Tuesday, November 1, 2011

A Beacon of Despair

The flywheel grid-stabilization technology company Beacon Power just filed for bankruptcy yesterday, sending another ripple through energy publications. Like Solyndra, Beacon Power had a DOE loan guarantee, though of a much smaller magnitude: $43 million rather than $535 million. Even so, its failure is another indication of the high risk nature of the DOE's loans and, increasingly, the poor management of the loan guarantee program.

From, what I've seen of the DOE's program, the conditions necessary for entry were extremely strict. But then again, that look was had only a few months ago, and applied only to biofuels companies. It is entirely possible that the standards for the program have only been mature for a short time. It is probably also the case that standards for biofuels were more strict than for other, less well-studied industrial sectors or less risky, a suspicion that is borne out by the flow of money to specific industrial sectors from the program. What I'm hearing in the news these days belies my initial impressions.

The thing I actually want to talk about, though, is a larger issue concerned with Beacon Power's technology. Truth is, Beacon Power was one of those companies that I wanted to succeed, not because of anything about the company specifically, but because flywheel grid stabilization technology is so important to the system as a whole. Flywheels can uptake and discharge power faster than any other kind of energy storage technology, and can act as rapid stabilizers for voltage fluctuations caused by renewables, among many other things. It's obvious why this is essential for a modern power grid. The problem is that deregulated power markets make the returns on investment for such an essential service extraordinarily low. Batteries that charge in the night and discharge at peak hours output power slowly but can take advantage of the maximal arbitrage opportunity - not a lot, maybe $15/MWh, but the max. On the other hand, low energy-density flywheels make their money in the minute-to-minute spot market for electricity, buying kilowatt-hours and selling them again at fractions of a cent more expensive than before. But they're also big, heavy, and expensive compared to batteries. Both of the grid stabilization technologies perform essential roles.

Because of that low revenue potential, Beacon Power needed more flywheel farms to get enough revenue to operate, and it needed more capital to build more. It didn't get it. Thankfully, the flywheel technology is still useful and their one current flywheel farm will most likely continue to operate once it is sold for a discount, unlike Solyndra's specialized factories. Even so, I think it highlights an important fact about investment in the electrical grid and what deregulation has done to it.

Without an overall system owner - not just an operator - the positive externalities that result from an otherwise low-return investment in the grid aren't taken into account and underinvestment prevails. Beacon Power provided an important service but it wasn't able to reap all of the benefits of its service to the network; under a regulated monopoly environment, the utility has the overall system in mind and can make those kinds of investments. In contrast, a merchant power environment places the responsibility of the grid on the transmission equipment owner itself, and often regulates the prices it can charge for transporting that power as well. Thus, a grid operator in a deregulated environment gets little revenue and has no incentive to invest in additional infrastructure in order to maximize returns from depreciated capital.

This highlights why I think the 90s-era deregulation blitz was penny-wise and pound-foolish. Sure we got lower electricity prices, but we also got Enron, and ten to fifteen years later a whole lot of crumbling infrastructure and transmission companies in need of government help just to maintain system usability, let alone large amounts of intermittent renewable capacity. It's a fundamental reflection of the "energy is a solved problem" attitude of the 90s that all people cared about was their price point, and not long-run investment.

No comments:

Post a Comment