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The Wild World of Energy Trading
A conversation with Emma Konet about energy trading and the emissionality of energy storage 🔋
👋 Hey’ya to 882 climate buddies - especially the ones who joined since our last issue 🌳
What is this? This newsletter explores topics in climate, energy, and everything in between.
I’m excited to present our second Delphi Zero interview.
In this wide-ranging conversation, she dropped some nuggets of wisdom about energy trading, electricity market design, and our path to net zero 🌎
The Wild World of Energy Trading
By Art Lapinsch
In early 2021, you experienced the Texas Power Crisis first hand. Can you describe what happened?
Winter Storm Uri was certainly the craziest event in power markets in my professional career.
Folks in the industry talk about rolling Northeast blackouts of 2003 caused by overgrown foliage in transmission lines as a monumental event (I was in 3rd grade), and we learned a lot of lessons from that. I think Winter Storm Uri is going to go down in history the same way.
Basically what happened is that Texas got very cold. Not colder than it’s ever been, but these cold events in Texas happen every 10 years or so, and the last time a winter storm blew through Texas of Uri’s magnitude was 2011… a very different grid from today.
Between 2011 and 2021, we saw a bunch of coal units retire, and a huge oil and gas boom in the Permian. More natural gas generation came online to make use of that ubiquitous cheap West Texas gas. We also had a HUGE increase in wind and solar buildout in that time period.
When it got cold, West Texas froze first and disrupted the gas supply to the generators in the state. It was really bad, compressor stations lost power, I remember gas was trading like $1200/mmbtu. The gas generators couldn’t get the gas, because there was no gas to be had. Meanwhile there were generators literally freezing over, coal piles freezing over, and wind farms having to curtail because of freezing rain and temperatures. It’s really bad for wind generators to run in conditions like that because they can form massive icicles on the blades that can knock the turbines off balance and cause damage to the gears, as well as fling those icicles football fields away. So the generator, or supply, side of the equation was failing.
On top of that, there’s enormous electricity demand as we have entered the “electrify everything” age. My house in Houston literally has resistance heating – which is extremely inefficient and takes a ton of electricity to run. So you have this demand that’s straining the system, and generators are rapidly dropping offline. The result was a drop in frequency that stressed the transmission infrastructure to the brink of failure.
ERCOThas reserve products that it deploys for frequency recovery, but it had essentially maxed out deployment of a lot of those reserve products during the storm. ERCOT eventually realized that it wasn’t going to be able to meet demand and started controlled load shedding to keep the grid at 60 Hz without deploying all the reserves. If there are no reserves on standby, the grid can’t recover from a large generator (like a nuclear plant) tripping offline.
What could have been the absolute worst case scenario (impact, duration, recovery time, etc.)?
Grid frequency collapsed to 59.4 Hz for four minutes and 23 seconds.
We were about 4 and a half minutes away from catastrophic failure of the entire Texas power grid, which would have plunged the state into darkness.
In order to recover from a complete black out, you have to rely on units that can provide something called “black start power”, which means they can start up without pulling any power from the grid. Not very many generators can actually do this – most require pulling a small amount of power from the grid to ramp up.
To recover the entire Texas power grid from a complete blackout would have required a coordinated effort of black start facilities that could have taken on the order of months. Something like that has never really happened before, and I think people were questioning whether or not ERCOT actually has the black start capacity to bring back the entire grid.
In a recent podcast, I heard you say that the 2021 Texas Power Crisis was one of the most influential events for the energy industry. Which important lessons have been learned? What are specific examples of change?
One big criticism from this event is that ERCOT could have recovered if it had AC (alternating current) ties to the Eastern or Wester interconnect, but Texas elected to be an electrical island to avoid putting the state under federal jurisdiction of FERC. Since there is no interstate commerce of power, FERC has no jurisdiction in Texas.
But if the grid had been interconnected with the rest of the country, we could have relied more heavily on imports. That’s obviously not changing, but I think it highlighted that energy independence is a great responsibility that must not be taken lightly.
The fallout from the event was immense; there were huge winners and losers from a financial perspective. The pricing engine that determines LMP (locational marginal prices), or the prices paid to generators and paid by load, effectively broke. Because it was a load shedding event, ERCOT and the PUCTdetermined that the price of power should be administratively set to the price cap of $9,000/MWh, and it stayed there for days.
Many generators went bankrupt, many retail electricity providers went bankrupt. A company called Griddy was effectively dismantled and banned, because they were passing wholesale power price risk directly into consumers who did not understand that power (which normally traded ~30/MWh, or 3 cents/KWh) could go to $9,000/MWh (or $9/KWh).
ERCOT jacked up the procurement volumes for reserve products to create a quasi-capacity market in the interim while it contemplated market reform initiatives that all effectively resemble a capacity market, which is what the rest of the US relies on to ensure that supply can meet demand on a long-term time horizon.
The dust has not nearly settled on the fallout from Winter Storm Uri, and the PUCT and Greg Abbott have been under fire for the issues brought to light during that storm for the past year and a half.
How did you get into energy/climate? Was there a defining moment that you can remember? What was surprising for you about the industry?
I got lucky and sort of fell into the energy industry.
I studied chemistry and math in undergrad and actually I was studying to be a veterinarian. Long story on why I decided not to go that route, but I was sort of scrambling for an internship after my junior year of college and I ended up landing one on the Citi trading floor in Houston. I was actually on the oil desk, but I was really interested in power. I ended up getting a return offer and landed on the power desk, where I stayed for my four years at the bank.
I decided to leave Citi to join Key Capture Energy (KCE) for several reasons – one was just I didn’t feel like I was really making a difference in the world by trading financial products. Two was that it started becoming clear to me that the bank couldn’t hedge wind and solar offtake using traditional power products that traded on the exchange, but a battery could be a physical backstop to that position. So I joined a battery start up to check out the world of physical power trading and learned a lot from that role.
You have worked on different aspects of power/energy trading. How were the jobs at Citi and at Key Capture Energy (KCE) similar? How were they different?
Yeah KCE and Citi couldn’t be more different.
Obviously Citi is a massive institution with a lot of capital and the ability to take and manage risk. When I joined KCE, I think I was employee number 25. It was a completely different world.
The products I was trading at Citi were called FTRs (Financial Transmission Rights), which traded in auctions and were entirely financial in nature, whereas our trading activity at KCE was physical power being stored in a battery. We mostly traded day ahead and real time at KCE, whereas at Citi we were trading “term” power which were power contracts that would settle years in the future.
I learned a lot from both jobs, and both had their challenges. I was on call a lot at KCE vs working market hours at Citi. The cultures are pretty different too, and I think I was a bit more comfortable at KCE in terms of being a young person, being a woman, and being in a revenue generating trading role.
What role do power traders play in the broader energy landscape? What are common misconceptions about the job? What is surprising about power trading?
I think traders close arbs (“arbitrage”), which make markets more efficient.
I personally didn’t feel like I was adding enough value to society when I was trading paper at a bank, though. Trading is really stressful though – you take your work with you everywhere. At Citi I was always worried about my positions and my P&L.
At KCE it was the same level of stress but more acute – for winter storm Elliot (December 2022), I remember getting up at four in the morning on Christmas Eve to trade and I traded for 18 hours straight that day. Pretty much the same thing on Christmas Day. It was a huge P&L opportunity for the company, and I was making multimillion dollar decisions that could make or break the firm’s revenue that year.
It’s a wild world.
Do power traders still have the power to manipulate the market? What are the risks of something like the 2000/01 California Energy Crisis happening again?
They can definitely manipulate the market.
Markets designs can’t rule out every possibility of nefarious action, and making a ton of money is a massive motivation for people to do nefarious things.
Look, I think spoofing happens pretty often in markets. I think people mismark their books and mislead investors. I think people figure out how to move physical products in ways that benefit their financial position, which is usually outsized in comparison.
The reality is that traders are paid a percent of their book, meaning whatever they make for the firm, they get a small cut. That’s a big motivator for people to do shady stuff, and I think they do.
There are many ways to design power markets (bidding zones; hubs; nodal pricing; etc.). How would your smartest colleagues design a power market for maximum efficiency/liquidity? What is the good, bad, and ugly of current power market design?
HA! I feel like all paths from this question lead to “should power markets even be deregulated?”.
Basically, in the 1990s power markets went from vertical integration where the utility owned the generation, transmission, and distribution of power to establishing transmission as a public good and allowing anyone to hookup to the grid and generate power, selling into a marketplace where they would be paid the marginal price of lowest cost dispatch.
The thing is, the market is not really “deregulated”, in the sense that other markets are “free”. It’s a highly regulated market, because it’s a product that requires a high degree of reliability.
I think what we are seeing in the 2020’s are the consequences of deregulation. We had 30 years of cheap power and now we are wondering if we have reliable power. Whereas for the second half of the 20th century, utilities would just overbuild generation and transmission for max redundancy (and profit) and just bill the rate payers.
I don’t know what the right answer – it’s always a balance between cost, reliability, greed and corruption. Does that make me a cynic? I don’t know, perhaps. I wouldn’t have my career if deregulated power markets didn’t exist, so I guess I’m grateful.
Listen, ERCOT is freaking fun to trade, but I think we all learned in Uri that no capacity market = big problem. I think PJMhas a decent market design but we haven’t seen that grid tested with high renewable penetration. CAISO is furthest along in the energy transition, but they have a lot of issues in how they are limiting the dispatch of storage projects in my opinion. I think generators should be able to set their bids at price caps as they wish (like in ERCOT), and competition should push prices down, but I also think we need things like capacity and resource adequacy markets to promote reliability.
There isn’t really a market that has those two features at the moment.
What role does energy storage (i.e. grid-scale batteries; etc.) play in our current energy system? How will it change by 2030? How important will energy storage be in 2050 and beyond?
Pumped storage has been around forever, and there are some massive projects that have been operating for decades. But grid-scale batteries, specifically lithium-ion, are pretty much in their infancy.
Most projects operating today have less than 2 hours of duration and largely provide ancillary services like Frequency Regulation and Spinning Reserves rather than doing energy arbitrage, which is what is traditionally thought of as the role of a battery.
Energy arbitrage is basically shifting generation from times of day when power is cheap to times of day when power is expensive. Outside of extreme weather events, this arb opportunity is usually not more than $20-30 on a once-a-day cycle. Batteries are a really low cost provider of ancillary services because their opportunity cost is energy arbitrage, which is worth a lot less vs a thermal plant providing ancillary services which has an opportunity cost of selling energy in that interval. As we see more batteries coming online, we typically see saturation of those smaller ancillary service markets which leads to price suppression.
Over the next decade I think we will see energy storage shift away from primarily providing ancillary services to doing much more energy arbitrage, and effectively acting as a clean capacity resource.
The National Renewable Energy Laboratory estimates that we need 200-400 GW of energy storage to reach net zero by 2050, and right now we have just shy of 11 GW nationally. So there’s a really long way to go, and as much as folks are really bulled up on energy storage right now in the news, I actually have concerns about reaching that target purely due to economics.
Batteries are not generators, in fact they are net loads on the system because their round trip energy efficiency is usually less than 85%. That means that for every MW charged, only 0.85 MW can be discharged to the grid.
Basically the problem is that wholesale markets are designed to compensate generators of electricity, which batteries decidedly are not. Yet batteries will provide an extremely critical service to the grid during the clean energy transition, which is time shifting power, and they are not being adequately paid for that service through wholesale power market structures.
I have talked to a lot of developers who are very concerned about the economics of storage on a longer time horizon, and many think we may actually enter a battery winter when investors start to see that returns on storage aren’t as juicy as they appear in sell-side models. I think energy infrastructure development and sales always have this pretty wide chasm between the buy side and sell side, and unfortunately for batteries, you kind of have to believe sell-side curves to believe storage is a good investment.
For example, in Texas, the buy-side market (like tolls on batteries from hedge funds) are coming in priced around $7-8/kw-mo for a 2 hour system over the next 4-5 years. That’s basically what the market thinks battery revenues are worth. On the sell-side, you have consultants shopping around curves that put those revenues at $14-15/kw-mo. Of course no one has a crystal ball on power markets, and Winter Storm Uri definitely showed us that markets can be VERY wrong, but I’m more inclined to lean towards buy-side curves as a source of truth than the sell-side ones.
Eventually this is going to start settling, and assets that were built on jacked up sell-side curves will generate real revenues in real time. Once investors see them, the capital pouring into batteries could dry up, which is a huge problem.
You are particularly interested in the “emissionality of energy storage” What is it and why is it exciting? What is the key insight behind your new company?
An “emissionality” approach basically means that instead of thinking about power in terms of MWhours, we think in terms of CO2 tons. This is really critical not just for batteries but for all energy projects.
For example, if solar is already producing the marginal MW on a system, (like in California), that means that an incremental MW of solar at that time actually doesn’t have a decarbonization effect on the grid. In fact, unless it’s going into a storage facility, it’s likely being curtailed.
To make that more concrete, assume load is 100 MW right now and that load is being supplied by 100 MW of solar power. Does an incremental MW of solar right now help decarbonize anything? No, because in a few hours when the sun goes down, we still have 100 MW of load that has to be supplied by a thermal generator.
Emissionality accounts for this concept by measuring the decarbonization effect of injecting clean MWhours. What batteries can do is store up renewable energy when it doesn’t have an incremental decarbonization impact, and save it for later when it does. By doing so, they are actually executing a “carbon arbitrage” that cleans the grid.
My company, Tierra Climate, is monetizing that service for batteries. We use marginal emissions factors to calculate the carbon intensity of power when a battery charges and discharges. The delta can be positive or negative, meaning batteries can actually cause “induced” carbon emissions, or they can abate carbon emissions from the power grid. [Find Tierra Climate’s Whitepaper here 📖]
Unfortunately right now, a lot of batteries actually induce emissions when trying to maximize their revenue, to no fault of their own. Power markets weren’t designed to minimize carbon, they are designed to minimize cost of dispatch, and those two things are not the same. By compensating batteries for the tons of CO2 they abate from the power grid, we can actually change their operational behavior so they become more effective at abating carbon, which cleans the grid faster.
While solving the emissions component, you also solve the economics issue I was talking about earlier, where batteries may not make enough money to justify the investment we need to get to net zero. By compensating a battery for decarb, you are creating a revenue stream that thermal generators cannot get. This can boost battery revenue as much as 30%, making batteries more cost competitive in offtake contracts like capacity agreements, can smooth their cash flows that make them more attractive for low cost debt, and give tax equity partners more comfort around the environmental integrity of their investments.
The flip side of the equation is Voluntary Carbon Markets, which are currently a 2bn global market. But as we get further along in the decarbonization curve, it becomes costly to decarbonize certain aspects of a business, for example scope II and scope III emissions. Businesses will become increasingly reliant on carbon offsets to reach their sustainability targets, and some people predict the global VCM market could be as much as half a trillion dollars by 2050.
Offsets come in the form of tree-planting, avoided deforestation, and forms of carbon capture and sequestration through direct air capture, mineralization, and others. Nature-based offsets are cheap and ubiquitous but have been under fire for dubious environmental claims. While CCS is still super new and expensive, and have a lot of hair on those projects. We are talking about storing gas underground, where you have to keep it there permanently, monitor for leakage, etc. There’s a lot that goes into that.
We are looking to add a product to the arsenal of tools available to businesses that specifically decarbonizes power, more as a transition offset than an avoidance offset because through the avoided combustion of fossil fuels for power generation, we can build more storage and rely less on fossil fuels.
Eventually, the power grid gets to net zero and the offsets have done their job transitioning a sector that is difficult to decarbonize.
I love that you started your company in Houston, Texas. You even wrote a sci-fi short story called Houston 2075. Can you steel man the argument that Texas is a great place to start a climate tech business?
I love Houston.
I’ve been here for seven years, I met my husband here, I am working on an MBA at Rice, and I started a business here. Houston has this reputation of being an oil and gas town, and it still is, but there’s also this undercurrent of clean tech and clean energy that is really thriving.
I wrote Houston in 2075 because I think there are going to be a lot of things that will change about life in Houston due to climate change, but I think people in ingenious and adaptive, and when pressed, we will find a way to make life work.
That said, it’s not all roses here in Texas. I feel extremely uncomfortable as a woman in this state with many of my healthcare rights stripped from me. I want to have a family here, but I’m terrified of being able to do that safely. I also feel some sort of way about building a business in Texas that supports the state’s economy when the state does not support it’s people here.
I have to say, if I stay in Texas it’s in spite of the current political climate, not because of it. If anything, staying in Texas means I can employ women, people of color, and marginalized people to give them a voice and press for change, especially since not everyone has the luxury of being able to leave when they want to. It’s a big internal conflict for me, actually.
This state really blatantly gerrymanders and suppresses the vote and treats women as second-class citizens. It’s challenging.
What are specific actions/initiatives that are helpful in supporting women in STEM/energy? Which actions/initiatives seem helpful but are actually not?
Hire women into front-office, revenue generating roles right out of college. Hire women of color. There are so many extremely smart and competent women out there who can crush it when given the opportunity.
Anyone who tells you “oh women don’t apply to these jobs so we have trouble hiring them” – complete bullshit. Not an excuse. Go find the smart women out there, they may not have the right degree or the right experience but I guarantee you they can figure it out.
At KCE, I hired a team of women traders, all without trading backgrounds. They are the most competent, technically skilled, and hard-working team I’ve ever worked with. Did they all have business or STEM degrees? No, but every single one of them was a rockstar hire.
Also, can we please stop telling children that some people are just “bad at math”? I hate hearing from women “oh I’m just not a math person”. No one is naturally born being good at math, it’s learned. And it has absolutely nothing to do with gender. I hated math in high school and I swore I’d only take my required math classes for my chemistry degree in college and be done with it.
But I had this professor who personally reached out to me after my first semester freshman year who said “Look you did really well in this class. I strongly urge you to considering declaring math as a major, you will do well, and I’ll be here to help you”. So I did, and that’s when I feel in love with math. When I had someone support my journey in learning. I have a degree in mathematics and chemistry from Tulane because of that professor. And guess what, I AM NOT naturally good at math. Not even close.
You have to nip that gender role stuff in the bud, because it permeates and it’s poisonous. People figure stuff out, and become good at what they practice and are encouraged to work hard in, regardless of gender.
Imagine a smart and curious person reaches out and wants to join your company. The only problem is that they have never worked in energy or climate before. How would you structure their first 30 days to get them up to speed? What is overrated? What’s absolutely essential?
Here’s maybe where I sound like a boomer or something, but I think in-person learning is so so critical. I am really against remote work when onboarding someone.
There’s so much to learn from just sitting next to each other and shadowing, hearing conversations on the desk, watching someone do something that seems intimidating to you. Look, I think work-life balance and flexibility in the schedule is important, but I’m really big on body language and in-person interaction and engagement. So for me, it’s all about learning through immersion.
In my experience, when I’ve hired because someone seems smart, engaged, and passionate, the role has panned out really well. Whenever I have hired purely on experience, not so much. In terms of learning about energy and climate, MCJ is a great place to get into climate stuff, and people are really welcoming. There’s tons of content.
For energy, especially power markets, there are great trainings on ERCOT and PJM’s websites that kind of walk through power markets 101. It’s all about repetition. This market is esoteric and super hard to understand, even for people who have been working in it for years. I tell all my new hires not to worry when they don’t understand something, it took me years to learn this market.
What’s important is that they ask questions, engage with the material, and care about learning. People who loved school usually do well in power markets haha.
It’s a constant learning process.
As we look back from a net-zero future, what do you hope they will say about us?
Gosh. Good question.
I hope we get there, it’s sometimes hard to imagine that we can. But I hope they look back on us and say, they did the best they could with the information they had. That’s all we ever can do, right?
I hope they can look back and say they put aside greed and corruption to build a better future on the only planet we have.
🙏 Thanks Emma for sharing your insights with us.
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ERCOT (Electric Reliability Council of Texas) is the power system operator in Texas.
FERC (Federal Energy Regulatory Commission) is the federal regulatory body in the United States.
PUCT (Public Utility Commission of Texas) is the state regulator in Texas.
PJM (Pennsylvania-New Jersey-Maryland Interconnection) is one of the main RTOs in the North-West of the United States.
CAISO (California Independent System Operator) is the power system operator in California.