February’s Texas icing event led to over $4 billion of financial loss for wind farms, according to ERCOT Market Cold Weather Failure 10-19 February 2021: Wind Energy Financial Losses and Corrective Actions, a recent study from ArcVera Renewables.
The study points to shortcomings in the hedged financial structures, with asymmetric price risk leading to significant losses for wind farm operators and gains for counterparties.
The study set out to quantify the lost energy production and calculate the financial impact of the rare Texas winter weather event. It is focused on wind farm outages reported by the Electric Reliability Council of Texas (ERCOT) grid operator for the period of Feb. 14-19, when the grid experienced extensive wind farm downtime, lost energy production and high hub-settled electricity prices.
The icy weather conditions and an unprecedented period of below-freezing temperatures caused extensive wind farm downtime. The study analyzes the outage periods documented by ERCOT for 191 wind farm units, with a nominal capacity of 21,888 MW, of which 57% (12,495 MW) is subject to a hedged financial structure. Lost energy production from wind farms, aggregating individual wind farm results, was 629,700 MWh with a financial impact of this lost production, whether the financial loss to the owner or gain by others, estimated at $4.18 billion. This represents an average financial impact on any project of $44.4 million. For hedged projects, the financial impact of this lost proxy production is even greater, with an average financial impact of $45.4 million.
“With more installed wind capacity than any other state in the U.S. and its projections for renewable energy capacity to dominate ERCOT generating capacity within a decade, we believe that ERCOT must now more stringently apply atmospheric science-based risk assessment, particularly concerning extreme weather operational scenarios,” says Dr. Gregory S. Poulos, CEO of ArcVera Renewables and author of the report. “Renewable energy production is governed by the weather. Peak electricity demand scenarios are also governed by weather, such as high- and low-temperature events. As such, there is a clear need for restructuring electricity system resilience to account for weather-driven production and demand, concomitant with the pace of the transition to renewable energy-dominated production.”
The study makes three assessments:
- Hedged financial structures in ERCOT need to properly reflect realistic meteorological conditions, extreme weather stress tests, and, therefore, more realistic production assurances
- Hedged products need to recalibrate their strike prices to reflect the asymmetric risks presented by the availability of different resources during extreme electricity demand, ERCOT minimum and maximum prices, and market interventions by regulators
- Wind farm owners and their hedge counterparties need to partner with turbine OEMs to develop reliable, cost-effective weatherization technologies to reduce the asymmetric risks from future icing events.
Having worked on ERCOT measurements and detailed wind energy resource assessment for more than 20 years, ArcVera Renewables, an international provider of consulting and technical services for renewable energy projects, has evaluated hundreds of wind farms in ERCOT development and amassed in-depth knowledge of wind behavior across ERCOT’s vast expanse of wind farms. Combined with decades of atmospheric science and engineering experience, the company has devised a method to determine materially accurate estimates of net energy production at the wind farms that experienced outages during the event.
The summary of study as well as the full report can be downloaded on ArcVera Renewables website, here.