The Energy Sector of 2038

The Energy Sector of 2038

10/17/2018

Jessie Lai, Thuy Phi Le, Megan Lorenzen, Geof Cleveland, Theo Johnson

The largest challenge for the energy sector over the next 20 years will be managing disruption and finding the resources to build a new smart grid.  As new business models invert the relationship between energy producer, energy consumer, energy storage, the grid and utility company, both economic and political pressure will mount and governments at all levels and a federally supported framework for energy policy will successfully facilitate private/public partnerships that invest, develop, build and complete a new, smarter grid than ever before that facilitates an energy revolution by serving as a smart platform for a cleaner, more affordable, more profitable, more efficient and more resilient energy sector. It will be the success of sneaky business models that tip-toe around the dinosaurs of the energy industry and emerge and successfully transform the energy industry.

In five years, distributed renewable energy and storage will have percolated throughout the energy system, accounting for a majority share of energy production. In twenty years, we will see that trend continue until the grid is comprised primarily of variable renewables, balanced through an advanced grid and fully integrated battery technology.  Renewables will move beyond clunky rooftop or ground mounted panels. Solar, wind and low impact hydro technology will be built into the very fabric of our society. Road and roofs will double as solar panels, skyscrapers will leverage wind tunnels effect with micro turbines, and water systems will be populated with micro turbines to generate electricity from water flow. Energy storage will shift from lithium-ion battery to a more effective form of storage which overcomes the current limitations of physical transfer capabilities and charge times. Batteries of the future will also take many shapes and sizes. They will be both stationary units (in-house and around the grid) as well as mobile units like electric vehicles or personal electronic devices which can receive power (charge) or push power back to the grid at a moments notice.

To seamlessly integrate all of this advanced technology, a fully integrated smart grid with interconnected grid regions is absolutely essential. The smart grid of the future will be more versatile than any micro grid that exists today, able to handle an inconsistent and variable flow of electricity. The grid will also need to leverage AI and predictive technology to send signals to participants - not customers - throughout the value chain when excess energy is needed or is available for consumption. Everyone will have smart technology in their home that seamlessly communicates with the Grid AI. When the Grid AI dictates a need to buy, sell or consume energy, it will communicate to all the AIs within individual participant’s systems to automatically dictate how resources will respond to market need. Customized preferences will allow the grid to interact with those various systems without the market participant having to take proactive steps. Grid AI will eliminate many of the inefficiencies of the historic utility system by understanding where energy is being used, optimize delivery of supply, eliminate excess energy and increase the efficient distribution of storage resources.

One of the biggest changes this future of energy will bring is that each entity connected to the grid to be an active market participant - both a consumer and a producer. Participants will carry greater freedom and play a larger role in the energy sector than ever before. As this transition takes place, so too will the shift of who captures the value in the market. The energy sector of the future will boast never before seen levels of customization, performance (resiliency) and costs (efficiency). And, as fundamental market participants, residents and businesses will capture an increased portion of the value generated in the market.   

As part of this grid modernization, utility companies will no longer monopolize the market. The future grid platform will establish monetary exchanges that efficiently match energy producers, users and storers into mutually beneficial relationships, in turn encouraging wider adoption and opportunities for businesses to cash in on the energy revolution.  This energy sector revolution will also bring about affiliated benefits including national security, law enforcement and emergency management. It is very likely that In the event of a natural disaster, the grid will automatically shut off to protect you and your family from any energy accident such as arc-flash and auto-turn-on once the disaster passed. Your electronics, car or smart homes will never be out of energy – auto-charging through the grid. The available energy from grids will also be used to aid in natural disasters domestically or internationally with the ability to sell globally to countries with energy deficits.

By 2038, the entire nation will be plugged into the Great American Electric Grid. This fully integrated system will be able to withstand natural disasters, cyber attacks and conventional military strikes while allowing customers to seamlessly connect new energy sources or batteries into the grid.  Each customer is now an active participant in the energy sector ecosystem, producing energy from their onsite resources, consuming energy in their largely electrified home, business or electric vehicle, and supporting grid reliability by offering behind the meter storage resources. Using advanced artificial intelligence (Grid AI), the grid can now effortlessly conduct the symphony of grid resources sending signals to local energy management software controlling the production, storage and consumption of energy in a manner designed to maximize efficiencies at all steps of energy production and use.  It will also function as a monetized platform, matching energy producers, consumers and storers of all sizes into highly efficient market driven relationships.

Theo's additional comments:

While technological breakthroughs in storage capacity and continued lowering of costs for renewable energy production will help it garner a far greater percentage the energy market than it has today, a growing global population and increasing demand for energy will challenge efforts to convert completely to renewable energy.  If extreme weather events continue along with warming trends and a correlation to green house gases, the Republican Party will be forced to change its current energy policy posture and forge an alliance with the nuclear energy industry.   The next generation nuclear and fusion technologies that create less radioactive waste and help to lower the costs of energy production could bring about a reemergence in nuclear energy as carbon neutral means of producing huge quantities of energy to power a growing population demanding increasing quantities of electricity.  The natural gas that will be the fast growing stop gap source of energy over the next five years will be surpassed by nuclear over the next 20, as the fastest growing source of domestic energy.  Domestic usage of Natural Gas will level off and then gradually decline along with oil and coal; however, domestically extracted natural gas be an increasingly valuable export product sold to a developed world that will have largely moved past coal and continue reducing its dependence on oil.  

The Energy Sector of 2023

 The Energy Sector of 2023

Jessie Lai, Thuy Phi Le, Megan Lorenzen, Geof Cleveland, Theo Johnson

     The next five years will be an exciting time in the energy sector.  Based on our review of the California Clean Energy Fund (CalCEF) and other Venture Capital funds investing in the energy sector, investors see the potential to radically disrupt the traditional energy sector and utility business model through the integration of technologies that change every aspects of energy production and consumption. The CalCEF fund in particular, is investing in companies that are developing alternative energy sources, optimizing energy storage, challenging the relationship between energy producer and consumer with smart grid capabilities, and integrating artificial intelligence and other smart software technologies. Given this investment trend in sneaky business models, over the next five years we expect to see early adopters of these technologies begin to disrupt the traditional single dimensional relationship with a utility, shifting towards a bidirectional relationship allowing greater value creation and value capture for customers.

     Coal, crude oil, and natural gas have been the dominant fuels used in energy production for decades. Technological advancements in alternative energy resources are creating new affordable supply, primarily from wind and solar. Exhibit A shows how renewable energy, solar energy in particular, is taking up a greater share of new US electric capacity. We can see this trend reflected in CalCEF’s portfolio from their investment in MMCI and Sunvapor, companies whose technologies aim is to turn solar energy into electricity in more efficient and productive processes than current fossil fuel systems can achieve. Renewable energy business models have always had the advantage of zero cost fuel. After all, wind and sunshine is free. As a result, wind and solar developers have the potential to out compete traditional fossil fuel facilities in the wholesale market because their marginal cost of production is almost zero. Although this competitive advantage is immense, it comes at the expense of a factor that can’t be controlled: the weather. CalCEF’s continued investment in renewable technology, despite the uncertainty of production suggests that they expect the market will adjust to accommodate increasing levels of variable generation. In fact, much of CalCEF’s portfolio is aimed at capitalizing on new technologies to improve efficiencies and further decrease the cost per watt of renewables, ultimately increasing the financial viability and penetration of renewables (Exhibit B). With any disruptive technology, initial implementation isn’t without it’s challenges. Recognizing the issue of variable generation remains, it’s no wonder that CalCEF is also investing heavily in storage.

       With increased penetration of renewables like wind and solar, the grid is being forced to accommodate variable production. While renewables were a small component of the grid, variable generation was not an insurmountable challenge. In five years, penetration will be 50+% in many areas of the country. In anticipation of this transition, CalCEF, and other energy sector VCs are investing in the development of faster, smarter and cheaper methods of energy storage. Saratoga Energy Research Partners, LLC., in particular, is developing an inexpensive process to produce synthesized graphite from carbon dioxide. The graphite produced can be used for faster charging electric vehicles, grid storage, and other energy and industrial applications. Current storage costs are high, but much like the decrease in solar costs, technological advancements are helping storage costs drop rapidly. CalCEF’s investment in both renewable technology and storage, suggest that we can expect to see significant increases in both renewable energy and storage penetration throughout the grid system in five years.

      Another benefit of many of the alternative energy technologies (storage, solar, etc…) is the ability to disrupt traditional energy generation and pivot towards distributed energy generation. As compared to the traditional fuel burning plants which are often centralized, alternative energy technologies like solar and storage can fit in places that would otherwise be underutilized (e.g. rooftops, carports). Moreover, the levelized cost of energy remains fairly flat between residential and utility scale installations (Exhibit C) allowing these small scale systems to compete for the same market as utility scale solar. In fact, an increasing number of individual consumers are now able to affordably and practically invest into their own private renewable energy generation, supplementing their reliance on utility companies. We already see solar arrays being set up on top of buildings and homes to fit the energy needs of that specific structure. These early adopters are the first sign that future power generation will be distributed across the grid in contrast to the traditional model of production being concentrated in a few large-scale suppliers. This transition is fostering an environment where consumers are becoming hybrid consumer-producers as they pull energy from the grid when their individual production is low and push energy onto the grid when their individual production is high. The business model of traditional utility companies is being forced to transform into a network model in response to this new, two way, relationship. Going forward, we expect utilities will be forced to increasingly adapt to balance many producers and consumers distributed across the grid.

For decades, the energy sector has largely boasted a straightforward, one-way relationship with energy providers and customers. A customer pays the utility each month based on the volume of energy they consume. In the next five years, we expect this relationship to change radically. Over the last decade or so, a few of the largest consumers were able to shift their load profiles to avoid peak rates and optimize energy costs (demand response programs). However, this was an incredible manual process (turning off machines to reduce energy consumption) with a high barrier to entry (a company needed to hire someone to track energy prices and respond to pricing signals). With the emergence of the energy management services we are seeing in CalCEF’s portfolio, energy management is no longer just about optimizing costs of consumption, now it’s about being an active participant in the energy market - as a producer and a consumer. With the introduction of on-site renewables, storage and electric vehicle charging, large consumers now need to answer the questions of “Do we store our generation?”, “Do we consume from the grid?” or “Do we push power generated back onto the grid?”. The relationship between consumers and the utility is becoming a complex, two-way relationship with companies like Correlate and Enerdapt entering the space to provide energy management services. Leveraging AI and machine learning, Correlate and Enerdapt are able to provide a much-needed service to customers, customizing their energy management strategy to optimize energy costs and opportunities. Integration still is not seamless, and with any disruptive there is opportunity to improve predictive technologies. Nevertheless, many early adopters with large energy profiles are finding value in these robust energy management services. No longer does the majority of the value capture of the energy sector sit with the utility. Consumers are able to capture a larger share of the value, with energy management companies like Correlate and Enerdapt capturing a sliver of that shifting value.

        To accommodate these rapid and dynamic changes to the grid, the next five years will also be filled with rapid grid modernization. CalCEF is investing in startups who are specializing in integration of the advanced energy economy - electric vehicles, stationary storage, distributed energy resources - to the grid. By developing technology that helps monitor and predict grid integration, companies like MOEV will help the grid become smarter and more versatile. Advancements in grid modernization, incorporating AI and predictive analytics, will further enable consumers to develop a customized, two-way, relationship with their utility, producing, storing and consuming like never before. This increased control and customization will allow consumers to capture a larger portion of the value generated.

       The technologies for an energy revolution have largely been developed, the challenge for the next five years is to develop effective business models that will provide for their wide scale adoption and integration within the context of an industry with large and powerful established corporations that have dominated the business for over a hundred years with a range of competitive advantages that have historically thwarted large-scale industry transformation.  The energy sector will experience substantial disruption over the next five years as new energy businesses entice adoption by offering lower costs and the opportunities to generate new revenues to people and companies that were once simple energy consumers.   There will be an increasing number of ways to produce energy and it should be expected that inventive and creative people find ways to offer a longer tail of energy sources while allowing energy consumers to choose which sources their energy comes from.  Expect ongoing experimentation in the private sector and at the municipal level by early adopters who will help test and prove the best ideas so that they are ready to be scaled up to meet the needs of evolving state and federal energy policies over the coming decades.

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Theo's notes:

While green-technologies will continue to increase their share of production, in the near term, the abundance of natural gas in combination with new means of accessing it in conjunction with relative cleanliness of burning it compared to coal or fossil fuels will cause Natural Gas to be fastest growing source of energy production over the next five years.  As frustrations with Russia, Iran and Qatar continue, the USA will have an opportunity to significantly increase their exports of Natural Gas.  Doing so will require investment in export ports and other related infrastructure.  

If population growth and economic development trends continue and concerns over global warming persist, the massive amounts of energy required are going to cause nuclear energy to get a second look.   I would anticipate that in the next five year, next generation nuclear energy products gain viability will begin to surface in the energy market.  

Neither Natural Gas or Nuclear Energy were discussed in this paper because the investment fund we were exploring, CalCEF, did not have investment in companies focused on these energy sources.  In my opinion, CalCEF is risky place to put money as it tends to invest in technologies and ideas as opposed to companies with clear profit driven business models.