A Black Swan Threatens The Renewable Industry

|
Includes: AMZN, GOOG, GOOGL, SCTY, TSLA, WMT
by: Jesse Moore

Summary

A lack of grid investment in the U.S. will hamper the growth of renewable energy.

As preferential treatment and subsidy encourage ever more intermittent power sources, the effects on the grid become debilitating.

Studying the effect of billions of euro's in spending by the German government shows that electricity prices have doubled while emissions have stagnated.

A Republican election or a realisation of the ineffectiveness of global energy policy could result in a black swan event if renewable energy policy is repealed.

Subsidy and legislation are costing citizens billions, and hardly affecting the carbon footprint of nations. Funds should be focused on research, and long-term energy plans should overtake today's weak ones.

Investing directly in renewable technology over the last decade have provided mixed returns. Investment poured into an industry that was supposedly on the cusp of a breakout, and investors chasing high returns found little to be excited about. An explosion of activity into wind, solar, and other renewable techs saw prices racing to the bottom. Within that activity, solar and wind power have been able to meet price-competitiveness and even price superiority with conventional means. Measuring the cost of electricity generation without accounting for externalized costs to the grid paint a far too rosy picture. A lack of grid investment promises to cause restrictions on intermittent renewable energy at best, and a backtracking of installed capacity at worse.

Source: The Financial Times

A Flood Of Investment

Following dropping prices and increasing environmental awareness, large companies have joined the fray and begun purchasing large swathes of renewable power. Companies such as Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), and Wal-Mart (NYSE:WMT) beat out utilities by MW produced in 2015.

Tesla (NASDAQ:TSLA) and SolarCity (NASDAQ:SCTY) also look to capitalize on the environmental movement. The much talked about merger between these two companies is based around the goal of creating a renewable technology powerhouse. All businesses directly exposed to installing ever larger renewable capacity are creating a problem. As the renewable portion of the grid rises, the difficulties managing instabilities escalate exponentially.

Germany's Renewable Problem

Germany is a perfect example of the challenges faced by utilities. There is a pair of articles here and here on Germany's energy transition - a project that faces crippling issues despite an enormous amount of funding devoted to a solution. At the heart of these concerns, electricity costs have been on a constant upward trajectory, a startling contrast to declining energy costs across the U.S.

Click to enlarge

What are those issues? They are varied, but almost all are linked to the variable energy flow via solar and wind. When you are dependent on an external fuel source (i.e., the wind or the sun), you cannot control the flow of electrons. The result is a non-linear system. Instead of adapting the upstream (power loading) of the system to the downstream (power consumption), you must match the downstream system to the upstream or shut off power supply - something that long-term energy contracts likely don't allow. The result is that the government or consumers pay for renewable power to be shut down.

Unfortunately for America and much of the world, Germany's grid is having issues despite being far more advanced. Germany's grid reliability is many times better than the U.S., and that comes despite a much larger renewable footprint. Bi-directional power, conventional fossil-fueled peaker plants, and flexible intra-day electricity markets have all soaked up billions over the last decade - it turns out that a renewable grid isn't cheap, and doesn't necessarily make a difference. The Economist discussed this issue in depth, in a must-read article that is aptly named " How to Lose Half a Trillion Euros". Utilities, whom must internalize the costs of the renewable policy, have lost nearly half their value.

Click to enlarge

Are Renewables Making A Difference?

At the heart of the discussion here is whether renewables are making a difference. The truth remains; German emissions have stagnated for much of the last ten years even as renewable have spiked - a direct result of preferential treatment to renewables. An electron from a solar plant must be purchased by a utility, while one from a gas plant does not. The effect is that efficient and expensive gas plants are substituted for cheap, inefficient, and dirty coal Peaker plants.

Click to enlarge

In summarizing a complex political, engineering, and societal issue in two sentences. Germany has spent billions to turn to renewable power (and continues to spend ~ €16 billion per year on subsidies) and attempt to reduce their carbon impact. In turn, they have hardly reduced their carbon footprint and increased the cost of electricity to the average consumer by over 100%. The solution is not nearly as simple as it is made out to be by solar and wind proponents. Furthermore, there are better means of heading toward a cleaner future which we will get to later.

An Analogy To Oil

So why are renewables so difficult to manage?

One way to imagine the situation is to envision an oil system. You have an upstream, a midstream and a downstream. As the upstream producer, you want to produce as much oil as possible to make money. However, if an immediate buyer is not found, or the midstream pipelines are overloaded, you have the option of storage. We are capable of storing many days' worth of oil consumption in our midstream facilities. Downstream refineries pull oil from those midstream systems as needed. The storage systems act as a balancing act between the upstream producers and the downstream refiners; this allows for discrepancies between supply and demand. If we could not store any significant amount of the world's oil consumption, you would either have to shut down refineries or turn off the producers as demand changes. Afterward, you would need to find ways to ramp up to demand instantly. The economic costs would be immense.

Click to enlarge

Imagine oil production over time looked like this! CMU.edu

With a renewable grid, you don't have any significant amount of storage. Modern technology has no method of storing large amounts of energy without high costs or energy losses, and thus you must find alternative methods of balancing the grid. Furthermore, supply and demand must nearly always match, the times involved are near instantaneous, and demand changes drastically throughout the day. If supply outstrips demand, then infrastructure can be severely damaged or shut down, if demand exceeds supply the grid shuts down. Both of these have significant economic consequences.

The Black Swan

A black swan is an event that 's hard to predict, creates an abnormal situation and typically adverse situation. Colloquially, it has come to mean a catastrophic event towards a market or company. While many predicted the GFC as a recent example of a black swan, many saw it coming. With renewables, this could be closer than many believe.

Where is the black swan coming from for renewables? In the form of unwound subsidies and backtracking energy policy. Much of the recent growth renewable grid power has come from wind and solar, and it is expected to make a much larger impact in the future. This is a direct result of subsidy and legislation to encourage renewable adoption. Those policies have failed to achieve much of an effect on carbon output past a critical figure.

Click to enlarge

Response To Intermittent Power And The Grid

While I would agree that wind and solar power is often cheaper than fossil fuel production, the price does not reflect the externalized costs on the grid. If wind and solar had to create the storage necessary to produce constant feed-in rates (in effect play on an even playing field with conventional power), they could not compete in the majority of markets. Furthermore, the large capital costs for grid maintenance and upgrades are becoming a serious problem.

…Utilities are going to have to cover the costs of maintaining the grid in any case, Arizona State's Miller said -- and without changes, that means that solar-equipped customers, who tend to be wealthier than not, may be pushing extra costs onto ratepayers that don't have solar. - Excerpt via GreenTechMedia.com.

As the issues rise, it is not surprising that grids often reach a point of maximum renewable penetration. Germany has spent billions upgrading its grid and managing the issues of renewable energy, the U.S. and much of the western world has nowhere near the advantages that the Germany grid boasts.

The resulting response to climbing renewables is concerning;

  • Due to weak energy demand and skyrocketing production from intermittent sources, energy prices in Germany have been negative as the grid tries to manage an overabundance of renewable electrons (also remember that the renewable producers are guaranteed a sale price, while the utilities are not)
  • Governments in the UK set aside nearly £60 million per year to pay wind providers to shut off power. This figure ballooned over 10 times between 2012 and 2014.
  • Australia and China are both discouraging rapid growth in the intermittent renewable sector dude to fluctuations in energy prices and potential blackouts (although much of the blackout concerns are over-blown)
  • Energy providers in the U.S. are incentivizing less peak-power consumption by giving free power late in the evening

Investor Takeaway

In the U.S., renewable energy producers are dependent on preferential treatment from both a preferred producer perspective and economic subsidies. With an aging, old, and widely dispersed electricity grid, the mounting costs of renewable penetration could cause a quick change of policy by the government. A republican government would likely unwind these subsidies shortly after the election. The result would be a tailspin and drastic drop in the valuations of those companies exposed. Economically, renewable producers could be forced to internalize the costs of upgrades via storage, or via feed-in tariffs. The policy on the industry at that point turn from subsidy to a penalty, and the growth would halt in its tracks. Investors should pay attention.

A Side Note

I am an avid supporter of clean energy technology. Not only for environmental reasons, but also for sustainability and health concerns. The billions being spent on renewable energy subsidies, grid upgrades, and legislative changes are giving us minimal benefit beyond some 10-15% penetration. That money would be far more useful in the hands of scientists, startups, and engineers focusing on making these technologies standalone competitive.

Fusion power, traveling-wave fission reactors, and significantly improved energy storage methods provide a route to a more sustainable future. Investment in research has delivered far better returns in the past, and it will in the future. Governments need to stop focusing on buying votes now with ineffective clean energy policy and focus on the long-term goal.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.