The Energy Infrastructure That the U.S. Really Needs

A power grid is what transmits electricity from where it is made to our homes because electricity cannot be stored (efficiently…yet).

There are thousands of power plants that generate electricity using solar, wind, gas or coal. These generating stations produce electricity at a certain electrical voltage. Conventionally, this voltage is then “stepped-up” (increased) to very high voltages, to increase the efficiency of power transmission over long distance and minimize the dispersion of energy. Once this electricity gets near your town, the electrical voltage is “stepped-down” (decreased) in a utility substation to a lower voltage for distribution around town. As this electrical power gets closer to your home, it is stepped-down by another transformer to the voltage you use in your home. This power then enters your home through your electrical meter. All of this is very good, but given the evolution of energy production, it needs to modernize to meet consumer preferences and environmental requirements.

Enter the smart grid.  The core premise of a smart grid is to add monitoring, analysis, control, and communication capabilities to the grid to maximize the throughput (the maximum rate of production) of the system while reducing the energy consumption. A smart grid entails technology applications that will allow an easier integration and higher penetration of renewable energy, facilitating homeowners and businesses that wish to put their privately-produced energy on the grid. It will be essential for accelerating the development and widespread usage of plug-in hybrid electric vehicles (PHEVs) and their potential use as storage for the grid. Smart grids will allow utilities to move electricity around the system as efficiency and economically as possible.

Essential to efficient use smart grids are smart meters:  Smart meters help utilities balance demand, reduce expensive peak power use and provide better prices for consumers by allowing them to see and respond to real-time pricing information through in-home displays and smart thermostats. For example, you may want to run your dryer for 5 cents per kilowatt-hour at 22:00 pm instead of 17 cents per kilowatt-hour at 18:00 pm in the evening, when demand (and price) is highest. Consumers will have the choice and flexibility to manage your electrical use while minimizing costs.

The need for a smart grid is increasingly recognized by US policymakers at all levels of government, as ways to improve the energy efficiency of producing and using electricity in our homes, businesses, and public institutions become an entrenched imperative. Many believe that a smart grid is a critical foundation for reducing greenhouse gas emissions and transitioning to a low-carbon economy. Certainly, PHEVs and renewable energy have been of great interest to Congress.

In light of this brief introduction, I came across Ethan Zindler’s prepared testimony before the senate Committee on Energy and Natural Resources, here is the meat of what he had to say:

Before I get to my main points, a quick note about “infrastructure”. In the current climate, this term has become a Rorschach test of sorts representing different things to different constituent groups. In the case of energy, infrastructure can encompass a broad scope, including, among other things, building power-generating facilities, expanding oil and gas distribution pipelines, or hardening local power grids.

Those topics are worthy of discussion and I know my fellow panelists will shed light on them. However, my testimony today will focus on the next generation of energy technologies and the infrastructure that will be critical to accommodate them.

The U.S. is transforming how it generates, delivers, and consumes energy. These changes are fundamentally empowering business and home owners, presenting them with expanded choices and control. Consumers today can, for instance, analyze and adjust their heating, air-conditioning, and electricity use over their smart phones thanks to smart meters and smart thermostats. And they can make efficiency improvements through advanced heating and cooling systems and innovative building materials and techniques.

Consumers in much of the country can choose their electricity supplier and may opt for “green choice” plans. They can produce power themselves with rooftop solar photovoltaic systems. They can even store it locally with new batteries.

Consumers can choose to drive vehicles propelled by internal combustion engines, electric motors, or some combination of both (hybrids). That car can be powered by gasoline, diesel, electricity, ethanol, or perhaps even methanol, natural gas, or hydrogen. And electric vehicle drivers who own homes can turn their garages into fueling stations simply by using the outlet on the wall.

Now, realistically speaking, few Americans today have the inclination or income to become high-tech energy geeks. But that is changing as prices associated with these technologies plummet. In the case of electric vehicles (EVs), such cars can be appealing simply because they perform better.

We at BNEF believe that further growth and eventual mass adoption of these technologies is not possible, not probable, but inevitable given rapidly declining costs.

For instance, the price of a photovoltaic module has fallen by 90 percent since 2008, to approximately $0.40 per watt today. For millions of U.S. businesses and homeowners, “going solar” is already an economic decision. Last year the U.S. installed far more solar generating capacity than it did any other technology.

By the end of the next decade, cost competitiveness for distributed solar will arrive most places in the US – without the benefit of subsidies. We expect the current installed base of US solar to grow from approximately 3.6 percent capacity to 13 percent by 2030 then to 27 percent by 2040.

Similarly, the value of contracts signed to procure U.S. wind power have dropped by approximately half as the industry has deployed larger, more productive turbines. We expect current wind capacity to at least double by 2030.

Many of these new energy technologies are, of course, variable (no wind, no wind power; no sun, no solar power). Thus the growth in these and other new energy technologies will be accompanied by unprecedented sales of new batteries of various shapes and sizes.

Utilities such as Southern California Edison Co and others have already begun piloting large-scale batteries in certain markets while providers such Stem Inc and Tesla Inc offer “behind-the-meter” storage for businesses and homeowners.

In the past five years, lithium-battery prices have fallen by at least 57 percent and we expect a further 60 percent drop by 2025. That will contribute to 9.5GWh/5.7GW of battery capacity in the U.S. by 2024, up from 1.7GWh/0.9GW today.

Continuing battery price declines will also make electric vehicles (EVs) for the first time a viable option for middle-class US consumers without the benefit of subsidies. Last year, EVs represented 0.8 percent of global vehicle sales. By 2030, we anticipate that growing to one in four vehicles sold.

The most popular place to fuel such cars could be augmented gasoline stations… or the local grocery store, or simply your garage.

The changes we’ve seen to date are giving U.S. energy consumers unprecedented opportunities to manage, store, distribute, and even generate energy. However, the new, empowered consumer poses inherent challenges to the traditional command-and-control / hub-and-spoke models of conventional power generation and power markets. Already, we have seen examples around the globe where incumbent utilities were caught flat-footed by rapid clean energy build-outs.

In some cases, it has been heavy subsidies for renewables that have catalyzed the change. But more recently, simple low costs are allowing wind and solar to elbow their way onto the grid.

So, where does “infrastructure” fit into this changing energy landscape?

First, conceptually, we must accept that the empowered consumer is here to stay. To some degree, this acceptance is already underway in the private sector where companies that once focused mainly on large-scale power generation are merging with consumer-facing utilities, or buying smaller solar installers and battery system providers.

Second, policy-makers should seek to promote infrastructure that accommodates a new, more varied, more distributed world of energy generation and consumption. Most immediately, this can mean supporting greater deployment of so-called smart meters. To date, the U.S. has installed almost 71 million of these devices, which enable better communication between energy consumers and utilities. Compare that to Italy where all consumers have such meters and are now receiving a second generation with more advanced functionality, or China which has installed 447 million units, across almost its entire urban population.

Policy-makers may also seek to facilitate the development of high-voltage transmission across state lines. It has long been an adage that the Great Plains states represent the “Saudi Arabia of wind”, given the exceptional resources there. To some degree, those states might as well be in Saudi Arabia, given the major challenges of building transmission that would move electrons generated there to more densely populated states in the east or west. The US has added approximately 1.5GW of high-voltage direct current transmission since 2010. By comparison, China has added 80GW over that time.

Investment is needed at lower voltages too. Our passive, one-directional, electricity distribution system is under strain as new distributed generation capacity comes online. In addition, policy-makers might also consider ways to expand support for EV charging stations. As sales of such cars grow, consumers are already putting greater pressure on certain distribution nodes around the country. Ensuring that EV “fuel” demand is managed in an orderly manner will be important.

Finally, the changes afoot and to come will require what might best be described as infrastructure “software”. Most importantly and pressingly, this must include the reform of electricity markets to take into account the new realities of 21st Century power supply and demand.

It may also include expanded programs to educate energy professionals on the new realities of modern energy markets. And, yes, it could include more software to improve energy monitoring and optimize system performance.

In closing, I would reiterate that none of this need be done at the exclusion of investing in traditional energy infrastructure where the needs are also pressing. However, any rational discussion about energy infrastructure investment today must do more than take into account the current situation. It must also consider where we will be tomorrow.

Trend #2: Equity Capital for Wind Energy

There are some interesting developments in terms of who’s got skin in the equity game in renewable energy. What’s really interesting to me is that the equity investment landscape has transformed quite a bit in the last few years and in this post we’ll see how and why.

Renewable Energy Asset Financing, 2004-2015

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In USD billion, statlink: http://dx.doi.org/10.1787/888933362596

But first, remember that, according to the OECD, there are three (main) ways to finance renewable energy projects:

  1. Project Finance: This involves a mixture of debt (usually from banks) and equity capital (we will go into more detail below). According to Bloomberg, 2015 was the first year in which project finance constitutes more than half of total asset finance in RE electricity. Remember that project finance involves creating a Special Purpose Vehicle (SPV) with its cash flows separated from those of its sponsor companies;
  2. On-the-balance sheet financing: Done by utilities (EDF, ENEL, Suez), independent power producers and other project developers. On the balance sheet financing, makes up over 47% of total asset finance in RE, about 94 billion;
  3. Project Bonds: Project Bonds, these do not include corporate bonds or government bonds. They account for a small fraction of financing.

Nevertheless, there are other emerging financial structures, which I can go into in another post, but venture capital is one of them. Utilities are substantial providers of equity capital in the renewable sector. However, due to the large scale investment and stable income returns, there is greater interest from the financial services industry.

This brings us to wind equity financing

Back in the day, the first offshore wind-power farms were usually financed on the balance sheets of the utilities that planned, built, and operated them. Today, there are many more players involved, such as banks, private equity funds, pension funds, state-backed “green” banks (such as the Green Investment Bank, the Nordic Investment bank and the European Investment Bank) and insurance companies. The graph below shows how the equity mix has morphed in the last couple of years.

Change in Equity Mix for Wind Energy

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The share of equity provided by utilities is steadily shrinking as other players get involved, decreasing from 62% in 2010 to 39% in 2015, and that of non-utility corporates from 31% to 15%. In other words, the combined share of the two traditional equity investors in the wind energy sector decreased substantially, from 93% in 2010 to 54% in 2015. Accordingly, other investors have stepped up their game. One of the possible explanations for this decrease may potentially be due to deleveraging as a consequence of the financial crisis.

The Rise of Institutional Investors

For brownfield wind projects, meaning wind projects where there is already existing infrastructure and possibly licenses as well, institutional investors such as pension funds, insurance companies, private equity and infrastructure funds have become major equity investors. According to the OECD, their cut in total equity provisions increased from 6% in 2010 to a staggering 37% in 2015, making them the second most important equity providers in the 2015 sample, just 1% behind utilities. This sharp increase of equity provision by institutional investors can be traced mainly to the acquisition of brownfield assets or portfolios for onshore wind deals. Pension funds and insurers were not involved in any greenfield onshore wind-power transactions included in the OECD 2015 sample.

This trend suggests that institutional investors look to the onshore wind sector mainly for the acquisition of existing projects.Such a strategy presents several advantages:

  • Lower Costs: Existing projects are already (usually) built, and there they do not need to start from scratch;
  • “Up to Code”: Lengthy permits, licensing and commissioning agreements may already be in place and therefore do not need to be requested;
  • Fast Deployment: Ultimately the project can be up and running (and earning) in less time.

Moreover, equity financing in wind energy assets by state agencies and public finance institutions grew from a negligible cut in 2010 to 9% of total equity invested in 2015. This sharp increase can be linked directly to the investments done by the UK Green Investment Bank. The UK’s GIB, an institution created by the UK government in 2012 with the aim of attracting private sector financing for green infrastructure projects. The creation or expansion of similar institutions is a trend observable at the global level and is important for risk sharing with newer technologies. Take offshore wind, for example, as projects scale up and move into deeper water, newer technologies also add to construction risk. This may be a barrier to entry and discourage some investors from participating.

In Europe, commercial banks have started partnering up with government supported banks (United Kingdom’s Green Investment Bank, Germany’s KfW Development Bank), export credit agencies (Denmark’s EKF and Belgium’s Delcredere – Ducroire and Italy’s SACE), and multilateral banks (the European Investment Bank) as a way to provide equity financing to wind projects .

The diversification of participants is good for everyone, because:

  • Risk: The risk that corresponds to the project is diversified across an array of investors, meaning that investors are more likely to invest if they do it along other reputable investors, rather than going in it solo;
  • Mainstreaming: the diversification of participants shows that equity financing for RE is no longer as niche as it was, with pension funds and insurance companies putting skin in the game.

Example: The Galloper Offshore Wind Farm

The largest wind equity deal in Europe in 2015 the the Galloper Offshore Wind Farm. It’s a project that will be completed in 2018, located off the coast if Suffolk, east England.

 The equity investors are:

  • Innogy Renewables UK, a subsidiary of the German utility company RWE
  • The UK’s Green Investment Bank, a public finance institution
  • Macquarie Capital, an institutional investor
  • Siemens Financial Services, a subsidiary of Siemens, a corporation
  • Sumitomo Corporation, a corporation

This array of private and public investors is an example of what the equity landscape is shifting towards.

So why did the equity investing landscape change?

The explosion of new capacity additions fostered equity market growth for wind projects. New projects not only became more frequent but they also grew in average size, requiring more capital. It would only be normal to have several new, independent developers enter the sector under such favorable market conditions. Moreover, many utilities have been financially constrained due to the difficulties in the merchant power sector, further limiting their contribution to the sector.

The take-home message we can draw from this is that as the demand for wind energy increased so did the associated capital requirements. Utilities and developers did not have the necessary capital to cover demand, so third party investors were roped in. Likewise, corporations like Siemens and Sumitomo are using their financial strength to offer financing directly to smaller developers.

 

How to Handle a Climate Change Denier

Preamble: I would like to point out that I truly prefer not to engage in these types of discussions (read: I’m over it), because the sources of information that are available to me, are available to everyone else. I also do not consider it my duty to educate every Tom, Dick, and Henry on climate change. However, in light of recent developments, we will probably be encountering a more energized brand of deniers, so here is a non-exhaustive list of answers I took from Robert Henson’s Rough Guide to Climate Change.

Since the days of Roger Revelle, the pioneering oceanographer whose body of work was instrumental for our understanding of the role of greenhouse gas emissions in our atmosphere, deniers developed certain criticisms that are still popular today. I believe that these arguments will keep on cropping up for as long as there is a “debate” on climate change, so it’s best that we equip ourselves with appropriate answers.

Taken to the extreme, anti climate change arguments can be summed up in the following quote:

The atmosphere isn’t warming; and if it is, then it’s due to natural variation; and even if it’s not due to natural variation, then the amount of warming is insignificant; and if it becomes significant, then the benefits will outweigh the problems; and even if they don’t, technology will come to the rescue;  and even if it doesn’t, we shouldn’t wreck the economy to fix the problem when many parts of the science are uncertain.”

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Toles 2006, Washington Post 

 “But the atmosphere isn’t warming….”

 

According to an ongoing temperature analysis conducted by scientists at NASA’s Goddard Institute for Space Studies (GISS), the average global temperature on Earth has increased by a mean of about 0.8° Celsius (1.4° Fahrenheit) since 1880. Two-thirds of the warming has occurred since 1975, at a rate of roughly 0.15-0.20°C per decade.

This arguement, has seeminly been put to rest, yet deniers seem to resist it, possibly because they do no think that a global mean warming of 0.8°C is a big deal. Here is a more vivd statistical example of what that means:

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Dr. Arun Majumdar’s presentation, Michigan State University

This is a bell curve mapping distribution of temperature anomalies over 60 years. To the left are temperatures colder than average and to the right are temperatures hotter than average. The mean is shifting and the distribution is broadening rightwards. The right tail of the distribution is reaching 4 and 5 sigma, which are probabilities that were unheard of decades ago. The anomalies occurring at 4 and 5 sigma are (were) rare massive heatwaves, storms, and floods, which are becoming more common then ever.

“Okay, but I still went skiing this winter…”

 

The weather and the climate are two different things. The difference between weather and climate is a measure of time. Weather is what conditions of the atmosphere are over a short period of time, and climate is how the atmosphere “behaves” over relatively long periods of time. We talk about climate change in terms of years, decades, and centuries. The weather is forecast 5 0r 10 days ahead, but the climate is studied across long periods of time to look for trends or cycles of variability, such as the changes in wind patterns, ocean surface temperatures, and precipitation. Snow in skiing locations isn’t proof that climate change is not happening.

The warming is due to natural variation…

 

This is a very common argument, the denier does not argue against the existence of climate change, generously admitting the climate has *always* changed, but they do not believe that humans are responsible for it.

The IPCC has concluded that the warming of the last century, especially from the 1970s, falls outside the bounds of natural variability.

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Variation of Co2 in atmosphere, from 800000BC to today, NOAA NCDC

Let’s walk down memory lane and look at what the IPCC has been saying to us for 26 years. And keep in mind that the IPCC reports are the most comprehensive, global, and peer-reviewed studies on climate change ever written by anyone, bringing together the work of over 800 scientists, more than 450 lead authors from more than 130 countries, and more than 2,500 expert reviewers. In short, the IPCC reports are humanity’s best attempt to date at getting the science right.

Over the last 800,000 years, Earth’s climate has been cooler than today on average, with a natural cycle between ice ages and warmer interglacial periods. Over the last 10,000 years (since the end of the last ice age) we have lived in a relatively warm period with stable CO2 concentration. Humanity has flourished during this period. Some regional changes have occurred – long-term droughts have taken place in Africa and North America, and the Asian monsoon has changed frequency and intensity – but these have not been part of a consistent global pattern.

The rate of CO2 accumulation due to our emissions in the last 200 years looks very unusual in this context (see chart above). Atmospheric concentrations are now well outside the 800,000-year natural cycle and temperatures would be expected to rise as a result.

Moreover, the IPCC in 1995, in its second assessment report included a sentence that hit the headlines worldwide:

“The balance of evidence suggests a discernible human influence on global climate”

By 2001, IPPC’s third report was even clearer:

“There is an new and stronger evidence that most of the warming observed over the last 50 years is attributable to human activities.”

By 2007, in it’s fourth report, IPCC spoke more strongly still:

“Human induced warming of the climate system is widespread”

In 2013, in the 5th Assessment Report, they stated,

“It is extremely likely that human influence on climate caused more than half of the observed increase in global average surface temperature from 1951 to 2010”

Human activity has led to atmospheric concentrations of carbon dioxide, methane and nitrous oxide that are unprecedented in at least the last 800,000 years.

There is, therefore, a clear distinction to be made between what is “natural variability” and what is our contribution.

“The amount of warming is insignificant…

 

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The European Geosciences Union published a study in April 2016 that examined the impact of a 1.5°C vs. a 2.0°C (bear in mind we are at 0.8°C now, without the slightest chance of slowing down) temperature increase by the end of the century. It found that the jump from 1.5 – 2°C, a third more of an increase, raises the impact by about that same fraction, on most of the natural phenomena the study covered. Heat waves would last around a third longer, rain storms would be about a third more intense, the increase in sea level would be that much higher and the percentage of tropical coral reefs at risk of severe degradation would be roughly that much greater.

But in other cases, that extra increase in temperature makes things ever more dire. At 1.5°C, the study found that tropical coral reefs stand a chance of adapting and reversing a portion of their die-off in the last half of the century. But at 2°C, the chance of recovery disappears. Tropical corals are virtually wiped out by the turn of the century.

With a 1.5°C rise in temperature, the Mediterranean area is forecast to have about 9% less fresh water available. At 2°C, that water deficit nearly doubles. So does the decrease in wheat and maize harvest in the tropics.

Bottom line: It may look small but it’s a huge deal.

“The benefits will outweigh the problems”

 

When people talk of alleged benefits of climate change, they are usually talking about agriculture. The argument says that the increased concentrations of CO2 will give a boost to crop harvests leading to larger yields.

This is laughable

Climate change will slow the global yield growth because high temperatures result in shorter growing seasons. Shifting rainfall patterns can also reduce crop yields. Climate trends are already believed to be diminishing global yields of maize and wheat. These symptoms will only worsen as temperatures and extreme weather events become more common. If climate change is allowed to reach a point where the biophysical threshold is exceeded, as would be the case on current emission trajectories, then crop failure will become normal. Also, the severest risks are faced by countries with high existing poverty and dependence on agriculture for livelihoods. Even at “low” levels of warming, vulnerable areas will suffer serious impacts.

  • Sub-Saharan Africa, according to the World Economic Forum, at 1.5°C warming by 2030 would bring about a 40% loss in maize cropping areas;
  • South East Asia, in a 2°C would experience unprecedented heat extremes in 60%-70% of their areas.

Agricultural productivity is at risk, not only in developing countries but also in breadbasket regions such as North and South America, the Black Sea and Australia.

Moreover, in October 2015, a study published in Nature estimated that the world could see a 23% drop in global economic output by 2100 due to a changing climate, compared to a world in which climate change is not taking place. The coauthor of the study had this to say,

“Historically, people have considered a 20% decline in global GDP to be a black swan: a low-probability catastrophe – Instead, we’re finding it’s more like the middle-of-the-road forecast.”

Technology will come to the rescue…”

Deniers who make this case seemingly acknowledge climate change, yet they are optimistic believers in technology being the be-all end-all and that geo-engineering will save us from the clutches of global warming.  There are two things I find problematic about this approach:

  1. I think this argument is akin to the “We almost discovered nuclear fusion- we’re only 20 years away!” argument, which stipulates that the nuclear fusion is at any given point in time 20 years away. It takes into account that we have not developed the appropriate technologies to “save” us from climate change, and when we do, there is still a maddening lag between the innovation and deployment. Not to mention the fact we still have not identified which technologies can do the greatest good in the shortest time so we cannot fly blindly in a vague hope that tech will rescue us;
  2. Such an approach fights the “symptoms” of climate change, not the cause of it, meaning that it entrenches our extremely wasteful and inefficient ways that have brought on climate change in the first place.

None of this is to say that I do not believe that technology will play a pivotal role in our transition, of course, it will! But we cannot afford to rely entirely on waiting for carbon capture and storage and the likes to become a deployable and scalable economic reality.

“We shouldn’t wreck the economy to fix the problem when it’s still uncertain!”

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When you really get down do it, people will just tell you what their ultimate bottom-line is. If we don’t know with absolute confidence how much you warmer and what the local and regional impact will be perhaps we’d better not committing ourselves to costly reductions in greenhouse gas emissions.

I have written a post on the employment benefits tied to jobs in the renewable energy sector, and there are a plethora of studies pointing to the huge costs of climate change inaction, amongst these, a new study by scholars from the LSE, published last year in Nature Climate Change, offers a daunting scenario.

They estimate that a business-as-usual emissions path would lead to expected warming of 2.5 degrees C by 2100. Under that scenario, banks, pension funds, and investors could sacrifice up to $2.5 trillion in value of stocks, bonds, and other financial assets. The worst-case scenario, with a 1% chance of occurring, would put $24 trillion (about 17 % of global financial assets) at risk.  This is but one of the scenarios that have been studied, that point to the huge costs of inaction.

Climate change can affect the economy in myriad ways; including the extent to which people can perform their jobs, how productive they are at work, and the effects of shifting temperatures and precipitation patterns on things like agricultural yields or manufacturing processes. These factors help determine our “economic output” — all the goods and services produced by an economy.

In spite of the fact that there is disagreement on how much exactly economies will be affected, we know the cost of inaction will be immense. With the information at our disposal, it would be foolish and dangerous to assume that reducing emissions will cost more than coping with a changing climate.

Good luck with your “debate” and let me know how it goes.