Tuesday, July 18, 2006

Realities of Distributed Energy

I responded to a post about distributed energy (www.energycentral.com and their EnergyPulse series of essays) at another site with the following. The original post came from an organization that is trying to create awareness about distributed energy within investment circles:

I teach my kids (and anyone else who will listen) to pay as much attention to the source of information as the information itself. In this case, let's be honest, DE Financial Group was formed to give definition and focus to distributed energy (DE) within the investment community. "Not (as Seinfeld's gang would say) that there's anything wrong with that." This is one of those articles that positions DE within the investment community against other better defined sectors (like public utilities, oil/gas, etc). Lumping everything but the kitchen sink into DE does not add clarity to the situation. I define DE as power generating or management devices that function on the customer's side of the meter and tend to exclude large industrial plants mostly dedicated to providng power to a single facility.

Being familiar with, or having direct experience in, every incarnation of DE since the early 1970s (Total Energy, Packaged and Micro-Cogeneration, Purpa and small Power, and now distributed power, let me add some pearls of wisdom:
1. You need high electricity prices and low premium fuel prices to make DE economics work.
2. if the incumbent distribution utility isn't working with you, it is working against you, usually in ways you won't discover until too late. (Who else remembers Purpa-killer rates in Southern California?)
3. The distributed computing model does not seem to be analogous for distributed power. Distributed computing broke the paradigm by being faster, better, cheaper. There was also no "incumbent" supplier to deal with, because there was no supplier at all for "computing."
4. The "customer" usually doesn't care about DE because historically (not currently), energy costs are typically a small component of overall costs. Other value elements like reliability don't resonate because the customer really has no way to bencmark it.
5. Most practical DE options are still fuel based (e.g. natural gas) and therefore do not improve the environmental footprint much, especially in the area of global warming. Just because funding for fuel cells comes from a renewable energy budget item doesn't make today's fuel cells a renewable technology.
6. Creative investment ideas have backslided. We're about to embark on a new round of construction of coal and even nuclear power stations, because that is what the financiers understand. Investment doesn't flow to the best ideas; it flows to the most predictable (at the time of the investment anyway) returns.
7. Practical and confident use of DE depends on energy storage devices and power electronics (PE) more than most observers give credit, and most R&D funders are neglecting. Ultimately, this may be the "Achilles heel" of the sector, unless greater resources and attention are devoted to them.

All that said, I think DE does have a future, in the form of micro-grids. Tying multiple devices together, and own/operating them like a "utility" using advanced automation and power electronics allows you to achieve economies of scale, as long as a utility-like entity is still responsible for the customer interface. Once this model is proven to achieve lower rates for the long term, all of the stakeholders should be mollified.

Our multi-decade strategy for electricity infrastructure development should include a "robust backbone" based on the traditional grid model (large centralized plants, long transmission lines, large energy storage facilities, etc) and micro-grids in high population centers, industrial centers, or special reliability situations (telecom, chip-makers, etc) that unify the DE resources, especially for those areas that truly place a value the benefits DE can bring.

Thursday, May 25, 2006

The "real" aftermath of Enron

The electricity side of the energy investment cycle is cranking back up again. People are telling me all the time that there is so much money chasing so few good opportunities in energy, and this runs the gamut from alt-energy, energy-tech, and traditional power station projects.

I am wondering if TXU is the next Enron. It has been Wall Street's darling for almost two years. Nothing but high praise has been heard for its recently announced plan to build 11,000 MW of new plants, some in Texas, but throughout the country. 11,000 MW? The last company to make statements this bold was, well, Enron. I have no doubt that the message was heard by other utilities: Build new power plants, whether in rate base or private, and your predictable returns on investment will be rewarded by the Street. Warren Buffet believes in electric utilities, so why shouldn't everyone else?

In 2001, there was a rumor going around Houston. The big Wall Street "trading" firms didn't think that energy trading should be headquartered in Houston. Commodities trading belonged with the New York firms. Don't look now, but most of the energy trading has now been acquired and is now operating out of New York. If I were to draw a connection between this outcome and the downfall of Enron and the other big energy trading firms (Dynegy, Williams, El Paso, etc), some would label me a conspiracy theorist. I'm not making a connection, just an observation.

New energy investment funds are starting up. Venture capital is looking for opportunities. When a respected VC like Vinod Khosla publishes white papers on ethanol, you know others are going to follow. I met a number of new energy investors at a recent biodiesel conference I presented at. They are eager for new ideas. They have little real capability to separate a bad idea from a good one, or a technology that works from a technology that can create a market, or how long it takes to cultivate an energy system for project, from inception to kilowatts or Btus out the other side. They have little awareness of just how slow this business changes, or that it tends to cycle, rather than change.

Thus, I find it almost the height of irony that the last vestiges of the Enron scandal are dribbling out of the courtroom and into the papers, while the energy investment machine is cranking up full force once again. Last time, it was the digital economy, a liberalizing global economy seeking market-driven solutions, and Y2K creating a need for new electric generating capacity. This time, it is the high price of natural gas, the need for national energy security, and a need to protect (or even close) our borders that is driving the business. We were opening up the world' economy as a "free-market" (I don't believe there is any such thing, but that's another point) leader. Now we are figuring out how to run an economy with China and India as the emerging "big dogs."

Well, maybe the aftermath is really just the beginning.

Tuesday, April 25, 2006

Quantifying the value of energy independence

I've been working on a presentation for a biodiesel conference that I will give this Thursday. It occurs to me that biodiesel suffers from many of the same fundamental issues that other low-density energy sources do, like wind. Wind, I believe, is becoming entrenched as a commercial option for generating electricity. The long-term structural problem for most other "alt-energy" sources is how to maintain a viable business when prices for oil and natural gas return to "earth."

One way is to credibly and defensibly quantify the value of energy independence to national security. Yes, put it in monetary terms. We've developed a methodology, called E-Equity (trademark applied for), to do this, and we even applied it for a client, who wanted to compare the "value" of a mine-mouth coal plant against imports of liquefied natural gas (LNG)to fuel a combined cycle plant.

Two of the most important factors in our analysis were: (1) the quantities of methane that could escape into the atmosphere along the vast LNG supply line (methane is a 20+X more potent global warming agent than CO2), and (2) the defense- and security-related costs associated with protecting our petroleum and LNG supply lines.

This analysis makes many people nervous (we think it made our client nervous!). It is the type of analysis that is prone to wide swings depending on initial assumptions. Also, one has to make educated estimates about how much of our defense budget goes to protecting energy supply lines. In the case of biodiesel, it should be especially sensitive, since the defense department is one of the main customers for biodiesel! I'll find out more on Thursday. Stay tuned!

The value of domestic energy sources, whether corn, soybeans, coal, etc, with respect to national security may be difficult to quantify but I believe it can help improve the long-term financial investment framework for alt energy.

Tuesday, March 28, 2006

Wind Turbines--Get ready for a wild ride!

Am I the only one in the industry who thinks that the wind turbine business is shaping up to be a repeat of the gas turbine business in the 1990s? Actually, there is a Siemens executive who spoke at an industry conference last year and alluded to this situation. Beyond his allusion, I've heard or read precious little.

I am referring to the industry's earlier infatuation with the advanced F-class gas turbine technology. Despite warning signs and mounting evidence of serious operational and performance issues in the field, in the mid-1990s, the orders kept coming (worldwide) and by year 2000, we had a situation of irrational exuberance. Utilities and merchant generators were lining up, paying deposits, accepting escalating prices, and swallowing service agreements on supplier terms just to stay in the queue for hundreds of these machines. Ultimately, the segment collapsed with the post-Enron malaise, but it was pretty clear to intelligent industry observers that the situation had, relatively quickly, become untenable.

We have analogous factors at work in the wind turbine market. Once again, General Electric (GE) is driving the market, and forcing the other suppliers, once the technological leaders, to play catch up. Just like with gas turbines, wind turbine technology is being scaled up rapidly to reduce costs and improve the economics. Demand worldwide is substantially ahead of supply of turbines and components. Other parts of the supply chain, like building transmission to serve wind farms, are lagging behind as well. The industry will consolidate to three dominant suppliers (as it does for virtually all major components in the power industry). Finally, the reliability issues are just beginning to surface. These machines are deceptively simple. The blades are pushing the limits of structural engineering and transportation (therefore need to be field erected), and the power electronics packages supplied with these machines get ever more complicated because of the grid interface and the intermittent nature of the energy source.

The number one problems facing wind project developers today is turbine supply. Not permitting. Not subsidies. Not financing. New suppliers will jump in to fill the void.

At the same time, the one power generating option that best satisfies (notice I did not say completely) all stakeholders today is a wind farm. Ratepayers are happy because it is renewable. Utilities are happy because they can build something, and relatively quickly, and maintain control (unlike distributed energy at customer sites which can cause loss of utility load). Investors are happy because the production tax credits and long-term power purchase contracts offer a predictable financing model. Environmentalists are happy because there are no emissions. Landowners (typicaly farmers) are happy they get some revenue for their land. Regulators are happy because no seems particularly unhappy, and there are no fuel costs to worry about.

Like gas-fired power in the 1990s, all stakeholder interests seem to converge on wind power today. But that is pushing up demand, pressuring suppliers, and forcing technology deployment and rapid cost reductions. The only question is this: Is irrational exuberance a year away, two years, five years?

We called the F-technology bubble through a widely references industry report, entitled, "Banking on Advanced Gas Turbines: Prospects for a Financial Meltdown," issued in October 2000. I was the principal investigator for that report.

We think we're on to something similar with wind turbines. It may be early, but the same warning signs are appearing.

What do you think?

Is more nuclear power inevitable?

It is difficult to reconcile social, economic, energy, and economic issues, but I've been stating for more than five years that greater reliance on nuclear power is inevitable. I don't harbor any ill will towards other sources of energy and electricity. In fact, I am staunchly agnostic! I believe in conservation and at least containing, if not reducing, one's personal environmental footprint. I am a proponent of coal as much as I am a proponent of wind and renewables. I am a proponent of things that make sense, face reality, and move us forward.

I find it ironic, though, that we are becoming fixated on the lowest density energy sources at a time when global economic growth and energy supply and demand (driving prices to historical highs) suggest we should be relying on the highest density sources.

So I want to offer a scenario that you don't read or hear about in the media.

Here's my premise: If we are to satisfy economic growth and supply significant quantities of electricity at reasonable prices worldwide, and decelerate growth in carbon emissions, without adding undue investment or technological risk (infrastructure must be financed, after all), then we need to pursue a policy of nuclear power plant construction concurrent with a program to convert transportation systems from fossil fuels to electricity. I would add that the only place where additional governmental intervention is needed would be to accept and manage the liability of high level nuclear waste. Reprocessing of the fuel would go a long way towards minimizing the waste management issue.

Nuclear power and electric vehicles require little stretch in today's technological know-how. Both can be incrementally improved to reduce cost but neither requires breakthroughs.

The nuclear industry doesn't need subsidies (such as provided in the energy bill) to build new power stations or demonstrate advanced reactors. It does need regulatory certainty that decisions made today won't come back to haunt them later. The financial community needs a predictable financial model, unlike what occurred during the last nuclear construction program.

This scenario is the only plausible one if you want the most electricity generation for the lowest carbon generation in the fastest amount of time at a fair cost to consumers and society. There are other excellent options if you can accept more modest carbon reductions, higher priced electricity, mandated reductions in energy demand, and other factors.

Yes, there are tradeoffs. Big ones. We build new targets for terrorist attacks. We have to store and manage the wastes for thousands of years. But no option comes with a clean bill of health. Logically, it seems to me we're better off exploiting our highest density energy source (nuclear fuel) to supply our most valuable and flexible primary energy source (electricity).

I am not agreeing or disagreeing with the science of global climate change. I am accepting that the popular vote is already in. Most people seem to believe it is a problem demanding a solution. Truthfully, if you read between the lines, energy company executives have already "baked" carbon constraints into their short and long-range planning scenarios.

At some point, we may have to accept that both managing global climate change and the nuclear fuel and waste cycle require cooperative international efforts, the first to maintain a healthy planet, the second to prevent abuse and terrorism.

Do I think coal is out? Absolutely not. We can get so much more out of a ton of coal (electricity plus numerous other products) than we do today. It just has to be exploited and priced in such a way that the externalities (negative impact on society) or converted to "internalities" (beneficial impacts for society). I am a huge fan of mine-nouth coal facilities that generate electricity, recycle ash into construction products, produce fertilizer, convert sulfur emissions into gypsum, supply pipeline quality natural gas and/or other "refined" products, and recycles or sequesters carbon dioxide. When the full value of coal is extracted on the basis of industrial ecology, it makes tremendous sense.

Am I against renewables? Don't be foolish. How could a thinking person be against a fuel-free source of electricity? But these sources are low density, intermittent, and therefore involve costs that are also not being properly accounted for. Making the economics work on a mass scale will likely require technological breakthroughs.

What are your thoughts?

Friday, March 24, 2006

Out of the box blog

Welcome to Pearl Street Inc's blog covering technology deployment, regulatory issues, and investment ideas throughout the global electricity production and delivery value chain.