The Winding Journey for Energy Transition
Even before the passage of the Inflation Reduction Act and its multi-billion-dollar infusion for energy transition, renewable energy growth was outpacing most forecasts as discussed in this Rocky Mountain Institute report. While much discussion focuses on technology change from fossil fuels to wind and solar, perhaps the more fundamental differences will be contractual and financial.
It’s easy to focus on the physical assets—those are the ones everyone sees. However, renewables are changing the architecture of delivery of electric power away from big, complex, centralized power plants that require skilled human operation to small, distributed ones that run seamlessly on their own. That changes the fundamental question of who owns the assets, the rights to dispatch them, and who benefits from those economics.
Here are three of the first milestones on the energy transition journey that are worth stopping at, taking in the view and pondering what it means to own and operate a renewable power plant:
Energy vs. Power. We often use these these terms interchangeably in casual conversations, but the difference in their meaning is coming into every day life. Energy is merely the ability to do work. It can be stored. It can be transferred at varying rates. Or it can be not used at all. Power is the supply of a quantity of energy at a particular point in time, or in other words, the rate of energy transfer. (Here’s a nice graphic overview.) Utility customers increasingly see the difference in the growing use of time-of-use rates that charge more in the late afternoon and evening when demand is high and solar supply is fading. Consumers also see it with fast charging for electric vehicles at much higher costs than Level 2. There’s a growing amount of money in both how quickly and when electricity is consumed (power) and not just its total volume (energy).
Location Matters. Especially in older, more densely populated areas of the country, our aging electric grid suffers from bottlenecks and congestion. For example, there’s nearly a 10x price difference in the cost of electricity in the afternoons in summer in central New York State (NY Load Control Zones B-C) versus New York City (zones H-J). Even down to the individual circuits, value can vary widely already in the form of costly upgrades and increasingly in real-time pricing. Those properties with bottlenecks between big centralized power plants of all types and them have significant economic opportunity to inject electricity into their neighborhoods at a premium.
Power Purchase Agreements (PPAs) Will Change. The flat landscape of the long-term, fixed rate, volumetric power purchase agreement is fading in our rearview mirror. With value changing quickly and with increasing volatility based on time, quantity and location, new contracting structures are needed to align interests and ensure performance. Renewable energy PPAs today still look like the competive long-distance telecommunications contracts of the 1980s-90s. They had flat-rate, long-term pricing to serve the capital that underwrote new infrastructure. Cheaper nights and weekends were a big innovation back then (read: time-of-use discount). However, with technological change with mobile phones, we quickly switched to tiered pricing and costs based on quality of service. Expect similar transformation in electric power with a-la-carte features, shared savings against benchmarks, and premiums for quality of service.
