Yet2com Blog

For the past few years I’ve co-hosted an interesting dinner, where I ask each guest to speak for less than 2 minutes on a way they think the world will change in the next 5 years – that is not obvious.

In November I hosted 55 leaders in a wide variety of disciplines – from horticulture to economics.  The guest list included; 2 Governors, a Senator, 5 CEO’s of companies of more than $2 billion in revenue, Chief Investment Officers of more than $38 Billion, 11 venture capitalists, etc….so you get the idea.

The 55 ideas were then voted on by each table, and below is the second of the 6 finalists – on ways the world will change that are not obvious.   Please share your ideas on other non-obvious predictions and your thoughts about this one.

Costly electricity from gas generation

Everybody is excited about the fact that oil prices have dropped from a hundred and forty dollars a barrel to around sixty dollars a barrel. But if you thought people were upset about what happened to gasoline prices over the past couple of years, wait until you see what happens to electricity over the next five to ten years.

Very little electrical generating capacity has been brought online over the last decade, but the last major building boom that did happen, happened in the 1990s.

If you think about general growth in the markets, the demand for electricity, and the needs that we are going to have as our reserve ratios fall from about forty percent to about twenty percent — and it starts to get very dangerous when your reserve capacity to meet peak demand falls between fifteen and twenty percent. What it means is that we are going to have to add between seventy and ninety thousand megawatts of power in the United States over the next ten years.

How are we going to add electrical generating generating?

We cannot do it with coal because you just cannot get a coal plant permit these days. Nuclear is not the solution because you cannot get that permitted and the time that it takes to get it through permitting… And even if you could finance it, it just is not a solution for the next ten years even though it might be a great solution.

Renewable energy, as much as I love renewable energy, is a small, distributed phenomenon at the moment, and is not a solution that can make a meaningful dent in the next ten years in what we need to add in generation capacity to keep massive blackouts from happening.

The compromise that environmentalists and utility executives have made for the last twenty years has been natural gas-fired power plants. That is likely what is going to happen in the future. Why? Because we have some of it, we have a fair amount of it here domestically.

The last time that we built plants based on natural gas capacity, the demand for gas increased so much that gas prices went from two to three dollars per mmbtu to on the order of about six dollars and fifty cents per mmbtu.

Wait until the next round of plants get built that are all gas-fired, and see what happens for the demand for gas. Gas prices are going to go through the roof, and what is interesting is that in most major electricity markets, gas is what is called the “marginal fuel.”

What that means is that it sets the price for power in most markets. Imagine now on the supply side that you have some gas reserves in the United States, even arguably ample reserves except for one thing: they are increasingly coming from unconventional resources, which means they are more expensive and you get less per dollar invested than you used to get when you could just tap into the Gulf of Mexico — those fields are largely depleted.

On top of that, you cannot really import much more gas because you cannot get an LNG terminal — a liquefied natural gas permit in the country — and even if you could, there are countries that need gas more than we do and are willing to pay for it more than we do because they just have no alternatives.

The upshot is that you have enormous demand for natural gas, and that is not even including things like hybrid vehicles, which are going to increase the demand for electricity generally, or if Boone Pickens’ plan gets accepted and we start using natural gas for transportation. That does not include any of that sort of thing. It also does not include any sort of cap-and-trade scheme, which would increase power prices even more. If anybody is very good at passing costs through to consumers, it is utilities. What you are going to end up with is an enormous spike in electricity prices.

Thougths?  Agree?  What is your non-obvious idea?

Ben in Maine

This entry was posted on Wednesday, August 19th, 2009 at 1:02 pm and is filed under commentary, open innovation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.