Exponential growth and the energy business model

By Rafi Raza

Hellen Keller once said, “The only thing worse than being blind is having sight but no vision.” Vision must come from within. It is what inspires an industry, gives projects a purpose and turns a company into a cause. It’s about searching, understanding and learning to solve the challenges of tomorrow.

Fundamental technological advancement can create rapid economic shifts. When a particular market or industry collapses, prices fall, the fundamentals of business are transformed, and new visions become possible. Legacy generation assets may no longer be needed to provide base load. Traditional energy transmission and distribution will evolve in the coming decades as the energy customers move towards a de-centralized grid. Will it still be heavily regulated by policy makers? Will it be an openly traded commodity enabled by direct consumers or better yet, free?

While exploring exponential technology growth and the implications one thing that became very clear to me was that technology evolution, just like biological evolution, is not linear. The rate of adoption of new technology is doubling every decade. Information Technology has doubled capacity, price performance and bandwidth every year

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With the U.S. Energy Information Administration predicting that energy consumption across the world will increase by 56 per cent by 2040, it’s abundantly clear that meeting this increased demand will require a smarter, more efficient energy model. The question on the table now is how the industry can accommodate the increased demand.

For the first time since Edison we are moving towards a de-centralized energy grid. Efficient, inexpensive, reliable, environmentally friendly and safe from disruption. The market-driven shift to a low-carbon economy is unstoppable. The economics of harnessing solar is becoming possible with large scale solar energy down to 6c/kWh and continuing to drop. Per some predictions, solar along with other renewables will meet all our energy demand by 2030, which can be transformative, if commercialized effectively. Price of energy storage is also falling. Enterprise wind power is already cheaper compared to traditional fossil energy production.

solar wind energyStudies investigating the price of solar power have revealed some surprising results. Prices for new solar energy installations are continuing to fall by 26 percent in the last year, according to data compiled by Bloomberg New Energy Finance. Prices have fallen by even wider margins in some of the most important emerging markets like India and China. Just recently, Xcel Energy received a bid for Solar with storage at a median price of $36/Mwh, and wind with storage came in at $21/Mwh, prices so low they have generated a buzz nationally among those who track the utility industry.

Critics often mention that until wireless transmission of energy is a technological and economic reality the energy transmission grids will be as closely guarded as global trade routes. Traditional energy generation (Fossil Fuels/Nuclear), that has fueled the industrial revolution and has given us the modern marvels that our society is so dependent on, evolved within the confines of a highly regulated environment. One reason is that barriers to entry for mass scale generation and transmission were high and required public sector funding. This still stands true in most instances. However, The Department of Energy projects that solar and wind will continue to provide an increasing share of the electricity load in the coming decades.

International Renewable Energy Agency (IRENA) – which has more than 150 member countries – says the cost of generating power from onshore wind has fallen by around 23% since 2010 while the cost of solar photovoltaic (PV) electricity has fallen by 73% in that time. With further price falls expected for these and other green energy options, IRENA says all renewable energy technologies should be competitive on price with fossil fuels by 2020. Adnan Amin, director-general of IRENA, noted “These cost declines across technologies are unprecedented and representative of the degree to which renewable energy is disrupting the global energy system,”. This indicated that a significant shift is underway in the energy sector.

utility scale chart

In the US, specifically focused on utility-scale new generating capacity – renewables totaled 12,321MW of 25,041MW of that new capacity. 6,759MW of the renewables being wind and 5,170MWAC of that solar, with 392MW of ‘other renewables.’ Those totals made renewables 49.2% of new utility-scale electricity generating capacity.

Benefits

Imagine abundant power trickling down to the most remote places on earth. What will this NASA image look like by 2030? More importantly, how will it impact humanity for the better? It will certainly disrupt the regulated energy sector and shift geo-politics.

Funding/Investment

In 2006, Silicon Valley venture capital (VC) firms bet heavily that the energy sector was ripe for disruption. But just five years later the cleantech sector was in shambles. During this period, venture capital (VC) firms invested over $25 billion funding clean energy technology (cleantech) start-ups and lost over half their investment. As a result, funding dried up in the cleantech sector. Shares of public cleantech firms traded at steep discounts in 2008, and almost all of the 150 renewable energy start-ups founded in Silicon Valley over the past decade had shut down or were on their last legs.

One could argue that the VC investment model was flawed or the hardware technologies did not deliver what they promised to the VC investors. However, I am always reminded that the R&D department will almost always develop a product, but the timing has to right for it to succeed in the market. One lesson is that cleantech clearly does not fit the risk, return, or time profiles of traditional VC investors. The sector requires a more diverse set of actors and innovation models. Perhaps, Cleantech investments should be modeled more like a software company, with product offerings guided by trending customer demand. Maybe long-term investors without the time or capital constraints of VC investors are better suited to scale up cleantech start-ups and realize returns in the longer-term. Guided by the lessons learned from the cleantech VC boom and bust, policymakers and regulators should capitalize on the momentum of recent announcements to develop a more functional ecosystem for cleantech innovation.

As of 2017, utilities benefited from cheap financing rates and a significant rise in interest rates in the near future would change that. Depending on their model, some utility companies can offset their increased borrowing costs by passing them on to the customers, while others cannot or choose not to do that. If companies are unable to pass on the extra costs to their customers then these costs are at least partially borne by their equity investors and bondholders, lowering the rate of returns and making their stocks less attractive to new investors. Utilities will need to monitor interest rate hikes and the confluence of disruption. Those conditions are not on the immediate horizon but should incentivize business model transformation. Utilities will have to respond to the rise of renewables and decentralized consumer solar options, and develop new business models for decentralized, distributed power generation. They will need to do more than optimize, they need to reinvent themselves and take full advantage of new growth opportunities downstream. They also must be cognizant of competition from within and outside the industry.

interest rates chart


What’s Next?

In Greg Satell’s book Mapping Innovation, A Playbook for Navigating a Disruptive Age, Greg points out that the organizations who are best able to innovate consistently over a long period of time are those that were constantly asking new questions and exploring new problems. It’s not so much the direction they set out upon, but the search itself, which led them to discover new heights.

Will Amazon, Walmart and Google also be a decentralized retail energy provider? Or will the other traditional last mile access service providers such as cable and telephone providers also jump into the multi-billion dollar market segment. What role will the auto makers/ transportation company play in the energy grid. Think about it, Tesla is no longer a car company, it’s a self-sustained energy company. All other auto manufacturers are quickly following.

At first glance, this looks like a disaster, but it opens up opportunities. Will traditional utilities transform, or will the forces of the status quo prevail? We often need a shock to shake us from our complacency. Tackling the hardest problems first forces us to ask better questions and those questions can lead to vastly different approaches. Some of these will be blind alleys that lead to nowhere, but others will be game changers and permanently shift our ability to compete in the next phase of energy transformation.

Rafi is a sales executive with 15 years in the Energy/Utilities experience.  His experience has given him this insight to understand the intricacies of the entire Energy/Utilities supply chain and brings well-rounded insight into the opportunities and challenges faced throughout the industry. His focus on identifying new business models assists clients to accelerate their move to the digital age for their own benefit as well as their customers.

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