Energy transition investors kept the US energy economy humming during the real world climate risk “stress test” of the last week.
As system strains mount further in coming years amid high energy demand, LPs need to revisit allocation strategies in light of early lessons from Winter Storm Fern.
Winter storm Fern and its aftermath have not been normal weather. The continent-spanning climate stress test of energy markets has highlighted the value of energy transition infrastructure in new ways important for capital allocators.
Winter storms and even polar vortexes are hardly unprecedented, but the unusual shape of Fern’s rolling deep freeze across the country’s major energy nodes in succession strained markets.
With load demand spikes over the past week providing a taste of a long-predicted era of “winter peaking” for US energy demand, it was the generation supply that energy transition and climate investors have rushed to market that provided the essential cushion for all-important capacity across fuels and power.
Energy Transition investors kept US energy markets functioning.
Solar, wind and battery additions have dominated power sector additions over the last decade, often combining with swing supply of natural gas peaking capacity in new ways that have challenged traditional financing and merchant risk models.
Without those double-digit additions of solar, wind and battery power – many of them added in response to investor demand for climate risk-aligned assets and energy transition projects – the US energy market’s flexibility in the face of Fern would have been much harder to pull off.
PJM, the country’s largest organized power and capacity market, experienced generation outages reaching up to 22.4 GW, representing roughly 16% of total capacity, with outages concentrated primarily in Dominion territory. That was overwhelmingly thermal generation going offline, as gas compressors shut in during extreme cold, ultimately spiking the financial returns to high-capacity batteries that can store cheap renewable electrons. The result is widening return spreads for energy transition asset owners.
Over the same period system demand reached approximately 132 GW. Power prices averaged around $3,000/MWh over the weekend, with Tuesday morning averages of approximately $417/MWh.
Looking ahead: Lessons for Allocators
LPs revisiting assumptions about returns to climate risk and energy transition strategies should be counting their future allocation this week as winter storm Fern continues to roil US power and energy markets in an abnormal way.
Continent-spanning freeze-offs accompanied by fierce winter storms that run Southwest to Northeast across the US economic core used to be the stuff of science fiction, but winter storm Fern is just the latest example that the future is here.
Limited partner capital allocators have been given a real-time demonstration of the shape of a new risk-reward matrix by the storm’s inability to break US energy markets.
Noreva’s capacity and power demand modeling increasingly show the clustering effect of battery deployment have outsized financial results when effectively paired with cheap renewable electrons.
For a demonstration of the ways Noreva can help you navigate this new energy return matrix, contact sales@noreva to learn more about our AI-enhanced and trade-aligned forecasts.
