Clean Sweep: The Coming Dominance of Green Energy

     “We will make electricity so cheap that only the rich will burn candles.

  Attributed to Thomas Edison, 1880
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For the past quarter century, Green Energy quietly made inroads into the global economy.  Despite government support and significant tax subsidies, Green Energy still constitutes just a small portion of energy generation across the world. Hydrocarbon related fuels such as coal and natural gas, along with nuclear energy, continue to dominate global energy use. This occurred due to the superior economics of Hydrocarbons.  But, with Green Energy continuing down the cost curve, the balance of power between traditional energy and Green Energy appears at a tipping point.  Green Energy economics now rival Hydrocarbon economics, putting them at par or cheaper than traditional fuels for many applications. In addition, these new sources of power come with fewer environmental issues, making them desirable from a public policy viewpoint.  As Green Energy economics continue to improve, their pervasiveness in the economy will expand, much as semiconductors moved from limited uses in the 1960s to embedding themselves in everything today.

To understand this transformation, a quick look at Solar Energy will demonstrate the massive drop in costs, producing a competitor to traditional fuels.  Solar Energy panels cost $3.00 per watt in 2008.  Today, they cost just $0.22 per watt, with costs expected to drop 5%+ in 2019. When put together to form large solar farms for utility scale solar, the US DOE estimates the cost to produce electricity at $0.042 to $0.114 per kwh (kilowatt hour) or a mid-point of $0.078. While this is more expensive than natural gas advanced combined cycle plants, whose cost to generate electricity is $0.045 – $0.075 per kwh or $0.06 on average, the cost of solar power 10 years ago was well over $0.20 per kwh.  With the cost of solar power generation continuing to drop, crossover should occur within the next 3 – 4 years.  At that point, it will cost less to generate power with Solar Energy than the most efficient Natural Gas Combined Cycle Plants.  Already, in places with high delivered electricity costs such as California, solar energy costs to the end user stand cheaper than electricity delivered from the utility, which adds to the generation cost the cost of transmission and distribution.  (Note: All Data from US Department of Energy using Levelized Cost of Energy.)

While Solar Energy stands on the cusp of overtaking the economics of Hydrocarbons, Wind Energy already sits in this position. The cost of wind power ranges from $0.041 – $0.077 per kwh or $0.059 at the midpoint.  This is slightly cheaper than the most efficient natural gas plants at $0.06.  Of course, while the economics work well, wind depends on the wind blowing.  Thus, Wind Energy depends on the location. Where the wind blows, Wind Energy wins. Wind Energy comprises 37% of the energy mix for Iowa, 36% for Kansas, and 32% for Oklahoma.  For places such as Florida, Wind Energy appears nowhere in the mix.  The wind does not blow consistently, making the power source uneconomic.  

The pushback to Green Energy typically comes down to the following: What happens when the wind does not blow or the sun does not shine?  Utilities address these issues today by putting in place natural gas peaking plants. These plants operate on demand, as needed and produce energy at much higher costs.  This undermines, to some extent, the economics above.  But the solution to this dilemma appears just a few years away.   Storage costs continue to drop.  By 2023, the capital costs for Storage will drop to those for natural gas peaking plants.  And by 2025, these costs will dictate putting in place Storage over these plants.  The DOE estimates that by 2030 many natural gas peaking plants will become obsolete, much as high cost coal plants are today, and that utilities will begin to shutter these plants.  

While Green Energy cannot take over the world today, as the economics become compelling over the next decade, displacement of more traditional sources of energy will occur, much as natural gas replaced coal over the past 20 years or kerosene replaced whale oil in the late 1800s.  For Green Energy, there sits a potential Clean Sweep, as its perceived environmental profile coupled with its economics drive adoption.  While Hydrocarbons will not disappear in electricity generation for some time, as marginal cost economics will keep these plants online.  And with the Coming Dominance of Green Energy, Green Energy will finally fulfill its potential as the energy of the future as it has been for the past 50 years. (Data from US Department of Energy coupled with Green Drake Advisors analysis.)

Confidential – Do not copy or distribute.  The information herein is being provided in confidence and may not be reproduced or further disseminated without Green Drake Advisors, LLC’s express written permission.  This document is for informational purposes only and does not constitute an offer to sell or solicitation of an offer to buy securities or investment services. The information presented above is presented in summary form and is therefore subject to numerous qualifications and further explanation.  More complete information regarding the investment products and services described herein may be found in the firm’s Form ADV or by contacting Green Drake Advisors, LLC directly.  The information contained in this document is the most recent available to Green Drake Advisors, LLC.  However, all of the information herein is subject to change without notice.  ©2018 by Green Drake Advisors, LLC.  All Rights Reserved.  This document is the property of Green Drake Advisors, LLC and may not be disclosed, distributed, or reproduced without the express written permission of Green Drake Advisors, LLC.

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