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.