New Energy Upending Electric Business
October 21, 2013
We’ve had a lively discussion in recent weeks on the benefits of renewable energy and the changes coming in the utility business as renewables take a larger chunk of the business. Here’s more food for thought. I have not yet worked thru the studies mentioned here, but the links should give us all plenty of fodder.
Investment bank Citi published a broad analysis of the world’s energy markets called Energy Darwinism that predicts that 71 percent of the money invested in power generation between now and 2035 will be in renewables or nuclear. More than 40 percent of that sum, which represents more than $4 trillion, will go to wind and solar, Citi’s energy economists concluded.
Solar, in particular, has shown an “alarming” learning rate where every doubling of production capacity results in a 30 percent price decline for panels. At 7.4 percent, wind’s learning rate is slower, but the technology has become cost-competitive with natural gas plants in some locations. Based on these cost reduction curves, Citi’s economists forecasted when utility-scale wind and distributed solar will cost the same as conventional fuels.
Digging into the effect on wholesale energy markets, Citi also forecasted exactly where “fuel substitution will take place” — or in what circumstances it’s more economic to use one power source over another. It plots the levelized cost of energy against the output in terawatt-hours to forecast how wind, coal, natural gas and solar compete.
In some cases, solar is actually displacing natural gas at peak times of the day, when power is most expensive. In Germany, some natural gas peaker plants are being run for less than ten days a year because of solar, the study noted.
“The energy market has changed dramatically in recent years and we believe this mix is only going to alter more rapidly going forward,” concluded Citi researchers.
The implications for utilities are profound. This is particularly true in developed countries, where energy efficiency could reduce utility demand by 20 percent in both gas and electricity in the years ahead.
Consultants at PwC also released a report on distributed generation and its impact on the power industry. Based on a survey of professionals around the world, the report found that a majority of utilities expect distributed generation to force broad changes to the business models of power companies.
“Many respondents [to PwC’s survey] believe that the tipping point to being market-driven is within reach. If that proves to be the case, it will have a big impact on companies worldwide,” wrote Norbert Schwieters, the Global Power & Utilities leader at PwC. A number of regulations need to be changed, such as capacity schemes for providing standby generation for wind and solar, he concluded.
Many in the industry expect the existing power utility business model in their market to transform or even be unrecognisable in the period between
now and 2030. 94% predict complete transformation or important changes to the power utility business model. But there are big regional differences and the industry is split on the extent of change and transformation ahead.
The prospect of transformation of the industry business model arises from a number of potentially disruptive changes. Decentralised generation is already eating into revenues and partly marginalising conventional generation. Ultimately it could shrink the role of unwary power utility companies to operators of back-up infrastructure. Across the main markets of Asia, Europe and North America, only a minority of our survey participants expect centralised generation and transmission to play the lead role in meeting future demand growth.