at $4.18B. This represents an average financial impact on any project of $44.4M. For hedged projects, the financial impact of this lost proxy production is even greater, with an average financial impact of $45.4M.
The study makes three assessments:
- Hedged financial structures in ERCOT need to properly reflect realistic meteorological conditions, extreme weather stress tests, and, therefore, more realistic production assurances.
- Hedged products need to recalibrate their strike prices to reflect the asymmetric risks presented by the availability of different resources during extreme electricity demand, ERCOT minimum and maximum prices, and market interventions by regulators.
- Wind farm owners and their hedge counterparties need to partner with turbine OEMs to develop reliable, cost-effective weatherization technologies to reduce the asymmetric risks from future icing events.
“Our observations, taken together, clearly describe a condition where, with greater attention to the atmospheric science details when assessing the risks of weather-driven electricity production and demand, an adequately resilient and interconnected ERCOT electricity system can be created. ERCOT planning should consider that cold-weather events worse than the recent February 10-19, 2021 event are possible.” Dr. Poulos concluded.
Having worked on ERCOT measurements and detailed wind energy resource assessment for more than 20 years, ArcVera has evaluated hundreds of wind farms in ERCOT development and amassed in-depth knowledge of wind behavior across ERCOT’s vast expanse of wind farms. Combined with decades of atmospheric science and engineering experience, ArcVera has devised a method to determine materially accurate estimates of net energy production at the wind farms that experienced outages during the event.
