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  • Background Information For Investing Opportunities Associated With The Transition From Centralized To Distributed Energy Resources  17 comments
    Sep 21, 2013 1:47 PM

    Background information for investing opportunities associated with the transition from centralized to distributed energy resources

    After Friday's (September 20, 2013) EPA proposed regulations placing curbs on power plant carbon emissions I started a line of research looking more closely at the issue. What I found was that there are several market forces converging that will likely change the nature of the power grid in the near future irrespective of the regulations.

    I don't know if there is any investor interest in these issues at this time. But I thought it would be interesting to summarize a few articles I found that surface key issues.

    I am going to start off with three articles that provide an informational overview of many of the issues. I will follow that with a brief summary about the impact of the EPA's proposed regulations.

    In my opinion, the EPA's actions are mostly irrelevant as market forces are already in place that signal the beginning of the end for coal fired electricity generation plants in the US.



    Why the U.S. Power Grid's Days Are Numbered

    By Chris Martin, Mark Chediak, and Ken Wells August 22, 2013

    There are 3,200 utilities that make up the U.S. electrical grid. These companies provide $400 billion worth of electricity per year, mostly derived from burning fossil fuels in centralized facilities and distributed over 2.7 million miles of power lines. Regulators set rates; utilities get guaranteed returns; investors get sure-thing dividends. It's a model that hasn't changed much since Edison invented the light bulb, and it's doomed to obsolescence.

    That's the opinion of David Crane, chief executive officer of NRG Energy, a wholesale power company based in Princeton, N.J. Crane says that a confluence of technology, deregulation, cheap natural gas, and political pressure poses "a mortal threat to the existing utility system." He says that in about the time it has taken cell phones to supplant land lines in most U.S. homes, the grid will become increasingly irrelevant as customers move toward decentralized energy. Rooftop solar, in particular, is turning tens of thousands of businesses and households into power producers. Such distributed generation, to use the industry's term for power produced outside the grid, is certain to grow.

    Crane suspects some utilities will get trapped in an economic death spiral as distributed generation eats into their regulated revenue stream and forces them to raise rates, thereby driving more customers off the grid.

    Anthony Earley Jr., CEO of giant Pacific Gas & Electric, doesn't share Crane's timetable for the coming disruption. He thinks it's further out, but he does agree about the seriousness of the threat. Solar users drain revenue while continuing to use utility transmission lines for backup or sell their power back to the power company. Earley questions how power companies pay for necessary maintenance and upgrades of the transmission system [the grid] if the free ride continues? So far regulators in Louisiana, Idaho, and California have rejected calls to impose fees or taxes on solar users.

    A July report by Navigant says that by the end of 2020, solar photovoltaic-produced power will be competitive with retail electricity prices, without subsidies, in a significant portion of the world. []



    Game Changers to the U.S. Electric Utility Industry.

    The Edison Electric Institute recently released a report entitled "Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business" [].

    The report describes what it terms as a series of disruptive innovations that are encroaching on Electric Utilities. The changes are due to convergence of factors such as:

    * Enhanced focus on development of new distributed energy resources [DER] technologies in conjunction with falling costs.

    * Increasing customer, regulatory, and political interest in demand side management technologies.

    * Government programs to incentivize selected technologies.

    * Declining price of natural gas.

    * Slowing economic growth trends.

    * Rising electricity prices in certain areas of the country.



    In an article appearing in Forbes that discusses the Edison Electric Institute's publication, Peter Kelly-Detwiler reports that these factors are potential "game changers" to the U.S. electric utility industry, and are likely to dramatically impact customers, employees, investors, and the availability of capital to fund future investment. []

    That Edison Electric Institute publication suggests that financial markets are not aware of the scope of disruptive potential. The publication further suggests that with the advent of demand response, distributed generation [behind-the-meter solar, storage], and increased end use efficiencies, revenues may fall and new tariff structures may become necessary.

    If tariffs for capacity or kilowatt-hours are raised to compensate for declining centralized generation utilization, the effect may be to further drive customers away from a centralized grid system.

    Germany and Australia:

    In some overseas markets with high tariffs, the push to distributed generation is proceeding more rapidly than in US market. CEO Peter Terium of RWE (RWE AG ), one of Europe's largest utilities, stated in 2012 "Our core markets are changing remarkably fast." With 32 gigawatts of solar, 40% of that on residential rooftops, consumers are now both producers and consumers. The success of this transformation of the energy industry will be decided at the local level.

    [Note: there are definite signs that the transition in Germany is proceeding too rapidly.] []

    RWE is already living the Edison Electric publication scenario. With the advent of solar, as well as increasing end-use efficiencies, the utility now forecasts declining electric sales from now to 2035, with mid-afternoon peak demand falling almost 20% from just over 24,000 MW to 19,000 MW.

    Australia is looking at similarly rapid and significant changes, having gone from 20,000 solar rooftops in 2008 to over 1,000,000 as of March this year (2013). Australian utilities are struggling to cope with this change, and looking to find new ways to remain relevant to customers.

    In the US:

    NRG's CEO David Crane recently indicated that solar power and natural gas are coming on strong, and that some customers may soon decide they do not need a centralized electric utility. He predicted that within a short timeframe, we may see technologies that allow for conversion of gas into electricity at the residential level. If this occurs, one could expect a significant impact on the value of existing generation companies as well as the value of electric distribution utilities.

    [I looked into the technology that Crane was referring too and found the following example of a direct conversion of natural gas to electrical power and heat. Redox's Power SERG 2-80, also called "The Cube," that connects to a natural gas line and directly electrochemically converts methane to electricity. The first generation, scheduled for release in 2014, has a nameplate capacity of 25 Kw, which can power a gas station or small grocery store, and is roughly the size of a dishwasher. The system can presumably run at an 80% efficiency when used to provide both heat and power.] []

    By the way, The Cube uses Rare Earths to function - []

    It remains to be seen if Redox can deliver what it promises, but the point is that technological advances are likely going to substantially modify the market environment for large electric generating/ utility companies in the next ten years.



    Changes in the U.S. Regulatory Environment

    Curbs on power plant carbon emissions.

    The Obama administration on Friday [September 20, 2013] announced regulations setting strict limits on the amount of carbon output that can be generated by NEW U.S. power plants. The proposed regulations quickly sparked a backlash from supporters of the coal industry and are certain to face legal challenges. []

    The new EPA guidelines make it nearly impossible to build economically feasible new coal plants without using expensive technology to capture carbon emissions.

    In practical terms, the proposed regulations are likely to be irrelevant because economic/ technological forces are already reshaping the power markets.

    Current natural gas-fired power plants are already within the rule's emissions limits without requiring new equipment. That means natural-gas fired plants, already by far the cheapest power plant to build and operate, will likely remain the top choice for utilities.

    While coal will continue to be an important fuel for electricity generation in the U.S. the country will get less and less coal from high-cost Appalachian mines. Companies with large Appalachian operations, such as James River Coal (JRCC) and Alpha Natural Resources (ANR), will likely suffer. []

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Comments (17)
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  • tripleblack
    , contributor
    Comments (13581) | Send Message
    Excellent DD, FPA. The Rat Rules!
    22 Sep 2013, 08:16 AM Reply Like
  • greentongue
    , contributor
    Comments (974) | Send Message
    Electric companies that capture the excess solar during the day for a discount and sell it back to maintain demand levels should profit. They will need affordable and fast responding storage more than ever.
    22 Sep 2013, 08:42 AM Reply Like
  • D-inv
    , contributor
    Comments (4807) | Send Message
    I look forward to reading your articles, FPA. Excellent idea.
    22 Sep 2013, 11:02 AM Reply Like
  • RBrun357
    , contributor
    Comments (820) | Send Message
    Thanks FPA,


    Very informative and appreciated!
    22 Sep 2013, 11:32 AM Reply Like
  • Stilldazed
    , contributor
    Comments (3697) | Send Message
    Hi FPA,
    Thanks for the research, analysis and links.
    22 Sep 2013, 12:18 PM Reply Like
  • H. T. Love
    , contributor
    Comments (19488) | Send Message
    Another timely and useful overview FPA! Good work!


    What you've summarized here occurs within the context of growing distributed generation. There;s a consortium that promotes it, WADE, and one of the (CPST) folks is a prominent participant, which is how I became aware of it.


    Thanks for taking the time to to this blog - it's going to be very useful I think.


    22 Sep 2013, 12:27 PM Reply Like
  • H. T. Love
    , contributor
    Comments (19488) | Send Message
    Heh! I meant to provide the link to WADE. Apologies.



    24 Sep 2013, 06:18 AM Reply Like
  • FocalPoint Analytics
    , contributor
    Comments (6282) | Send Message
    Author’s reply » Hi HT, Thanks for bringing up the association between distributed generation with clean (Solar and Wind) power issue.


    Distributed generation is one complicated subject. It hurts my head. For example, power generated by solar setups generate all their power during the day when people are at work. Now the people come home, and the sun is down. One of three possibilities now surfaces: Virtual battery, Home Storage, High rate demand.


    If people use the grid as a 'virtual' battery, they channel the power into the grid during the day and get power back during the night. This brings up a lot of questions. What happens to the solar power when its channeled into the gird? What rate is the rooftop provider paid, and who's paying them? The solar owner comes home, and its dark. Now they have to buy power. My guess is the rate they have to pay will be a lot higher than the rate they got for their power.


    Than we have the home storage option. Adding a home storage function means the solar owner needs an expensive storage device. In addition, the manufacturing of storage devices is not a green process. On top of this I think I see a business opportunity for a 'stored power' business. In this situation, a third party builds a large energy storage facility, and contracts with solar owners to have their daily generated power sent to that facility via the grid. Now it gets dark, and the power is sent back via the grid.


    Than we have the high rate demand possibility. In certain situations, the grid might want to access a solar owners stored energy. The owner would want a premium price for that. This line of reasoning suggests that so called "smart" meters need to be a lot more than meters, they are instead computers running complicated programs. Who builds those programs? Who decides if a solar owner's stored energy can get tapped, and at what price?


    There is no doubt that distributed generation is going to be growing. Our ability to make money on this mega-trend will be dependent on our knowledge of what kinds of new products and businesses are going to be needed to deal with the new realities of the energy grid. What kinds of "smart" meters are out there, and who makes them?


    One of the things that makes writing about this challenging is that the terminology and concepts are so new there is no common or even no name for the concept. For example, I came up with that term 'virtual battery' as I was writing my comment. It turns out there was a previously existing phrase for that concept (Grid energy storage). But I did not know that, and as a result, I found myself inventing terminology on the fly. As a result of this, one of the things I am going to be adding in the header in the near future is a list of terms for these new concepts.
    24 Sep 2013, 07:44 AM Reply Like
  • H. T. Love
    , contributor
    Comments (19488) | Send Message
    FPA: The storage issues are now being addresses, rather haphazardly of course at this early stage, in many areas. Check out California - as usual they lead with state mandates and incentives for storage being imposed upon the providers.


    I suspect the grid operators will eventually be installing a lot of distributed storage and using any privately available storage where allowed. Installing their own will keep them in the revenue game, as well as allowing substantial other grid upgrades needed currently to be deferred. Normal competition from various distributed generators, especially homeowners that see incomcing revenues as just "gravy" on top of savings, should allow purchase of juice cheaply from these generators (after a long time of getting a market established, populated and stabilized within a new pardigm of course) and dispatch it later at a higher price to folks that don't have storage.


    Regulators will need to paly a big role in this to help assure "they do no harm" - i.e. allow some kind of reasonable ROI/ROR to the big players for the expense undertaken.


    24 Sep 2013, 10:47 AM Reply Like
  • Mayascribe
    , contributor
    Comments (11198) | Send Message
    "Virtual battery." Great sniglet, FPA.
    24 Sep 2013, 12:05 PM Reply Like
  • tripleblack
    , contributor
    Comments (13581) | Send Message
    My thought is that the contract which will accompany the initiation of a private off-grid power relationship with the grid operator would include a requirement to allow the grid operator access to any stored power at a certain price.


    The tendency in all such cases will be to fit the new relationship into the old political infrastructure, ie, the regulatory tolling process. Regulators in such an instance would probably (although not certainly) tend to rely on their existing relationship with the grid provider, so the terms of such agreements would not be advantageous to the private, off-grid power producer interacting with the "public" grid operator. This perception that the grid operator would be working for the public and protecting the public interests (which is a logical discontinuity in my opinion, but still something I have often seen take place anyway) is going to stall the progress of this movement until more enlightened thinking occurs.


    As for the potential sources for that off-grid power generation, I believe it will come from a plethora of methods.


    In my part of the country we have a long tradition of harnessing water flowing down hill, particularly in the thousands of small creeks and springs which are so abundant. Small hydro generation units are available, and incredibly efficient and long-lived, and unlike both wind and solar, not highly variable if installed properly. They will run day and night, nonstop, and at a very constant output. I know of one such installation on a small spring in Tennessee built by an ex-TVA engineer on his 10 acre sidehill farm that has run flawlessly for nearly 20 years, producing steady power from the small spring and a tiny dam which builds just enough head to compensate for any small seasonal variations in flow.


    This farm also has 2 old but very functional wind-powered turrets which pump water. One is used to provide fresh water supply from a well to the house, although it can also (with the turn of a valve) divert water elsewhere, including into the containment pond. The other is a backup for the first, but is also capable of either pumping water up from the pond to irrigate the fields, or to generate power (it has an array of large LAB's bought for lead salvage prices from a TVA auction) for the barn and outbuildings.


    My friend uses solar hot water heating (unit mounted on the south-facing roof of the garage), and has a large solar power unit mounted on the roof of the barn which is largely abandoned, since it proved more trouble than it was worth.


    He IS very interested in storing power, and has been watching developments play out with the various topics we talk about all the time here and on the APC. Rather than jump at one of the new ideas, however, he continues to stay focused on his water power solution, and is now building a new generator from scratch which will be his reserve unit in case his installation fails or finally wears out. Since he is using spare power and wind to pump water to keep his pond at a stable level, he IS of course already storing power via pumped hydro techniques.


    Needless to say this sort of solution would not work down in the flatlands.


    He IS still tied into the grid, but his local grid operator has thus far been able to find excuses NOT to buy surplus power from him, so he does virtually no business with them on either side of the meter, and has no interest in doing so in the future.
    21 Oct 2013, 09:39 AM Reply Like
  • Mayascribe
    , contributor
    Comments (11198) | Send Message
    Nice job, FPA.


    Funny timing of your Insta, too, as my eldest sis is in town celebrating mom's passing three years ago today, and this morning we were talking about this topic, specifically West Virginia coal producers. Apparently, West Virginians are more than peeved about Obama's policies regarding coal miners, and utilities that use coal to create electricity.


    Historically, West Virginia is a Democrat state...which may be moving more and more toward the right.


    I'm astounded that there are already 1,000,000 solar installations in Australia; that's one installation for every 23 Aussies! What a nightmare in the coming years when cloudy days happen. The amount of backup power needed in case of solar dropping to 5% efficiency....


    Great idea, FPA!
    23 Sep 2013, 04:52 PM Reply Like
  • FocalPoint Analytics
    , contributor
    Comments (6282) | Send Message
    Author’s reply » What started me thinking about it Maya was when you started talking about (LINE) on the QC. All the new technology and equipment needed to maintain a distributed power network has got to increase the distribution costs for electricity. So I started to wonder if the Power distribution business model was obsolete.


    I dug around a bit and found the articles in the header to be useful in conceptualizing the issue. My preliminary conclusion is that yes, the grid business model is becoming obsolete, but only because a new absolutely essential business model will have to be built to replace it. The new grid will be there to provide backup power for some, primary power for others, and a new revenue stream, allowing owners of distributed generation facilities to monetize the value of the spare power they generate. I also see a real need for the availability of cheap local power storage for small power generating facilities.


    What I think is going to happen is that grid businesses will pick up a new revenue stream to replace the revenues they will be losing from central power generators. That new business will involve managing and balancing the needs of different kinds of customers. That's a more complex service, and I think it will be associated with higher costs and profit potential. The modern grid providers will be collecting revenues from people buying power, and from many more people selling it.


    The companies that are likely to suffer are centralized power utilities. As distributed power generation grows, the needs for highly profitable peaking plants seem like to diminish, and that should hurt the bottom line since that kind of power is sold at a premium. On top of that, they will likely need to downsize their existing centralized power facilities.


    The latter brings up the economy of scale issue. I don't know what is going to happen with that aspect of the generation business.


    The idea of the Insta is to elicit thoughts on the potential for making money by these on-going changes.
    23 Sep 2013, 05:42 PM Reply Like
  • FocalPoint Analytics
    , contributor
    Comments (6282) | Send Message
    Author’s reply » Here is a good link on micro-grid development posted by LT
    19 Oct 2013, 06:36 AM Reply Like
  • SMaturin
    , contributor
    Comments (2268) | Send Message
    It's a bit of a stretch to say billionaire Larry Ellison installing a microgrid on his private Hawaiian island is a threat to the utility monopolies, as the first sentence of the article implies.


    Good story, nonetheless.
    19 Oct 2013, 11:11 AM Reply Like
  • tripleblack
    , contributor
    Comments (13581) | Send Message
    LOL, when it comes to monopolies (and I include government in this) ANYTHING which is not under their control is perceived (by them) as a "threat".
    21 Oct 2013, 09:49 AM Reply Like
  • H. T. Love
    , contributor
    Comments (19488) | Send Message
    CA officially passes requirements for grid storage. I think this is n essential part of distributed energy, of course.




    A one-pager saying we did it, we';re happy and going forward ... not worth reading other than noting it's been enacted.



    19 Oct 2013, 08:42 AM Reply Like
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