Energy Industry Trends: A Year in Review

In February, we took a look at five energy industry trends in 2017. It was initially unclear how the new administration would affect these trends. However, recent policy shifts have done little to slow the decarbonization of energy systems.

Decarbonization is proving to be robust against policy reversals. It underlies the many strands of the ongoing transition to a less carbon-intensive energy economy. This transition is increasingly becoming more about making economic sense than going along with prescriptive policy or relying on subsidies. Against this backdrop, here's a reexamination of the five trends that Transform highlighted at the start of 2017.

1. Distributed Generation and Demand-Side Response

The assertion that distributed generation is approaching critical mass has stood the test of time. As two-way power grids give more and more consumers the opportunity to sell electricity they have generated themselves—from rooftop solar, to combined heat and power (CHP) plants, to behind-the-meter battery storage—traditional utilities and regulators are facing increasingly urgent questions.

How should investments made by utilities to facilitate this trend be incentivized? What is the fair rate to pay consumers for the power they feed back into the grid? How does the traditional utility model need to evolve to accommodate these new realities? These questions and others are still a matter of much debate within the industry and beyond—but at least they're being asked.

The technologies that make two-way power flows possible and commercially feasible are also relevant to demand-side response (DSR) in the sense that a megawatt saved is as good as a megawatt generated. In the past, DSR has been limited by how reliably it can be called upon by system operators. New technologies are changing that.

By aggregating enough sources of distributed generation and demand response, augmenting them with increasingly cheap energy storage, and putting control systems in place to manage all the components and power flows, virtual power plants (VPP) become possible. Combine VPPs with the rise of utility-scale wind and solar power, and you can begin to see why some people are starting to question how many new, large, and centralized thermal power stations we will need in the future—at least in certain industrialized countries.

2. Fuel Mix Trajectories

In the EIA's Annual Energy Outlook for 2017, the central reference case projection assumes the implementation of the US Clean Power Plan (CPP). It shows coal consumption falling, as it loses share in electricity generation, and natural gas and renewable energy growing strongly.

Only one of the scenarios in the Annual Energy Outlook examines what might happen in the absence of the CPP—the situation the US electricity industry faces today. Its projections show continued strong growth in gas and renewables, but at a slower rate than with the CPP implemented. Coal consumption remains pretty much flat, as some power stations that would have been forced to close remain open.

3. Renewables

Renewable energy sources, especially nonhydro sources such as wind and solar power, continue to gain strength. The International Energy Outlook published by the EIA projects that renewables are "the world's fastest growing energy source, increasing an average 2.3 percent/year between 2015 and 2040."

On a levelized-cost basis, some renewable technologies can now compete with traditional power sources without subsidy, and others require much smaller subsidies than before. A case in point is offshore wind, one of the trickiest renewable technologies. In a recent UK auction, two wind power developers submitted bids that, for the first time, were much lower on a cost-per-megawatt basis than the guaranteed payment agreed to by the government for the nation's first nuclear power station built in decades.

The Achilles heel of nondispatchable renewables remains their intermittency, which means that dispatchable, flexible generation sources, such as gas-fired power stations, are needed as backup. System operators continue to develop incentives to reward flexible operation. Over time, utility-scale, battery-based energy storage will play an increasing role in helping to manage intermittency, but for now its role is minuscule.

4. Natural Gas and Coal

Despite all the talk of coal's demise, rising natural gas prices have allowed coal to reassert its position as the main power sector fuel in the US. This is a shift from the period in 2016 when gas became the predominant fuel, thanks to gas prices hitting 20-year lows.

The latest Short-term Energy Outlook from the EIA projects the share of gas falling from an average of 34 percent last year to 31 percent in 2017. Coal's share rises from 30 percent to 31 percent, putting both fuels on a par. In 2018, the EIA projects that coal will edge ahead to 32 percent, while gas is forecast to stay at 31 percent, as gas prices will rise from an average of $3.05/MMBtu in 2017 to $3.29/MMBtu in 2018. The rise in gas prices comes despite the fact that production is forecast to be 4.4 Bcf/d higher next year than 2017's 73.7 Bcf/d—with LNG exports from the US rising substantially, as new liquefaction projects come on stream and domestic consumption increases.

5. Digitalization

People tend to overestimate the impact of new technologies over the short term and underestimate their impact over the long term. Digitalization is a case in point. Today, digitalization in the power sector is in its infancy, but Transform's assertion that 2017 could be the year its adoption accelerates is another that has stood the test of time.

Already, the biggest electricity utility in the US, Exelon, is busy rolling out a digital transformation program across its entire fleet of generation assets. Several other big utilities are evaluating the enabling technologies that together make digital transformation possible: big data, the Industrial Internet of Things, advanced analytics, cloud and edge computing, artificial intelligence, machine learning, and the digital twin—a functioning virtual copy of a physical asset, such as a gas turbine, that exists in the digital realm. According to Gartner, within three to five years, the total number of digital twins across all industries will be in the billions.

After considering all the US energy industry trends in 2017, one thing is certain: change. Despite the slight slowing of decarbonization efforts post-CPP, renewables and new technologies are poised to radically restructure the US power industry in 2018 and beyond.