Texas solar outlook clouded by grid, storm regulation

Texas solar activity is surging but developers must overcome transmission constraints and new market regulation that curbs revenue potential and favours storage.

Texas will continue to drive US solar growth this year, installing 6.1 GW of utility-scale capacity, around a quarter of all US installations, the Energy Information Administration (EIA) said last month. By the end of the year, Texas solar capacity will reach almost 20 GW, around four times the capacity installed before growth accelerated in 2020.

Transmission constraints and permitting delays are impacting solar developers accross the U.S. but activity in Texas is set to rise further in the coming years as projects spread out across the state, Joseph Rand, a senior associate at Berkeley Lab, told Reuters Events.

Solar capacity in the Texas ERCOT grid interconnection queue climbed 18% in 2021 to 100 GW, the latest research by Berkeley Lab shows. Some 24 GW of these projects have signed connection agreements to come online by the end of 2023 and Rand predicts up to 30 GW of solar will be installed in Texas over the next four years.

"We are seeing proposed solar projects distributed all across the state, from West Texas to the Gulf region,” Rand said.

However, some developers fear lower growth in Texas as new market regulation imposed following last year's devastating Winter Storm Uri combines with dwindling grid capacity to derail projects.

"We expect this forecast will be very difficult to reach," Kevin Smith, CEO of solar developer Lightsource bp, told Reuters Events.

"After Uri, there was hesitancy from the investment community as many were impacted by the storm and were hesitant to invest more in ERCOT," Smith said.

Meanwhile, insufficient grid investments and rising solar capacity are raising curtailment risks, he said.

Missing links

Last month, the U.S. Department of Energy (DOE) launched $20 billion of federal financing tools and planning authority changes to strengthen and expand the US power grid in its first measures enabled by President Biden’s $1 trillion Bipartisan Infrastructure Law.

The Texas power shortages following Storm Uri in February 2021 "made it clear that America’s existing energy infrastructure will not endure the continuing impacts of extreme weather events spurred by climate change,” the DOE noted.

The winter storm caused rolling blackouts across the ERCOT grid and sent wholesale prices rocketing. The shortages highlighted the issue of interstate transmission as well as local grid resilience. Neighbouring states had some power capacity available during the crisis but it could not  be delivered into Texas.

                 US utility-scale solar projects online by end of 2020

                                                               (Click image to enlarge)

Source: Berkeley Lab

Transmission investment is most needed in the West of Texas where wind and solar resources are highest but other areas are also showing "signs of more constraints,” Smith said.

Lightsource bp brought online its 260 MW Impact, 163 MW Elm Branch and 153 MW Briar Creek projects ERCOT-North in 2021 and is developing others.

"This [lack of grid capacity] is already stopping projects," he said. "There is considerable curtailment of projects delivering energy to major load pockets in the state due to insufficient investment in new transmission, which is inhibiting the development of new renewable projects in that region."

Invenergy selected a site in north-eastern Texas for its 1.3 GW Samson Solar plant, the largest solar project in the US. Samson is estimated to cost $1.6 billion and Invenergy completed construction financing in June 2021 for a 250 MW second phase of the project.

Grid interconnection costs and delays are the largest barriers to solar development nationwide, according to a survey of 44 solar developers by pricing platform LevelTen Energy. The next greatest issues for developers are permitting challenges, local opposition and supply chain challenges, the survey said.

Storm measures

Smith also fears that Texas legislators are introducing policies that favour thermal power plants following Storm Uri. Extreme low temperatures took offline over 30 GW of gas, coal, nuclear and wind generation. The largest drop came from gas-fired plants, which supply almost half of Texas' power annually.

“Despite facts to the contrary, state legislators and the governor want to target the renewable energy as a source of the problem,” Smith said.

ERCOT is considering providing additional compensation for plants that have 'firm fuel' and are dispatchable, as well as new ancillary services that would benefit storage and gas-fired plants, he said.

In addition, the Public Utility Commission of Texas cut the system-wide cap on prices from $9,000/MWh to $5,000/MWh, slicing potential revenues during tight supply margins.

"Scarcity pricing is important in ERCOT given there is no capacity market,” Smith said.

Wholesale risks

Solar developers in Texas are building larger projects to drive down costs but some investors are concerned about recent volatility in wholesale power prices alongside the increasing risk of curtailments, Smith said.

                        US monthly average power prices by market

                                                              (Click image to enlarge)

Source: U.S. Energy Information Administration (EIA). Data: S&P Global Market Intelligence.

Developers typically secure long-term power purchase agreements (PPAs) of around 10 years, while solar plants are expected to operate for over 30 years, leaving much of the plant's offtake exposed to price swings.

Solar PPA prices in the Texas ERCOT market held firm at $28.3/MWh last quarter as competition outweighed global inflation pressures, LevelTen Energy said last month. Nationwide, average solar prices rose 5.7% to $34.3/MWh.

Wholesale power prices in Texas rise sharply during the summer, when hot weather drives up demand from cooling appliances. Going forward, increasing renewable energy capacity will soften these price spikes, as shown in California and Europe.

Storage gains

Greater deployment of energy storage in Texas would help solar developers install more capacity.

As solar capacity increases, many developers are including storage in their projects to dispatch during high value periods.

A growing number of Texas solar projects are including storage but the state lies far behind other markets like California, where solar penetration is greater. Some 26% of solar projects in the ERCOT interconnection queue were coupled with storage at the end of 2021, the latest research from Berkeley Lab shows. This is five percentage points higher than the previous year but far lower than the 89% recorded in California at the end of 2020.

The regulatory response to the Texas winter storm will encourage storage build, Heath Herje, senior development director at Enel Green Power, said. Enel plans to install 600 MW of storage capacity paired with solar and wind in Texas by early 2023.

"We should see an even greater push for storage," Herje said.

"Texas leaders have been clear that they want more “dispatchable” generation and the PUCT has indicated that they would like ERCOT to accelerate deployment of [ancillary] Contingency Reserve Services, which will create additional opportunities for battery storage growth."

Reporting by Neil Ford

Editing by Robin Sayles