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Investment Ideas From the One-House Grid

In June, I wrote how intermittent power sources such as photovoltaics and wind would have to compete with baseload technologies such as IGCC "Clean Coal" and nuclear for capacity on the grid.  The key problem is that neither baseload technologies nor intermittent technologies are able to match themselves to the fluctuations of demand.  This creates a need for technologies which can fill the varying gaps between supply from these sources, and normal energy use.  From the comments, it seems like I was not completely clear how intermittent and baseload power cause problems for each other, so I will start with a simplified example, which I will use to illustrate the various strategies for dealing with the problem.  I see investment potential in all of these strategies.

The One-House Grid: An Illustration

Suppose that the entire grid were just one house, and it was the utility's job to make sure that there was always enough power to run all the gadgets that anyone in the house was using.  Even in the middle of the night when everyone is asleep, there will still be some power usage: running clocks, the VCR, charging cell phones for use the next day, and maybe the porch light.  That is the minimum load of the house, and traditionally utilities have met this demand with baseload power.  In contrast, there will probably also be a moment on hot summer afternoon when the air conditioner is running full blast, the refrigerator kicks on, dad is watching football on his 60" plasma TV, dinner is cooking in the electric oven, and 15 other appliances are on somewhere or other.  This is peak load, and the difference between the minimum load and peak would traditionally be met with dispatchable generation, which, until recently, mostly means gas turbines.  

In addition, some dispatchable generation will always be kept running below full capacity in order to maintain power quality and availability as appliances are turned on and off throughout the day.  These ancillary services [pdf] are called load-following reserves (maintaining availability) and voltage and frequency regulation (power quality,) and both require fuel, even if the actual energy provided is negligible.  Ancillary services are like your car's engine idling at a stop light so that you can start quickly when the light changes.  They're necessary to keep the system running, and they use fuel, but they don't actually get you anywhere.  Also like idling engines, options like hybrids exist which can save much of the energy cost (see below.)

Add a Solar Panel

Suppose we now add a photovoltaic system and a wind turbine on the roof.  Most people with solar systems know, that if you want to spin your meter backwards (i.e. produce more energy than you are using) the best time to do it will be in the late morning, while it is still cool, but it's bright enough that the panels (which actually produce more power from the same amount of light when they are cool) are producing near their peak output.  

With grid-connected solar, spinning your meter backwards may be fun, or at least get you bragging rights.  However, in my fictional one-house grid, we now have a new minimum demand: demand will be negative (we're going to have to find something to do with the excess electricity) because there is no other grid to sell it back to.  Peak demand will also be reduced, because on the hot summer day, the PV will also be producing power.  The result is that the one-house gird with a PV system will no longer need any baseload generation (since minimum demand is now negative), and it will probably also need less dispatchable generation, because peak demand will also have been reduced, most likely by more than minimum load. Not only will peak demand have been reduced, but it will also have shifted to the early evening when the PV is producing little electricity, but cooling, cooking, and football watching needs are still high.

Adding a wind turbine to the roof has a similar effect.  Now, the meter will also be spinning backwards on windy nights, and demand is reduced whenever it's windy, which will in turn save fuel and reduce the need to run the remaining dispatchable generation..  However, if the climate is similar to that here in Denver, on the hottest days of the year, the wind will typically be minimal, so there will be little further reduction in peak load, so nearly the same total amount of dispatchable generation will be needed, although it will not be in use as often.

Consequences

As the above illustration shows, the oft-repeated shibboleth that we "need" baseload generation is not only misleading, but also counter-productive.  Adding baseload generation will simply increase the number of hours per year that intermittent sources of power exceed net demand.  I too, formerly believed we needed baseload.  I no longer do, although some level of baseload power in the grid is no doubt inevitable, at the very least produced by renewable sources such as geothermal and electricity generation from industrial waste heat.

Solutions

Returning to our one-house grid thought experiment, a number of options present themselves.

  1. Storage.   In the real world, if you build a house off the grid, you will add batteries so that you can still run your lights when the sun isn't shining and the wind isn't blowing.  
  2. Transmission.  Suppose our one-house grid has a neighbor, running his own one-house grid.  While generation from their PV and wind systems will be similar (but not identical), demand at the two houses is likely to be different.  By diversifying the electric demand, average demand will double, but peak load will increase by somewhat less, and minimum load will more than double.   This reduced volatility of electrical load brought by connecting two homes is analogous to the reduced volatility of a portfolio of two securities, rather than just one.  Unless the electrical load of the two homes is perfectly correlated, there will be benefits in terms of a reduction in the overall amount of dispatchable generation needed to service the same total load.  Our knowledge of the principles of diversification will correctly lead us to the intuition that connecting dissimilar users of electricity will lead to greater diversification benefits than similar users.  If residential, commercial, and industrial users are all on the same grid, the same average electric demand will be easier to serve than if only residential or only industrial customers were connected, because a residential user will have lower correlation of demand with most industrial users than with other residential users.
  3. Demand-Response.  My sister lives in an old house, and the kitchen is on an old, low amperage circuit breaker.  If she ran both the microwave and the toaster at the same time, it would trip the breaker and she would have to trudge outside to turn it back on.  Needless to say, she quickly stopped using the toaster and the microwave at the same time, and thereby reduced the peak load in her kitchen.  Demand response involves getting electric customers to agree ahead of time to refrain from using high-wattage appliances during times of high electric demand.  In the one-house grid example above, dad might choose to record the football game and watch it later in that evening.
  4. Energy Efficiency.  Another way to reduce volatility of demand is simply to reduce overall demand.  If dad had decided to buy an LCD TV rather than a Plasma TV, the demand from his 60" TV might have been reduced by as much as 200-300 watts, depending on the models, and this in turn would have reduced peak load.

Investments

Each of the above solutions leads to an investment, and as intermittent power sources grow as a percentage of total generation, the needs for these solutions will increase.  Below is a selection of companies working to provide each of the above solutions to the overall problem of matching electrical supply and demand.

Electricity Storage

Electricity storage can serve several related needs of the grid.  First, it can absorb excess supply of power at times of otherwise low demand, which means that intermittent and baseload sources of power do not need to be curtailed, even though they are producing power at near zero marginal cost.  Second, when charged, energy storage can provide ancillary services to the grid, by supplying power to meet short term spikes in demand or drops in supply, and absorbing power if intermittent generation ramps up unexpectedly, or demand suddenly drops.  According to Paul Denholm of the National Renewable Energy Lab, the revenues from these ancillary services are significant, and should not be discounted in any economic assessment of an energy storage technology.  Finally, storage can help to shave peak load by supplying power from off-peak charging.

I have previously written about investments in large scale batteries for the electric grid, but when I did so I neglected to consider the value of ancillary services.  Since I wrote that article, both VRB Power (VRBPF.PK) and NGK Insulators have continued to sell their respective solutions to utilities, telecoms, and other consortia.  However, these technologies are still searching for general market acceptance.  Beacon Power (BCON) recently commissioned a 20 MW flywheel based plant to supply frequency regulation services to the New York grid, which will primarily be used for frequency regulation.  Given the enormous potential of demand response and electricity transmission to improve long-term electricity price volatility, I am currently much more bullish about companies using energy storage primarily to provide ancillary services over large scale storage.  Because of that, I have recently increased my investments in Beacon, Maxwell Technologies (MXWL) and Active Power (ACPW).  

Maxwell's ultracapacitors can be used in various power quality applications, as well as a high power, low energy supplement to batteries in hybrid electric vehicles. (As a side note, high power is more of a concern in hybrids than pure electric vehicles, because the smaller battery pack has difficulty producing enough power for rapid acceleration.)

Active Power, like Beacon, uses flywheel technology, selling mostly into the customer side, rather than utility side of the market.  However, as the market for ancillary services grows and becomes more sophisticated, I could see Active Power's UPS systems selling ancillary services to the grid, in addition to their primary function of protecting data centers and other sensitive equipment from temporary power outages.

Transmission

I've written extensively about investments in electricity transmission and distribution.  My top picks are ABB Group (ABB) and Siemens (SI), Composite Technology Corporation (CPTC.OB), ITC Holdings Corp (ITC), Quanta Services (PWR), General Cable (BGC), and National Grid (NGG).  Geographic diversification of electric supply and demand is as essential as financial diversification in your portfolio.

Demand-Response

I haven't written about demand-response aggregator EnerNOC (ENOC) since before its IPO in March 2007, but that doesn't mean I'm no longer interested.  EnerNOC, along with Demand-Response/Smartgrid companies Comverge (COMV) and Echelon (ELON) all became quite expensive on a wave of investor euphoria in 2007, which is why I was not buying or writing about them much at the time.  That has now changed, with all three losing about 70% from their peaks, and making them look relatively valuable.  I have been taking positions in all three over the last few months.

Energy Efficiency

Unfortunately, few pure-play energy efficiency companies exist.  The recently named Waterfurnace Renewable Energy (WFIFF.PK) is one I've recently been adding to my portfolios.  I've previously written about Flir, Inc (FLIR), a thermal imaging company which I do not currently own due to valuation concerns, a pair of LED companies, Cree (CREE) and Lighting Science Group (LSCG.OB) , and a number of energy efficiency related conglomerates.

DISCLOSURE: Tom Konrad and/or his clients have long positions in VRBPF, BCON, ACPW, ABB, SI, CPTC, ITC, PWR, BGC, NGG, ENCO, COMV, ELON, WFIFF, CREE, LSCG.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.



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Comments

Tom, I find your writings inciteful, but I must strongly disagree about our need for baseload power. A mag-lev train may need to run when its not windy or sunny. So may an MRI, an elavator, a lumber yard, a food processing plant, a crane,the internet, etc. I fear that you will make yourself sound irrelavent if you go around saying that we don't need baseload power.

Tom -

Check out what Delaware is doing to make wind dispatchable. In approving the first offshore wind in US, they also ordered back up with gas, for those times when the wind isn't blowing. MN is doing the same with hydro as backup, gas too. And AZ is using gas as backup for CSP. I don't get why Xcel isn't leading the charge in CO -- but I'd guess that they could be shamed into it by publicizing what they're doing in MN and what others are doing elsewhere. Wind can cover a lot, and coal can be shut down right now through pairing of RES/RSP with shutdown of coal. (yes, gas isn't great, but as a backup, use would decrease greatly). A good investment pick would be those wind and CSP developers tying wind to other intermittent sources for dispatchability.

Isaac,
Again, it sounds like I am not being clear enough about the problem with baseload. The problem is that it's expensive to turn OFF.

Not needing baseload generation is not the same thing as not always needing electricity. However, a combination of dispactchable and intermittent electricity generation can easily provide electricity 24/7.

When the wind/sun is not blowing/shining, you can use dispatchable generation or stored electricity, but you can also turn it off when the wind/sun is more than suffcient to meet current demand.

Carol-
I think Xcel isn't doing much in CO because they have a so much gas on the grid here already (due to historically low nat gas prices... but that is changing) that they have all the dipatchable generation they need to back up their current supply of wind. Also, until 6 mo ago, the PUC was Xcel's lapdog... which has now changed. In a recent DSM docket I was involved in, it was Xcel (and Wal-Mart) who filed the hopeless RRR's, not the environmental groups, for a change.

BTW, congrats on your sucesses vs Mesaba and Excelsior.

Tom,

Another great article.

You really need to add heat and cooling to your nightime load - they are in aggregate the biggest nighttime loads even with the thermostat down in winter, up in summer, and a well-insulated house.

(And if it's summer, it's baseball on the TV, not football! :-)

MXWL, yes, but I'm not sure how much application BCON and ACPW have to utility-level power. A recent SciAm article with which I'm sure you're familiar advocated compressed-air storage. Personally I don't see why a few coastal locations don't set up energy storage based on raising sea water... possibly integrating it with tidal or wave.

GH- point taken. Even in houses heated by natural gas, the furnace fan will be part of the nighttime load in winter... what actually contributes will of course depand on the local climate.

Re: baseball: I just lost any chance of convincing anyone that I'm in touch with the common man, didn't I?

Re: Beacon & Active power
--- Beacon is building their business around supplying power quality services (see link in article)... this is not long term storage, but short term, high power storage. I used to think that long term storage was the thing, but I now believe that Demand Response, Time of Use pricing, and long distance transmission will in most cases be cheaper solutions to the same problems as long term storage... not so for power quality services. Active Power is more of a strech, but I've long believed that we will see widespread adoption of UPS-to-grid for peak shaving before we see the widely touted Vehicle-to-Grid (V2G) from plug in vehicles. See my January 2007 blog post Vehicle to Grid Without the Vehicle.

I see a lot of potential for CAES, but, like pumped storage, it's dependant on the geography and I do not currently know of any public investments, although there's a cool private company, General Compression, which makes wind turbines to directly compress air for CAES rather than creating electricity.

Ahhh... so many interesting issues... where to start? Perhaps alphabetically?

I had written off ALTI long ago as a company with a great idea but insufficient execution skills. I am revisiting that in view of their recent announcement that they've built and now demonstrated a 2-megawatt, 500 kilowatt hour battery system that can play a significant role on the grid. (Their PR is here).

Another in your grid-improvement-businesses category (you may remember my mention of this back in February) is AMSC.

I am not long either of these... but kinda wish I hadn't rejected them quite so hastily when the fruit of my first research efforts was unattractive.

About CAES: it has a major physics problem not often mentioned: it produces a lot of waste heat during storage, and a lot of waste cold during retrieval. Contrast this with pumped storage, which has neither problem (but has some friction losses). If I ever go off the grid, it'll be because I've found a hilltop with a nice wind resource for my wind turbine, a spring of drinkable water feeding a brook, a good spot for a big tank for my pumped energy storage system, and a nice spot 200 feet lower to put my cottage and a micro-turbine that empties into a swimming pool/pond which then empties back into the brook.

Re: using small home UPS's as a distributed grid-support battery for peak shaving, etc.: it sounds like a terrific idea at first blush, much better than V2G which I always thought was unworkable. The devil is in the details, but as a product provided by the power companies and integrated with their grid management (along with smart meters, etc.) I think it has major potential. There are issues regarding fast aging of the equipment due to its use supporting the grid, etc., that would be minimized by the design I suggest. The idea of making the device much bigger than the typical single-computer UPS, and supporting the entire home for a period of time in the event of an outage, also has some compelling aspects, but I worry a bit about storing that much energy in a box in the home, purely from a safety perspective. But the functionality and scale are similar to EV power supplies, and if EVs can be made foolproof, so can home energy storage boxes.

With all that said, the lowest-hanging fruit is the grid itself: more efficient/higher-capacity conductors are available than what's out there. Lowering the losses of the grid directly lowers demand. As things stand there is no financial gain to be made by doing it, so it's not being done. Our brilliant Wall Street financial engineers should have been working on that problem, instead of figuring out how to securitize bad mortgages.

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