The Energy Industry Is Undergoing Radical Change
Summary
- New energy technologies are transforming the power industry.
- Distributed energy generation is threatening to upend the traditional utility business model.
- While there are a few utilities adapting to the new energy landscape, the majority of them are unprepared.
The energy industry is transforming at a rapid rate. The emergence of increasingly cost-effective renewable technologies like solar and wind are completely changing the industry. Electric utilities are starting to grapple with the fact that these new forms of energy will likely dominate the narrative moving forward. Whereas some utilities are embracing this change, others are struggling to adapt.
A few energy companies like NextEra Energy (NEE), AES Corp. (AES), and Duke Energy (DUK) are pouring billions of dollars into renewables. These companies are well-positioned to take advantage of renewables' explosive growth. Energy companies that are overly reliant on traditional energy sources like coal could find themselves at a disadvantage moving forward. In fact, some even predict that a utility death spiral will occur for these companies.
The emergence of cost-competitive renewables like solar and wind are changing the dynamic of the energy industry.
Source: iStock
Growth of New Energy Technologies
Renewables like solar and wind are opening up entirely new possibilities of how energy is generated. Distributed energy, for instance, has become increasingly viable with the advancements being made in solar and storage. Tesla (TSLA) is almost single-handedly pushing down the cost of lithium battery storage at a stunning rate. This, in combination with the rapid advancements being made in solar, is making distributed energy increasingly cost-competitive with centralized energy.
Solar PV is arguably the biggest threat to displace traditional fossil fuels moving forward. Despite solar's exponential growth, solar companies have had an extremely hard time profiting from this growth. Even leading US solar companies like SunPower Corp. (SPWR) and First Solar (FSLR) have struggled despite solar's growth. The consistent steep price declines experienced by solar have made it incredibly hard for solar companies to maintain healthy margins.
However, some solar companies like SolarEdge (SEDG) and Enphase (ENPH) have managed to successfully capitalize on solar's growth by focusing on solar components rather than solar modules. SolarEdge and Enphase are now some of the most valuable solar companies in the world despite not focusing on module manufacturing. Solar will likely pose an even greater threat to traditional utilities as the industry continues to mature. In fact, solar technology is allowing for new forms of energy generation that could be devastating for the utility industry.
Solar and wind are starting to compete with even the cheapest fossil fuels on the cost front.
Source: IRENA
Challenges Ahead for Utilities
The growth of distributed energy is bad news for traditional electric utilities, as most of these utilities rely on the centralized energy generation model. The distributed energy trend is so threatening to utilities that many believe the growth of distributed energy will cause a utility death spiral. While many are skeptical of such a death spiral, it is definitely a very real possibility.
Essentially, as more customers leave utilities for distributed technologies like solar plus storage, utilities will be forced to raise prices for the remaining customers, as these utilities have many fixed costs. This price raise will subsequently incentivize even more customers to defect from the grid, thus causing a vicious cycle or death spiral. Utilities are well aware of the potential threat of a death spiral. In fact, a poll indicated that 71% of utilities believe that a death spiral could be a very real possibility.
The advancements being made in energy storage technology is only making a utility death spiral scenario even more plausible. Cost-effective energy storage will enable solar users to essentially become grid-independent. The explosive growth in the popularity of electric vehicles will only accelerate energy storage innovation. In fact, Tesla has almost single-handedly revolutionized lithium battery technology in recent years.
Many major utilities can already sense the change coming. Increasingly strict environmental regulations and rapid technological changes in renewables are already starting to make a big impact on the energy industry. Major energy companies like Southern Company (SO) and AES are already pouring vast amounts of resources into renewables.
Whether or not major utilities will be successful in transitioning towards renewables is still highly questionable. It will be incredibly hard to transform an aging centralized grid energy infrastructure in a relatively short period of time. While some nimble utilities could successfully transform their business models, it is hard to see the vast majority of the utility industry adapting to the new energy landscape.
It will be incredibly hard for utilities to upgrade a huge and aging grid infrastructure.
Source: NREL
Conclusion
Solar and wind are rapidly increasing their presence in the energy industry. In fact, solar has been on a consistent exponential growth trend for at least a few decades now. What's more, this growth does not seem to be slowing down despite the fact that solar is no longer a niche industry. In fact, solar and wind are expected to account for the majority of new energy generation capacity in 2020.
Aside from the more nimble and innovative companies like AES Corp. and Duke Energy, electric utilities will likely struggle moving forward. Investors would be far better off looking into solar companies like SolarEdge and Enphase. The advancements being made in solar PV and energy storage are too large to ignore at this point.
This article was written by
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Comments (38)
you wrote: ....No one is defecting from the Grid.....
Actually many are.
Individuals and individual members of energy co-ops. Especially in California.
These former utility customers are lost to utilities forever, increasing the charge to the remaining customers.That is part of the "death spiral" explained by the author.You do not seemed to be aware of "mini-grids" growing rapidly.
Mini-grids formed by multiple home developments with common storage of excess day electricity, as well as a gas turbine back ups at night or when there are not sunny days.
Many of these house cluster only have 60 to 70% occupancy or large electric needs. Yet all have solar roofs, a new law in California.
Excessive electricity from the seasonally occupied houses is "pooled" by mini-grid distribution software, now getting standartized.And BTW, most of this planet has no Grids to begin with.That is why the village pooled solar and wind, tied, shared and distributed in the software driven mini-grids is becoming the future.
Actually many are. "If they are I think it's a foolish decision to disconnect from the grid. You double your the with batteries when the existing grid could be your battery. What sense does that make?
many people (both individuals and communities) want to be "Grid-free", not because they are foolish, but because they want to save money.To say that you are using the Grid as a battery is incorrect and very misleading.
What you really doing is that when your solar panel generate electricity, the electrons go automatically on the grid. You just sold your excess electricity to the utility.Now the question is how much the utility pays you for your excess electricity. In 95% cases, the utility pays you their "wholesale" prices.
However, when you take electricity from the Grid, let's say at night (having no battery) you are buying electricity for whatever utility charges you, which in 95% cases is the "retail" price.
But their "retail" price is usually at least 3 times more than their "wholesale" price.
With storage getting cheaper every year, at some point you would be better off without using the Grid.
You may be getting some sweeter agreement from your utility but that is quite unusual.
Whether or not major utilities will be successful in transitioning towards renewables is still highly questionable. It will be incredibly hard to transform an aging centralized grid energy infrastructure in a relatively short period of time.
My additional comment:
Even upgraded Grid could never eliminate its two major disadvantages and vulnerabilities:a) Up to 30% of generated electricity is lost in the Grid transmission. 100% of generates electricity is used locally. No transmission losses.b) Centralized Grid is vulnerable to a sabotage by terrorists or even a foreign power internet attack. Distributed generation is not.
a) Up to 30% of generated electricity entering the Grid (Wind farms and large Solar farms), is lost in the Grid transmission.
Compared to the distributed solar market with 100% of generated electricity immediately reaching their nearby destination.
All electricity used locally bypassing the Grid. No transmission losses.
Tesla’s Energy biz is almost like printing money. Got to buy more shares....
Hence why I often see many wind turbines not turning - cos they done need more energy right then.Tesla will solve the storage problem and win big because of this.