Energy and investment / by Simmon Li

This post follows from my thinking about nuclear energy and its viability in my Earth As A System crazy ideas post. Why does investment in energy infrastructure always focus on playing the game better, as opposed to investing in game changers? The question is best exemplified by Apple and the technology market. Many people have already distilled Apple’s success into the formula: instead of competing in an existing market, create a new market. While this doesn’t apply directly to energy investment, I think a similar approach can be taken by these companies. Instead of investing in playing the production game better, why not invest in a way to uproot the distribution game? First of all, there’s a lot of intellectual property licensing money to be made (I assume). Second, you get the set the standards for such a system. Third, you attract investment. This discussion came to my mind when I considered the question of nuclear power and what its real worth was to us as time presses on. The problem with nuclear is best articulated as such: it is, by its nature, a long-term investment, but its usefulness to us is, in my opinion, short term. Eventually, renewable solutions will become much more attractive than nuclear generation simply because of the waste that it generates. So this is the paradox of nuclear energy, and I began to consider other ways in which the capital would retain its utility over a longer period of time, and something just clicked: the distribution infrastructure. This lead me to another realization: our distribution infrastructure is centralized around power utilities that provide power. Now, this seems like an obvious conclusion (and by any means, it is), but the power lies in the often espoused idea of the smart grid. The problem with the smart grid idea is that investment in is not very much encouraged. Whether the reasons are cynical or not, it seems a lot of energy companies want to simply invest in playing the game better. An idea like the smart grid would essentially force companies that run these networks to innovate. At the moment, the generation market is very monopolistic. The distribution mechanism for energy (electricity, in particular) encourages this monopoly, and makes it very cost prohibitive to compete in the market. Part of the problem is that people hardly think about their energy consumption or usage. In fact, very few people do. And so, companies get stuck trying to play the game better than each other. More generating capacity, more back-up generators, etc. These companies keep on playing the same game. The question I’m asking then, is one of value. Think about it: nuclear, by nature, becomes a long term investment. Distribution infrastructure is also a long term investment. Which  one of those two is likely to remain more relevant half a century down the road? My bet would be in the distribution infrastructure. The value, however, comes by monetizing use of the network, not simply by building more. This is essentially the problem that no one has solved: how can utilities make money by opening up the market of generation to competition? After all, this is their monopoly (well, monopolistic market) right now. The thinking is that they only stand to make money if they have a monopolistic hold on the generation market. I don’t believe that to be true. In fact, I think, if companies invested in improving the distribution network to allow a kind of energy “upload”, we would step into the next generation of energy production and distribution. In a way, it’s similar to the idea of a network provider for services like internet, etc. I’m sure someone familiar with the power industry could probably think of better ways to monetize the distribution framework better than I can, but I sure as hell bet it’s possible for companies to make money by leveraging their distribution networks. This is what energy should be about. In my head then, because nuclear generation sparked this question, I begin to ask: “Why invest in nuclear energy at all?” This stems from my belief that nuclear generation of power is a short term solution. But I think the question is a valid one: what is the long term value of nuclear generation? Nuclear generation certainly costs a lot of capital like distribution framework investments do, but arguably has a shorter value lifespan than the distribution framework. I believe that it is possible to pump more sustained value and return on investment from the distribution framework if it is leveraged in the right way. It’s a hell of a lot cheaper in legislative terms, much less hassle in terms of safety, and a more sustainable way to invest capital. Now, the key here though, is to invest in the distribution to make it more of an open market as generation is concerned. Power companies can continue to generate value in the traditional way by making generation a focus, but by opening the market, these companies stand to open up another revenue stream.

This is an idea I think is extremely worthwhile to consider. I think it ends up saving the companies money too, in that an improved distribution grid can reduce the demand for energy in tangible ways, reducing the burden of generation. So not only does this one time capital cost help to generate new value, it can help to save on future capital costs. What’s not to love about it? Well here’s where I get a little cynical. By opening up competition, the utilities stand to lose. I don’t think that will happen, as local power generation will never match the scale of generation a central plant can produce, but it will mean lost revenue for the company. Again though, like I said, if they can monetize the distribution framework in a reasonable way, they can probably recoup the costs of opening up the generation market. I don’t know enough about the power generation market to make advisory statements, but it seems the idea is rife with change. Like I said in the other post: it’s about changing how the game is played, as opposed to playing it better. Do in the energy market what Apple did for the tech market: make a new market to dominate.

In any case, I'm sure I'm missing something, because if it was this obvious, companies would be doing it already, no?

On a completely different line of thought: price certainty for oil. This is desperately needed, but I was always saying a carbon tax was needed. I've now gone and flopped on that (I'd make a terrible poli, eh?). I think what we need is a non-revenue tax on oil. Set a threshold. Market price above it? Great, no tax. Market price below it? Well then we tax you up to the threshold. I think 70$ a barrel is a good start. We keep flirting with 80$ a barrel, I think 70$ or even 75$ is good economic incentive. The money that is collected? Well we can use it for any number of fun things, but at the end of the day, it needs to be put to good use. A lot of people will likely say "Well, government can't do anything right when it comes to money." I think that collected money can be put to something. I would prefer if it was put towards some kind of credit to encourage research, but you never know. Because it would be a non-revenue tax, I think it would be hard to misconstrue it as a tax grab. It's the perfect solution in lieu of a carbon tax to provide price stability so that companies that bet on investing in green energy don't get screwed by OPEC and market volatility. Heck, the threshold could be set lower too, but I think at lower thresholds, the incentive to invest may be lost to cheap oil. I'd take oil prices over the last decade or so, and average them out and set that as the price threshold.

More on this later.