The Irony of Cannibalization: Renewables Earn Much of Their Revenue When the Wind Barely Blows and the Sun Barely Shines
It is intuitive that a wind project would earn more revenue when the wind is relatively strong compared to when the wind is relatively weak. And the same logic would seemingly apply to solar; when the sun shines most, solar projects should be most valuable.
In ERCOT, however, this isn’t always the case. In fact, certain wind and solar projects can earn much of their revenue when renewable capacity factors – how much renewables generate compared to their full potential – are low.
The explanation for this paradox is the cannibalization effect, which occurs when generation from intermittent resources like solar and wind drives down the hourly price of electricity. If a wind project is generating at high levels, for example, it is likely that other wind projects are generating at high levels too, which suppresses prices since wind is a relatively cheap form of generation.
A project generating at high levels when prices are low might earn less than a project generating at low levels when prices are high. In other words, a project earns something of a premium when it manages to generate at a time when few other projects can do so.
Wind projects at ERCOT’s West Hub demonstrate the trend. With spring approaching, it’s helpful to look at data from the spring months of the last two years. This demonstrates that the average price of a megawatt hour was lower at higher wind capacity factors, as shown below.
What did this mean for the revenue of a wind project in West Hub? The conclusion is striking: 70% of revenue was earned when the overall wind capacity factor at West Hub was below 40%. Wind projects made most of their revenue when the wind wasn’t blowing all that strongly.
The implications for developers and offtakers are profound.
First, this trend makes a strong case for co-located BESS to capture megawatt hours when capacity factors are high and re-sell them when capacity factors are low. The result could be significantly enhanced project economics.
Second, developers should consider this trend during site selection. The most valuable profile might be the one least correlated to other wind profiles at the given hub.
Finally, offtakers must understand the effects of cannibalization as they negotiate PPA prices, since high capacity factors may not translate into higher revenue.
