Industry Analysis
Feb 20, 2023

Originating in ERCOT Has Never Been More Complex

ERCOT today barely resembles the market of just a few years ago. A succession of shocks has made prices more volatile, has introduced a wave of new entrants to the market, and has altered the way market participants transact. Originators in ERCOT are adjusting to this new reality. The ones who manage to adjust quickly stand to win big.

Price volatility

Only a few years ago, wholesale power prices in ERCOT were relatively stable. The cost of natural gas hovered predictably around $2-3/MMbtu (see figure 1). Key input costs – from panels to wages – were either decreasing or constant. Inflation wasn’t an issue. In this macro-environment, originators could hold their PPA prices for months. And in many cases, those prices were materially below forward power price curves.  

Figure 1. Source: Macrotrends

Today, power prices are volatile. Winter storm Uri made the industry risk averse and, more recently, has spawned significant market reforms in ERCOT. Due in part to supply shocks, the war in Ukraine, and an uncertain global economy, project costs are now difficult to forecast and sometimes change so much that PPAs need to be renegotiated after they are executed. Given these factors, developers are seeking higher offtake prices. On the demand side, a wave of corporate buyers, led by big tech firms like Google, Facebook and Microsoft, are driving prices higher as well.

The result is that prices in today’s market not only change frequently but have also climbed to new heights. Originators can no longer hold a low price for months; today, they are lucky if they can stand by any price for more than a few weeks.

New entrants

As prices are changing, so too are the players in the market. Whereas a few years back, originators could rely exclusively on their personal rolodexes to source deals, now an influx of new entrants is creating both uncertainty and opportunity.

Corporate interest in procuring wholesale renewables has surged in response to the ascendant ESG movement (see figure 2). These corporate buyers have brought with them an army of brokers, consultants, and other intermediaries to help them transact. Simultaneously, more and more firms are entering the development business, spurred on by the promise of increased demand and economic incentives, including those in the recently enacted Inflation Reduction Act. While these new entrants bring more potential for deal volume, they also introduce complexity for industry veterans, who once relied on a small and trusted network to engage the market.

Figure 2. Source: CEBA

Greater use of technology

New ways of engaging are adding complexity too. Prior to the pandemic, most origination happened in person. Originators flew across the country to network at conferences and even hand deliver term sheets to one another. When originators used technology at all, they typically needed only a phone, email, Excel, and maybe a CRM like Salesforce.

The pandemic and the subsequent influx of new players to the market has forced originators to adopt new workflows. Now, substantive networking and negotiations happen over Zoom or Teams in addition to in-person meetings. Millennials, inspired by the mission of decarbonization, are flocking to the industry, bringing with them a digital-first approach to origination. Corporate buyers and their consultants are launching new platforms on which developers are expected to submit offers. With so many ways to engage, origination has gotten more segmented and difficult to track.

Adjusting to the times

What is preventing originators from adjusting to this new environment?

First, originators lack a way to monitor fast-moving prices. Most originators continue to rely on their existing networks to source market intel. While this is a trusted source, it is not an unlimited one. Many originators feel they are burdening their contacts with constant inquiries as the market moves, leading to the unenviable choice between risking relationships or going without important market intel. Uncertainty regarding the implementation of policy and market reforms only exacerbates the problem.

Second, originators are trying to leverage the increasing demand from corporates but often struggle to navigate through the web of platforms and intermediaries that stand in the way. These intermediaries are rarely the final decisionmakers, rending negotiations highly uncertain.

And third, originators are growing increasingly frustrated with RFPs, which often entail an irksome back and forth of documents and spreadsheets, only to hear nothing back from the counterparty. In today’s environment, RFPs often move too slowly. By the time the RFP host is ready to make a decision, the market may have moved and the prices are no longer valid anyway.

These deal making channels are the industry standard and continue to produce results. But just as the market has evolved, so too will the channels. Originators need greater price transparency, faster ways to access the market, and an easier method to vet counterparties.

In today’s ERCOT, whoever has these advantages will win.

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