By Gian Schelling, Global Business Development Manager, Renewables, Hitachi Energy

When it comes to aggregating, trading, and selling renewable energy in North America, a myriad of factors must be considered, including new challenges that develop as the energy landscape evolves. Renewable energy market participants (including aggregators, independent power producers (IPPs), traders, and utilities) must be mindful of how emerging trends affect three main risk categories – market, credit, and operational – so they can optimize their investment strategies accordingly. The three main risk categories include:

1. Market risk: Variation of future earnings due to changing market conditions

More renewable energy in the system

The United States increased its share of variable renewable energy sources, mainly wind and solar, by 70 percent between 2010 and 2020 (EIA, 2021). With more renewables in a power system, like a specific TSO/RTO bidding zone, more balancing will be required to operate reliably.

Consequently, expected revenues are increasing from balancing services, such as those provided by battery energy storage solutions (BESS), conventional power systems (with rotating masses), or flexible loads, including electrolysis plants, especially those based on flexible proton exchange membrane (PEM) technology.

However, the values of such balancing services fluctuate, making emerging revenue streams more complex to forecast, bid, and settle. This is particularly true for IPPs and utilities active across multiple states and regulatory regimes. Software and advanced specialist algorithms are required to effectively participate in and benefit from ancillary services markets.

More BESS deployments

BESS is a powerful way to balance renewables. After all, BESS installations ‘flatten the Californian duck curve.’ Growth in BESS has been rapid in the U.S., increasing 1700+ percent from 288 MW p.a. (mainly in California) in 2017 to 4,798 MW p.a. in 2022 (Wood MacKenzie, 2023).

While originally deployed to de-risk solar PV asset investments through co-location and stabilization of power output, operators have deployed more than 400 BESS projects in the U.S. in various applications. Those installations face significant exposure to market risks, such as fluctuations in renewable energy levels, electricity prices, and ancillary services values.

More extreme weather

More wind typically means more wind power, reducing prices on electricity markets. Counterintuitively, storms typically reduce wind energy production. Modern wind turbine generators (WTGs) start producing power at 2 m/s of wind speed and shut down into protection mode at 20 to 25 m/s wind speeds (well below the level of large storms like cyclones and hurricanes).

Wind turbines freeze if things get too frosty, like in Texas in 2022. Most North American installations do not have ice detection or defrosting systems, which can reduce available renewable electricity to black-out levels across entire regions.

For solar PV systems on sunny days, cooler temperatures often mean performance increases of 5 to 10 percent. However, if things get too hot, PV power output drops while demand surges for cooling. This is what happened recently in Texas, where electricity prices went up 800 percent in August 2023 during a heat wave (Bloomberg, 2023).

Droughts can create problems on the hydropower side. Canada’s capacity factor (yield from installed hydropower plants) decreased from 63 percent in 1991 to 53 percent in 2023 (IEA, 2023).

In summary, weather swings lead to higher-than-expected fluctuations in both intraday and seasonal energy prices.

Shifting regulations

In addition to existing risks, market operators across the U.S. regularly update and recast rules and regulations. For example, PJM’s capacity market and adequacy concerns in the eastern interconnection are leading to the introduction of new rules. We’ll also see adjustments in ISO New England and ERCOT. In short, renewable energy market participants are exposed to ongoing regulatory uncertainty, impacting market risks.

2. Credit risk: Default by a counterpart

Interest rates

North America recently saw one of the most dramatic annual increases in interest rates; the Federal Funds Rates in the U.S. increased 10 to 19 times from 0.25 to 0.5 percent in March 2022 to 4.75 to 5.0 percent in March 2023 (Forbes, 2023).

Renewable energy offtakers exposed to high shares of debt have been confronted with dramatically increased financing costs. Some debt-exposed players have passed their risks to consumers by increasing electricity prices within regulatory limits.

Others, like Puerto Rico’s utility in 2023, have gone bankrupt (Bloomberg, 2023). Many aggregators, traders, utilities, and other offtakers have struggled to pay their bills on time, increasing credit risks and debt ratios.

3. Operational risk: Possible errors in settling transactions or instructing payments

Increasing complexity

While renewables IPPs and utilities enjoyed stable feed-in-tariffs (FiTs) and highly attractive Investment Tax Credits (ITCs), such incentives either are no longer available or have decreased substantially.

As a result, more renewable energy producers today participate in electricity wholesale markets. Sometimes, they even take their complete asset base ‘fully merchant,’ relying entirely on wholesale market revenues rather than power purchase agreements (PPAs) or long-gone FiTs.

Being fully merchant requires sophisticated participation processes that comply with rules, while increasing revenues and decreasing wholesale market participation costs. To avoid the risk of human error in these processes, many IPPs rely on automation to increase wholesale market participation in the face of increasingly complex rules and greater risks.

Human error

Overall, human involvement increases the risk of faulty settlements or payment instructions. The more activities handled by people – in commercial daily operations, energy sales, back- and middle-offices of energy traders, and billing and settlement departments — the higher the risks become.

Hitachi’s Energy Trading and Risk Management (ETRM) Software mitigates risk

Hitachi Energy offers complete ETRMs to more specialized software solutions for renewable energy market participants and even industrial energy consumers, including:

• TRMTracker (Trading and Risk Management): a highly configurable, easily integrated, and flexible ETRM software suite.
• RiskTracker: advanced risk-management software measuring and managing price fluctuations and offering customized reporting and analytics.
• CreditTracker: Centralized counterparty and credit risk management platform.
• SettlementTracker: Complex energy settlement and invoicing solution that manages one or more bilateral project power purchase agreements (PPAs).
• Forecaster: Forecasting tool tracking price, load, and generation, offering data-driven insights for better decision-making.

You can learn more at Market Operations | Hitachi Energy.

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