Disruptive Technology Rationalizes the Energy Supply Value Chain

SOURCE: Scalable Growth Strategy Advisors

Disruptive technology is transforming the energy value chain. That process of rationalizing is being aided by energy policies and regulations that seek to frustrate or punish ‘black fuels’ and aid and abet ‘green fuels’ in order to achieve the policy goals of a clean energy economy.

But disruptive technology is an equal opportunity change agent breaking old rules and habits we like as well as those we’re happy to see change for competitive advantage.

The problem with depending on disruptive technology to play industrial policy games of choosing winners and losers is sometimes there are unintended consequences. As a result we don’t always get the outcome we seek as market forces use disruptive technology to tip the balance in favor of one outcome over another and thus gain competitive advantage.  This is not a new phenomenon.  We have seen and felt such disruptive changes over history back to the discovery of fire and the invention of the wheel.  And that is still where we are today competing to put technology to use to gain advantages over competitors.

In the energy industry after making great progress in expanding wind and solar energy with help from favorable government policies and subsidies, we have seen the market share for these clean energy sources grow exponentially.  And while their costs have fallen as installed capacity has grown and experience improves the learning curves of these new technologies, they still require subsidies despite nearing grid parity price levels. And as long as that dependence continues these renewable technologies are vulnerable to other disruptive technologies that are more competitive and sustainable.

The divestiture of power generation by investor owned utilities seeking stranded costs recovery as the 1992 Energy policy Act authorized wholesale power generation competition demonstrated the power of the combined forces of competition and disruptive technology to improve efficiency and optimize our energy performance.  As utilities divested baseload nuclear and coal fired generation, the new owners ‘fixed them up’ retrofitting the plants with new technology, new control systems, better emissions controls and put them back on line to ‘eat the lunch’ of other power generators.  In a study entitled Putting Competitive Power Markets to the Test we assessed those forces of competition and applied disruptive technologies finding strong evidence they worked and they still work today.

Clean Energy Economy Tipping Point

That brings us to today as many states and their jurisdictional investor owned utilities reach their renewable portfolio standards goals.  As wind and solar energy comes on line brings success ever closer to the RPS goal, the industry is worried.  Worried that reaching the RPS goal will mean a slowdown in wind or solar energy construction, worried that Congress will not renew subsidies and tax credits in the face of declaring RPS victory, and worried that ratepayers facing rising rates from above market renewable energy projects, smart meter deployment and emissions reduction will say ENOUGH!

But there is an even more ferocious competitor for renewable energy bearing down on the industry and it comes from the disruptive technology of 3D seismic exploration tools, horizontal drilling methods, and hydraulic fracturing production techniques that have unleashed a new wave of domestic energy productions of oil and natural gas. The impacts of disruptive technology on this part of the energy value chain are profound and threatening for both the clean energy sources as well as the old ‘black fuels’.

Our goals for a clean energy economy where we reduce emissions, improve efficiency and better manage energy demand are not incompatible with equally plausible goals for improving energy security, domestic energy production growth to keep dollars working at home and substituting new technologies for older ones that help us realize cleaner domestic energy aspirations.

Thus disruptive technology is doing what politicians have lacked the courage and political will to do.  The forces of disruptive technology are rationalizing the energy value chain enabling the market forces at work to change the outcome of the game of picking winners and losers in profound ways.

How?

  1. High oil prices encourage the use of horizontal drilling and hydraulic fracturing in shales dramatically expanding domestic energy production.
  2. While E&P companies target oil production because of those high oil prices they also are finding plenty of natural gas proving reserves and increasing gas supplies thus keeping natural gas prices low.
  3. Lower natural gas prices are the nightmare scenario for coal, nuclear power AND renewable energy because it drives down the price to beat at grid parity and makes each of these old and new technologies more difficult to build.
  4. The result is disruptive technology is rationalizing the electric power supply business forcing every fuel and technology to compete with today’s low natural gas prices for a place in the supply stack.  This is good news for ratepayers but terrifies power plant developers both black and green.

The lesson is that the benefits of disruptive technology are at work across the economy and so is its potential for change whether we like all of them or not. Disruptive technology enabled remarkable progress in renewable energy, smart meters, and the automation and optimization of green buildings. But it has also enabled horizontal drilling, hydraulic fracturing and deepwater drilling to breathe new life into the ‘black fuels’ opportunities enabled a dramatic expansion of domestic energy production.

Darwin is Cheering!

Disruptive technology enables our clean energy economy future.  We like the idea of renewable energy from wind and solar where the fuel is free and all we must do is capture and harness it.  Wind was the first to approach grid parity competitive costs and solar prices for photovoltaic panels have been falling rapidly thanks to China.  But despite the Federal subsidies and state renewable portfolio standard mandates and all the installed capacity for these clean energy sources —it’s just not sufficient to make a serious dent in coal and nuclear market share.

While our policy support for renewable energy is adding new capacity in the hundreds of megawatts our policy of emissions reduction and EPA’s clear intent to undermine the market potential for coal and remain passive over support for nuclear energy—we worry.

  • Will we have enough reliable energy supply to meet our needs if we bet on renewables alone?
  • Can we afford to keep subsidizing renewable energy and will doing so raise our rates?
  • Is it prudent to lease a home solar energy system on 20 year lease when the cost of this PV technology is falling fast and may be obsolete long before the lease is up?  Isn’t this really like leasing new car today on a 20 year lease?  How’s that going to work out?

Meanwhile, the recession and slow economic recovery has hurt energy demand and low natural gas prices are undermining the economics for coal and nuclear baseload power generation more ruthlessly and more quickly than any EPA regulation proposed.

But what happens when we finally see some economic growth again, and we will.  Will we risk being energy short?  Will our reliability be compromised by too much reliance on intermittent resources? Will we have wasted our lead time to build new nuclear power as an alternative to coal?  Are we making ourselves dependent upon China for the wind and solar technology we say we want?  No!

The answer is clear—we’re going to build natural gas fired combined cycle generation—lots of it.  And as long as domestic energy supplies of natural gas keep growing gas prices will stay low and the combined impact of disruptive technology and competitive market forces with ruthlessly bear down on both the black and the green players across the value chain and make them rationalize their costs.