February 23, 2018 Read More →

Analysis: A Disruptive Shift in American Electricity Markets

Bloomberg News:

The sudden consolidation of the U.S. merchant-power industry is a response to flat demand and the flattening of price spikes by renewable energy. Hence, Calpine Corp. and Dynegy Inc. are shuffling off the stock market, while Vistra Energy Corp. and NRG Energy Inc. tout their retail power businesses. Wholesale power markets themselves are having to change or consider it as they grapple with more supply coming at the unfamiliar marginal cost of zero or negative dollars.

Similarly, regulated utilities are shifting ever more of their investment — the basis of their returns — to wires and away from generation. Giant new power plants are tough to justify, and there’s a stronger case to be made for expanding and strengthening grids to better accommodate renewable and distributed energy sources (including electric vehicles).

That brings up the biggest potential disruption.

Renewable energy technologies such as wind and solar break with the experience of the past two centuries because they represent manufactured rather than extracted energy.

In manufacturing, costs tend to fall over time due to experience curves, while costs tend to rise for drilling and mining.

Things aren’t always so straightforward: You only have to look at what innovation in tight-oil-and-gas drilling — itself modeled on a repetitive, manufacturing approach — has done to costs there. However, the most bullish argument for oil today is essentially that the price is too low to encourage enough drilling — or keep shaky petro-states functioning — threatening a supply shock.

Yet a spike in oil or gas prices would mean a short-term windfall to producers but also provide another big push toward efficiency, electrification and renewable energy. Those cats aren’t going back in the bag.

Molecules and electrons becoming true, competitive commodities portends deflation. In turn, more of the value accrues to customers or companies that can produce that raw commodity at the very lowest cost — or turn it into a compelling, differentiated consumer product.

The latter means concepts such as mobility rather than gallons, or cleaner, smarter power supply and management rather than just a meter and a bill. Get it right, and Americans might even pay a bit more than 4 cents for that.

Big Energy Confronts An Unfamiliar Power: Competition

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