We frequently describe clean tech as being transformative or disruptive because it generally saves money, while improving the quality of life with enhanced environmental benefits. By offering cheaper, more efficient solutions, clean tech is also often disruptive and a threat to incumbent industries. A timely and relevant example of such a disruptive clean technology is the rapidly changing electrical grid. The incumbent electric grid has been roughly unchanged for over 100 years. The outdated legacy model is for electric utilities to build thermal coal-fired power plants that are sited on waterways, because coal-fired utilities require massive amounts of water for coal preparation, combustion and electricity generation. The plants are massive, ugly, and cause environmental degradation given water use and the air pollution associated with the process, from cancer-causing particulates to greenhouse gases. I took this photo from the Long Island ferry entering Bridgeport Harbor in the spring of 2018, and find it speaks volumes about the shortfalls of centralized energy production.
Our electrical grid has been in the process of a transformation over the past several years, to a system of electricity management that is no longer solely dependent on centralized, obsolete coal-fired generation. The antiquated system is either on or off, relying on electricity delivery that cannot easily adapt to peak energy demands. For periods of high demand, expensive and centralized “peaker” plants have been constructed, compounding the costs and problems of our legacy grid as they are expensive assets that are used intermittently.
The disruptive and new smart grid is transforming electricity generation and usage, and this new grid requires fewer centralized generation resources because it relies on an equally important clean tech trend: greater energy efficiency. The energy intensity of our economy has decreased over the past decade given clean tech solutions such as enhanced building climate controls, industrial automation, LED lighting and more energy-efficient building materials. Secondly, the smart grid is disruptive because it is more flexible—electricity can be generated at the source of demand because of the rise of solar power. Solar panels installed at the commercial or residential site lessen commodity price risk, as the installation costs are depreciated over time, arresting risks and exposures to variable electricity prices. This distributed energy source is also more resilient as the grid is decentralized, making for a stronger system less prone to power outages or disruptions. Increasingly, solar systems are being installed with battery storage, allowing additional benefits for the consumer and utility. Solar is intermittent, as the systems cannot produce power during peak-usage evening hours. Battery storage systems allow several hours of electricity supply which was generated earlier in the day when solar systems run at peak productivity. Battery storage can also be called upon during severe demand periods, drawing power to the grid from consumer, negating the need for peaker plants. An important example is Sunrun, which installs and leases solar systems primarily to the residential market. Increasingly, Sunrun solar systems are installed including battery storage systems.
This evolving and disruptive smart grid is two-way, allowing for variable electricity costs and capacity and efficiency payments to consumers that harvest decentralized energy or practice energy efficiency. The smart grid is evolving swiftly at the edge of the network, meaning consumers are adopting technologies to save and generate electricity. Itron is a key power technology company that operates between the electric utility and the customer, measuring and now optimizing electricity loads on this two-way electric grid. Utilities that hold onto legacy systems without embracing the smart grid will go out of business. Utilities that embrace the new grid will ensure their business models are enhanced, customer relationships deepened, and margins increased. Over the past several months at energy conferences, we have noticed forward-looking utilities investing in technologies to enable their future.
Bill Page is senior vice president and senior portfolio manager at Essex Investment Management.