A New Evaluation Paradigm for Flexible Resources

Important policy guidance was issued late last year that could
impact the country’s investor-owned utilities, and it largely
flew under the radar.

The National Association of Regulatory Utility Commissioners
(NARUC), the organizing and policy setting association for the
country’s public utility commissions (PUCs), issued a resolution
document that sets the stage for what represents prudent assessment
of energy storage and flexible resources.

In the resolution,
NARUC weighed in on the unique attributes of energy storage,
stating that it represents a “fundamentally a different class of
resource.” Accordingly, NARUC argued, utilities should develop
“new modelling tools and new planning frameworks that allow for a
more complete evaluation of flexible resources, such as energy
storage.” 

State-of-the-art modeling requires three critical criteria to
incorporate and solve for the complexities of a renewables-focused
electricity market: 1) sub-hourly dynamics consistent with observed
and forecast real-time prices, loads and renewable production; 2)
impacts of weather on renewable generation, load, and market
prices; and 3) imperfect foresight included in unit commitment
optimization.

Inclusion of these three critical components address the
principal factors necessary to realize the value for more storage
and more flexible generation, as we explain below.

Three critera for a renewables-heavy grid

1. Stochastic sub-hourly forecasting is needed to match
real-time volatility
.

Determining the cost of a resource mix based on deterministic
scenarios leads to a sub-optimal selection process. As we convert
our resource portfolios to renewable resource options (primarily
solar and wind), power production and clearing prices will be
increasingly volatile.

We’ve seen this in the California and Texas markets, two
leaders in renewable penetration, as day-ahead (DA) and real-time
(RT) prices often clear at extremely low or even negative values.
For example, in California, as variable renewable energy
penetration (wind and solar) grew from 8 percent five years ago to
19 percent last year, DA and RT price volatility (as measured by
the standard deviation of prices across major nodes) increased by
roughly 200 percent and 50 percent, respectively.    

Stochastic approaches allow the testing of up to 100 scenarios,
as critical inputs based on historic distributions, are allowed to
move in an unconstrained manner. Resource decisions made on an
hourly basis leads to batteries and other flexible generation
resources being undervalued.    

2. Weather-induced volatility will be a critical
element.

In the past, only load was subject to weather variability. Now,
supply is too, increasing the impact of weather on our ability to
meet load obligation. Due to the variable output of renewables,
high penetration of solar and wind will lead to highly volatile net
load and market price conditions.

Weather-related impacts on generation and load, outages of
generation and transmission assets, and congestion all cause
volatility in the DA and RT markets, representing a critical risk
exposure to ratepayers and investors. Utility modeling practices
need to incorporate weather and its volatility characteristics as a
primary input to ensure physical and financial risk factors are
fully comprehended in a world where weather plays such a
significant role.

3. Perfect foresight is highly imperfect.

Most commercially-available production cost models incorporate
“perfect foresight.” Meaning: they know when load will be high
or a generation or transmission outage will take place, and
minimize costs or maximize value by running the optimal unit
commitment and dispatch.

In the real world, we have something called forecast error,
which is caused by a wide range of factors from intermittent
renewable forecasts diverging from actual production to
unanticipated outages. That is, if we could predict load and
generation supply perfectly, there would be no market volatility.
But since that will never be true, we should stop relying on models
that pretend to know exactly how load is shaped, transmission
congestion will impact power imports, and variable resources
produce energy. 

A paradigm shift

Utilities have been tasked by policymakers with transforming our
electricity grids to be highly dependent on renewable supply
resources in a few short decades, all while electrifying the
transportation sector and other components of the economy.
Achieving those extraordinary goals will require a paradigm shift
in the way we assess and operate our resource options.

We believe NARUC has correctly steered to the horizon, guiding
our PUCs of emerging prudency requirements. We would encourage PUCs
and the utility industry to take on the innovation task at hand and
put in place analytic solutions that are consistent with capturing
the complexity of these changing dynamics.

***

Mike Mendelsohn is the manager of marketing and analytics at
Ascend Analytics, with 25 years of experience in utility
regulation, wholesale electricity markets, and thought leadership
in solar finance and capital acquisition.

Dr. Gary Dorris is co-founder and president of Ascend Analytics, a
software and consulting firm with integrated approaches to physical
and financial markets. Dr. Dorris has conducted resource planning,
portfolio management, and asset valuation services for over 50
utilities across the country and led valuation analyses for three
dozen storage projects.

Source: FS – GreenTech Media
A New Evaluation Paradigm for Flexible Resources