The era of energy dinosaurs is coming to an end
Working in clean energy can be frustrating. Tons of exciting things are happening, but elite conventional wisdom isn’t keeping pace and nobody listens to bloggers like me shouting about it.
One of the few outlets in the mainstream energy world to consistently stay ahead of the curve is Bloomberg New Energy Finance. (I have interviewed its chief executive, Michael Liebreich, before.) As Exhibit A, I offer this new “VIP brief” written by Liebreich and his able colleague Nathaniel Bullard. It’s a big old chunk of brain food, slightly dense and buzzwordy in a few places but chock-full of insight about dynamics of the energy world in the coming decade. Let’s take a look, shall we?
Like too few writers and analysts in this area, Liebreich explicitly takes a systems approach:
What happens when you saturate the system with wind or solar depends on what you think is going to happen next with power storage, demand response, electric vehicles, mandated back-up and dozens of other factors. These are all highly dynamic because, of course, they are part of a complex system, and systems exhibit emergent behavior. You can spend a lifetime studying the construction of a single neuron, yet know little of what drives a nematode, let alone a human. Real-life systems exhibit unexpected population surges and crashes, periods of equilibrium punctuated by periods of shattering change, tipping points, phase changes, extinctions.
… The value of a solar rooftop in a world of electric vehicles is very different from the value of the same solar rooftop in a world without. The value of demand response is negligible in a world optimised around “baseload-plus-peak” generating capacity. The value of energy efficiency is negligible in a world of fuel subsidies. And so on.
You will note that this echoes, somewhat eerily, my widgets vs. systems language. Naturally I agree!
Here, in capsule form, is the shift in perspective Liebreich urges for those making decisions in today’s energy markets:
This is the reality of the world’s energy transition: it is dynamic, complex, unpredictable and fraught with risk. And it is among these shifting sands that energy decision-makers must plant their feet. Not surprisingly, perhaps, some choose to cling to old certainties, heuristics that worked fine during a long period of strategy stability: demand stimulation, baseload-plus-peak, centralisation, scale, vertical integration, dispatch management, control, confidentiality. But a shifting environment means increasingly replacing dinosaur heuristics with mammal heuristics: efficiency, flexibility, responsiveness, open data, transparency, coalitions.
I am stealing “mammal heuristics.”
Liebreich is describing the same trend I wrote about the other day: decentralization, the shift from a few big players and technologies (dinosaurs) to a profusion of small, networked ones (mammals).
Liebreich breaks this mammalian approach down into three “strategic elements.”
The energy world is now subject to more shocks, from more directions, than ever before: “Technological change. Commodity price spikes. Climate-related extreme weather. Financial instability. Policy change.” And so on.
These kinds of changes can creep along for years and then suddenly become disruptive. So decisionmakers need to ask themselves not just about the desired or expected outcome of their choices, but about what can go wrong. (I wrote a post about risk management that is consonant with this theme.) From that point of view, certain kinds of solutions suggest themselves:
Distributed beats centralised. Diversity beats a mono-culture. Consensus beats confrontation. Local beats distant. Resilience means power storage, to build in tolerance. It means smart grids, to match supply and demand. It also means future-proofing the design and location of assets.
Where the old mentality was about optimization, the new one will be redundancy and fault-tolerance.
This is about utilities hedging their bets, leaving themselves options rather than locking into a few huge, capital-intensive, one-way bets (like, say, a $6.85 billion nuclear plant). By diversifying investments and breaking them into smaller increments, they can hedge their bets against unexpected changes in “technology, policy, regulation, economics, or environment.”
… an electric utility or a fuels distribution company is fundamentally a provider of energy and related services, and not just a coal generator or a gas burner. Optionality allows a company to embrace new opportunities first at the margin, but eventually at the heart of operations. Most century-old firms know this already, as do all technology companies. Today, IBM is a services company; Apple a consumer devices and services company. Asking the counterfactual “what would they be if they still made only mainframes or iMacs?” gives a simple answer: they would be out of business. Energy is a service to meet a need. As technical and societal needs change, so must the service, and that means portfolio options.
As I’ve said before, this shift is going to unleash powerful market forces. One electron or gallon of fuel is like another; insofar as energy providers compete, it is purely on price. But when it comes to energy services (heat and cooling, emergency backup, transportation, etc.), there’s much more differentiation possible, and thus much more competition. Where there is more competition, there is more innovation.
This is not only about getting the best information — which is harder than you’d think for energy investors — but about the many ways now possible to get more information and pull meaning out of it.
Intelligence is also about collecting, analysing and harnessing data that is several orders of magnitude beyond what was available to energy companies in previous decades. GE chief executive Jeff Immelt recently referred to the emerging world of connected, sensor-imbedded machines and the processing power to analyse it as the “Industrial Internet”. Energy efficiency software applications are allowing building owners to optimise consumption and control costs with greater granularity than ever before. Smart meters make possible the use of detailed information on which consumers use electricity when, and offer the opportunity to shape their consumption habits over time. Smart grid sensors and analytics software allow utilities to pinpoint and correct faults, and optimise energy networks in response to real-time conditions. Opportunities for new intelligence range from managing grid losses to predicting renewable and distributed generation performance, from pricing strategies and maintenance schedules to arbitrage opportunities. Ultimately, new connected and intelligent capacities allow us to, in Immelt’s words, to “find meaning where it did not exist before”. And not only meaning: value.
That the key: To pull meaning from data, and value from meaning. I am reminded of something Bill Gross — inventor, entrepreneur, and head of eSolar among other companies — is fond of pointing out: The cost of almost every industrial commodity is rising. Copper, steel, aluminum, concrete, you name it. The one thing that’s steadily getting cheaper is computing power. So they key to getting ahead in the market is substituting computing power for other commodities by making systems smarter and leaner. The more you can do that, the more you can get off the downslope of the Hubbert curve and onto the upslope of Moore’s Law.
Anyway, to conclude: As we move from the era of dinosaurs to the era of mammals in the energy world, some players will cling to the old ways and perish; others will diversify, focus on resilience, keep their options open, gather intelligence, and thrive. One thing’s for sure: by the end of the century, there won’t be any dinosaurs left. These are exciting times.