How one man’s electricity overcapacity will become another man’s oil

Renewable energy has a problem. OK, it has a lot of problems. But today, we’re going to investigate how one of them is about to go up in smoke, pun intended.

In fact, I want to show you how a particular pair of problems that have plagued Britain will suddenly cancel each other out. Starting in 2020, they will become an opportunity for each other instead. One man’s electricity overcapacity will become another man’s emission-free oil.

That’s the conclusion we’ll get to by the end of this letter. And it hints at the nature of the profitable opportunity too. But let’s start at the beginning.

Currently, electricity pricing runs in an odd way. Largely because it’s tough to store power and it’s tough to turn power stations on and off at will. Electricity isn’t like other goods in that sense.

The power price in our current system is all about peak power demand and the pricing during that moment in time. The price of power is determined by the moment when we use the most of it, because the capacity to supply that much needs to be sitting there at the ready, waiting for the peak.

This odd situation creates odd prices. Even negative energy prices when there’s “too much” electricity outside of peak demand times.

Renewable energy has a habit of producing energy at precisely the wrong time given the daily fluctuations of power use. Solar energy stops producing power just when you want to turn your lights on, for example. Other forms of renewable energy are often unreliable and can’t be dialled up and down on demand.

Because of this, renewable energy has exacerbated the problems with peak energy pricing. It’s added supply when it isn’t needed and hasn’t added reliable supply when it is needed. The price gap between the peak and the trough in demand is widening, or becoming more unpredictable.

All of this is generalisation and oversimplification, but you get the idea. It’s why batteries are such a big deal for the renewables sector. And why pumping water uphill into a dam in order to release it back through a turbine is actually profitable. If you can control the timing of electricity supply, you’re on to a winner.

But what if the problem of excess capacity and timing is about to be solved in a different way? In a way that actually adds even more power and value to our economy, at the same time. A way that converts the problem of volatile energy production and peaks in power demand into an advantage.

I think that’s what’s about to happen in Britain. Thanks to what we’ll call “the new oil”. You can find out what it is here.

The new oil requires a lot of electricity to produce it. To convert it from a widely available resource into the form that already powers all sorts of engines and motors today, in a way that creates no carbon emissions.

Of course, electricity production itself does still produce carbon. That’s why the new oil is imperfect. It just shifts the requirement for power to electricity generation.

But what if the poorly timed power producing capacity of renewable energy were used to produce the new oil? What if the concept of “excess power capacity” literally stopped existing because all excess electricity is soaked up by production of the new oil whenever it isn’t needed by the grid? What if our demand for electricity is almost infinite because it can be used to produce the new oil?

In other words, what if there was no wasted electricity production during periods where there’s a lack of demand from the grid? What if the production of new oil set a floor under the price of power by making it viable to switch over to new oil production when the grid doesn’t need the power being generated?

This would be like killing hundreds of birds with no stones at all, a bit like wind turbines already do.

It would mean that you can’t have too much power because it can be used to produce new oil whenever there is a surplus of power.

The stability this would create for energy production would completely change the viability of renewable energy. And that would cut the price of electricity you pay, presumably.

If electricity producers know that, worst-case scenario, they just produce the new oil instead of selling unneeded electricity to the grid at rock bottom prices, then there’s no threat of your energy production being completely wasted.

It’s a bit like the dairy industry realising it can sell whey protein. A waste or by-product that is just part of production suddenly becomes a sellable product.

Or, in the case of producing the new oil, it allows the energy-producing business to make less of a loss during temporary gluts when the price of electricity is low by swapping over to new oil production.

But here’s the kicker. Even if the process of producing the new oil is not cost efficient yet (as most believe), you may as well use the power which isn’t needed by the grid at that particular moment to produce the new oil. It still makes sense to produce it as a by-product, even if it is inefficient to produce it as a stand-alone product. In the same way milk producers don’t produce whey protein for the sake of it, power companies could sell the new oil which was produced by their excess power. And that’s the key point I’m making. Only my colleague and energy specialist James Allen has a better way of explaining it.

In places like Denmark, where wind power is creating too much energy on some days, power prices sometimes go negative. This means that using that electricity to produce the new oil must be economical, even if it’s uneconomical to, say, set up a power plant purely for the purpose of producing the new oil. Better to produce the new oil uneconomically than sell your electricity to the grid at a negative price.

By encouraging a green energy boom and being flexible with how the electricity is used at the same time, Britain could be on the verge of becoming the first major producer of the new oil. Not to mention crushing power prices by making electricity generation less risky thanks to the new source of demand for excess power.

This company holds the key to that future.

Until next time,

Nick Hubble
Editor, Southbank Investment Research

Category: Energy

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