Zero power prices implications
In a powerful ‘essay’ – Sun Machines by The Economist provided a compelling case for a fast coming revolution whereby power prices are trending towards zero. This has been a long held view at AlphaValue although that opinion has been meeting much pushback and clearly was not so well put.
The mechanics of the ‘NIRP of power’ are quite simple: solar power is free and the technology to harness it is costing zilch those days. That applies foremost to photovoltaic capture as opposed to wind (remember that wind is sun driven too). With energy prices trending toward zero, all 19th to early 21st century concepts about finite energy markets can be binned. As it is green and illimited, there is no real concern about efficient use of power so that inefficient ventures become acceptable ones (say electrolysing water into green H2).
Baseline power principles held as the alpha & omega of power pricing may not survive long and with them the whole pricing structure of energy markets at least on both sides of the Atlantic. The prospect of nearly free power is powerfully enticing and will change even the way energy hungry industries organise themselves. Grids, an issue everywhere, will have to change their ways to accept highly variable holds. This itself requires a change to regulation principles such that grids no longer act as choke points. Adapted grids may come from more competition but answer may stem from new geographies of production of power and its usage. A blast furnace may well end up sitting in the Sahara not too far from the sea for instance. If Utilities do not want to adapt or are slowed down by impossible regulations, cottage industries of local power production and consumption will emerge.
So who loses? Every legacy player
About every one who leads the current western value chain of electrical power is set to lose, with the exception of the proverbial picks & shovels providers (Siemens, ABB, Schneider, Hitachi Power, Mistubishi; Prysmian and Nexans; a vast number of leading Chinese capex providers). The reason is that legacy businesses are great businesses up to the moment when a technology shock puts a brutal end to the rent. Think of satellite players wiped out by LEOs or diesel cars wiped out by Musk and BYD. It takes ages for incumbents to wake up and it is nigh impossible to ditch existing assets and take the risk of a big mistake.
So the RWE or Engie of this world may spend the next ten years wondering what to do next. Worse some like EDF are meant to think ‘nuclear’ where phenomenal capex is deemed to be the price to pay for stable and independent energy supplies. If the EDFs stick to their plans (spend too much for baseline power while storage might do the trick eventually), they will provide an interesting pricing umbrella to the solar players and make their fortune. If government tries to regulate ‘NIRP solar’ out of the way, they will face consumers/ voters rebellion anyway.
What The Economist article implies is fast improving visibility on everyday lower power prices for the future, i.e. a trend that can be taken for certain as it relies on technological progress (PV cells) and excess Chinese capital. That implies that it does not make sense to buy power today for delivery tomorrow if it is not in a sharp backwardation. This should open question marks for would-be equity investors in the next ‘levelized price power project’ as the economics are shifting too fast. In plain English there is no pay-back in taking the risk of setting a new power project if prices are set to fall for certain as even the pace of the fall cannot be planned. Buyers of power for future will know that cost prices are bound to decline and act accordingly.
Existing LT power contracts may not be renewed so that every ongoing project that hoped to extract a few more years from fully depreciated assets will have to sit on that hope. Legacy PV farms will be facing competition from those with a better kit.
As Utilities related business models are reshaped by collapsing capital costs where power generation is involved, it probably makes sense to sit on the sideline. Gate keepers remain the capital goods providers but they too will have to adapt to a differently structured demand (fluctuating and stored power call for different techniques than an AC steady flow).
The mechanics of the ‘NIRP of power’ are quite simple: solar power is free and the technology to harness it is costing zilch those days. That applies foremost to photovoltaic capture as opposed to wind (remember that wind is sun driven too). With energy prices trending toward zero, all 19th to early 21st century concepts about finite energy markets can be binned. As it is green and illimited, there is no real concern about efficient use of power so that inefficient ventures become acceptable ones (say electrolysing water into green H2).
Baseline power principles held as the alpha & omega of power pricing may not survive long and with them the whole pricing structure of energy markets at least on both sides of the Atlantic. The prospect of nearly free power is powerfully enticing and will change even the way energy hungry industries organise themselves. Grids, an issue everywhere, will have to change their ways to accept highly variable holds. This itself requires a change to regulation principles such that grids no longer act as choke points. Adapted grids may come from more competition but answer may stem from new geographies of production of power and its usage. A blast furnace may well end up sitting in the Sahara not too far from the sea for instance. If Utilities do not want to adapt or are slowed down by impossible regulations, cottage industries of local power production and consumption will emerge.
So who loses? Every legacy player
About every one who leads the current western value chain of electrical power is set to lose, with the exception of the proverbial picks & shovels providers (Siemens, ABB, Schneider, Hitachi Power, Mistubishi; Prysmian and Nexans; a vast number of leading Chinese capex providers). The reason is that legacy businesses are great businesses up to the moment when a technology shock puts a brutal end to the rent. Think of satellite players wiped out by LEOs or diesel cars wiped out by Musk and BYD. It takes ages for incumbents to wake up and it is nigh impossible to ditch existing assets and take the risk of a big mistake.
So the RWE or Engie of this world may spend the next ten years wondering what to do next. Worse some like EDF are meant to think ‘nuclear’ where phenomenal capex is deemed to be the price to pay for stable and independent energy supplies. If the EDFs stick to their plans (spend too much for baseline power while storage might do the trick eventually), they will provide an interesting pricing umbrella to the solar players and make their fortune. If government tries to regulate ‘NIRP solar’ out of the way, they will face consumers/ voters rebellion anyway.
What The Economist article implies is fast improving visibility on everyday lower power prices for the future, i.e. a trend that can be taken for certain as it relies on technological progress (PV cells) and excess Chinese capital. That implies that it does not make sense to buy power today for delivery tomorrow if it is not in a sharp backwardation. This should open question marks for would-be equity investors in the next ‘levelized price power project’ as the economics are shifting too fast. In plain English there is no pay-back in taking the risk of setting a new power project if prices are set to fall for certain as even the pace of the fall cannot be planned. Buyers of power for future will know that cost prices are bound to decline and act accordingly.
Existing LT power contracts may not be renewed so that every ongoing project that hoped to extract a few more years from fully depreciated assets will have to sit on that hope. Legacy PV farms will be facing competition from those with a better kit.
As Utilities related business models are reshaped by collapsing capital costs where power generation is involved, it probably makes sense to sit on the sideline. Gate keepers remain the capital goods providers but they too will have to adapt to a differently structured demand (fluctuating and stored power call for different techniques than an AC steady flow).
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The markets have sorted out the conundrum by pushing prices lower: the consumer wins, for now.
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