A lot of renewable energy makes sense when one looks at the 20 year levelized cost of energy. All one has to do is make assumptions about Coal and Natural gas inflation over the next few years and wind and some forms of solar start looking good from a risk management perspective in a power generating portfolio. Here is a spreadsheet tool for comparing renewable energy costs with fossil based equivalents.
Please note oil generates only 1.6% of electricity in the U.S. So please ignore any pundit comparing electricity generation via wind and solar with oil prices at $X price, it is a red herring and something for the CNBC crowd.
Crunch Time!
The new stimulus package is going to include $54 billion for efficiency. If one assumes that these efficiency investments have a 6 year payback period or IRR of 16.6%, then we might see about $8.64 billion less spent on fuel for heating and electricity due to efficiency savings. If we assume a 50-50% split for electric and fuel based energy, then there could be a $4.3billion contraction going forward in the U.S. electric market due to the stimulus.
This isn't a huge hit for a +$320b industry, but look out if a green smart grid gets put in for transmission and distribution, then it could be a 10% upstream demand side hit going forward. Yes, I am for the green smart grid as it will make things more efficient, safe and reliable over time, but it is important to realize all change has ripples.
The real crunch: The larger impact comes from national HVDC transmission installation and efficiencies in distribution. You can read about the U.S. grid here.
ABB thinks upstream demand could be reduced over 10% with an HVDC grid and smart distribution. See report here and read with care, this is a vendor speaking.
That could mean a +10% decline in demand for power generation, a big decline in upstream generating requirements. From a value investor's perspective, some generators' moats are going to get smaller as the effective grids get larger and more efficient. Depending on the wholesale to retail mark-up, it could be $10 billion in lost upstream generating revenues. Utility experts feel free to submit your estimates in the comments.
On top of the decline in revenue for power generators, a national HVDC grid and / or making the current multiple U.S. grids more efficient would mean the retirement of many Peaker plants and other fixed assets held by generating utilities.
Currently grid congestion means that peaker plants and other capex are required to be available. Depending on the regulatory regime, firms receive compensation for a fair ROI on these assets. In light of efficient grids a lot of these will become redundant, shrinking the rate base. Regulatory regimes vary from state to state and region to region. EnerNoc (ENOC) and other smart load management systems could see their market shrink dramatically.
A smart green grid makes sense. Some wind farms actually had negative electric rates due to poor grid infrastructure. The generating utilities and FERC have been far too cozy for too long.
Upstream electricity demand will shrink. That might not be a bad thing on the macro scale. Some utilities with generating assets instead of just T&D (transmission & distribution) may face a bit of a challenge as the assumption of 1%/ year growth reverses quickly and they are fixed with usage assumptions and fixed debt loads. Earnings could suffer.
Ever wonder why those smart meters never made it into your home or why you never had variable rate electricity pricing? The technology has been around for 20 years. The problem is no utility wants to pay for the privilege of shrinking the consumption rate of their product. Variable rate pricing and in-house meters cause behavior shifts in domestic users leading to 3-10% declines in consumption. Makes a person think a little about what will happen if these become standard.
I am not advocating an energy or policy position, just saying, it pays to look around and see who the winners and losers are from inevitable change that is happening; in the long run efficient, sustainable use of resources benefits everyone. Decisions made in energy typically run for 20-30 years, so before you jump to a decision think about your children's world.
