On April 14, 2017,
U.S. Energy Secretary Rick Perry ordered a two-month study of the U.S. electric grid. Sounds like a good idea, since we know that a
resilient and reliable electric grid is vital for economic growth as well as
homeland security. However, the study
has a particular goal: determine how
policies promoting wind and solar power are accelerating the retirement of coal
and nuclear power need for ‘base load’ power.
True enough coal and nuclear power are two fuel sources that are
valuable for generating base load power, i.e. the amount of power needed to
fulfill minimum demand presented to the electric grid. Base load power generation requires a
continuous supply of electricity throughout the day and all year long,
maintaining grid reliability and resilience.
The underlying premise of Perry’s study appears to be that coal and
nuclear power are necessary for adequate base load power and without them the
country is vulnerable.
Investors might see Perry’s study in the context of
environmental politics. However, the
dynamic of the study - even one flimsily designed to promote
coal -
can inform investment strategy and tactics.
Political Background
It did not take
long for scientists, energy experts and even politicians to see the weaknesses
in the Perry study. Within a couple of
weeks various energy groups joined together in a letter to Perry expressing concern
over the study construction. The
petitioners include the Advanced
Energy Economy (AEE), the American Council on Renewable Energy (ACORE),
the American Wind Energy
Association, and the Solar
Energy Industries Association. The group submitted materials to improve the
study, which the group says is off to a bad start with a “faulty premise”. The group also questioned the qualifications
of the study leader who was previously employed by a group that lobbies for
utility companies against renewable energy.
An even louder
voice has expressed doubt in Perry’s study.
Republican Senator Chuck Grassley has also written a letter to Perry. Besides ethanol for transportation fuel,
Grassley’s home state of Iowa is one of the leading producers of wind
energy. Grassley’s letter appealed to
Perry’s own track record while governor of Texas where a one of the most modern
electrical grids in the country relies extensively on wind power.
Sorting Through the Coal Dust
In the letter announcing
his new study Perry decried the loss of diversity in power sources at the peril
of coal-fired power plants. Actually electricity
sources have become MORE diversified. As
shown in the chart below thirty years ago the U.S. relied primarily on coal, oil,
hydroelectric and nuclear power sources.
Fast forward to today, we can add natural gas, geothermal, biomass,
solar, tidal wave and wind to the mix.
Perhaps the
better way to understand Perry’s study is through the coal industry’s fear it
will be sidelined as a fuel source for power plants. Our chart illustrates the loss of market
share by coal beginning around 2000.
Renewable sources have captured market share, but largely these sources
are simply benefiting from new demand that results from an expanding
population and increased power use per capita.
Per capita energy consumption in the U.S. increased to 97.7 quadrillion
BTU in 2010 compared to 78.1 quadrillion in 1980. Total power production increased 86% from
1980 to 2014.
It is natural
gas that is really eating away at coal’s position in the power industry. Every electric grid in the U.S. scans the
market place every day looking for available power, ranking each by selling
price. Expensive power sources are
ranked last. Electricity from the lowest
priced power plant is served up first. As
demand increases during the day, more power producers are asked to provide
electricity. The last one to get called
up will be the most expensive and therefore sets the price for every source in
the provider group. This market-based
system favors the low-cost producer.
These days that provider is quite likely the power generator using natural
gas, which is presently priced at about $3.00 per million BTU.
According to the
National Renewable Energy Laboratory (NREL)
in 2015, natural gas powered systems set up for combined cycle operation
operated with a Levelized Cost of Energy (LCOE) ranging between $42 to $55 per
megawatt hour - the lowest among all power sources. The NREL is forecasting an increase for these
combined cycle natural gas power plants to a cost range of $56 to $68 per
megawatt hour. However, coal is not
expected to gain any advantages. Indeed,
wind power sources are expected to experience a reduction in LCOE to as low as
$40 per megawatt hour. Photovoltaic
systems under operation by utilities are expected to reach an LCOE as low as
$43 per megawatt hour.
The coal
industry is worried and tactically it makes sense to attack renewable energy sources. The lobbying strength of the real enemy - natural gas - is exponentially more powerful than even the combined lobbying efforts of solar, wind, geothermal and biomass. Why take on a powerful enemy when a lesser threat can be vanquished with no more costly an effort than misinformation masquerading as a ‘study’.
The first targets are the environmental standards
that bring back to the income statements and balance sheets of coal producers the high costs of toxic emissions and greenhouse gas from burning coal. Other programs that promote renewable energy
are also fair game. If renewable power
sources lose the small advantages of even temporary tax credits or other
economic incentives, coal can pick up their portion of the power market
resulting from new power demand. This
would be a plus for coal producers even though natural gas is still the most
significant power generation fuel.
In other words,
the coal industry does not want diversity in power sources. The argument against renewable energy is strengthened by focusing on an apparent vulnerability - intermittentcy of power production. Wind and solar in particular cannot supply
power all day and night and therefore theoretically cannot be relied upon for
base load power production. A study
focused on this circumstance and undertaken by the U.S. Energy Secretary could
be quite handy in discrediting wind and solar power sources in particular.
Smarting up the Grid
Grassley gave
Perry a deadline of May 25th to explain how the study will provide
for transparency and objectivity.
Investors do not need to wait for Perry’s response or even the results
of his study. Technology advances are changing electric grid
operation and with it the economics of electric power generation. Base
load is no longer the bugaboo that grid operators worry about. Granted renewable power sources such as wind
and solar are not available 24/7, but these power sources can still be strong grid
competitors. An unfortunate but real circumstance for the coal industry.
Our next post will feature long plays on electric grid
technology that are being driven by economic reality and not politics.
Neither the author of the Small Cap Strategist web
log, Crystal Equity Research nor its affiliates have a beneficial interest in
the companies mentioned herein.
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