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Gary Hunt

Gary Hunt

Gary Hunt is President, Scalable Growth Strategy Advisors, an independent energy technology and information services adviser and a partner in Tech & Creative Labs, a…

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The Importance of Balancing Energy Economics for the Success of Sustainability

It does not feel like recovery.  Recovery is a time for rationalizing the old and positioning for what is to come.  I know it seems like the economy is still in the ditch.  But now is the time to get to work preparing for the competitive, smart-grid enabled, distributed, global energy future.

But first we still have some clean-up work to do.

Over the last two energy business cycles we saw high inflation crater nuclear power generation, the rise of exempt wholesale power generators, qualifying facilities, wind and solar power all competing to take its place.  Competition was the regulatory policy of choice after the huge cost overruns of nuclear power that combined inflation, high interest rates, supply shocks from embargoes of Middle East oil, and a worry that the US was running out of natural gas.

PURPA in 1978 and the Energy Policy Act of 1992 ushered in avoid cost qualifying facilities and merchant power producers. The energy market consulting business needed new tools.  Production cost models of electric supply and demand levelled the playing field and provided an independent view of reserve margins, expected wholesale electricity prices, avoided cost and the optimal fuel mix to achieve least cost, best fit balance in a power supply portfolio.

By 2007 as the boom stage in the last power business cycle was giving way to bust, the contraction in consulting work lead to consolidation of the power market modelling players.  That brings us back to the present. Preparing for recovery, the market again needs help navigating the volatility and uncertainty in fuels and fundamentals around the world.  But today the market is different but the tools are the same.

We transformed the energy marketplace from the fragmented utility dominated regional markets into the multi-market integrated transmission markets.  Renewable portfolio standards and Federal stimulus money helped scale the growth of wind, solar, demand response and other alternative technologies.  Smart grid technologies shifted the focus to performance optimization needs emerging in a distributed energy world of rooftop solar, microgrids, combined heat and power projects, customer aggregators and other new entrants.

Those old production cost modelling tools are still used and useful but they are no longer sufficient to manage a portfolio of fuel, power production, customer segments and self-generation along with procurement contracts dynamically changing. Integrated, smart grids require collaboration and interoperable technologies.  Global competition for solar PV and wind turbines has undermined national protectionist industrial policies.  Domestic energy production growth  brought falling natural gas prices turning regulatory drivers on their head and sacrificing political correctness on the altar of lower costs.

And that is just the electric power side of the energy industry.

On the upstream oil and gas side, the world has tilted on its axis from the growth of unconventional production using horizontal drilling and hydraulic fracturing to extract oil and gas from shales and oil sands.  So profound has been this transition that North America turned into an energy exporter because we can no longer consume all the natural gas and soon oil we are able to produce and there is no place left to store it.  The growth in domestic energy production of oil and gas is now intimately linked with the electric power side of the energy industry.  Falling natural gas prices are savaging coal fired generation, nuclear power and renewable energy forcing each to compete with near record low gas prices.

While the Federal Government issues waves of needless new regulations, it is low natural gas prices that are killing the economics for many coal and new nuclear power plants.  Wood Mackenzie now estimates that 78 gigawatts of coal fired power plants will be retired as a result.  ICF confirms that estimate saying 50 gigawatts of coal and 70 gigawatts of older fossil fuel power plants will be retired by 2016.

The question is what will replace it?  Environmental advocates hope it will be renewable wind and solar.  We are certainly building plenty of it.  But volatility happens and it does not spare the politically correct.  Oversupply of photovoltaic panels and wind turbines from China flood world markets to suction up subsidies and feed in tariff supports to capture market share.  Today we have two times more PV supply than demand and PV producers and wind manufacturers are feeling the pain. This market imbalance is rapidly bankrupting the solar and wind producers we are counting on to meet the next wave of growth in the energy business cycle.

And then there is this.  Despite environment policies opposing fossil fuels, the least cost, best fit, most sustainable alternative to coal is not solar and wind but natural gas fired generation. That is why we are fighting over fracking because low gas prices force renewable energy to compete despite rules jury rigged to favour it.

We still need energy fundamental analysis of supply and demand to plan for our energy future.  Power markets may still be regional but fuels markets are global and so is the competition for access to the energy supply.  Managing an energy portfolio today is more like managing a hedge fund.  And then are the messy problems of customers— customer aggregators, combined heat and power, demand response, net zero building codes, microgrids, Tres Amigas-like potential grid boundary hoppers not to mention the looming hope for more dynamic pricing, energy storage, electric vehicles and net metering.

See what I mean?  Fundamentals matter. Economics matter.  Technologies matter. Rules matter but so does balance if we want it to be sustainable.  Competition brings balance between each element, each fuel choice and each alternative technologies forced to compete on a level playing field where the rules are not rigged to preselect winners and punish out of favour losers.  Only then will be achieve the least cost, best fit balance that produces the best available environmental results for the next boom.

Getting our energy economics balanced is essential to economic recovery and sustainability.  If we undermine our energy potential for growth we risk losing an entire generation struggling to pull our nation out of the ditch.

By. Gary L. Hunt

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