Toronto: Speaking at the APPrO 2009 conference on November 17, energy expert Roger Gale put forward a challenging set of observations about what to watch for in the electricity sector. Gale, who is President and CEO of GF Energy LLC, was asked by conference organizers to present his view of what the power industry will look like in 10 years’ time. He has identified six key trends for the North American energy sector in the coming decade:
1. Renewables will grow, but there are limits to large-scale, centralized renewables.
2. Decentralized generation will grow significantly in urban areas.
3. We still need fossil power from coal and natural gas.
4. The greatest uncertainties revolve around the gas sector, as prices and capacity can change relatively quickly.
5. Climate-related regulations will proceed, but will not get strong traction until late in the decade.
6. Demand-response will take off.
Mr. Gale started by discussing “the buzz,” or what people are currently talking about as drivers for the industry, the factors that are expected to cause the most change in the next 10 years.
Environmental concerns and the possibility of cap and trade, which has been delayed multiple times, will undoubtedly be a factor going forward, said Gale. We are currently at the “foothills of a revolution,” where widespread commercialization of new technologies will drastically change the power industry. Plug-in hybrids, smart appliances and homes, green buildings, solar electric and hot water collectors, as well as solar and wind generation, are all technologies that will start to become common for consumers.
The overall weak state of the economy has dominated recent discussion, and has caused a 15% drop in industrial demand, as well as 3 to 5 year delays in major investments such as renewable and baseload projects. Nuclear in particular is expected to see 2- to 4-year delays, partly because of weaker growth in baseload, but primarily because of licensing changes and safety upgrades.
Demand response is another area of interest as some predict reductions in demand up to 30%. The development of smart grid technology is expected to contribute to this direction.
In trying to predict the future, it is important to study current trends in the industry. However, many of the trends are not consistent: Mr. Gale pointed out that there are great divergences between regions and markets within North America. For example, while Ontario closes coal plants, nearby American Electric Power is planning on building new ones, and while some markets have been installing advanced metering systems, most have not. Pricing policies are quite disparate, particularly for transmission.
Despite the inconsistencies, he identified basic drivers that stood out as being factors for change across the board.
The system is moving towards one that is more decentralized, noted Mr. Gale, although he does not believe that this movement will progress to the point that everyone will be off the grid in 10 years. In the past, centralized, large-scale generation was the norm, but technology and environmental drivers will shift the trend to remote wind and solar, dispersed generation at the customer end, and at least small amounts of storage within the system.
Mr. Gale also mentioned the political unpopularity of fossil power. Politicians like Al Gore believe that fossil energy is no longer needed, and Barack Obama is aiming to abolish subsidies. However, new coal plants are still being built in many markets. Currently, Renewable Portfolio Standards regulation is a major driver for planning and setting limits on fossil generation. However, Mr. Gale believes that if goals for renewables are not met, systems planners will likely turn to gas generation again.
An important failing of power markets has been with respect to dynamic versus artificial pricing, and this problem will continue to distort economic choices. Current pricing is generally quite artificial and provides subsidies for industrials, which does not create incentives for change in consumers. This will continue to be an issue, as new developments such as renewable generation, and nuclear increase costs. Regulators are not ready to let costs be passed on to consumers and he sees no political will to change the status quo in North America, to real time dynamic pricing that more accurately reflects reality.
Mr. Gale posed numerous questions facing the industry to the audience, including topics ranging from baseload generation, to transmission, the environment, technology, and financial and regulatory questions. In summary, he predicted that in ten years, the power industry will be greener, more customer controlled, lifestyle driven, and that the new players of today will become mainstream tomorrow.
Renewable energy sources will grow, he believes, but centralized utility-scale renewables such as wind and solar farms will reach limits of growth within 10 years. Specifically with respect to solar farms, Canada will be limited by the amount of sun available here. Still, beyond this point, there will be high growth potential at the building, house and substation levels.
Urban areas need more baseload generation, he believes, since it will not be possible to power an entire city only on solar panels mounted on rooftops. Although there are jurisdictions such as California that have no intention of adding more baseload, most jurisdictions will require more nuclear, coal or gas. Proof can be seen in other cities around the world such as China and India, that baseload generation is required to support urban life.
Mr. Gale acknowledged that North America might be able to get rid of fossil power in the 20- to 30-year time frame, but noted that it’s more likely that the system will retain fossil generation while being substantially cleaner than today’s fossil power. In the ten-year time frame, we still require fossil power, including both gas and coal. As well, if cap and trade proposals get through Congress as they stand today, existing coal plants will be grandfathered. Given that these facilities have been amortized and are highly profitable, Mr. Gale believes they will continue to run.
Natural gas will remain a volatile option, given that it is a fuel that’s relatively quick to deploy, and can be planned last minute. Natural gas prices will be experienced by different organizations in different ways. For example, the aforementioned existing coal plants will stand to profit greatly if gas is expensive and on the margin. So will demand response.
Mr. Gale suggests that climate change policies will be implemented but not get strong traction in the immediate future. Although he believes the climate issue is real and will move forward, he thinks regulations will continue to move too slowly. The legislation for cap and trade has not yet been clearly defined, and will not become something that affects the industry until 2015 to 2017. Furthermore, he believes that cap and trade does not directly address the real issues, as a carbon tax would, but rather only delays needed action for 10 to 15 years. Overall, he feels climate will not be as much of a driver as many think it will be. Since Mr. Gale’s presentation in November 2009, the results of the Copenhagen summit have only elongated the expected delays before climate-related regulations would have serious impact on the power sector.
Finally, Mr. Gale projected that the demand lost during the economic downturn will bounce back. However, demand-response will start to become a factor. Although he feels 30% in demand reduction is likely overly-ambitious, it will begin to play a much more significant role.
The future will not look like the past.
Based on a conference report by Ian Chow.