An energy voyage with no shortage of icebergs
If Belco’s integrated resource plan proposal is anything to go by, the utility is steering a Titanic-like course through a sea of ice.
Iceberg No 1: energy efficiency and conservation. Belco has built its financial projections on the assumption that it will be selling the same amount of electricity in 2038 as it does today.
By contrast, the Government has set an aspirational target of 15 per cent reduction in energy use and, behind the meter industry professionals, expect the demand for electricity to drop by 30 per cent.
Iceberg No 2: cheap solar. As the Government moves towards lowering the cost of energy, it is likely it will take the necessary steps to further reduce the soft costs of distributed solar.
In addition, consumers will realise savings from sourcing their own systems directly from North American wholesalers, which will shift local providers from low volume/high price to higher volume/lower price business models, lowering the cost of distributed solar by 30 per cent to 40 per cent within the next five years.
Iceberg No 3: rapidly falling battery prices. Bloomberg New Energy Finance predicts that utility-scale battery storage will be at four cents per kilowatt-hour by 2025.
Home battery storage for rooftop solar typically cost twice that of utility-scale solar.
Iceberg No 4: rapidly falling price of utility-scale renewable energy, including aggregated distributed solar.
To quote James Robo, chief executive of NextEra Energy, one of the three largest electricity utilities in the United States: “Without incentives, wind is going to be a $0.02 or $0.03 product early in the next decade. Battery storage will be $0.01 on top of that. ... That is going to totally transform this industry.”
There is not much Belco can do to avoid declining revenues because of increasing energy efficiency and conservation other than adjust the load forecast in its IRP to more accurately reflect the new reality.
This would put upward pressure on its levelised cost of energy calculations, which they will be understandably reluctant to do so, since the cost of energy has become a politically hot topic.
They may have better luck putting the brakes on cheap solar by trying to persuade the Regulatory Authority of Bermuda to accept a low cap on connecting distributed solar under section 40 (d) of the Electricity Act, which directs Belco to “include proposed limits for total distributed generation capacity over the planning period”.
However, the unintended consequence of a low cap is likely to be wholesale grid defection.
As it stands today, I can source and install 5kW of solar for $10,000 and get a $4,000 rebate. I need 15kWh of storage to capture the power not used during time of production which I can source and install for $15,000.
Add a 4kW LPG generator for $1,000 as back-up on cloudy days and I am off-grid for $22,000.
With modest efficiency measures, my average daily use is 20kWh at 42 cents/kWh, which gives me free electricity for life after seven years.
The rapidly falling cost of batteries will put my cost of going off-grid at $16,000 by 2025 or $20,000 without the rebate.
The good news is, Iceberg No 4 can become a lifeboat. A 30 per cent to 40 per cent decrease in revenues from increased energy efficiency and cheap solar could put the utility underwater.
But by connecting cheap renewables, they offset the extra expense of reduced central-plant production, still making a reasonable profit by using the lower cost of renewables to keep the overall consumer price down.
Liquefied petroleum gas is the preferred fuel in this scenario. Liquefied natural gas has much higher up-front capital costs, which become fixed costs that must be paid back regularly over time regardless of how much electricity is sold.
Therefore, if demand drops, which it probably will, the price will have to increase to cover these fixed costs.
The low capital cost of LPG allows for greater flexibility because production can be scaled to meet demand with less impact on price.
Speaking at the recent Energy Summit, Kathleen Riviere, of the Bahamas Utility Regulation and Competition Authority, said “utilities must change their business model”.
JP Morgan, the deputy chairman of the Cayman Islands URCA, elaborated further in an excellent speech opening the afternoon session, outlining these key features of the new business model:
• Separate the grid from generation
• Invest in smart grid technologies
• Help consumers become prosumers who produce and consume energy within their own neighbourhoods
• Encourage peer-to-peer transactions using blockchain
These kinds of initiatives will help to build resilience and keep customers connected.
Unfortunately, barring direct intervention from policymakers and regulators, these initiatives taken together will likely require a “Saul on the Road to Damascus” transformation within the Ascendant boardroom.
But, judging from the course it has set for Belco, that seems unlikely until perhaps faced with falling revenues and wholesale grid defection.
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