by Jason Makansi, Pearl Street Inc.
In these days of heightened uncertainty in the power industry, it’s easy to have amnesia about long-term prospects in the electricity business. The opportunities may be shifting, for a few perhaps like the ground underneath you during an earthquake, but the long-term opportunities remain excellent.
The short version of the state of the industry (SOI) is that electricity demand continues to grow, along with population; the sources for supplying that electricity are “decarbonizing”; electric transportation represents a significant source of new demand; and future activity is shifting towards the customer end of the supply and delivery value chain.
The only sub sectors of the power industry that face an existential threat are nuclear- and coal-fired generation, and even that is tempered somewhat by activity in Asia.
According to the “Exxon Mobil 2018 Energy Outlook,” world population will grow from 7.4-billion to 9.2-billion in 2040, but 1-billion people don’t have access to electricity today. The International Energy Agency (IEA)’s World Energy Outlook notes that 40% of world energy is consumed by Europe and North America and 20% by Asia. By 2040, these percentages are expected to reverse.
Asia also represents 50% of global natural-gas growth, 60% of renewables growth, 80% of petroleum growth, and 100% of coal and nuclear growth.
The run of historically low natural-gas prices in the US still has a way to go, according to experts, although it now appears that LNG exports and displacement of petroleum by natural gas for hydrocarbons processing and heavy manufacturing are poised to chip away at the supply glut. At some point, this trend will have to impact prices.
Because electricity demand growth is still anemic in most parts of the country, new generation capacity will be driven by decarbonization policies at the state level, a gauntlet of other environmental laws choking coal, resiliency, and operational flexibility. You can sum that up in a meme: “must run renewables, must follow gas.”
Ironically, the deregulatory and competition programs of the last 30 years have resulted in regulated utilities with protected distribution functions. As impressive as technical and economic progress have been with solar PV, battery storage, micro grids, so-called “smart” homes, and the like, distribution utilities seeking their traditional regulated rate of return on invested capital are likely to drive the distributed energy sector.
Unless electricity demand growth roars back, this likely will be where utilities focus their efforts.
Large-scale storage remains the wild card for the future. If gas prices escalate and battery costs decline, the peakers of the future may not be simple-cycle gas turbines. If home-battery storage prices decline rapidly, then large swaths of ratepayers may opt for rooftop solar PV + storage to supply the bulk of their electricity, whether it’s the local utility offering the system or a company like Tesla.
Storage is such a wild card because it can “play” across the electricity supply and delivery chain, including inside an electric vehicle (EV). With continued battery cost declines and effective management of safety aspects (for example, the catastrophic fire hazards often associated with lithium-ion batteries), one can envision a multi-year period during which tens of thousands of megawatt-hours of storage are added to the US grid, in much the same way as 1997-2002, when 200,000 MW of gas-fired capacity was added.
The death spiral, articulated in a 2013 EEI report, “Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business,” of customers leaving the grid appears to be coming to pass. That is, as more and more industrial, commercial, and residential electricity customers opt for some form of onsite generation, utilities must spread the costs of maintaining the grid across a shrinking customer and kilowatt-hour demand base. That increases prices, which forces more customers off the grid, a destructive feedback loop.
For this reason, some believe it inevitable that regulated utilities must “control” the distributed-energy rollout and the retail space, or face an existential threat of their own.
However, it’s critical to realize that everyone still needs electricity. What is in question is which entities will be providing it. The opportunity isn’t going away, it’s just shifting.
A good example is a university in New Jersey. It replaced and expanded an old combined heat and power facility in 2011 and then added a microgrid that started up last year. Two main project drivers: (1) enhanced resiliency, avoiding reliability issues on the utility side of the meter; and (2) avoiding escalating rates from the local utility resulting from fee adders for bringing more renewable energy to the service territory.
“Must-follow” gas plants present their own slate of opportunities, especially for service firms. Harsher and less predictable operating tempos, combined with shrinking O&M budgets, mean that owner/operators have an appetite for lower-cost solutions for repair and upkeep. And the new H and J machines coming into the supply side will inevitably proceed through their own teething and O&M issues in the early years of the model lifecycle. They are designed for faster and even more frequent cycling than their F-class predecessors.
While those in the fossil-fuel side of the business tend to shudder at the renewables + storage paradigm, adding the third parameter to the equation may be even scarier. Digital technology is transforming society in much the same way as electrification did one hundred years ago. Consider that 60% of adults under 30 don’t even have a driver’s license! They are content, apparently, using digital sharing platforms like Lyft and Uber, or mass transit.
