Cheaper energy; pricier wires

 A very interesting and informative analysis.  I shall quote only parts of it.

Shortly after covid hit the US and the work from home era began, I looked into buying a bottle of shampoo online. I used to always grab things like that at the drug store next to my office, so without an office to leave, I kept forgetting to buy it. Unfortunately, shipping would have more than doubled its cost, which I couldn’t stomach. Instead, I wrote “BUY SHAMPOO, IDIOT” on a post-it note and put it on my front door.

Increasingly, this is what buying electricity in the US may feel like.

Your electricity bill has two elements: the cost of generating power and the cost of delivering it. People typically assume their bill is mostly or exclusively driven by the former. Far off power plants produce energy, they sell it into the wholesale market, and those costs eventually get passed on to consumers.

In reality, the cost of building and maintaining all the infrastructure to get power to your house (transmission lines, substations, distribution networks, transformers, etc.) is a significant portion of your bill. In fact, when working with large energy users across the country, I even see utility bills where a majority of costs are associated with delivery.

And one of the most slept on trends in the energy industry is that this portion is growing rapidly. According to the US Energy Information Administration,

“After adjusting for inflation, major utilities spent 2.6 cents per kilowatthour (kWh) on electricity delivery in 2010, using 2020 dollars. In comparison, spending on delivery was 65% higher in 2020 at 4.3 cents/kWh. Conversely, utility spending on power production decreased from 6.8 cents/kWh in 2010 (using 2020 dollars) to 4.6 cents/kWh in 2020.”

Put simply, generating power is getting cheaper while delivering it becomes more expensive. In this post I will show how the utility business model creates this situation, how it can meaningfully slow the energy transition, and why DERs must challenge the monopoly if we want to fix it.

There are obvious downsides to electricity becoming more expensive [because of surging 'poles and wires' costs]. For industry, high prices hurt the bottom line. For residential consumers, one can be forced to choose between a credit card balance and keeping the heat on. But within the more specific context of electricity generation becoming cheaper while its delivery cost increases, the impact on electrification should be considered.

The term electrification is used to describe fuel-switching a fossil-fuel energy demand to electricity. The two most common examples of this are electric vehicles and heat pump electric heating. Both are considered by most in the energy sector to be essential parts of decarbonization. The idea is that if we switch as much energy use to electricity as possible, then unlike when using fossil fuels, we can clean up the electricity source.

One reason electrification is supposed to be economical (in addition to sustainable) is that making power through renewables and batteries is getting cheaper by the day. As the power system converts to these sources, electricity prices should come down, making electrification economics more attractive. Or so the theory goes.

But if delivery costs continue to increase at the current pace, they’ll eat any savings generated by large-scale solar and wind. This is a problem for decarbonization, when around 130 million Americans live in a state where replacing an old gas furnace with a heat pump would create higher energy costs than simply buying another gas furnace (ignoring the higher capex as well).

And this doesn’t just impact residential home electrification. Buried in the business model of virtually every new and exciting decarbonization pathway (direct air capture, H2 for steel and shipping, e-fuels for aviation, etc.) is the assumption of very low cost electricity inputs made possible by renewables. You can listen to this episode of The Interchange for a deep dive on the subject, but the quick version is if that cheap renewable energy input is to be accessed via the grid, then delivery costs once again become a problem.

If we want rapid climate action the cost of electricity needs to fall, but its delivery costs may get in the way.

Another outcome of rising delivery and declining generation costs is electricity users will try to avoid those delivery costs. This will be accomplished by building on-site power systems or migrating to locations adjacent to existing cheap energy generation.

The former is becoming commonplace. Homes and businesses are installing on-site solar and storage at a rapid pace, and while they may not realize it, they are doing so to avoid delivery costs. The economics of this choice are often superior to signing up for a grid-delivered power contract because each unit of energy generates value at the retail rate (inclusive of delivery costs) rather than wholesale rate. And as the march of technology learning rates continues, the quantity of locations where this choice makes sense will grow.

Over time, the cost of electricity alone will decline, as renewables get cheaper.
But as the costs of delivery rise, the total cost of utility-scale electricity will exceed
the initially higher costs of distributed generation (rooftop solar)

Simultaneously, load will begin to migrate to places where large wind and solar projects already exist, in attempt to offtake power directly. This has started to happen with new industrial energy loads like hydrogen production and crypto-currency mining because they are extremely sensitive to the cost of power. Soon, other new-build industrial sites will do the same. And eventually, when this dynamic becomes compelling enough, businesses will even consider moving from their existing facilities to capture low cost power directly from large-scale energy sources. If you can avoid the distribution grid, you will.

In the electricity industry we refer to this as load defection, for which the primary concern is the so called utility death spiral. If load defection accelerates, delivery utilities will experience significant decline in energy sales, necessitating rate increases to pay for fixed infrastructure costs. This leads to more load defection, and the cycles continues. This is considered problematic because it will leave those without on-site power systems shouldering the cost of the delivery infrastructure we all (including on-site energy users) rely on.

This argument has been used to levy prejudicial fees on customers with on-site generation, and while this may seem logical, it ignores a crucial consideration; short-run versus long-run costs.

It is true that existing grid delivery assets are fixed costs. Reducing energy consumption from the utility doesn’t reduce the cost of that infrastructure. Once it exists, we’re stuck with it. However, reducing energy consumption (at the right times, more on that later), absolutely does decrease the need for future delivery infrastructure. If the delivery infrastructure needs to support “x” peak load today, and 1.5x at some point in the future, then a 0.25x reduction today means we only need to support 1.25x in the future. While it doesn’t translate immediately into delivery infrastructure savings, it most certainly will over time.

This matters because, while load hasn’t grown for 15+ years, it is about to explode. Earlier I mentioned electrification to show how increasing electricity delivery costs are a problem for decarbonization, but what I didn’t describe was the extent to which this will transform our electricity system. A study from the National Renewable Energy Laboratory (NREL) found high levels of electrification (but not even full electrification) will result in the power system requiring between 2 and 3.5 terawatts of generation capacity, relative to our 1.1 terawatts today.

Doubling or tripling our generating capacity will require a ton of new delivery infrastructure. It follows that reducing load on-site with distributed energy will absolutely reduce total delivery system costs. In turn, this means distributed energy will help keep delivery rates low for everyone, which is a very different outcome than the dystopian utility death spiral narrative some would lead you to believe.

Load defection is good for the grid, because it makes room in our existing delivery infrastructure to accommodate electrification. That results in a more optimized, cheaper power system for all, while making successful decarbonization more probable.

This phenomenon isn't just confined to the US,  It's happened here in Australia, too.  The grid was privatised, despite being a monopoly, and the regulatory system in effect encouraged the grid companies to 'gold plate' the network.  This led to surging electricity prices, which the right-wing party (the badly misnamed Liberal Party) used to justify ditching the renewable energy target, despite the steep actual decline in renewable energy costs.

Solarquotes calculates the cost per kWh of rooftop solar at ~7 cents/kWh.  At first sight, it appears much more expensive than utility-scale solar.  But that's before the cost of the grid is added in.  Utilities are charging anything from 18 cents/kWh to 30 cents/kWh to supply electricity, plus they also add a fixed 'poles and wires' charge to your bill.  In sunny Australia, the risk of grid defection is very real. 

Renewables at grid parity

Source: Deutsche Bank
This chart was prepared in 2015.  Since then, solar prices have fallen 40-50%

From CarbonBrief:

A series of Financial Times features make up a “special report” on energy efficiency. One says that the price of electricity from wind and solar has reached parity with average wholesale prices in California, China and parts of Europe, with renewables expected to become cheaper in Germany, France and the UK “by the end of this year”. It says: “Improvements in the cost-efficiency of green energy supplies is having a profound effect in reshaping the mix of power supplies in many economies.” Other pieces cover the rising efficiency of white goods, “virtual batteries” in supermarkets that can help balance the grid and risks to the competitiveness of gas due to advances in renewable energy. Another FT feature asks if “economics may be the death knell” for the internal combustion engine, even though efficiency improvements for the technology are possible. A final feature in the special report describes the work of “father-and-son scientists” working to develop batteries that are faster to recharge. Meanwhile, in the lead op-ed in today’s Sun, Quentin Willson argues “we are still not ready for mass electrification” of transport due to a lack of charging points. He says plans to ban diesel cars in Bristol are a “wrong turn”.

Well, what can you expect from The Sun?

The truth is that renewables are already cheaper than fossil fuels in lots of places and will be cheaper in many other places soon.  Coal is finished.  Gas is temporarily triumphant, but as the cost declines in renewables continue, it's only a question of time before gas loses out too.  Even though I am a perennial bear, it's prolly wrong to be too pessimistic.   Cost declines in renewables and batteries will drive out fossil fuels, though perhaps not soon enough.  Problems will remain with iron and steel, cement, agriculture, air travel, sea transport and forest clearing.  But none of those is insoluble.  If we wanted to, we could cut emissions by 90% by 2050.

China's road to grid parity

From PV Magazine:

Each shift in Chinese PV policy is watched by the solar world. And the reforms unveiled in late April and early May have left many scrambling to catch up. While they may rein in unbridled growth, the changes are leaning towards a future of further cost reductions, particularly soft costs, and the golden goal of grid parity PV.

So what’s new in the latest regulations? The most critical measures represent a significant revision, some would say correction, to the 31/5 policies – although they maintain a focus of shifting China’s PV sector towards an unsubsidized footing.

In short, the new policy measures set a FIT for residential PV, reduced tariff levels for utility-scale PV, and a new blended auction system for larger installations. A hard budget cap of CNY 30 billion($445 million) has been put in place, with the exception of Photovoltaic Poverty Alleviation Projects – which will receive top priority status and be funded separately.

The new measures amount to the replacement of the former FIT subsidy model, to a blended FIT/auction model. Consequently, the new solar regime is much more complicated. The previous program appears to have been left somewhat at the mercy of the market and companies executing massive installations, resulting in an unsustainable level of subsidy payments – with the resolution of these legacy payments having not yet been fully achieved. The new system reigns [sic] in this spending, while pursuing a number of other objectives.

Annual subsidies do appear to be back under control. Since 2013, the Chinese state has accumulated over CNY 120 billion ($17.6 billion) in commitments to PV subsidy payments. The new system will strictly limit the annual subsidy to within CNY 30 billion, which obviously was carefully calculated by the central government with an eye to sustainability and timely payments. That’s a win-win for both the industry and the government: The government saves money, and private companies receive payments that work in terms of their internal financial feasibility planning.

Second, the new system pushes the progress towards grid parity PV projects forward. It is well acknowledged that only grid parity will make solar power genuinely competitive with other energy sources – part of the climate solution China and the wider world needs.

In many places around the world, grid parity is becoming a compelling reality for solar as a result of declining costs – indeed, that’s why many markets have flourished for a second or even third time since 2018. However, in China, because of the so called ‘non-technical costs,’ which include taxes, land costs, and related fees, grid parity is still very difficult for PV projects to achieve in most parts of the country.

These costs are often referred to as ‘soft costs’ and have been markedly reduced in markets outside of China. The new regulatory system limits total subsidies and utilizes bidding mechanisms to encourage investors to further reduce costs and push them to approach cost structures more and more in line with parity levels.

Meanwhile, the new policy also incentivizes local governments to reduce solar soft costs. Because the reverse auction system will be based on the entire national market, rather than previously allocated installation quotas determined on a per province basis, there probably will be some provinces which will be successful in few (if any) project bids in a particular year, due to having higher non-technical costs than others.

In the mid-term, China’s spectacularly rapid growth achieved in 2016 and 2017, both with something approaching year-on-year (YoY) installation increases of over 50%, appears a thing of the past. Over the next few years, market growth rates of around 20-30% YoY appear more likely.

There are several factors to strongly support the prediction of more steady growth. First, the non-technical cost in China’s domestic market is not easy to reduce because it provides vital revenues to some local governments. Second and more importantly, the capacity of China’s electricity grid to absorb such rapid expansions of PV capacity is limited. Due to a long-standing cooperation relationship – some might say love affair – with traditional coal power, China’s national grid and its sub-branches of provincial grids are not entirely willing to embrace solar power.

Solar PV generation also presents some challenges to grid operation, requiring a paradigm shift of sorts, and for grid operators this presents problems. China’s government is implementing a complex market-oriented reform of its power system, especially the national grid system.

However, without major policy breakthroughs in power usage, the implementation of micro-grids, and the integration of energy storage, China’s domestic PV market will suffer increasingly from grid limitations. Overall, policy and grid constraints will limit runaway growth, but they will also limit wild fluctuations of demand – and its resulting impacts on global PV supply chains.

[Read more here]

A hydroelectric dam is connected to a solar farm at Longyangxia
- it is one of the largest photovoltaic power stations in the world (Credit: Nasa Earth Observatory)
Source: BBC Future

A New Tony Seba speech

Tony Seba calls it "God Parity" when solar plus storage falls below the cost of transmission.

This is the latest Tony Seba speech. It's long but eminently watchable.

He makes the usual point with the two pictures of the same New York street in 1900 (with just one car, the rest horses) and 1913 (all cars except for one horse-drawn carriage); of how AT&T (the inventor of the mobile phone!) hired McKinsey and Co in 1985 to forecast total mobile phone demand by the year 2000, and were 120 tmies out; and how Kodak (the inventor of the digital camera !) went from record profits in 2000 to bankruptcy in 2012 as conventional camera sales collapsed.

He pointed out that technological adoption rates (for successful technologies) are ALWAYS S-curves,  starting slowly then accelerating, and only peaking out when they approach 100% market share. Over the last couple of decades,  the S-curves have become steeper: new technologies are being adopted faster.

Lithium ion batteries fell in cost by 14% per annum from 1995 to 2010.  From 2010 to 2014 the rate of decline accelerated to 16% per annum.  From 2010 to 2016 it accelerated again to 20% per annum [which implies that in the last couple of years it has been higher than 20%, which we know is true]  For Con Ed (a US utility) 1/3rd of generating assets are used for just 6 hours a year.  So even if batteries are too expensive to be used for 3 or 4 or 5 hours of time-shifting power output, they are already cost competitive for these brief periods of peaking power.  By 2020 or so (3 years away!) it will cost the average American consumer just $1 a day to store 24 hours of electricity demand.  But disruptions starts earlier.  The most profitable part of utility sales is the supply in the afternoon-evening peak which is just 6 hours. Already tropical islands are switching to 100% solar+batteries because it is cheaper than diesel.

ICE (internal combustion engine) cars, i.e., petrol/diesel cars convert just 17-21% of the energy stored in the petrol/diesel into motion; electric cars convert 90-95%.  Plus electrons are much cheaper to transmit than atoms.  He gives the example of a Jeep Liberty which would cost $15,000 for 5 years of "gas" (i.e., petrol) vs $1565 if it were electric.  Petrol cars have 2000+ moving parts (transmission, driveshaft, clutch, valves, differential , pistons, gears, carburettors, crankshafts ....) EVs 20.  Reflecting this, Tesla has offered an infinite mile warranty.  Biggest cost of maintenance is tyres. In 2013 he drew the battery cost curve which projected an SUV at $35-$40K in 2017-18, $29K by end 2019, and $22K by end 2022 for cars with over 200 miles range.  People said he was mad.  But we have the Chevy Bolt, the Tesla Model 3 and soon the new Nissan Leaf.

Lidar (needed for autonomous vehicles) cost $70,000 in 2012, $1,000 in 2014, $250 in 2016.  $90 Lidar on the way. World’s first 1 teraflops computer cost $46 million in 2000 and covered 150 square metres.  2016, a 2.3 teraflops computer by Invidia cost $59, and is about the size of a laptop.  Invidia expects a 1000 times improvement by 2025.  All these forces together will lead to transport as a service: autonomous cars which you will only use when you need them (the average car is used for only 4% of the time—the rest of the time, it’s parked) Per mile, costs of transport will drop 10 fold.  The (ICE) used car market will collapse. ICE car companies will have to compete with zero-value used cars and transport as a service which will be 10 times cheaper.  By 2030, the car fleet will be 80% smaller.  Oil demand will peak in 2020, and will be 30% lower by 2030.

A newly-built Danish school gets 50% of its electricity from solarpanels—in its walls.  Copenhagen is 55 degrees N, 3 degrees south of Juneau in Alaska, and 5 degrees north of Vancouver.  If they can do it, 90% of the world can.  Installed solar capacity has doubled every 2 years since 2000 (a 40% per annum growth rate)  Solar provides 1.5% of total world electricity, but it is just 6 doublings—12 years—away from providing 100% of world electricity.  By the end of this year, solar will be at or below grid parity in 80% of the world.   The falling cost of rooftop solar will soon fall below the cost of transmission, never mind generation.  Generation will be distributed, like an internet of energy.

When I watch Tony Seba, I am optimistic about us—mankind—doing enough to stop runaway global warming.  Solar is just getting cheaper every year, and if it continues growing at anything like the rate it is now, we will cut CO2 emissions by 30% over the next 15 years.  Electric cars will dominate the market in 15 or 20 years, and that will lead to a further cut in emissions from transport by 30% plus (remember a big chunk of oil demand is for stuff like tarmac or as feedstocks for plastics).  If we can also cut the emissions of iron and steel, cement production, and air transport we will be able to reduce emissions by 70% over the next 20 years.  This is far better than the IEA (International Energy Agency)’s  projections which assume emissions will keep on rising for decades.  Of course, you then have to deal with dimwits like Australia’s “Liberal” party, which now wishes to subsidise a coal-fired power station, which no utility will build (because it’s so much more expensive than renewables.)  But I hope intelligence will win.

Tesla's Q2 shareholder statement

We still keep on getting comments that renewables won't work, because grid stability/renewables variability.   But that ignores the advent of cheap storage.  Tesla's introduction of the PowerWall (for households) and the PowerPack (for businesses and utilities) will revolution electricity storage and the functioning of the grid.

This article about Tesla's second quarter note to shareholders is most interesting.

Musk makes the point that storage will halve the need for power plants EVEN WITHOUT RENEWABLES, because we have had to build extra power plants to cope with high demand at peak periods.  Batteries can do this better, and cheaper.  Add renewables to the mix and most power plants will be redundant.  And before you mock the man as too optimistic, recall that 5 years ago Tesla sold as many cars a year (800) as it sells in a week now.

But that doesn’t mean Tesla needs renewables to sell batteries, founder and CEO Elon Musk said Wednesday.

“It seems like people link this too much to renewable energy,” Musk said during Tesla’s Second Quarter earnings call. “Of course we are great believers in renewable energy, but that is not the gating function for stationary storage.”

Ultimately, said Musk, storage allows utilities to turn off power plants or defer new ones.

“You can basically, in principle, shut down half of the world’s power plants if you had stationary storage" he said.

Utilities currently have to build power plants to meet peak demand, and then some. Batteries allow utilities to store energy when demand is low and use it when demand is high, without turning on more power plants. [read the full article here]

There is a limitation, though:  how rapidly we can deploy storage?  The output of Tesla's giga-factory is now already committed for the first year of its life, so that is the true  constraint on switching to a coal-free future.  It's not the cost of renewables, which are now cheaper than new coal plants.  It's not the cost of storage.  Tesla has solved that.  It's the supply of batteries.

It matters, because the world continues to warm.  Once again, the latest month's data (for June) were the hottest ever.  The 12 months moving average shown in the chart below shows a sharp spike to new highs.

Source

Going 100% renewable

Georgetown, Texas, has gone 100% renewable:

Georgetown didn’t pursue renewable energy for environmental reasons, but simply because it was the best investment for their customers. The 150 megawatts of solar PV and 145 megawatts of wind power will supply as much as double the town’s annual electricity use, ensuring sufficient supply year round even with fluctuations in sunshine and wind, and allow the town to sell the excess into Texas electricity markets. As attractive as the price—which was lower than the town’s current wholesale electricity costs—the solar and wind contracts have zero volatility because they have zero fuel cost, insulating Georgetown electric customers from rising fossil fuel prices.

It’s worth noting that the solar and wind contracts don’t mean that Georgetown will be completely reliant on the sun and wind. Their grid remains interconnected to the rest of the Texas electricity system, so in periods of zero wind and zero sun, the town can still tap into the ERCOT spot market for power. However, the wind and solar resource tend to balance one another. As the city’s press release notes, “This means that wind power can most often fill power demand when the sun isn’t shining.”

This study suggests that municipalities across the US could switch to renewables without increasing costs.   [Read more here]  And it implies that the only thing stopping that happening is vested interests.   Note also that they have no batteries. They are achieving grid stability in their town by relying on the larger grid, in their case ERCOT, the Texas grid.  But the variability of wind and solar offset each other, which is enough for a small plaey within a bigger sustem, but as more and more do this, battery storage will become more and more important.  Fortunately, battery costs continue to decline.

But the really important thing is that switching to 100% renewables can be done; it's no longer more expensive than coal-fired power; and it won't reduce growth or living standards.

US solar booms

US solar energy capacity up 5-fold since 2010, and 100% in the last year alone.

This chart (slightly out of date--2011--, costs are now lower and installed capacity higher) suggests that 100% of US electricity needs could be met from solar by 2025.  That's just 10 years away.  Of course, that ignores wind and hydro power.  Note double log scale, because costs are falling exponentially and installations rising ditto.  I'm not sure I understand Alliance Bernstein's "grid parity"  As far as I can make out solar is already at grid parity in the US.