Energy use in the US can be split into two large (very, very large) pies. One is electricity for use in homes, buildings, and industry and the other is transportation, which is powered primarily by liquid fuels (gasoline and diesel) from oil. There are some exceptions, and small overlapping fuel uses – direct industrial use of liquid fuel (a fairly significant quantity), some liquids burned to make electricity (this used to be a significant amount, but is now only a very small amount), and now a very small amount of electricity used to power electric vehicles (“EVs”).
American consumers spend, on average more than $1 billion every day on each of these energy uses.
Daily U.S. Consumer Energy Spending
Electric utilities have never made a serious effort to attack the transportation market at scale. Historically this made sense. Transportation infrastructure was built around liquid fuels and virtually the entire fleet of U.S. cars and trucks run on liquid fuels and there was no viable electric-drive alternative and fueling infrastructure was non-existent.
Barclays Just Threw Gasoline on the Fire that is the Battle Between Utilities and the Solar Industry
This week Barclays downgraded the high-grade bond market for the entire electric utility sector because “we believe that a confluence of declining cost trends in distributed solar photovoltaic (PV) power generation and residential-scale power storage is likely to disrupt the status quo.” While this is not the first statement about vulnerability of electric utilities to competition from new technology it is the most important to date.
Electric Utilities vs. Solar
There has been growing tension between the electric utility industry and the solar industry – specifically the part of solar industry that is focused on distributed, or point of use, solar installations. This friction has really been a proxy for what is developing as a larger challenge to the utilities. New technologies are making generating, storing and managing electricity at the point of use much easier and much more economical. This technical evolution is occurring at the same time that overall electric demand growth has been stagnant for several years and rising infrastructure requirements are putting upward pressure on the price of delivered electricity. Those factors together mean that electric utilities are struggling with eroding demand and eroding profitability, and the best available option is to increase the price per unit of electricity, which only accelerates the economic competitiveness of the competing technology – and thus starting the “spiral”.
Texas both produces and consumes more energy than any state in the U.S. It controls one-quarter of U.S. proven oil reserves. Energy companies looking to grow or to establish a U.S. presence set up operations in Texas. The primary electricity transmission system in Texas is independent of the rest of the country (a long-time source of pride). The Electric Reliability Company of Texas, or ERCOT, is responsible for regulating the generation and supply of power to 85% of the state, except the extreme eastern and western portions.
The fundamental challenge of a closed system is that it must meet its own needs, and that has not happened. There are increasing concerns about rolling blackouts in America’s “energy capital”. NRG Energy reported that by 2016, Texas could experience four rolling blackouts a year, and strongly recommended that the state build more power generation reserves to improve grid reliability. CONTINUE»
The solar industry has been very hot. Record amounts of new solar capacity have been installed over the past two years. The accelerating pace of adoption of solar panels for distributed generation (installed at the point of use, rather than sold into the power grid) and the downward trend of module prices have created exuberance over the industry’s future.
Solar has reached and eclipsed price parity with traditional fuel sources in some markets, and ultimately the potential market for solar PV is huge. A solar module costs approximately 1% of what it did 35 years ago and prices for solar pv panels have plummeted since 2010, with an average price per watt for panels falling from $1.81 in 2010 to less than $0.70 and today.
It is clear that the future is very bright for the industry. What is less clear is when growth will accelerate and how near-term challenges for the industry could create some rough patches for the industry before widespread adoption drives truly explosive industry growth.
As regular readers of this column are aware from time to time I will host provocative perspectives on the energy industry. The failed nomination of Ron Binz to be the Chairman of the Federal Energy Regulatory Commission, which was formalized with his withdrawal from consideration on late Monday night, was unprecedented in Washington. The role of FERC has never been the subject of public of political interest – and I’d argue that few people (in Congress or otherwise can actually explain what FERC does) – so the sudden acute interest that resulted in no confirmation vote and Binz’s eventual withdrawal is well worth examining.
My friends at Operation Free (a campaign of the Truman National Security Project and Center for National Policy, is a coalition of over 5,000 veterans and national security experts advocating for securing America with clean energy) have been watching the FERC nomination process, and have expounded the view of many energy insiders that Binz’s failed confirmation represents an important and troubling development in the evolution of America’s energy industry.
Ron Binz, the once leading nominee to be the next Chairman of the Federal Energy Regulatory Commission, announced Monday evening that he had formally withdrawn his name from future consideration for the post.
To be sure, Binz is a highly qualified candidate who has spent his entire career working on energy regulatory issues, and he would have brought needed vision and leadership to a post that is critical for diversifying our energy portfolio and strengthening our national security.
Unfortunately, members of the Senate Energy and Natural Resources Committee resorted to bitter partisanship, dooming his confirmation based on a fear and misguided assumption he would encourage prioritization of renewable resources over legacy coal and oil sources of energy.
Their excuses not only illustrated a lack of understanding of FERC’s authority, but also they were inaccurate and pose a serious threat to America’s energy future.
As citizens from Ohio, Michigan, and West Virginia, we know the benefits that traditional energy sources have provided to the growth of our nation and states’ economies. While we acknowledge these sources – like coal- will continue to play an important part of our nation’s energy mix, in order to strengthen our national and economic security, it is critical that we continue to find ways to diversify our energy options and reduce our carbon emissions
From time to time I will start highlighting some groups that are finding new ways to solve some of the many energy financing challenges that we face. I will be looking at both groups that are finding ways to fill gaps as well as companies that are rethinking old approaches to energy finance.
I thought I would start this series with a look at Greentown Labs, which is actually in the midst of both building a platform to fill a gap in the energy finance marketplace and exploring the use of new financing techniques, namely crowd-funding, to try and take their vision to new heights.
Greentown Labs is a cleantech incubator based in Boston (though in the process of moving to new and expanded space in neighboring Somerville in September). The idea – started two years ago – was to provide early-stage companies a place to not just collaborate on ideas and share services, but to have space to actually build the energy hardware of tomorrow. The lab has all of the things you’d expect to find at an incubator – collaborative space, mentors, and inspiration, but what sets it apart are the work areas – more than a dozen projects were underway on the lab floor (which boasts a machine shop and an electronics shop to go with the more typical software platforms and office-like work space), ranging from systems that fit on a table top to 40 foot long welding projects. Rather than my experience with most incubators – something along the lines of coffee shop meets office meets collaborative space – Greentown looks 1 part incubator and 2 parts mad scientist workshop.
Supporters of coal have called the planned new rules from the EPA on CO2 emissions from coal-fired power generation a war on coal and have pledged to fight the rule-making process. It is true that there will almost certainly not be a new coal-fired electric generating station built in the U.S. for at least the next several years, but the hiatus won’t be caused by any specific rule. The real danger to the coal industry is uncertainty.
Investing in the electric business is about long stable returns. Electricity assets last a long time, are expensive to install, and are typically expected to provide long-term stable, if modest, returns. Since returns are spread over a long period and are stable, with limited upside (10x returns on energy infrastructure don’t exist) investors and lenders require a quantifiable and manageable amount of risk. Uncertainty in any form makes the quantification and valuation of risk in an electric generation investment much more difficult (or impossible) and severely limits investor interest.
An excellent illustration of the impact of uncertainty on electric generation investment is a recent history of the wind industry. Despite a pattern of consistent, and even retroactive extensions, the uncertainty created by the political fight over extending the Production Tax Credit for wind power has caused nearly complete cessation of new wind facilities being brought on line each time the credit wasn’t extended well in advance of expiration.
The impact of the PTC on the economic case for a wind project has been substantial and was (and still is for some projects) the difference between a profitable and an unprofitable project, so the uncertainty regarding the availability of the credit was a threshold requirement for an investor. An investor simply could not have certainty that it could earn the necessary return (or in most cases any return) without realizing value from the credit, so no investments were made. The result of this uncertainty in 1999, 2001 and 2003 is stark, as investment dropped precipitously from year to year, even though any project would have qualified for the credit because of retroactivity of the extensions.
In the most recent issue of our subscriber-only newsletter, Energy Trends Report (ETR), I took a look at the lessons learned from the decline of the US coal industry. As we have done previously, we would like to share a story from ETR with regular readers of this column. Interested readers can find more information on the newsletter and subscribe for free at Energy Trends Report.
Lessons From the Beginning of the End of America’s Coal Industry
Only a few short years ago the U.S. coal industry enjoyed a mini-renaissance with several new large power plants brought on line in 2010 and 2011, which at the time firmly entrenched coal as the dominant source of electric generation in the U.S. Since then, coal’s share of the electric market has contracted sharply, and against the backdrop of the White House’s new position on climate change is why many see an industry in serious trouble.
The U.S. coal industry has been left to fight an uphill battle with the EPA over the agency’s authority to set rules on CO2 emissions from power plants. The coal industry is fighting this battle virtually alone, as traditional fossil fuel allies sit on the sidelines (oil) with no direct stake, or wait eagerly to absorb market share (natural gas). In parallel to this new policy reality, technology developments – from advances in unconventional gas extraction to startling declines in the cost of renewable energy generation and efficiency – are redefining the economics of electricity markets.
Recently Sens. Jeanne Shaheen (D.-N.H.) and Rob Portman (R.-Ohio) reintroduced the Energy Savings and Industrial Competitiveness Act. The bill is meant to spur the use of energy efficiency technologies in residential and commercial buildings as well as in industrial and manufacturing operations. One of the key focal points of the bill is on supporting the update of building codes to integrate energy efficiency improvements and requirements.
In our energy finance newsletter a few weeks back I wrote about some possible fallout after Energy Future Holdings (EFH), the massive private equity-owned Texas electric holding company and the result of one of the largest leveraged buy-outs ever, formally warned that it might need to seek bankruptcy protection.
Last week, EFH offered a restructuring plan to creditors in an effort to avoid bankruptcy. The restructuring offer will almost surely be rejected, but may lay the initial groundwork for some type of structured resolution outside (or even inside) of bankruptcy court.
A little more than five years ago EFH was created as the vehicle for the most expensive leveraged buy-out in history when a private equity group led by KKR, TPG and Goldman Sachs Capital Partners bought the Texas energy company at a price of $43.2 billion. The failure of EFH will be hugely important in terms of the direct impact on investors, lenders and the private equity market, but perhaps more important will be what this failure means for the broader energy landscape.