Generation RENEW: Go Big Or Go Home!

 

On August 17th, lightning strikes ignited wildfires across Northern California that have so far burned over 1.3 million acres. Separately, a heat wave led the state regulator (CAISO) to warn about rolling blackouts as electricity demand exceeds both electric supply and the ability of the state’s antiquated electric transmission lines to handle increased loads. This 1-2 punch of negative natural phenomena has caused some to point the finger at California’s renewable energy mandates, and the impact they’re having on load management. The rest of us simply stand back up, dust ourselves off, and work the problem. Nobody said disruptive change is easy.

 

 

Fossil fuel advocates claim the state’s focus on renewable energy has led to the forced closure of the most reliable power plants (natural gas) and an underinvestment in electric transmission. The power sector can’t meet the state’s electricity needs during periods of high demand like during a heat wave, and an inability to re-route electricity due to inadequate transmission capabilities. One solution involves the development of renewable energy microgrids. A microgrid is a local energy grid with control capability, which means it can disconnect from the traditional grid and operate autonomously.

 

Source:  Climable

 

Microgrids have been slow to develop because they historically cost more to operate than a macrogrid that benefits from economies of scale. Consumers will always prefer the cheapest version of any fungible product. Increasing solar efficiency and localization (particularly rooftop) combined with expectations that battery costs will continue to decline has led to renewed calls for developing renewable microgrids. Perhaps it’s humorous to only us that the one thing both sides of the political spectrum agree on is a desire to disconnect from the grid!

However, we do not believe being disconnected from the grid is the answer, for the simple fact the vast majority of people do not live in areas that have high solar radiation or wind speeds. It makes far more sense for the world to integrate and share the immense resources the natural world provides. The “Macro Grid Initiative” by the American Council On Renewable Energy (ACORE) “seeks to expand and upgrade the nation’s transmission network to deliver job growth and economic development, a cleaner environment, and lower costs for consumers.”

 

Source:  NREL, DOE, IRENA, EPA, Zeihan on Geopolitics

 

Such a network would incentivize allocators to deploy capital to maximize productivity and efficiency, in other words to construct solar fields where solar radiation is the highest and wind farms where the wind blows the strongest. This would also incentivize the development of an integrated grid that would deliver this lower cost energy to the cities that demand it. It’s proving the age old adage that economies of scale matter, and the societal benefit from integration and interconnectivity is far greater than anything that can be achieved on the micro level. Go big or go home!

 

Source: ACORE

 

An example of going big is Sun Cable, an Australian company that is developing the Australian-ASEAN Power Link. This $16 billion project seeks to deliver solar power from the Australian desert to Singapore and was recently fast tracked by the Australian government. It includes a 10 GW solar farm, a 30 GWh battery storage facility, and a 2800-mile power cable. For context, the solar farm will take up 46 square miles that is just over twice the size of Manhattan. We don’t know if this project will get built, but the low-cost concept requires producing solar energy where radiation is the highest (like the Australian Desert) and then transporting power to where it’s needed (cities).

 

Source: Sun Cable

 

We believe microgrids make sense from a reliability perspective for those in remote locations or for those who require backup power to provide essential services or functions. However, the reality is urban power demand is way too large for any microgrid to meet. Only a macrogrid that further connects the world with itself can provide the necessary power to drive the world forward. For California and all other states this means upgrading its existing intrastate networks as well as expanding investment in interstate networks. Who knows, maybe over time we’ll increase cross border (international) connectivity as renewable energy doesn’t adhere to national borders. Go big or go home!

“Failure is not fatal, but failure to change might be” – John Wooden.

 

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Michael Cerasoli, CFA

Michael leads the Renewables effort at Eagle Global Advisors, including the development of active and passive strategies, and portfolio management. He is also the Co-Head of the Energy Infrastructure team and Co-Chair of the Energy Infrastructure Investment Committee.  He shares Portfolio Manager responsibilities for the firm’s four separate Energy Infrastructure strategies. Prior to joining Eagle in May 2014 Michael was employed by Goldman, Sachs & Co. for ten years where he covered Midstream for seven years and small/mid cap Oil Services for three.  Prior to Goldman, Michael worked for three years as a sell-side equity trader at various Wall Street firms. He earned bachelor’s degrees in Economics and History from Union College, and an MBA from the Hagan School of Business at Iona College. Michael holds the Chartered Financial Analyst designation.

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Curt Pabst

Curt is a member of the Energy Infrastructure Investment Committee and manages institutional client relationships for Eagle Global. Prior to joining Eagle, Curt held a similar position at an energy infrastructure asset management firm in Dallas, Texas. He has 39 years of investment experience.  Curt began his career at Kidder, Peabody in the institutional fixed income division, and spent a combined 15 years at Kidder, Peabody and then Merrill Lynch where he left as a Director of the firm. He has served as a partner/principal in both a hedge fund of funds and a venture capital fund. He received his bachelor’s degree in Economics from Grinnell College.

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