Recent PPAs signed by El Paso Electric show just how profitable renewable energy is for power companies. The future of the power sector looks to be 100% renewable. ESG fund growth supports the bull case on the entire sector. El Paso Electric (NYSE: EE) just signed two ridiculously cheap solar and solar-plus-storage PPAs, including one solar project at under $15 per MWh.
|Hecate||100 MW||N/A||Santa Teresa, New Mexico||$14.99/MWh|
|Buena Vista||100 MW||50 MW||Otero County, New Mexico||$20.99/MWh + $5.46/kW capacity charge|
Source: Utility Dive
For context, that comes out to 1.5 cents per KWh. If you’ve looked at your electricity bill lately, you would see how cheap this really is. The average electricity price in the US across all sectors is 10.29 cents per KWh, but residential prices are actually significantly higher at 12.85 cents, according to the EIA.
Notably for El Paso Electric, these PPAs mark the first time the company will use utility scale battery storage in the state. These projects are replacing 91 MW of capacity from two units at the Rio Grande natural gas plant, which are set for retirement in 2022. In 2019, New Mexico approved a carbon-free by 2045 goal, which is the driving force behind these investments.
However, with solar PPA prices where they are, these carbon free goals, which were once political pipe-dreams, now appear to be not only practical, but VERY profitable. This implied margin and low cost is indicative of the future generation mix of the United States, which is likely to be driven almost entirely by renewables and renewables + storage assets.
Solar Power is the Future of Power Generation in the US
Solar Power is the future of generation in the United States. Not only have costs been dropping, driven by larger utility-scale modules being developed in China, but solar generation is the definition of on-peak power. On-peak power represents power needed at the highest load times throughout the day.
A typical load day sees demand peak when the sun rises, and fall when people go to sleep. The graph below represents a screenshot from ISO-NE showing real time load.
Typically, in a baseload generation heavy market, prices rise during these high-load periods because the supply of power is relatively stable. Of course, especially in NE and PJM, gas peakers will make up the difference during these times and collect premium pricing.
However, it doesn’t have to be this way.
The California solar story shows the success of solar penetration and why future technology will eliminate the need for fossil fuel generation.
As more solar is installed and makes up a greater percentage of power generation, the steeper the “duck curve” becomes. The duck curve is the phenomenon which occurs when power prices during the middle of the day drop as solar panels generate energy, and rise in the evening and early morning when the sun sets.
In order to combat this, energy storage is required so that batteries can store energy during the day when prices are low (and even negative), and discharge energy when solar generation is lower.
This was always the argument against solar power and other renewables — that the intermittent generation would cause wild swings in power prices and make their usage impractical. The argument went that fossil generation would always be needed as a baseload source of power, along with fast-start peakers to balance out the price spikes when the sun went dark or the wind stopped blowing. But now that argument is starting to lose merit as battery storage becomes a more viable technology.
Battery Technology Continues to Improve
Historically, long duration battery storage was dominated by pumped hydro, which represents more than 90% of the world’s installed base of energy storage. Pumped hydro is relatively easy to understand, but requires massive amounts of up-front capital commitment, as well as natural advantages to warrant an investment.
Recent pumped hydro investments have included the Australia-based firm Genex Power which would use an abandoned gold mine as a natural advantage to make the project feasible. This capital was came from the Northern Australia Infrastructure Facility (NAIF), not a corporate balance sheet.
Likewise, In Chile, a 300MW pumped hydro project is under development, with funding coming from the Green Climate Fund. The Espejo de Tarapacá project is a $600 MW investment.
However, Lithium Ion battery storage costs have plummeted, and have begun to make market share in even the longer horizon storage market.
Source: Wood Mackenzie
With prices falling, the US and the world could easily be looking at a Carbon free future well before the death of the Earth time-frames laid out by environmental activists.
For Investors, This Means BUY
With the mega-trend of ESG investing beginning to take hold, power sector investors could be beneficiaries of large capital inflows throughout the next few years. With trillions of dollars on the way to ESG-eligible companies, the power sector (NYSE: XLU) looks poised to benefit as they gain weight in ESG funds.
There remains substantial margin to be earned as power companies expect to continue to produce power at record low prices, supported by politicians on both sides of the aisle. Besides utilities well known defensive properties, they also sport massive growth potential in the future of the US.