Opportunities From Decentralization

Decentralization of power generation has introduced an element of competition to the domestic electric power market.  As states have enacted legislation to require monopolistic electric utilities to allow consumers to select the electric generation company of their choice, the competition has lowered consumer prices.  For example, prior to deregulation, Pennsylvania consumers paid roughly 15% more than the national average per kilowatt hour.  Post-deregulation, these same consumers now pay on par with the national average (1).  In fact, in my personal experience, I have been able to lock into a supply contract at the rate of $0.055/kWh, which is nearly 24% less than if I purchased my supply through my utility ($0.072/kWh).

As deregulation takes hold across the nation, we are also entering an era where traditional coal-fired power plants are being decommissioned in favor of natural gas turbines.  While still a fossil fuel, natural gas can be combusted with fewer carbon emissions than that of coal, and with EPA anti-pollution regulations, this significantly narrows the BTU price gap between coal and natural gas.  As natural gas gains market share at the expense of coal, there are also significant opportunities for renewable energy projects to begin and seek market share.  With a market determined price, these renewable projects could easily become profitable as global electricity demand increases.

Anywhere there is a change taking place, there is a business opportunity.  In the case of electric market deregulation, I believe these opportunities extend beyond that of simply becoming an electric supplier.  There are several energy cooperatives taking hold in my area, the majority of which are partnered with a renewable energy supplier.  With several large wind projects located in the nearby Laurel Highlands, I think a consulting service could be established whose goal is to partner large neighborhood developments and/or retail developments with the local renewable energy suppliers.  This would give existing and new renewable energy projects a guaranteed base demand for their electricity, allowing them to bypass the spot market for a long term contracted price with the end user.  Supplemental load would be provided by other traditional supply from the utility.

1. http://paindependent.com/2011/08/energy-deregulation-benefiting-consumers/

The Cost of Capital and Why It Matters

When presenting a business proposal to savvy investors, there are several key criteria they will want covered.  First of which would be the sources of my existing funding, if any.  Am I reinvesting money from existing cash flow generating projects or is this all a brand new investment offering?  Investors will also want to know how much experience I have in the chosen field.  Do I have a portfolio of previous projects on which I’ve worked?  A proven track record means a lot especially in a field such as renewable energy where people with significant experience can be hard to find.  With renewable energy requiring more of a venture capital investor, I may also be asked my thoughts on the role of renewables and whether I am more interested profit or principle.  Also the corollary, if I believe renewable energy investment is something that must be “wanted” beyond the potential for positive return; therefore, I need an investor whom shares that vision.  If not, I will find myself battling for investment dollars with traditional investments that could early exhibit a track record of higher return on capital expenditure.

As far as finance processes I would use to sell my project, I believe the main two would be return on investment and net present value.  Return on investment, or ROI is a simple calculation of the percentage gain or loss of a particular investment over a period of time.  ROI is calculated using three criteria, cost of investment, gain on investment, and the difference between the two values.  It is a quick and dirty calculation that does not take into effect the effects of inflation or the opportunity cost of investing in a higher-return investment.  ROI works best for short-term projects.  Complementing ROI is net present value (NPV), which gives the investor a tangible figure of the overall value of their investment discounted back through years of inflation and opportunity cost via a hurdle rate into a value given in “today’s dollars.”  This discount rate could vary from project to project depending on scope and even from investor to investor as one may demand a rate of 12% versus 8% for another.  Regardless of the investor, the value will almost certainly be significantly greater than the expected inflation rate since sane investors could simply open a savings account if he or she desired to watch their money’s value erode.  NPV is an excellent tool for comparing longer term investments.  No matter how good the sales technique for an investment is, it always comes down to what I will make of the investor’s money.



Lesson 3_Promoting Conservation

The government is often looked at to provide stimulus to emerging technologies and concepts that otherwise run counter to business as usual. When it comes to promoting sustainability and efficiency, the government could easily set forth a good example of “putting your money when your mouth is.” By retrofitting government-subsidized housing with modern energy efficient features, we can provide the private sector with a functional proving ground to promote the adoption of said features. According the Department of Housing and Urban Development (HUD), there are approximately 1.2 million units of publicly funded housing in the United States. On top of that, millions of additional Americans receive heating assistance funding. The government could create more efficient use and increased impact of this funding by promoting energy efficiency upgrades for the publicly and privately held properties. As stated by McKinsey Global energy, a 28% reduction in energy consumption can be achieved using only NPV positive improvements. With an upfront investment, state and federal governments could reap significant savings over time. This means either more people could be served with the existing funding level or the same number of current recipients could be served for fewer dollars per capita.

I believe a public-private partnership could be forged between the local governing bodies responsible for administering public housing and heating benefits and private sector contractors which would focus on bolstering the weatherization and insulation of all public housing units while also offering subsidized work on private properties whose owners receive heating assistance. The business model would be based off of a series of systematic grants given out in the form of labor contracts. The contractor would be responsible for sourcing any and all necessary parts and equipment as long as it meets specific criteria set forth by the governing body. In the end, public housing and private homeowners would be less burdened by utility costs, occupants would experience better seasonal comfort, and private industry would receive the economic boost.

Unlocking Energy Efficiency in the US Economy, McKinsey Global Energy, page 29, July 2009

Rock, Paper, Scissors, Fission

Renewable energy projects rarely receive financial support on par with nuclear due to the former’s limited profit potential.  Nuclear energy, regardless of its associated connotation, is a constantly available source that relies on neither sunlight, wind, nor replenishable fuel supply to generate electricity.  Outside of venture capital firms, capital investments are made based on the profit that can be reaped.  Nuclear energy is cheaper to produce per kilowatt hour than any other source sans perhaps hydroelectricity; therefore, a dollar invested has the potential do become much more.  Government grants often go to the candidate with the greatest bang for the buck potential to please voters, or at least to the candidate with the most persuasive lobbyists to this end.  With our economy and society so heavily reliant on affordable and reliable energy, these decisions will always be based on dollars and cents.

Entrepreneurs in the renewable energy sector should not be without hope.  In my opinion, there is substantial opportunity for investment in research and development.  Technology breakthroughs will require patents, and those patents will then be licensed to manufacturing firms for development.  Royalties from these licenses could be very lucrative for a venture capital firm looking to assist the renewable sector.  Now is the time for ground floor investment opportunities in these technologies