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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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Why Energy Will be Driven By Profitability in the Future

The energy business cycle has always been dominated by boom and bust cycles.  Through changes in technology, economic conditions and regulation nothing has altered that cyclical pattern.  We have, however, seen driving forces of change affect the energy business cycle both for the good and not so good.

Energy Market Business Cycle

The Big Shift in energy today is not what you think.  It is not going to be driven or dominated by political correctness or government industrial policy. The big shift in energy is not pro-coal.  It is no pro-renewable energy.  It is pro-business and a competitive, sustainable business bottom line.

The recovery from this recession may be slow and feeble but it is coming.  And when it roars to life there will be no stopping the pent up economic energy, demand and willpower it brings.

Electric power has traditionally tracked the rise and fall of GDP.  And so it will in this business cycle as well.  But that does not mean that the energy industry is not also continuously adapting to change and reinventing itself for the business stages ahead.

The boom and bust cycle is not new but the factors driving it are changing it radically from our recently history:

•    From Falling to Rising Marginal Cost of Power Generation. For the long period of post World War II growth across America improvements in technology and other factors led to declining marginal cost of production.  That is each new baseload coal fired generator added to the power generation fleet reduced the marginal cost of electricity because these power plants operated more efficiently at lower cost. Early enthusiasm for nuclear energy was based upon the belief that it would continue to add low cost electricity supply to power America’s economic growth. But it didn’t work out that way with high inflation, constantly changing regulatory requirements, construction delays, and growing public opposition after Three Mile Island.   The result was that first generation of US nuclear power plants cost orders of magnitude more than expected and stopped future nuclear energy expansion in its tracks to this day.  It also shifted the marginal cost of energy higher. Rising marginal cost of energy create powerful incentives for efficiency and technology change.  Low natural gas prices offer a safe haven from rising marginal costs.
•    From the Fuel Use Act to the Growth of Unconventional Gas. There was a time when America thought it would run out of natural gas.   Conventional supplies in sufficient volume difficult to find with the technology available and the depletion rates were a steep slope.  The Fuel Use Act prohibited the burning of natural gas for power generation in the Jimmy Carter era to save the gas for home heating purposes.   As little as five years ago the conventional wisdom was that the US would soon become a net importer of natural gas in the form of LNG securing from the same volatility and unfriendly places  that provide imported oil.   Technology in the form of horizontal drilling and hydraulic fracturing combined with the ingenuity and persistency of wildcatters like Mitchell Energy and others used the disruptive potential of these new technologies to turn this natural gas situation completely on its head.  By 2011 America is exporting excess natural gas, gas prices have fallen to historic low levels on the oversupply and been decoupled from oil prices. Low priced natural gas is America’s global strategic competitive weapon of choice.
•    From Renewable Energy for Fuel Diversity to Clean Energy and Back. As marginal costs rose concerns were raised about putting too many of our eggs in one fuel basket.  Too much coal, too much nuclear energy and then later too much natural gas.  The Clean Air Act and other environmental legislation raised our consciousness about smog and greenhouse gas emissions that caused acid rain conditions in New England from Midwest coal plants.  The adoption of the foundational environmental legislation of the Clean Air Act and the Clean Water Act created a market for clean energy resources from wind and solar.  The technologies were new, untested and costly.  Renewable Portfolio Standards were designed to create a slice of system place in the power supply mix for these new technologies in hope that their marginal cost would fall as the installed capacity increased much as it did with coal and natural gas generation previously.  Today, more than thirty years later the marginal cost of wind and solar are falling due mostly to oversupply of wind turbine and PV panel production in China, the states are nearing achievement of their RPS targets, wind and solar resources are considered mainstream and their market share has growth to about 13% of total installed generation capacity.  The problem is few are satisfied with this outcome.  Hydropower remains the largest contributor to renewable energy today at 63% of the total as it did 30 year ago.  Without hydro factored in wind makes up 60% of the renewable market share (23% when hydro is included in the total) but solar energy is still tiny at 1%.  Subsidies are still required for renewable energy to be economically viable. Low natural gas prices force renewables to learn to compete without subsidies—or else.  Tough love.

The Big Shift in energy is being more competitive to sweat out excess costs.

The cumulative cost of our electricity bill is going up because of renewable portfolio standards, smart meter deployment, greenhouse gas emissions reduction, power grid security and ongoing investment in maintaining, replacing and extending our energy infrastructure to meet our future needs. Upward pressure on rates at a time of intensive economic uncertainty is forcing competitive balance to the equation.

Low natural gas prices are an equal opportunity competitor undermining the economics of coal-fired power generation with a ruthlessness effectiveness even the US EPA admires.  But low gas prices have also stopped new nuclear power plant projects in their tracks and they are bearing down on renewable energy with the same low price efficiency.

US Dry Gas Resources

Ten factors favour natural gas as fuel of choice for future power generation:

1.    We’ve got plenty of low cost natural gas—why not use it?
2.    Gas fired generation is fast to build, easy to site with no technical risk.
3.    Natural gas is available in every regional market today.
4.    Wind and solar have locational issues and require difficult to build transmission
5.    Natural gas displacement of existing coal reduces emissions 40%!
6.    Intermittent wind and solar require gas back-up to be dispatchable.
7.    Gas fired generation can be built in load centers to improve grid stability.
8.    Gas makes combined heat and power projects and microgrids practicable.
9.    Natural gas can be stored to balance peak demands.
10.    Low gas prices encourage strategic industrial security and manufacturing growth.

The Big Shift in energy is toward a competitive distributed energy future

Natural gas fired generation improves grid security allowing faster evolution to a distributed energy future in a more modular grid made up of resources that can be isolated to avoid major grid failure in a natural disaster or terrorist attack.  There is a place in the distributed energy future for every fuel type including renewable energy.  But each must be placed in our modular, self-sufficient, reliable, cost competitive cleaner distributed energy future  based upon the least cost, best fit principles that guided integrated resource planning for years until RPS standards, wind and solar carve-outs and other politically correct industrial policy rules hijacked the process.  That time is combining to an end as the distributed energy future is assembled microgrid by microgrid by the private sector, using competitive forces and reliability standards at least as substantial as the governments to assure continuous operation of their business.

The big shift in energy use is toward competitive performance optimization from the convergence of energy, technology, supply chain operation including distribution and the use of energy by end use consumers in the distributed energy future.  The role of the utility is no longer producing energy for us but to choreograph the reliable delivery and the diverse access of various energy sources, energy products and energy management services in a perfectly choreographed dance taking place 24/7.

We should anticipate the return of direct retail access to energy competition. But we should also expect it to be vastly different than the crude first attempts that worked in Texas but fell flat on its face in California’s energy crisis.  The big shift in energy will bring more customer aggregation vendors or buying co-ops acting as purchasing agents for businesses and homeowners.  We should expect bundling of energy, technology, information, security and other services designed to provide convenience and value tailored to meet our needs.    Yes, there will be “apps” for that!


So what does this big shift in energy mean?

The Big Shift in energy means new strategies and risk in competitive energy markets. It means new knowledge available from a tsunami of data available about our energy use.  It means new choices not just in energy sources like fuels for power generation, but also new vendors, new bundles of services.  It also means new connections made possible by collaboration and mutual interest both designed to help us get a better deal, optimize the performance of our business, and deliver a better value proposition to our own customers and our households.

When all this low cost energy gets put to work focused on building a better future, America will be prepared to compete anywhere in the world across every stage of the business cycle.

The big shift is using energy—low cost domestic energy growth—to reinvent America’s competitive economic position for the future.  A future that makes America more secure, more technologically advanced, more globally competitive, more environmentally responsible and more self-confident than ever.

By. Gary L. Hunt

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