Author Archives: kfh5089

Opportunities in Deregulation

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  • What will be the effect of greater decentralization of power generation?

While I think the idea behind decentralization is wonderful, I think in practice it’s going to be a double-edged sword.  Allowing the industry to experience the free market will help it become more efficient, but it will also free utilities from the constraints of governmental price controls.  This translates to higher prices for consumers.  In fact, deregulated states are burdened with some of the highest energy rates in the nation (Marcus, 2011).  There are a number of reasons for this, but the most interesting (and least cynical) is the concept of deintegration.  By taking these former monopolies and dividing their functions amongst several companies, you open the market to more costs along the way (Marcus, 2011).

In terms of renewable energy, I can see it playing a role in deregulation in the near-term so long as there are incentives such as Renewable Energy Certificates (REC) and policies such as Renewable Portfolio Standards (RPS).  However, in the long-term, as the costs associated with renewables continue to drop, I can see that role becoming a primary influence in generation growth.  In fact, wind energy alone has contributed 30% of the added capacity in the last 5 years (AWEA, 2014A).  This is largely due to 90% reduction in costs since the 1980s, yet the technology is still becoming more efficient and less expensive (AWEA, 2014B).

 

  • What new businesses will evolve in this changing landscape?

This question led me to think about a really interesting article I read recently about Germany.  Deregulation in that nation has led to a number of entrepreneurial ventures aimed at using spare land to generate electricity and contribute it to the grid.  Here is a quick summary of that nation’s deregulation experience:

In just a dozen years, industrial-powerhouse Germany has replaced around 31 percent of its nuclear and fossil fuel generated electricity with green power, produced overwhelmingly from moderately sized onshore wind, solar PV, hydro, and bio-energy installations (Hockenos, 2014).

The big difference with Germany, however, was that the grid became open game.  From what I understand, US utilities still own and govern the grid, so in a way they are still the gatekeeper for power.  Somewhere along the line, however, the small-business type electricity generation plants that can be found in Germany cannot be found in the US.

I can’t see small players entering the US market as long as large utilities continue to govern the grid.  There may be opportunities to service large power providers, however, and I can see many ancillary businesses for contractors servicing customers outside the purview of the traditional utilities.  What I mean is, instead of a utility employee going to fix a broken power meter, these jobs will become available for local skilled contractors.

 

  • What business can you see yourself creating to serve this market?

I’m torn in answering this question, because–given the traditional resources–in the US I can only see opportunities in offering services to the new competition for traditional utility companies.  While there may be a lot of opportunity there, it would be nice to have the same opportunity as the German entrepreneurs who are able to turn their roof into a source of income.  Also, I can see pivoting a solar PV installation business or a wind energy installation business into an energy generation business.  For example, if I were to offer lease agreements to my customers, I could perhaps make an arrangement where I would install excess capacity and charge the consumer for their consumption while charging the distributor for the added power.  I’m not sure how–or even if–this could work, of course, but I’m certain if the policies allow for this type of arrangement there could be a significant opportunity.

 

References:

  1. Marcus, William, 2011.  “Does Deregulation Raise Electric Rates? A Cross Sectional Analysis.”  jbsenergy.com.  Accessed:  http://www.jbsenergy.com/downloads/Does_Deregulation_Raise_Electric_Rates.pdf
  2. American Wind Energy Association, 2014A.  “American wind power reaches major power generation milestones in 2013.”  awea.com.  Accessed:  http://www.awea.org/MediaCenter/pressrelease.aspx?ItemNumber=6184
  3. American Wind Energy Association, 2014B.  “The Cost of Wind Energy in the U.S.”  awea.com.  Accessed:  http://www.awea.org/Resources/Content.aspx?ItemNumber=5547
  4. Hockenos, Paul, 10/31/14.  “Germany’s Revolution in Small Batch, Artisanal Energy.”  foreignpolicy.com.  Accessed:  http://www.foreignpolicy.com/articles/2014/10/31/german_green_energy_revolution_backyard_windmills_solar_gas

Cost of Capital

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1  Considering what I know about renewable energy, what are some of the key things I need to be able to explain to a potential funder of my project?

There are a number of obstacles that will surround any project, and raising the up-front capital needed to fund a project is certainly the most crucial.  In terms of renewable energy, the project not only needs to be equitable, but it needs to be even more equitable than alternatives.  For example, a company may consider installing solar PV with a large up-front cost at a 20 year payback period, but if they can save a few dollars immediately by converting to natural gas and applying some low-cost efficiencies around the facility, they may implement the latter if only to avoid the up-front cost while still being able to demonstrate a savings.  Even though long-term the solar PV technology would have a significantly greater return, it’s that instant gratification and the fear of the initial large investment that may deter the project.

I think it’s extremely important not only to explain the long-term benefits of the project, but also to explain the long-term negative impacts for not pursuing it.  Using the example above again, we must also take into consideration that natural gas is relatively cheap for the time being and that electricity rates are steadily on the rise in most places.  In fact, they’ve risen about 50% since 2003.(1)  In the end, it all comes down to the volatility and unpredictability of fossil-fuel driven energy rates versus the stability and assuredness of renewable energy costs.  Once that solar PV array is installed, one won’t have to worry about the sun sending a higher bill next month.

Insofar as funding a renewable energy startup, I think the crux of funding success can be found in the potential of the market.  Energy is a colossal business, and as long as oil is expensive and coal is dirty, there are going to be gains made in the renewable energy sector.  But the cost comparison of renewables vs. fossil fuels is growing slimmer as the technological advances of renewable energy technologies drives its price of adoption down while the increasing scarcity of “conventional” oil and natural gas sources drives their costs of extraction up.  It would also be important to discuss the increasing efficiencies of many renewable energy technologies, because as they become more efficient the more viable an option they become.

For either renewable energy projects or startups, government incentives will be crucial to their near-term successes.  The high up-front costs of adoption will continue to temper the industry’s growth until innovative new ways of allowing consumers and businesses to adopt at a lower cost are implemented.  Elon Musk’s SolarCity just recently built financing into their installations, allowing consumers to simply pay a stable monthly rate to SolarCity instead of their utility company, and other companies have used leasing to confer the same effect.  The only difference is that SolarCity’s method allows the consumer to eventually own the solar array, whereas with the leases the array is owned by the installation company.  Either way, these innovative ideas have found a way to eliminate the deterrent of that high up-front investment.


2.  What finance-based processes would I use to explain our potential for success?

In order to explain our potential for success I would certainly use, for simplicity, Return on Investment (ROI) in order to illustrate that the project is equitable.  For a clearer understanding of the potential for the project I would also provide a Net Present Value (NPV) analysis.  Using the NPV, I can clearly illustrate the year by year accumulation of capital after the original investment has been paid off, which I think is a very powerful tool.  Because the NPV analysis takes into consideration a host of limiting and contributing factors like taxes, inflation, and stable investments, it makes it very clear the true potential of the investment.  In the case of a renewable energy projects, assumptions will need to be made in order to design the outlook of the project–namely year-over-year savings, yearly current utility cost increases, etc.–so it won’t be a perfect representation of the return on the investment.  However, the more factors that are taken into consideration the more concise the outlook will be.

 

Reference:

  1. EIA, 2014.  “Short-Term Energy and Winter Fuels Outlook.”  eia.gov.  Accessed:  https://docs.google.com/document/d/1Zn6XamC2DNkOAIsMd5p8_G0aGhGOlZBWAJWsFpbOPl0/edit#

Moving Beyond Lean Six Sigma

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There are many policies that the government can adopt to promote energy efficiency, and, to be sure, some will be more effective than others.  One of the most effective policies is rewarding those who install renewable energy generators with rebates or tax incentives, whether it be consumers or businesses.  We saw this in action when the American Recovery and Reinvestment Act gave a much needed boost to renewable energy back in 2009.  The incentives for wind projects alone led to a 31% increase in installed capacity of wind energy since 2009, with an average annual investment of $15 billion.(1)

But we all know making renewable energy cheaper for industry is an easy answer.  What are some of the other policies the government can implement to spur the growth of renewable energy?

I think one of the most important is the implementation of Renewable Portfolio Standards (RPS), which require electricity providers to generate a certain percentage of their energy from renewable technologies.(2)  Right now RPS are adopted from state to state, with 30 states and Washington D.C. enforcing them as mandatory measures, while 7 other states have voluntary goals (it’s up to the utilities if they want to participate or not.)  There are no national RPS as of yet.  To use California as an example of RPS in action, by 2020 they are requiring that 33% of the electricity generated in the state comes from renewable resources.(3)

Another policy that can be implemented is something a little more controversial:  taxing carbon emissions.  This works a little differently than incentivising renewable energy adoption as it entails promoting process efficiency.(4)  Just as we learned in Lesson 3, “the kilowatt not used is the best of all.”  By creating more efficient processes within industry we can simply avoid extra energy being used, reducing the need for both renewable and nonrenewable energy.  The other benefit of a carbon tax is that it allows state governments to collect extra money from dirtier industries–money that can be reinvested into mitigating the effects of climate change, developing new renewable energy projects, or funding education programs that will lead to a more aware and involved populace.  The Congressional Budget Office has a plan that could raise as much as $1.2 trillion during its first decade.(5)  You could imagine what an effect those fees would have on the efficiency of industry in the U.S. (assuming businesses stay in the country.)

A business that will benefit from these new efficiency mandates is a business that helps established businesses and industries meet these new standards.  Just as businesses tried to eek out every drop of productivity from employees and processes with managerial practices like Six Sigma–and then Lean Six Sigma–there are other strategies out there.  I think that, after looking at the information we’ve discussed, that there is a tremendous potential for a business that can successfully help businesses implement efficiency assessments that lead to a reduction in waste and energy usage.  There is one management strategy that seems especially promising called Multivariable Testing (MVT), and it involves testing a bunch of different variables aimed at improving the efficiency of a given process.  By experimenting on different methods of implementing the process, you can tell if a certain method is better, the same, or worse.  Along the way lessons are learned that can benefit other processes.(6)  Companies as large as Lowes have used MVT with success.  Certainly, however, there will be benefits to each of these managerial practices out there.  A successful business might aim to master all of them, and then help tailor an efficiency program for each client depending on the managerial practice that best fits them.
Sources:

1.  http://www.awea.org/Resources/Content.aspx?ItemNumber=5059

2.  http://www.epa.gov/statelocalclimate/state/topics/renewable.html#a03

3.  http://www.eia.gov/todayinenergy/detail.cfm?id=4850

4.  http://www.aceee.org/sector/state-policy/toolkit/chp/emissions

5.  http://www.cbo.gov/publication/44223

6.  http://www.bscdesigner.com/six-sigma-reviewing-of-alternatives.htm

A Niche in Wind

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In response to the question:  Why are renewable energy projects failing to receive the same degree of support from the financial community and the government that nuclear does?

While nuclear may receive more monetary support than renewables, I think it’s important to note that the only new nuclear projects in the works right now for large-scale electricity generation in the U.S. involve new nuclear reactors at existing power plants.  Ground has not been broken on a new plant in the U.S. since 1974.(3)  I think there are a few reasons renewable energy projects receive less governmental support than nuclear energy projects.  First, I don’t think nuclear energy is a viable option without large subsidies.  According to an article I read by the Union of Concerned Scientists, even after being over 50 years old the technology only continues to grow more expensive.  According to them, the “subsidies often have exceeded the average market price of the power produced.”(1)  That said, the enormous costs to create a nuclear reactor alone make them extraordinarily expensive to subsidize.  The 2 new reactors currently being built at the Vogtle Electric Generating Plant in Georgia are expected to cost $14 billion.(4)  Outside those reasons, I see the current nuclear energy generation industry as a relic awaiting its demise.  There are new technologies out there that may breathe life into nuclear, such as reactors harnessing thorium as a fuel, but I think the prohibitive up-front investment will keep construction of the standard plants from springing up in the U.S.  When looking at the numbers at what energy will cost to generate by 2019, it’s easy to see that renewables are quickly gaining ground on fossil fuels and nuclear in terms of economic feasibility.(2)

”This chart is based on an analysis released by the U.S. Department of Energy in April projecting the total “levelized” cost of producing electricity based on the type of power generation.The analysis is for new power facilities going online in 2019. The analysis takes into account the estimated average cost of building and operating the plant, well as the cost of fuel and transmission expenses. The complete analysis can be found at http://www.eia.gov/forecasts/aeo/electricity_generation.cfm”(2)

 

In regards to the question:  What niche opportunities do you see for entrepreneurs in the global development of renewable energy sources?

Looking at the illustration above, and taking into consideration the speed at which the segment is growing, I think there are huge opportunities for entrepreneurs in wind energy.  While the initial investment in constructing industrial wind-farms would be huge, I think there are certainly a lot of opportunities in either servicing the industrial side or simply serving the consumer side.  Small wind turbines can be installed in many states with significant rebates or tax incentives, but there has been a huge drop-off in recent years in the purchases of new small wind turbines.(6,7)  So in this case I would focus on starting a business servicing the expanding commercial wind power generation industry.  One of the challenges facing the industry right now is the absence of transmission lines.  Many wind farms are located in areas that are far from load centers, so new lines need to be constructed over long stretches to carry the new energy as it’s brought online.(7)  Just to paint a picture of how big an opportunity this is, the Competitive Renewable Energy Zones (CREZ) project in Texas led to the installation of over 4200 circuit miles of new transmission lines at a cost of $6.8 billion.(7)  This is just one of many projects in planning.  According to the U.S. Department of Energy’s 2013 Wind Technologies Market Report, the addition of these new transmission lines could open the development of wind power in even more areas, allowing wind energy to grow even further.

 Edit:  Clarified vague “nuclear energy projects” comment to refocus discussion on large-scale electrical generation projects that use nuclear energy.

Sources:

1.  http://www.ucsusa.org/news/press_release/nuclear-power-subsidies-report-0504.html

2.  Julie Mack, “With renewable energy growing and coal shrinking, what’s the future of nuclear plants like Palisades?”  mlive.com.  (08/28/2014)

3.  http://en.wikipedia.org/wiki/Nuclear_power_in_the_United_States

4.  http://en.wikipedia.org/wiki/Vogtle_Electric_Generating_Plant

5.  http://www.world-nuclear.org/info/current-and-future-generation/thorium/

6.  http://energy.gov/eere/wind/wind-program

7.  U.S. Department of Energy, “2013 Wind Technologies Report.”  U.S. D.O.E. (08/2014)

http://energy.gov/sites/prod/files/2014/08/f18/2013%20Wind%20Technologies%20Market%20Report_1.pdf

 

Hi, I’m Ken

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Hi,

My name is Ken and I currently work in the Oil and Gas industry on the “completions” end of well development.  I specialize in tools that allow production companies to isolate zones during hydraulic fracturing.  I currently live in Pennsylvania, but I grew up in New York.  I started working in the Oilfield in Oklahoma about 3 years ago, where producers focus mainly on oil production, and I moved up to Pennsylvania about a year ago, where producers focus mainly on gas production.

I ended up in the oil and gas industry completely blind as to what it actually was, which I think was necessary if I’d have ever even considered pursuing it otherwise.  It gets rough.  But now that I stuck it out I find it fascinating and challenging.  I realize, however, that energy production can’t go on like it is forever.  After all, there’s only so much oil and gas in the ground.  Eventually we’ll need to move on to more sustainable options, and, when we do, I’d like to be at the head of the pack in developing those options.

This course is a requirement for my Energy and Sustainability Policy degree, but it’s the course that I hoped to take when I applied for the program in the first place.  So I am really looking forward to this course.  I plan on starting a business–hopefully sooner than later–having something to do with sustainable energy production or solutions, and I’m confident this course will give me a little direction in terms of what kind of business I would be passionate about enough to pursue.

I have never started a full-fledged business.  I’ve flirted with the idea, going so far as to flesh out ideas and business plans, but I’ve never pulled the trigger on anything.  I regret this, and this won’t be the case for long.  I think the biggest obstacle I’ve faced in terms of pulling the trigger is passion–I don’t think any of the ideas I’ve pursued would have kept me motivated enough to make them a success.  At least that’s what I tell myself.  But sustainable energy is something I can get behind, and it’s a subject that always fires me up.  I want to help power the future.

That said, I hope to learn a lot from others in this course.  I love other perspectives on the energy business.  Hopefully my perspective will help others as well.

All the best!

Ken