There are a number of notable energy trends for investors to keep an eye on in 2018. Oil prices are on the rise, as is domestic production. Wind and solar energy continue to provide out-sized shares of new electricity production, both domestically and around the world, opening up a cleaner energy future. And the revolution in electric and self-driving vehicles could upend much of oil sector. But none of these are the most important energy trend this year.
What investors should really be keeping an eye on is how the rise of energy storage technology is changing the way utilities, regulators, and investors look at the electric grid. There hasn't been much disruption in the grid for a century, but this one shift may redefine the future of energy.
Energy storage is changing energy
The rapid reduction in the cost of batteries has changed the way utilities and regulators look at electricity production. Distributed energy resources (DERs) like rooftop solar, energy storage, and demand response can now provide consistent energy flow as needed at a price that's often lower than keeping natural gas peaker plants online.
Think of energy storage and demand response as the buffer between power generation and power demand. As costs come down and companies innovate new storage solutions, we'll see supply and demand disaggregate. No longer will utilities have to build enough power-generating capacity to supply the peak hours of the highest demand day. Instead, they'll be able to build the lowest-cost generation to supply the grid, no matter the time of day. That's a paradigm shift -- and it's already happening.
The chart below shows GTM Research's historical tracking of energy storage deployments in the U.S., and its projections for the next five years. Just 295 MW was installed in 2017, worth about $440 million. But based on these projections, by 2022, the market will explode to 2,535 MW, worth $3.1 billion.
What's really notable for investors is the surge in deployments will be driven by utilities and regulators looking to save money.
The game changer
Energy assets like wind and solar have always operated on a somewhat separate path from coal, natural gas, or nuclear power plants. Renewables may have won bids for new generation, but they didn't generally compete head-to-head in resource plans against existing assets. To make the dynamic even more lopsided, natural gas power plants tend to be used as backups to fill any gaps when the wind isn't blowing or the sun isn't shining. In that sense, fossil fuels have always been protected from the growth of renewable energy.
That may change if DERs can replace existing power plants. That's exactly the strategy the California Public Utilities Commission proposed for Pacific Gas & Electric when it asked the utility to bid out grid capacity and voltage services currently provided by three natural gas plants owned by Calpine Corp. (NYSE:CPN).
Calpine has said that in order for it to keep those plants in operation, it needs a "reliability must-run" designation, which pays the company for their capacity even though they're only used a few hours per year. If energy storage, demand response, and solar power generation can provide the same services to the grid at a lower cost, those plants may shut down.
Energy storage will drive new energy trends
Here are a few major trends emerging in energy that investors should watch for, some of which will be propelled by low-cost energy storage.
- Demand for coal and natural gas will decline over the long term. Coal is already being replaced by natural gas at a rapid rate, but as DERs compete more directly with natural gas peaker plants, natural gas use will drop as well.
- Variable renewable energy production will go up. Energy storage and demand response will allow more wind and solar to be built on the grid.
- Smart devices that can take advantage of grid price signals will proliferate. If regulators open up DER markets, it will likely coincide with time-of-use rates for electricity. Variable electricity pricing will bring new innovations in smart devices like energy storage, smart meters, and other devices that will enable homeowners to take advantage of those price signals to save money.
- Nuclear will no longer be needed as a baseload power source. Nuclear power is one of the most expensive new forms of electricity, but one argument that has given the industry hope is that it's a great baseload power source. If regulators stop putting so much value on the concept of baseload, and instead value DERs with their price advantages, it will likely push high-cost nuclear power out of the market.
The leaders today
As DERs become more commonplace, it's worth considering who the industry's leaders are. Tesla (NASDAQ:TSLA) has obviously gotten a large share of media attention for its solar power systems, but it's also a major player in energy storage around the world. No matter how the industry evolves, look for Tesla to be a big player.
SunPower (NASDAQ:SPWR) has already started deploying solar power systems with energy storage attached. In residential and commercial solar, I would expect them to have a major presence.
There will be more players entering the market as DERs grow and get more support from policymakers, but these are the three I would watch right now.