What if the real long term prospect is incredibly cheap energy?

This may seem a bit provocative given current energy prices, and expectations/worries of shortages this winter or next year, but some long term trends are worth considering, as they will shape not just the energy markets but a lot of other economic activity.

As we now know, power prices are largely correlated with gas prices - except (and maybe this is suddenly being forgotten) when there is a surplus of zero-margin cost supply, like nuclear or renewables. This used to be extremely rare, and has become rare again in Europe with France’s nuclear and hydro woes taking 15-20 GW of low cost generation out, but it was becoming slowly more frequent - and can only happen more often - as we keep on installing more renewable generation capacity.

The logical end-game of a power system regulated by spot market prices and dominated by renewable energy capacity is prices at zero *most* of the time, whenever there is enough renewable capacity to cover demand, with very high spikes when renewables are not enough and peaker plants (hydro, gas, storage) need to be switched on to ensure system balance. Renewables can survive in such a pricing universe if they have long term fixed prices (via CfDs - contracts for differences - or similar), and peaker plants can be profitable if the number of periods with high prices, their duration and the corresponding prices are sufficient to ensure enough revenue over time. Experience in fully merchant markets like Texas or Australia show that such plants can be profitable with a very small number of hours of use per year, say below 50h, i.e. they produce less than 1% of the time. If very high price peaks are not politically palatable, it is possible to procure the power required from such plants via capacity mechanisms, whereby they are paid to remain in standby and produce when directed by the grid. Both the physical result (production hen required) and the economic cost (amount of money paid per annum) are very similar under both regimes.

Under such circumstances, it is likely that there will lots of periods when supply is significantly higher than demand. That can resolved by simply curtailing production (wind turbines are very easy to stop, for instance) or by increasing demand. Storage obviously comes to mind, but it stands to reason that there are a lot of activities that can generate something of value if they have access to essentially free energy.

All the talk about hydrogen and other “power-to-x” schemes is essentially about converting low marginal cost electricity into something that has more value, whether because it can be transported elsewhere, or simply stored for a while (whereas electricity is subject to the constraints of the grid and of the impossibility to store it as such), and sold for more than zero.

Current discussions are largely about producing goods like hydrogen, ammonia or even desalinated water at a cheaper cost than existing alternatives, under long term contracts, rather than producing opportunistically. But what about if spot prices are really at zero for a majority of the time?

The could lead to a complete paradigm shift, whereby we move from a system where supply adapts to demand, to one where demand adapts to supply: suddenly a whole new universe of demand will come from new activities that take place only when there is surplus electricity over “normal” demand. Storage is the most easily conceivable, as are interruptible industrial processes like hydrogen production, water desalination and the like, but we could suddenly see completely new business models.

One example that I have is a company that would offer its customers dryers (for clothes) for free, on the condition that they can only be used in time windows specified by the company, and not used in other time windows. That company would aggregate the demand for electricity from thousands of dryers into a virtual large scale power user, with a highly flexible demand profile. By combining that with the right combination of power purchase agreements (for instance using a fixed price formula, which would be attractive to some generators) and power sales (at times of power peaks), and directing dryers to be used only at times when electricity is cheaper than the purchase price, the company could be quite profitable. I’m sure there’s demand for availability-constrained but otherwise free dryers…

We simply can’t begin to imagine all the new ideas that will come out of a world of large scale availability of free electricity, especially at a time where smart grids, large scale data accumulation and massive computing power will allow to do things that were simply not possible before.

The risk, of course, is that as energy becomes very cheap most of the time, we start wasting it again, and ultimately reach a new equilibrium where demand is a lot higher than today, and prices no longer go down to zero because profitable demand arbitrages such prices away. Even with renewables, such a system will not be pollution-free or nuisance free, and will require resources to build and maintain, and we may end up with a less efficient outcome. No new technology has ever come without unexpected consequences, and it is naive to think that the same will not be true of renewables, ultimately, even if they appear to generate a nirvana or zero-priced power.

The current crisis reminds us that energy is critical to all life, and (relatively) cheap energy is essential to the well being of all of us. We should hope that the lessons from that period of relative scarcity are remembered in a future where energy is managed under very different rules than it is today.