Two More Energy Trends at Work

 | May 02, 2014 | 2:30 PM EDT  | Comments
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On Monday, I described "Three Energy Trends at Work." I discussed trends in coal, natural gas and nuclear power. Today I'll discuss two new trends: Renewable energy and batteries. These trends will improve nation's infrastructure and reward investors.

Renewable Energy

There are two types of renewable energy. One is drop-in fuels that will be used to replace transportation fuels. Often called biofuels, drop-in fuels will likely struggle for the next several years.

The other type of renewable energy is aimed at the power industry, and it will not struggle. Today, it is the biggest source of new electric power capacity. In all likelihood, it will remain the biggest source for the foreseeable future.

There are three actors in renewable energy. They are wind, solar and dark energy. All three have already achieved grid parity. Compared with a new nuclear or coal power plant, all three are now cheaper to build and cheaper to operate.

To be fair, nobody really knows what a new nuclear or a new coal plant will cost. However, investors believe they know what new nuclear and new coal will not cost. They will not be below $5 million per megawatt. Investors also know that new nuclear and coal plants require substantial government guarantees to protect holders of debt and equity. These guarantees far exceed anything contemplated for wind and solar projects.

Government guarantees notwithstanding, the capital costs for new wind and new utility-grade solar plants are lower than those for new coal or nuclear plants. They have lower operating costs. At zero, they have much lower fuel costs. Their maintenance costs are relatively small. Their capacity factors are horrible. Nevertheless, they now have lower levelized costs.

Compared with alternatives, new wind and new solar represent lower risks and higher returns for their investors. Construction costs have high degrees of certainty. Construction schedules are relatively short. Regulatory risks are minimal. Expected internal rates of return on project financing are higher than for nuclear or coal projects.

Wind and solar are important, but the big trend is dark energy. It is a winner for investors, grid managers and consumers. Without a doubt, it is the market's cost leader.

Dark energy is energy efficiency. It includes smart meters and demand-response, whereby consumers are financially motivated to cut power during periods of high market prices. It includes energy efficiency, where consumers are financially motivated to replace energy hogs with energy-efficient motors, lights and equipment. It also includes new technologies on the customers' side of the meter that use energy more intelligently.

Renewable energy will provide winners in several different categories. In solar, development opportunities have consolidated around SunPower (SPWR), First Solar (FSLR) and SunEdison (SUNE). In wind, consolidation has produced three winners: Vestas (Denmark), General Electric (GE) and Siemens (SI), with GE having the edge in market share. In dark energy, the market is expanding, and consolidation has yet to occur. EnerNOC (ENOC), Comverge (private) and Exelon (EXC) are early leaders, and many more entrants such as OPower (OPWR) and others are on the horizon.

Batteries

Wind, solar and dark energy do not necessarily need batteries to reward their investors with strong returns. However, grid-connected batteries are a new and important trend. They are going to become big business.

My colleague Tim Melvin advises value investors to follow private equity. It is wise advice, because private equity is quietly funding battery technologies, particularly grid-connected batteries.

Here is one example. GreenTechEfficiency reports that a grid-scale battery technology startup called Ambri has raised funds from Khosla Ventures, Bill Gates, Total (TOT) and others. The firm's technology is based on the research of MIT professor Donald Sadoway. It struck deals to construct storage systems in Hawaii, New York, Alaska and Massachusetts.

The highest returns for batteries are found on island grids. Ambri noted that Hawaii is now dumping 30% of its wind energy, while distribution feeders are over-generating.

Grid-connected solar on mainland systems do not necessarily need batteries. Solar naturally produces power during the high pricing hours of each day, so a battery does not provide owners with any economic advantage. However, some mainland systems behave like islands. Alaska and New England can often behave like islands.

However, grid-connected batteries have surprising value elsewhere. Large-scale batteries help grids displace gas turbines and coal plants, which normally provide the grid with spinning reserves. They also increase grid power quality, decrease pollution and reduce consumers' energy costs.

There will be other examples as battery technologies unfold. In the meantime, companies such as AES Corp (AES), Duke Energy (DUK) and GE have already been deploying large-scale battery technologies in three separate grids.

It's about investor returns. Yes, regulations are a factor, but renewable energy and battery technologies are responding to long-term market forces.

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