Thoughts on the Energy Transition: Abundant Electricity for all
- Oct 31, 2020 3:25 pm GMT
The i-waves (Internet airwaves) are full of chatter offering opinions on where the energy transition is heading. Topics range from “how are we going to stop cyber threats as more Distributed Energy Resources (DER) attach to the grid” to “what will the utility business model look like when we finally reach a stable state in the transition”. That’s a whole lot of room for discussions to take place and opinions to be opined; there is an abundance of chatter across this spectrum of topics. This piece is an attempt to stimulate a discussion in the EC community with regard to just one of those topics “what will the utility business model look like when we finally reach a stable state in the transition”. There are plenty of reasons to be concerned with cyber threats, but that topic has had plenty of exposure on EC, so I’ll refer you to that piece, if cybersecurity is “your thing”.
I look to other business model transitions for guidance and one in particular that seems to offer some useful insights exists within the “Rental Car” business model. Anyone that has rented a car at an airport rental agency is familiar with the model. A business sets up shop as a rental car agency by acquiring vehicles which they provide to consumers for some defined period of time, in exchange for a revenue stream. The model has been evolving over the years, but one significant change may be finding its way into the energy transition. Here is just one more opinion for the i-waves to consider.
Do you remember when renting a vehicle required you to agree to a daily rate, plus a per mile charge? I do. This has changed, the rental cars that I have used over the past several years no longer have a per mile charge. Why? I suppose one answer is competition – if one agency forgoes the per mile charge then other rental car agencies might do the same, in order to compete. But, why would a rental car agency forego the per mile revenue stream to begin with? I don’t have any factual data to answer this question, but suffice it to say that “something changed” which enabled this change in business practices to occur. It could have been technology advances or some other effect, regardless of what caused the elimination of per mileage charges to consumers – the shift in rental agency business model practices did indeed occur.
Could this change in rental agency business practices offer some insights to the energy industry for how the utility business model may change as a result of the energy transition?
The parallels are strikingly similar. In wholesale electricity markets there are two significant categories of charges, capacity payments and energy costs. There are other charges, i.e. taxes, which occur in the rental car and utility business charges to consumers, but lets just focus on the capacity and energy costs for this discussion. The capacity cost is the amount of money a consumer pays in order to have access to a utility function, like transportation or electricity. The capacity cost is the daily rate for the car rental case and it’s the capacity payment provided to generators in the energy industry case, in order to “be available when needed”. You pay the rental agency a daily rate in order for you to have the car available, when you need it. It does not matter if the car is parked in a driveway or traveling down the road you must pay something to make the car available for your use. The same is true with generators and capacity payments – the consumer pays to have this generator available when needed – it may be producing energy or it may not – the consumer still pays to have this resource available.
Taking the analogy to the next step, we see that per mileage charges are no longer part of the rental agency revenue stream. Equating this to the energy industry would be like removing the “energy cost per kWh” from a customer’s bill. Wow, could that actually happen some day? Well, if the rental agency business model is any indicator, then the answer is – it’s possible. But what would have to change in order to eliminate the energy per kWh charge from a customer’s bill? The answer: an abundant supply of cheap energy, the type of which you get from solar and wind generators, which have no inherent and variable fuel costs to consider. It turns out that this is the fastest growing area for new generation coming onto the grid, which means the supply of this “negligible cost” electricity is increasing, at a rapid rate. With FERC Order 2222 now officially in play, this is like firing a second stage booster rocket to increase the velocity of this DER growth. How much more of these “no fuel” generating resources need to connect to the grid before it makes sense to “forego” the energy charge to consumers, because it no longer has the value it once did, because of the supply glut. We see this supply glut happening today, when wholesale energy prices go negative, which means a generator is willing to “pay” for the ability to generate electricity, resulting in a rebate to the consumer. I don’t see how this trend can continue, especially given the rapid supply expansions coming from wind and solar installations and FERC Order 2222. It seems inevitable to me that the “per kWh charge” for electricity could be abandoned like the “per mile charge” of car rentals, as electricity supply approaches an over-abundance. I assure you, generators do not like having to pay to generate power, they prefer to receive payment for generating power, as that is the sustainable business model. I’m sure Generator companies are aware of this very tenuous situation and they are pursuing methods to keep this “$/per kWh” in place through policy initiatives, like carbon pricing, but the rapid growth of “non-fossil fuel” supply resources is increasing and momentum is strong for these non-emitting resources through programs, like Clean Energy Standards, which incentivize investments in clean resources, like solar, wind and nuclear.
The changes within the car rental agency business model may indeed serve as an “indicator” that changes are coming to the energy business model. I think the time is approaching, rapidly, when you may see “$/kWh” charges go the way of “per mile” charges. Go ahead charge your EV at 1:00 PM – it won’t cost you a penny, if this scenario plays out like the rental car case. I will definitely buy an EV when this day comes.
Just in case you're wondering; is there any evidence that negative electricity prices can occur across many hours I refer you to this article from Ireland which poses the same question I'm asking you to ponder in this article " The question that instantly arises when an event of this nature occurs is whether this [negative electricity prices where generators pay to produce energy] will become the new normal when there are even more renewables on the system. "
Get Published - Build a Following
The Energy Central Power Industry Network is based on one core idea - power industry professionals helping each other and advancing the industry by sharing and learning from each other.
If you have an experience or insight to share or have learned something from a conference or seminar, your peers and colleagues on Energy Central want to hear about it. It's also easy to share a link to an article you've liked or an industry resource that you think would be helpful.