Jan

10

Energy, from Carder Dimitroff

January 10, 2025 |

I believe 2024 will be remembered as the year of great awakening. First, the so-called "hydrogen economy," pushed by several administrations and countries, is struggling. Plug Power, Ballard Power, Bloom Energy, and Hyyvia have all experienced losses and related financial challenges. Wood Mackenzie warns that green hydrogen projects are near collapse, with several projects likely to be canceled or deferred (how does it make economic sense to consume electricity to make hydrogen, compress it, move it, store it, and then consume it to make electricity?).

Second, Big Tech is colonizing local power grids at a scale and speed few anticipated. Policymakers are slowly realizing that demand is eclipsing supplies, and at the current rate that demand grows, supplies will quickly be exhausted.

Third, there are unrealistic expectations that the industry can respond in time to avert troubles by increasing supply. Many assume that energy supplies are commodities and can respond to market forces. With new baseload power projects taking at least five years and an average of ten years to initiate and complete, the only realistic option is to manage demand. This conclusion presents significant implications for Big Tech and local consumers.

Like biotech, the electric and gas industries will face an uncertain future in 2025. In the United States, states and Regional Transmission Operators have ultimate control, with the federal government's role limited to providing economic incentives. Consequently, the nation will likely witness various responses depending on local interests.

In any case, Big Tech's demand for power may be severely checked. If investors see unlimited growth in AI and related technologies, they may want to consider the challenges.

The alternative is less pleasant. If Big Tech successfully colonizes the nation's grids to the needed levels, the price of electricity and gas for other industries, commercial properties, and residential consumers will jump, resulting in more inflation.

Either way, the current situation is not sustainable. Solutions will be implemented in 2025 and beyond, but new nuclear power and transmission lines will not be among them for several years.

Remember that there are always winners and losers in energy; there's rarely an easy win-win opportunity. Higher prices produce substantial margins for those previously invested. For cost leaders, supply-demand mismatches present a happy outcome at the bottom line. Even marginal assets, like old nuclear and coal, could become more attractive. However, pipeline capacity issues could create growing challenges for natural gas assets.

The consumer is at risk. Self-generation is attractive to upper-income consumers. Avoiding the purchase of any watt-hours at any time of the day could produce significant savings.

Stefan Jovanovich writes:

The appeal of the income tax was that it promised a tiered system of pricing - i.e. the rich would pay more. There could be an Americans First progressive movement in this century that demanded the same system of pricing for electricity, health care and other services that have become rights. The "average" Americans could pay one rate; the corporations and wealthy users could pay a higher one.

A question for CD. Assuming that politics produces an Americans First tiered system for utility and other pricing where the "average" Americans are guaranteed priority over the large volume consumers, what would the effects be for the utilities? Don't current rate structures give large users a unit discount because they provide so much more demand?

Carder Dimitroff responds:

Remember, a utility's primary mission is/should be to rent its wires or pipes. Every wire and pipe used by utilities in the United States is economically regulated to ensure its owners earn a margin above its levelized costs. Theoretically, utilities' gross margins for wires and pipes are guaranteed no matter how individual tariff books are constructed.

In states where utilities have not deregulated their power plants, utility commissioners may create sophisticated tariffs where utility returns consider the combination of wires, power plants, commodities, and services. If a utility upsets its state commissioners, it could see margins thinned. This frequently happened with nuclear utilities when they delivered new power plants late and over budget. But the penalty is temporary; their full returns were restored later.

Tariffs are [intentionally] complicated. Large power users are frequently offered a break on their energy costs. However, they pay more for services that are not charged to residential consumers. Historically, one hefty example has been the utilities' demand charges, which large consumers hate. Another is for power factor charges, which require large customers to actively manage how they consume energy. In addition, many states require large power users to pay the utility for their capital costs to place transformers on customers' properties and to compensate utilities for stringing high-voltage power cables to those transformers. However, every state is different, and utilities within states negotiate different tariffs.

Big Al adds:

AI Needs So Much Power, It’s Making Yours Worse

AI data centers are multiplying across the US and sucking up huge amounts of power. New evidence shows they may also be distorting the normal flow of electricity for millions of Americans, threatening billions in damage to home appliances and power equipment. 75% of highly-distorted power readings across the country are within 50 miles of significant data center activity.


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