The big picture
Markets matter
This site is meant to provide important information about the financial aspects of power generation and storage -- especially development of new assets. There are plenty of sources of information about existing and planned capacity, as well as public policy favoring renewable resources. Academic institutions, government agencies, information providers and consulting firms are increasingly attracted to covering the industry as climate-based investing develops from a niche market to a mainstream one. Yet those multitudes forecasting the industry's fortunes rarely pay attention to the role of commodity (energy) prices in the financial performance of various assets. Energy prices -- and financial management of them -- are critical to performance and the overall success of the industry.
We focus on energy prices and other market factors in asset performance. After all, despite characterizations of renewable power -- and clean tech generally -- as a rapidly-evolving industry, new generation and storage assets are still in a commodity business, facing commodity pricing just like all of the legacy assets and the companies that own them. If the price of the commodity (energy) declines, the businesses that haven't managed their price risk properly will suffer. As new sources of generation proliferate, there will be commensurate downward pressure on prices which asset owners must manage using various financial and physical market tools. Most of this site's content addresses practical aspects of those tools.
There is an underlying risk that, collectively, all of the new capacity in the years ahead will push energy prices to levels that threaten the economic viability of future investments. Government mandates may provide some offsetting element of demand, and there's plenty of research devoted to how such mandates might be implemented in the U.S. But the most effective means for propping up long-term energy prices is via market-based mechanisms such as carbon credits. So far, the U.S. has no such program and Congress doesn't appear likely to develop one in the the foreseeable future. As such, downward energy price risk will remain a significant risk for all future development.
Long-term prices don't guarantee attractive investment
European oil majors are jostling to become offshore wind heavyweights. Building capital-intensive projects at scale in familiar offshore environments, underpinned by guaranteed returns, has proved alluring. But cost inflation and aggressive bidding at cut-throat ‘subsidy-free’ auctions have eviscerated margins.
Energy Flux takes a critical look at new research into the economics of offshore wind for the likes of Equinor, Shell, BP and ENI.
Hydrogen's many uses
Hydrogen is among the most ubiquitous elements on earth and is a key component of all carbon-based sources of energy, including oil and refined products, natural gas, and biofuels such as ethanol and biodiesel. Those fuels – composed mostly of carbon, hydrogen, oxygen and sulfur – often need to supplement their hydrogen content in order to limit sulfur, which is environmentally destructive.
Refiners and other fuel producers incur cost in order to raise hydrogen content. They may produce it internally or purchase it from others, which has led to an active bulk market. But these markets tend to be localized, with far less transportation infrastructure as for other refinery inputs such as crude oil. More importantly, since hydrogen has traditionally only been utilized in industrial and chemical processes -- as opposed to being a fuel itself -- it has not developed physical trading hubs like markets for gasoline, diesel or natural gas.
Utilizing hydrogen as a fuel is a key element of long-term decarbonization plans since it produces only water vapor as output. Fossil fuels produce carbon dioxide, the most ubiquitous (though not the most potent) greenhouse gas, as well as carbon monoxide and a host of other pollutants. But producing hydrogen today is still far too expensive to compete with fossil fuels, especially in places like the U.S. where there is no national carbon pricing scheme or tax.
The two main technologies for producing hydrogen are steam cracking – which is utilized in virtually all commercial-grade facilities today – and electrolysis which utilizes electricity to break water molecules into their component elements. Steam cracking is well developed and far cheaper than electrolysis. But with growth in renewable electricity, at zero marginal cost and with a zero-carbon footprint, electrolysis is the focus of most new hydrogen production. Someday in the future -- perhaps decades ahead -- so-called green hydrogen might provide a significant portion of fuel to transportation, industries and commercial and residential facilities.
Hydrogen as transportation fuel
Hydrogen's promise as a zero-carbon transport fuel has two main avenues forward: direct combustion and fuel cells. Both technologies consume hydrogen directly in gaseous form, with the former basically substituting hydrogen for fossil fuels in internal combustion engines or large boilers.
Hydrogen fuel cells, by contrast, are more akin to battery systems that run electric motors except that the charging mechanism is refueling rather than charging. There is plenty of room for each of these technologies to grow in the future if hydrogen itself can be produced cheaply and with less of a carbon footprint than legacy fossil fuels.
Alpha Power Advisers Research
Power Risk
In addition to various ad hoc research notes and analyses, we publish a series of Power Risk briefs on topics are are relevant to risk management in electric power. Topics range from the structure of forward markets and their various participants to the platforms on which participants transact -- all of which is subject to significant and rapid change over the course of time. We attempt to think forward in each of these reports and welcome feedback from your perspective.
Economics corner
In the broader interest
Aside from all of the fascinating changes taking place in energy markets, there are substantive economic issues affecting all of us. Commodity markets -- energy, in particular -- are often considered the best proxy for inflation hedges. But inflation is a tricky subject, and CPI alone does a poor job of measuring the dilutive effect of rising prices. Most importantly, neither CPI nor it's upstream kin, PPI, consider asset prices. But asset prices -- whether financial assets like equities and cryptocurrencies, or hard assets like real estate -- have significant roles to play in economic systems. Few observers pay much attention to this topic, but they should.
Learn More
These two OpEd pieces from the Wall Street Journal, published roughly one year apart from each other, are among the most compelling in recent memory. They address the pernicious effects on society from misallocation of resources, specifically when it comes from distorted price signals.