In a watershed 1968 essay, ecologist Garrett Hardin defined "The Tragedy of the Commons" as the depletion of a shared resource by individuals, acting independently and rationally according to their own self-interest, despite the knowledge that depleting the shared resource is contrary to the best long-term interests of their society.
He began with an example from medieval times when residents of a village frequently had the right to graze their cows on a community pasture. An individual herder pursuing his own best interest would invariably increase the number of cows he grazed in the pasture. But when all herders made the same individually rational decision, the common pasture was depleted or even destroyed by overgrazing.
As a trailblazer and thought leader in the early days of the environmental movement, Mr. Hardin was particularly critical of pollution of the commons, which he described as follows:
"In a reverse way, the tragedy of the commons reappears in problems of pollution. Here it is not a question of taking something out of the commons, but of putting something in -- sewage, or chemical, radioactive, and heat wastes into water; noxious and dangerous fumes into the air; and distracting and unpleasant advertising signs into the line of sight. The calculations of utility are much the same as before. The rational man finds that his share of the cost of the wastes he discharges into the commons is less than the cost of purifying his wastes before releasing them. Since this is true for everyone, we are locked into a system of "fouling our own nest," so long as we behave only as independent, rational, free enterprisers."
While some might disagree, I think the electric grid is an essential commons that makes life in an industrial society possible - a commons that is no less important than clean air and water.
The two critical attributes for an industrial society's electric grid are reliability and stability. We demand 99.999% reliability from utilities and we insist on stable power without surges, sags or outages. Since electricity must be used or stored the instant it's generated, intermittency is the mortal enemy of a stable and reliable electric grid.
Over the last decade, we've seen a stunning shift to renewable power sources like wind turbines and solar panels that's attributable in large part to the widely-held belief that CO2 emissions are causing global warming and are, therefore, an unacceptable pollution of the commons.
While renewable power sources produce squeaky-clean green electrons, the electric current they generate is inherently unreliable and intermittent, which makes it fundamentally destabilizing to the grid. That introduction of massive intermittency into a system that requires absolute stability is, by definition, pollution.
In an ironic twist of fate, the renewable power industry is flagrantly polluting one commons, the electric grid, in the name of avoiding possible harm to another commons from CO2 emissions.
We're inundated with stories about how wondrous renewable power resources are when it comes to reducing CO2 emissions. Unfortunately, we almost never read about the technical challenges and correlative costs of making these inherently unstable resources useful in an industrial society. The result is a one-sided debate where companies acting in their own self-interest accentuate the positive aspects of green electrons while scrupulously avoiding any discussion that focuses on the catastrophic impact of adding unreliable and intermittent power to the electric grid.
In a recent report titled "Cloudy with a Chance of Energy: Evaluating Technologies to Manage Grid Intermittency," Lux Research explained that wind farm output can fluctuate up or down by 3% over a ten-minute interval, 10% over a one-hour interval and 16% over a two-hour interval. Similarly solar panel output can plunge by 50% or more in a few minutes. Therefore, to avoid grid collapse, somebody else has to be waiting on standby and willing to step in and fill the intermittency gap with conventional generating resources.
Providing that service is neither easy nor cheap because it effectively requires the standby power producer to maintain a duplicative back-up system of generating assets that will be operated in a terribly inefficient manner. Those inefficiencies impose a huge cost burden on society as a whole. One observation in the Lux report put the magnitude of the economic problem into perspective for me.
"At 30% renewables penetration, over the course of a year, only around 0.5% of electricity generation capacity will require storage. Yet in 2009, over 20,132,212 GWh of electricity was produced globally, indicating a market potential of over 100,000 GWh for storage from the 1,482 MWh currently installed if and when renewable generation around the world approaches 30%."
Manufactured energy storage systems typically cost a couple million dollars per MWh, which means they cost a couple billion dollars per GWh. When you run the numbers, the total cost of providing all the energy storage that Lux thinks we might need would run to a couple hundred trillion dollars, an amount that would choke even Ben Bernanke.
Alternative power generators enjoy a wide variety of government incentives including feed-in tariffs, investment tax credits, production tax credits, renewable energy certificates and power curtailment priorities that make their intermittent and unreliable power far more valuable than stable power from conventional sources. They receive premium prices for power production when the weather is cooperative, and force standby producers into a position where they must charge higher prices for power when the weather turns inclement.
I have no quarrel with those who argue that green-electrons are more valuable than conventional electrons because of reduced CO2 emissions. I do believe, however, that the price premium paid for green electrons must be offset by the fully loaded cost of providing standby generating and storage for times when the weather is uncooperative and the green electrons are not available.
Every industry in the world is expected to pay the costs of abating the pollution it creates. Why should renewable power producers be treated differently as they pollute a critical commons?
Over the last year it's become increasingly clear that something has to give and companies and individuals who sell or operate renewable power generating systems will be compelled to accept responsibility for their unavoidable intermittency. Some will choose to sacrifice their curtailment priorities. Others will contract with standby capacity providers. The third, and in my opinion the most interesting, class will incorporate enough energy storage in their project specifications to firm their power delivery commitments.
At this point it's not entirely clear what the minimum required level of capacity firming will be, although I tend to believe a minimum of 15 minutes will be required to leave enough time for a reasonable ramp of standby systems.
There's no question that all three choices will reduce the economic benefits renewable power providers have enjoyed in the past, but it has to happen. Unless I'm gravely mistaken, the primary beneficiaries of a shift to energy storage as a tool for combatting intermittency will be producers of manufactured energy storage systems.
In the lithium-ion battery sector manufacturers like Altair Nanotechnologies (NASDAQ:ALTI), A123 Systems (AONE) and Ener1 are devoting substantial resources to renewables integration after ambitious expectations for electric vehicles proved to be overblown. In the lead-acid and advanced lead-acid battery sector, publicly held companies like Enersys (NYSE:ENS), Johnson Controls (NYSE:JCI), Exide Technologies (XIDE) and Axion Power International (NASDAQ:AXPW) together with privately held companies like Ecoult and Xtreme Power are all working on demonstration projects. The same is true in the flow-battery sector where publicly held ZBB Energy (NYSEMKT:ZBB) and privately held PrudentEnergy are conducting demonstrations. We're also seeing intense activity from a number of private companies like Ambri, which is developing a low-cost liquid metal battery, Aquion Energy, which is developing a low-cost aqueous hybrid battery, and EOS Energy, which is developing a low-cost zinc-air battery. They won't all succeed, but they're all working very hard to bring cost-effective energy storage solutions to a highly cost-sensitive market.
Since 2008 I've been telling readers that energy storage is the beating heart of cleantech and an investment mega-trend that will outlive us all. While electric cars are shaping up as catastrophic failures for reasons I've discussed ad nauseum, the energy storage sector is progressing exactly as I expected it to. Most of the cool ideas have fallen by the wayside as developers of cheap and cost-effective solutions have surged to the forefront. Sooner or later the market will get the message and investors who have positioned themselves in a diverse portfolio of energy storage stocks should profit handsomely as the ugly duckling becomes a swan.
Disclosure: I am long AXPW. 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.
Additional disclosure: Author is a former director of Axion Power International and has a substantial long position in its common stock.