Teri Viswanath: Welcome to Power Plays, a CoBank Knowledge Exchange podcast series, an audio program where we connect you with top energy and environmental innovators who share their insights, experience, and market observations. For this month's podcast, the race is on to build the biggest batteries in Texas. We're going to explore battery investment from a merchant perspective. I'm Teri Viswanath, the economist covering power, energy, and water for CoBank. I'm joined by my cohost, Tamra Reynolds, CoBank's regional vice president of electric distribution. Hey, Tamra.
Tamra Reynolds: Hi, Teri. For today's interview, we caught up with Steve Vavrik, managing partner and CEO of Broad Reach Power, back in early February, just weeks before the polar vortex blast from Canada brought the season's cold weather to the central US. A winter storm last month left millions without power in Texas.
Teri: That's right. EnCap pointed the extreme cold is causing the electricity supply shortfall for the state noting limited natural gas supplies, frozen plant instrumentation lines, and frozen turbans, highlighting that nearly 30,000 megawatts of thermal generation was offline due to the winter storm, and about 16,000 megawatts of renewables.
Tamra: This epic weather event makes the discussion we had with Steve all the more relevant. Storage developers had largely steered clear the ERCOT market until recently choosing to build big batteries in California and other places that offer long-term offtake agreements with utilities. Yet, Texas offers notable benefits, the wind industry has long appreciated, which are relatively easy land acquisition and permitting and a competitive market the batteries can enter without waiting for major policy changes to occur.
Teri: All things considered, there might be more reasons to build battery storage in Texas, Tamra. Broad Reach Power is making significant storage investments in the state, and they're definitely worth watching. Here's our conversation with Steve. Hey, Steve.
Steve Vavrik: Hi, Teri. Hi, Tamra. Thanks for having me on your podcast.
Teri: Oh, absolutely. Now, what really motivated us to talk to you, there's been a number of really interesting articles that you've been featured in, and you said some really interesting things. One thing you mentioned is that if the country if the US is really intended bringing lower cost, lower emission generation online, there's an absolute need for storage development. What's more, you feel like your organization has identified the markets where prices reflect a pressing need for storage? Can you help me understand that?
Steve: Oh, sure. I'd be happy. For power grid, and let's take Texas, for example, ERCOT is the ISO, the independent system operator. They are of course the orchestra conductor. They are making sure all the parts are playing at the right time so that the customer is really seamless. You can flip on those switches or your commercial industrial customer, you can run your machines when you're manufacturing whatever you want when you want it. It is there reliably at the price you've agreed to with your supplier. Behind the scenes, there's all this elaborate matching, and it's done through auctions and dispatch.
Well, what's changed, again, for the last few years, is with the emergence of more and more wind and solar. You've added an exogenous variable and that's called nature. You've got generators that are generating not so much when they have the fuel and the equipment, and it's ready to fire, but now it's when it's windy or sunny. If you add that to the orchestra, you add this kind of randomness that is good overall, it's causing cheaper power and cleaner power. When you've added this other element, it's creating a greater complexity to match this real-time supply and demand.
Tamra: Steve, you had mentioned ERCOT, and that's of particular interest to me because my team covers the ERCOT market in addition to the south and southwest parts of the country. It sounds like a large share of what you guys are doing in terms of investment appears to be in Texas, right?
Steve: Definitely, and that's not by accident. We like Texas for a number of reasons.
Tamra: Well, I do too. I'm a native. I sympathize with that. I'm curious to hear your insights, and I think that's where you were going on why storage development in ERCOT really makes sense.
Steve: I'd be happy to, and this is a large part of our investment thesis. Some people may not be aware, but recently Texas became the largest wind power state in all the US. Interestingly, for policy wonks out there, it wasn't due to really a policy drive, it was due to economics because there's some parts of Texas and if you ever been to Lubbock or Amarillo, you know it. It is really windy. You can't find a straight vertical tree and Amarillo if you have to--
Teri: That's true.
Steve: It is windy, and they've gotten used to that. Now, based on the cheaper and better wind turbine technology, we're able to produce probably the cheapest electric power at the bus park in the entire nation in the Panhandle of Texas. A lot of the oil and gas history of Texas, you found this tremendous natural resource. The challenge now is getting it to the customer. How do you get it to Dallas and Austin and San Antonio and the Valley, and the rest of Texas and certainly Houston, where the industrial loads, the residential loads are? That's been the challenge.
Again, Teri and I worked together a number of years ago at Dynegy, based in Houston. That's a daily task, is matching supply and demand across this electric grid that spans are really big state, and frankly, was designed based on old technology. It was designed to optimize large central station thermal power plants, that frankly, were pretty forgiving when you had to ramp up or ramp down to a bit. They were so big and so singular that you created this large network to get power from the resource to the customer. Of course, you had to cite it right because it was emitting, and you also had needed water cooling. You had to find a large lake or reservoir to cool the machines.
Now, with wind and solar, you have different constraints. It's got to be windy or sunny for a large part of the day but you're going to have to rebuild the distribution system to match that. There's partly that, is the natural resource advantage of Texas. Again, as solar and wind technology continue and improve that trend for more and more resources should continue.
The other thing we like about Texas is the market structure. Especially in the ERCOT region, it is designed, and this happened 20 years ago. They deregulated in the sense that they took apart the utility ownership and restricted it just to really the wireless, the transmission, and distribution.
Frankly, just even that last mile, they deregulated the ownership of generation, in fact, forced the utilities to sell that off. What that led to is really a boom in innovation, especially with private investment in generation. Now, Texas has one of the most robust and diversified generation stacks in the entire country. That was to a large part due to the market structure changes that happened 20 years ago. For us, we saw these fundamental trends that were creating an increased demand for storage.
Teri: Steve, you said something really interesting, though, I think, coming back to this idea, you said in Texas that maybe the market structure has engendered this build-out; we've now got this really diverse portfolio of generation. You said something really important, rising transmission and distribution costs, figuring out where we need, because we have this big shift coming west to east, certainly with a wind, but you have these nuanced markets in Texas where centralized generation and the costs of rising transmission distribution it seems like a layup. This cost issue that we have with TND where storage in the right location is just you're getting the right price signals it seems to make sense. Am I reading that correctly?
Steve: I think you're spot on, Teri. It's always a balance. This is a complex system with lots of stakeholders and a lot of things to optimize. The trends here on generation are pretty clear. It's getting cleaner, and cheaper, and again, largely due to technology. It is all thanks a lot to the electric vehicle industry for batteries in that sense, that the ability to generate and then store cheap and clean in terms of emission-free power and energy and the cost of that keeps going down. The challenge is redesigning and rebuilding this distribution system.
Teri: There's a great podcast I listened that you were on in December, you discussed how you wanted to emulate that IPP merchant approach towards storage rather than in a one-off. ? Tell me about that. There's an important distinction I want to make sure I don't miss.
Steve: We set up our shop like an IPP. What's different about that is, compared to, I would say other solar and wind developers over the last few decades, is that at the end we're building something that we want to own and operate. We're eating our own cooking here in one sense. The reason we did that is, we see a lot of the value is knowing how to use an incredibly flexible asset, which is the battery, in the daily markets, in these daily auctions that go back and forth. In addition, from an investment perspective, we think the opportunities are growing.
In some sense, why sell the asset when we think opportunities are growing. To put a finer point on that, the interesting thing about a battery compared to a gas peaker is it's a very flexible generator. In fact, the ramp rate is so much faster than a gas peaker. We can ramp to full capacity in under a second. We're also controllable load. The feature here, I think that most power planners and as well as utilities and co-ops have worried about is will there be enough energy for that hot August day?
We've all seen him in Texas and Houston when it is hot out there and humid and you can't find relief. Everyone's got the air conditioner. We've always been worried about that peak day. Now we're seeing, and in a fact we're going through it right now this week in Texas, there are days when there's too much energy in the system. When that Panhandle wind is blowing and the weather is pretty mild in Texas, so you don't have the heating or the cooling load, but you've got a lot of energy. What do you do with that excess energy? The last thing you want to do is turn off the generator. That is zero marginal costs energy. How do you store it?
The utility now is facing co-ops in many ways. It's facing this dilemma of is there enough generation resource, but what do I do on the times when I've bought too much? That we see as the opportunity for battery storage in particular. Not only can we ramp up, so the reg up service, we can reg down. We think this is a growing opportunity for controllable load. The great thing about our assets is we can do both. Put that all together. We'd like to hang on to this and really learn to get this instrument finely tuned and really singing, and then we'll see where that goes.
Tamra: I think we have a better idea of why Broad Reach is actively involved in the Texas market. In the second part of our discussion, Steve talked with us on what other policy developments could further encourage investment.
Teri: Tamra, I found that part of the discussion really helpful. Steve makes this really important point that there are enormous number of clean energy projects that actually never get funded or never commissioned because of problems with accessing these markets. That was really illuminating to me.
Tamra: Yes, I'd agree. I think that's not a story that's talked about a lot in the marketplace. Let's go back to that conversation.
Steve: I spent the last 15 years developing wind and solar power plants. I don't know how many times we've had great projects with great landowners and with utilities or corporate customers that wanted the energy and the project didn't happen because there was a lack of tax equity capacity. This gets into some of the wonky nuances of policy. Without direct pay, you have to find a taxpayer who has an immediate need for tax credits and is willing to pay for that with cash in terms of an investment in your project. Recently, and especially during a recession or at least a flat-lining of the economy like we're seeing here, there are more projects than tax equity investors.
Even though you've set up a credit which should lead to the growth of whatever you're crediting, it created this constraint to the structure that there were just not enough tax equity investors with tax equity capital ready to invest [crosstalk] Yes, exactly right. What happened was that the tax equity field itself when there are lots of customers looking for your product, you tend to constrain it. I think that's what we saw during these times especially this when the economy isn't creating the taxable income when companies are looking and waiting to see what the next few years hold.
To put it simply over the last few years, I would say, I think the numbers are 60% to 70% of the tax equity investments in renewable sector have been done by three or four banks, basically. This is one of those unintended consequences. We think certainly tax credit is a tried-and-true subsidy or a way to promote something, but the devil's in the details. This is where direct pay comes in. Direct pay would relieve that constraint. You'd be able to grow the projects which is ultimately what you're trying to, and remember the more projects, especially wind and solar that are on the grid, the cleaner and cheaper the energy is for the consumer. It really flows back to the consumer.
Now, when it comes to storage, standalone storage right now is not eligible for the investment tax credit. We are the ones who when we talk to policymakers we're saying, "Be careful with the investment tax credit. If you don't have direct pay paired with it, you may actually be slowing the very industry that you're trying to promote." In fact, what we'd rather see is policymakers focus on the demand side of it.
If you're trying to get people to use more electricity, the cleaner, and cheaper, and more reliable electricity, then promote that. You can promote that through rebates for electrification and your fleet changeovers or commercial-industrial sector if you want to transition from a fossil fuel thermal to electric thermal. Create a re-rebate there. Ultimately probably the greatest policy tool would be a carbon price, but I think that is a really complex policy challenge, but we'll see what the new administration Congress can do.
Tamra: Steve, last summer you gave an interesting interview to E&E News where you argued that ISO's and their dispatch rules and their interconnection rules shouldn't create barriers to entry for new technology. We've since seen FERC take some action there, but do you think that's enough or what else could be done?
Steve: There's always more to do. Again, that's due to the pace of this technology change. FERC has had new commissioners now and we have a new chairman, Chairman Glick. We're looking forward to working with other of our industry peers and talk to them about-- Again, really from a high-level, the principle is an old principle that no one can argue with free and open markets.
As we've seen, it's easy to say hard to do, and certainly hard to live, especially when folks have invested in the old way and there's a stranded asset, there's a change of rules and that needs to be addressed. We look for FERC leadership in providing at least the clarity so that the state ISO's can say, "Okay, we need to now comply with the FERC order." Again, simple things like, "Let's review the dispatcher rules or let's review these studies or how can we do our studies faster is the way to streamline." Hear a little anecdote.
I started my career during traditional power plants and a good combined cycle plant may be from, I would say from permit to COD when you're actually operating maybe two, three years. Now it's a big investment, probably 400 to 800 megawatts, maybe even bigger but you got lots of systems. Maybe two years is even fast, maybe more like three to four. We're building a 100-megawatt battery in Texas right now.
From notice to proceed to COD is going to be probably nine months and that's allowing for some delay. If you've got resources that can be built that quickly, then a two-year study period really doesn't seem to match. That's just another example is, can we take another look? This is where the top-down leadership from FERC can allow the ISO's and the PUCs to enable the reforms that ultimately will help the consumer and the member.
Teri: That's really helpful. It's great to hear that some guidance on where we may go from here. What do you think? Where are the costs headed?
Steve: Well, one answer to that. Absolutely it will compete no matter when. When does the curve cross the axis? Here's what I know, Teri. Again, I've learned enough to not to predict a date. I was wrong about wind LCOEs or wind capacity factors. I've been involved with lots of wind firms and I was amazed when it got a 1-megawatt machine, then a 1.5-megawatt machine.
Now we're seeing what? 7-megawatt wind turbines and 9-megawatt wind turbines. These things that no one dreamed of even us as practitioners. Once the technology curve surprised me on wind. Solar, same thing. I remember when people thought a dollar a watt total install cost was a dream because we were at over 250 a watt. That wasn't that long ago.
The fact that we're now in these areas routinely and still seeing innovation is a lesson for me like, "Listen, I'm really bad at predicting when. I just know it's going to be faster than you think." In addition, for storage too, keep in mind a lot of it's driven by electric vehicle industry. When you didn't have that in wind and solar, you didn't have this other big--
Teri: Precursor.
Steve: Right. Pushing the billions and trillions of investment on the supply side. Add that to the mix. This is where I think everyone's predictions on where the cost and performance of battery cells are going are wrong. It's going to surprise us all. Take that as given, how do we prepare for that? We prepare for that by taking a look at the grid, being ambitious with our plans, and thinking, okay, if we've got really cheap powerful batteries, where's a good place to do it? Let's start putting in the regulatory changes that need to happen now to anticipate that. Maybe we're off by a year or a few years, fine, we'll be ready for it when it's coming because it's bound to be coming just through to these natural forces of supply and demand that's in the market.
Now, it comes to duration. Now, certainly, batteries do not pump storage. This is where the age-old response, all of the above comes in because if you've got more and more cheaper generation coming, you still got to match real-time supply and demand. Well, put your portfolio of storage resources to work. Now, one neat thing about batteries is you don't want to be too cute, but I can string together four one-hour batteries and I've got a four-hour battery. Frankly, I hate the word of hour when it comes to the duration because you think--
Teri: There's some flexibility, right?
Steve: It's easier you can think of it as barrels of oil, and it's just how much energy or we should call it BTUs, go back to that and just say how much energy is in my facility and I can use it. I can either absorb or generate the power at any rate, but it's just a unit of energy. The point is, and we've seen this again back in the molecule that you've got a series of store. It's not all in Cushing. You've got storage all over the place depending on where you need it.
To me, the same thing's going to happen with batteries. Either even behind the meter, you're going to have smaller batteries that are going to absorb or generate when you need it when you need that quick ramping at the load, and then you'll have larger batteries on the wholesale level that we'll be providing energy storage as well as ancillaries at key spots on the grid.
Teri: Oh, it's amazing. I think it's just that flexibility. Hey, Steve, thank you so much. Really helpful insights. Tamra and I have been really excited about this topic, super excited about having you on as our guests to really lead that discussion. Thanks for joining us today.
Steve: It's been my pleasure.
Teri: I hope you've enjoyed our discussion with Steve Vavrik, the managing partner and CEO of Broad Reach Power. Please join us on Power Plays next month when we're going to shift gears and discuss those factors that will ultimately drive costs lower for solar generation.
Tamra: Thanks again for joining us.
