Analysis of CAISO and ERCOT reveals storage growth amid stark contrasts

A new white paper from U.K.-based energy services provider GridBeyond shows how regulatory policies and specific market drivers dramatically affect utility-scale battery energy storage system (BESS) availability and economics. The report focuses on the California Independent System Operator (CAISO) and the Electric Reliability Council of Texas (ERCOT) service areas, which the authors said represent the bulk of the current U.S. energy storage market, with about 80% of new battery installations going into these regions in recent years.

According to Alden Phinney, a regional director of GridBeyond and a co-author of the report, an interesting aspect of CAISO and ERCOT is that, despite having completely different structured electrical markets, both are growth regions with great potential for energy providers with front-of-the-meter (FTM) battery storage systems.

CAISO requires grid-energy providers to sign resource adequacy contracts that establish a criteria for grid stability, Phinney noted, which are very attractive to developers because they offer fixed, predictable revenue.

“So, between the contracted revenue from CAISO and federal level incentives, you can pay for 70% to 80% of the project,” he said. “That’s a very attractive proposition. There’s not a ton of risk in that, at least from an energy market revenue perspective. I think that’s been driving a lot of the the growth in CAISO.”

This relates to what Phinney described as a permissive structure for energy storage supporting intermittency (mostly solar but some wind), which otherwise might drive the energy price higher. Thus, by providing grid stability, BESS also brings some order to the energy market.

ERCOT, on the other hand, is growing without many of those governing factors, Phinney said. In this case, the driver is first and foremost solar and wind’s widespread availability throughout the service area that makes renewable projects attractive. Moreover, the favorable permitting and overall business climate in Texas makes building a solar farm or a storage project a straightforward process.

“If you want to put a natural-gas plant next to a preschool, that’s also okay,” he said. “So, you know, there’s maybe two sides to that coin. But from a development perspective, it definitely does make things easier than in California, where we’ve seen solar projects get killed in the second environmental permitting phase. In Texas, you just don’t have that.”

The GridBeyond report said the relatively open market for developers, combined with high solar and wind resources has resulted in wide and and volatile swings in energy prices. For example, according to the report ERCOT withdrew some procured capacity from the real-time energy market in 2003 to make it available for grid reliability purposes. “This reallocation caused operational reserve shortages, triggering high real-time price spikes in summer 2023, with intervals reaching as high as $5,000 per MWh,” the report said.

The report said ERCOT subsequently has implemented more flexible and responsive grid operation mechanisms, reducing the need for high-priced emergency resources and thereby lowering real-time energy prices.

Ultimately, to make a profit, energy providers need to have a comprehensive understanding of the regulations in the service areas in which they operate.

BESS operators have the ability to store energy during periods of low prices and discharge during peak-price periods. Analysis of local conditions helps inform optimized bid strategies that enable participants to adjust their storage capabilities to match market conditions and mitigate risks from price fluctuations. Energy service providers such as GridBeyond support BESS operators with teams of analysts and proprietary software.

According to Phinney, renewable energy and photovoltaic solar in particular is are able to produce so much power during peak resource hours to drive down energy prices to effectively negative rates. Conversely, prices precipitously climb during high-demand and low-productivity periods. This phenomenon, described as the “duck curve” has been common in California for a decade or more. The duck curve is occurring in Texas, which is emerging as the top state for solar energy production. Bid optimization helps energy providers manage rapidly evolving market conditions, which are increasingly weather dependent because of the growing percentage of intermittent generating resources.

The advent of BESS as an essential part of the energy mix is coming at a time when demand is increasing. Phinney said this necessarily acts as an upward driver on price. After decades of a relatively stabile electricity demand, the U.S. is experiencing sustained load growth. AI and crypto-mining data centers are tremendous drivers, particularly in the ERCOT region. In addition, electric transportation and other sectors are experiencing this effect.

“California has much more of an EV impact than ERCOT, but ERCOT has electric baseboard heat, which is more common in the south and the southeast,” Phinney said. “Overall, this is where we see batteries as a really good complement to solar at just the right time. There’s such a predictability with solar irradiance, hail storms aside,” he said. “But generally, if you could have a battery you could cycle twice a day, which is a bit of a hard ask on a lot of the manufacturers right now, you [could] manage with solar and wind and some baseline. Just rinse and repeat.”

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