Iteration. Innovation. Coopetition.

An energy transition in three acts

Andy Lubershane
Dec 2, 2020 · 19 min read
Image credit: Wikimedia commons

The first act of the energy transition was powered mostly by incremental progress on decades-old technology.

The second act, which we’re entering now, will be a period of furious innovation to overcome three daunting obstacles to deep decarbonization that incrementalism can’t fix.

The third act will most likely begin in the early 2030s, as the winners emerging from Act II simultaneously begin to form alliances and draw battle lines — engaging in fierce “coopetition” (apologies for the business jargon)— to determine their places in the energy system of the future.

Iteration

First came triple-bladed, horizontal-axis wind turbines; then, polycrystalline-silicon solar panels; then, lithium-ion batteries. Each of these technology platforms already worked, albeit poorly and expensively, for decades before they became fixtures of the energy transition.

The winners of the energy transition so far have been those who seized upon these old ideas, iterated on them, and scaled up manufacturing & deployment until they worked much more efficiently and affordably. A few examples…

  1. Suntech, Yingli, Trina, and other Chinese solar manufacturers: Government subsidies helped scale up the manufacturing of existing polycrystalline-silicon photovoltaic technology, driving down the cost by more than 80% from 2005–2015. (Germany’s feed-in-tariff policy also deserves a shout-out for giving Chinese manufacturers a price-insensitive market, which provided the government confidence to invest.)
  2. Vestas, Siemens, GE, Gamesa, Nordex, etc.: Some of the first modern wind turbines were installed in the Tehachapi valley in California, in the early 1980s. These early machines were a few notches above old, medieval windmills, with a generator in place of a stone for grinding flour. Yet the basic design was ripe for incremental improvement by the likes of GE, which acquired some wind turbine IP from the ashes of Enron, in 2002. Vestas made a similar move in 2003; Siemens followed suit the very next year; and a few other small, European wind turbine manufacturers began to invest in scale (e.g. Gamesa and Nordex). They all began to iterate on the same basic design, and within a decade the industry was delivering turbines that generated twice as much power, at about half the cost per kilowatt-hour.
  3. Sony, Panasonic, BYD, and other Lithium-ion battery manufacturers: Sony built on basic research on Lithium-ion batteries from the 70s and 80s, and commercialized the technology in 1991. (It’s important to note that Sony was pursuing better rechargeable batteries for the Walkman, not for storing solar energy). Ten years later, Li-ion became the go-to option for laptops and cell phones, and a scrappy Chinese company called BYD emerged as a major new player. Panasonic agreed to build a “Gigafactory” with Tesla, and a few other electronics manufacturing giants followed suit, investing in Gigawatt-hour scale production. Now, the technology appears integral to the next phase of the clean energy transition.
  4. Tesla: Took a stack of Lithium-ion laptop batteries and asked the obvious-only-in-retrospect question: “Why don’t we put these in cars?” (Tesla is probably the closest to an exception to my ‘old-IP’ thesis, as the Roadster — though it was built mostly from existing building blocks — probably ought to be classified as something fundamentally new.)
  5. NextEra, Iberdrola, Enel, Orsted, and other renewable independent power producers: Regional utilities who placed early bets on the ‘deployment & operations’ end of the clean power value chain — first by developing wind farms in Europe and North America; then by expanding both geographically and technologically, to solar and storage. These bets have paid off handsomely, as the market capitalization of each of these “clean energy supermajors” now equals or exceeds those of comparable oil majors.
“The new energy giants are renewable energy companies”, Bloomberg, Nov 2020

The first phase of the energy transition is rife with these kinds of incremental innovation success stories: Phillips & the LED light bulb; Nest and ecobee & the ‘smart thermostat’; a whole bunch of solar inverter manufacturers... You get the gist.

Meanwhile, nearly every attempt to develop and commercialize fundamentally new clean energy technology — from wave power, to concentrated solar power— has been left in the dust by the relentless march of wind and solar PV down their respective cost curves. So far, in the battery storage field, Lithium-ion has crushed all pretenders to the throne; and fuel cells have been an expensive distraction.

And yet…

…it’s important that we don’t over-learn this particular lesson. There have also been a handful of bright spots towards the “deep tech” end of the clean energy pool over the past several decades. Offshore wind, for example, required a lot more fundamental innovation than simply bolting established onshore wind turbines to the ocean floor. There have also been a couple of modestly successful alternatives to standard polycrystalline silicon solar technology — First Solar’s thin film modules, and SunPower’s monocrystalline modules, for example — which have each managed to carve out a slice of the market.

Moreover, there’s no way that incrementalism alone will get us all the way to the zero-carbon finish line. The lesson for entrepreneurs can’t be to avoid deep tech…not if we want a habitable planet. Instead, I think the lesson is to avoid betting against the cost curve for more established technology that’s not yet manufactured at scale. If you set out to ‘build a better mousetrap’ on the premise that yours will be cheaper than the leading mousetraps today…be prepared for those other mousetrap manufacturers to build bigger factories before you can trap your first mouse!

Innovation

Source: The Monstrologist

There are three interrelated reasons why simply continuing to iterate on established wind, solar, and battery technology alone won’t be sufficient for fully decarbonizing the energy system:

I. The last 20(ish)% of clean electricity generation will be exponentially harder to decarbonize: Wind & solar resources are limited — both temporally and geographically — and those limitations will become costlier to overcome as the penetration of wind & solar in the electricity mix rises. In any given region, the first renewable energy projects tend to occupy the best sites — the windiest or sunniest spots with flat ground, acquiescent neighbors, and nearby transmission. Moreover, the natural intermittency of power generation from those first few projects will be effectively washed out by the intermittency of power demand — which is already balanced out on the grid by small adjustments to the output from fossil fuel or hydro power plants.

However, as more wind & solar is added, it will tend to be added in locations with weaker resources or more difficult terrain. And the intermittency of these resources will quickly become the dominant source of variability & uncertainty in the system.

At first, wind & solar intermittency will cause occasional stress on the remaining fossil fuel generation fleet. Natural gas plants will need to ramp up and down somewhat more frequently, more rapidly, and with less notice, in order to keep the grid balanced. But small amounts of battery storage are already a fairly cost-effective solution for performing this balancing feat over the course of a few hours each day.

At some point, though, renewables will begin to cause wild daily swings in power generation; then, eventually, energy deficits that last days or weeks at a time; and lastly, in the home stretch to full decarbonization, enormous seasonal surpluses & shortfalls. At this point, the ‘supply curve’ for wind & solar energy will become so steep that the cost of extracting a marginal megawatt-hour of electricity from those sources will become socially & politically untenable. It’s hard to say exactly where along the supply curve this point will arrive, but the industry seems to have settled on an 80% ‘grid penetration’ threshold as a decent benchmark. Hence, the decarbonization agendas advanced by a growing number of legislatures and utility companies aim for 80% clean electricity within just 10–15 years; but allow for 20 more years after that to quash the last 20% of fossil fuel generation.

In reality, regions with more challenging renewable energy development environments might hit the steepest part of their supply curves much sooner. Hence the (ish) in 20(ish)%. That (ish) implies big error bars.

Source: Energy Impact Partners analysis (various input sources, back of the envelope)

II. Clean electricity can currently only reach 80(ish)% of energy demand: Established wind & solar technology produces clean electricity…but in industrialized economies, only 20–30% of energy is currently delivered & consumed as electricity. The lion’s share of energy end-uses are fueled by the direct combustion of fossil fuels. Hence, in order to decarbonize the vast majority of transport, industry, and heating, we’ll need to either electrify all of those end-uses, or come up with an alternative clean energy ‘medium of exchange’ for them to consume.

Source: IEA, “Global share of total final consumption by source, 2018”

III. Energy system inertia: It‘s incredibly unlikely that we’ll be able to replace existing fossil fuel energy sources with clean energy sources fast enough to hold ourselves to even the most permissive global carbon budgets. New fossil-fuel-consuming power plants and industrial facilities are still being built around the world today, as I write— for example, several gigawatts of new natural gas power plants in the US, and about 100 gigawatts of coal power capacity in China. In fact, thirty percent of global fossil fuel power capacity was installed in the past 10 years. Absent the addition of carbon capture technology, operation of these plants over the full course of their 30–50-year projected lives would make global carbon goals impossible to achieve.

Sources: EIA, Bloomberg New Energy Finance

In a series of articles published earlier this year, I dug into some of the specific places where truly game-changing innovation is probably necessary in order to overcome the challenges outlined above — including hydrogen production, batteries for electric vehicles, seasonal energy storage, and offshore wind. I still believe these are likely to be big pieces in the decarbonization puzzle.

Yet, oftentimes when solving a puzzle, it’s worthwhile to step back and survey all of the pieces arranged on a table…

For each of the puzzle pieces splayed out above, there’s now a wave of investment fueling innovators trying to find the right fit. (See: Gates, Bezos, Nadella, et al, and my own firm Energy Impact Partners, too.) At this point the key question for the industry has shifted from “If” there will be sufficient investment in deep tech to “When” the deep tech within each category will be ready for commercialization.

2025–2030 is shaping up to be a pretty good answer to that “When” question. Dozens of the most promising technology companies across the deep decarbonization landscape are targeting the second half of this decade to prove their mettle and commence full-scale deployments.

That brings me to the next phase of the energy transition…

Coopetition

Diplomacy: The quintessential board game of ‘coopetition’

Assume one or two companies working on each of the categories above are successful, meaning: by the late 2020s they’ve proven their technology works; they have line-of-sight to cutting costs by scaling up manufacturing; and they’ve shaken hands to cement some important commercial relationships.

They’ll soon begin to compete with each other, but only in some places; in others, they’ll form more cooperative relationships. Hence, the race to decarbonize in the 2030s and beyond will be defined by the admittedly business jargony, but in this context fully appropriate term coopetition.

So, let’s take a look at the coop-etitive landscape…

Decarbonizing the last 20(ish)% of power generation

(henceforth referred to as “20%”, for readability)

What do we know about the last 20% of power generation that will need to be decarbonized?

  1. It will be seasonal, just like the ebb and flow of renewable energy. By the time we get to the last 20%, the majority of diurnal intermittency will already have been addressed with some variant on today’s Lithium-ion batteries.
  2. If the last 20% comes from even more wind & solar resources, those resources will be extra far away from energy demand centers. The good sites for wind & solar close to cities or existing transmission lines will already be taken. The mediocre sites will be, too.
  3. In most established electricity systems, the last 20% of fossil fuel power plants to be displaced will be made up of natural gas-fired peaking units — the most operationally flexible fossil-fuel generation sources, which will make them the last to go.

From here we can already see some of the biggest competitive fault lines, as well as the most important symbiotic relationships beginning to emerge…

1. Continuing to lean on wind & solar is an option, but it will require cooperation among at least three technologies beyond established wind turbines and photovoltaics. Two of those technologies are still mostly on the drawing board: floating offshore wind; and some form of ultra-cheap, ultra-long-duration storage technology. The third — high-power, long-distance transmission — is well-established technology, but has proven extremely difficult to deploy in the US, due in no small part to the social phenomenon known as “not-in-my-backyard-ism” (or NIMBY-ism).

Transmission & storage are classic ‘coopetitors’. In one sense, they‘re obviously competitive: transmission reduces the need for storage by blending wind & solar generation profiles across regions, which tends to decrease intermittency at an aggregate level; meanwhile, storage reduces the need for new transmission by increasing the utilization of existing lines. Yet, neither technology is a sufficient solution on its own; the combination will be necessary to allow us to continue tapping into more remote, intermittent renewables. Their relationship will be like a buddy comedy.

2. The aforementioned storage technology might be electrochemical (a battery), and it might be mechanical (e.g., pumped water, or compressed air), but hydrogen also remains a strong contender. Make it either “green” with electrolyzers powered by zero-carbon electricity; or make it “blue” by splintering a couple of H2's off of a methane molecule, then capturing & sequestering the resulting carbon. Next, store that hydrogen at very high pressure underground, or in enormous tanks. Then exchange it once again, on-demand, for electricity — using either a fuel cell or a gas turbine built to run on hydrogen.

One challenge for ‘green’ hydrogen as a storage medium is that converting electricity to hydrogen, and then back again to electricity, currently has an abysmal ‘round-trip’ efficiency of just 40–50%. (For sake of comparison, Lithium-ion batteries are ~90% round-trip efficient.) Another challenge for green hydrogen is capital utilization: to address the seasonal gaps inherent in the last 20%, green hydrogen entails two processes each working only part-time: electrolyzers running full-tilt for just a few months each year, and fuel cells or turbines operating for a few different months. In an excellent piece on hydrogen, Michael Liebreich from BNEF makes a compelling case that ‘blue’ hydrogen is better suited for the role of ‘seasonal grid balancer’ because “the capital-intensive stage, separating out and reinjecting the CO2, can be run at a very high capacity factor. The second stage, using the hydrogen, can then be intermittent.”

I don’t want to venture too far into the weeds of political economy; however, it’s important to note that blue hydrogen might also benefit from securing buy-in from key political interest groups — for example, the natural gas industry, and voters in politically crucial US states where natural gas is produced. (cough, cough Pennsylvania…) Blue hydrogen has its detractors too, on the ‘green’ (political) side of the sprectrum, but there’s no future for decarbonization without a little compromise.

3. Blue hydrogen is an inherently cooperative endeavor — a mashup of hydrogen & carbon capture, utilization, & sequestration (CCUS). Yet while blue hydrogen needs CCUS, CCUS doesn’t need hydrogen. It can instead be applied to the last 20% of power generation directly, either by retrofitting old natural gas plants, or building new ones, with mechanisms to capture the carbon in their exhaust — that’s the ‘CC’ step. The other two steps are distinct (and are not inherently baked into blue hydrogen production): carbon needs to be either bound into super-long-lived materials, like cement (‘U’), or pumped underground into permanent storage repositories (‘S’).

Capturing & sequestering carbon from natural gas power plants is already feasible with existing technology. If the cost were low enough, and the technology were sufficiently widely-applicable, CCS might just become the end-all, be-all of the clean energy transition. I personally might launch a lucrative new career as an instagram influencer.

Unfortunately, that’s not yet the case. Cost remains a major hurdle. Somewhat surprisingly, though, it’s not the CC step that’s the biggest sticking point. That’s already getting cheaper, and innovators appear to be making additional progress. Plus, there are a handful of high value ‘U’ companies which could indirectly propel CC further down the learning curve by driving additional demand for carbon.

The sticking point is another letter: ‘T’, for transportation. In fact, the implicit ‘T’ step between the ‘CC’ and ‘S’ is likely to be the most expensive step for many power plants, as laid out in a great piece by Jake Tauscher from G2PV. Take a look at the map below, which features geologic carbon storage potential in the US. Take note of the big swaths of the country — including most of the population centers along the East Coast — that would require a whole new transportation system to deliver captured carbon back from whence it came

Source: US Geological Survey

IV. Lastly, there are two more contenders for the final 20% of power generation: nuclear power, and geothermal power. Although these resources appear radically different at first, they’re functionally quite similar in many ways. Both resources can be tapped with established technology that’s already deployed at scale today. (As I write, tens of gigawatts of large nuclear reactors are currently under construction in China, Korea, and India.) But for both resources, conventional plants are difficult to site, permit, and build where we need them — in the case of nuclear, because of safety concerns; in the case of geothermal, because of geological constraints.

Fortunately, both resources are also being tackled by a handful of innovative companies aiming to push the envelope of where new plants can be cost-effectively built. Small, modular reactor proponents are envisioning a future of faster-to-deploy, more operationally-flexible, even more accident-proof nuclear plants. Meanwhile, “enhanced” drilling techniques could expand the range of geothermal development outside of places where heat rises naturally close to the earth’s surface.

If these companies are successful, their value proposition will be compelling: super power-dense sources of energy that can hypothetically be sited close to demand centers; and can be run 24/7. Hence, they’re technically capable of addressing wind & solar’s two critical weaknesses: remote space requirements & intermittency.

And yet, neither nuclear nor geothermal appear to be the ideal fit for the last 20%, due to a critical mismatch. Nuclear & geothermal plants are characterized by extremely high up-front capital costs, high fixed operational costs, and low variable costs. This cost profile means that maximizing utilization is crucial for delivering competitively priced energy. Such resources are best suited for a power system that needs a steady ‘baseload’ supply; but the last 20% is more likely to call for energy source that can deliver sporadic bursts of energy for only a few months each year. Hence, if either next-generation nuclear or enhanced geothermal technology take off, it will likely be hand-in-hand with some form of seasonal storage.

Decarbonizing the 80(ish)% of end uses that aren’t yet electrified

If I’ve convinced you to prepare for a period of intense coopetition in the electric power sector…well…you ain’t seen nothin’ yet.

In the power sector, it’s easy to imagine a symbiotic relationship among just a few technologies emerging as a dominant strategy. Perhaps an early partnership between ultra-long-duration storage and high-voltage transmission will head off major plans for investment in either hydrogen or carbon pipelines. On the other hand, a big early push for carbon infrastructure could give CCS the ability to satisfy most of the last 20% single-handedly.

On the demand-side of the energy market, it’s much harder to see this kind of winner-take-all scenario playing out. At first glance, there appear to be fewer coopetitors in the mix: just electrification, green hydrogen, blue hydrogen, and CCS. But the ways in which we use energy are simply too varied for a one-size-fits-all solution.

So, what generalities can we make about the 80%?

Delivery: Two of our options for the last 80%— electrification & green hydrogen — have big, obvious delivery problems. There’s no shortcut to massive investments in new infrastructure in order to get more electrons or hydrogen molecules to all of these new end-uses. Yet the other two options have a less obvious, reverse delivery problem. Blue hydrogen and direct CCS both aim to capture carbon from fuels that are already being delivered to end-users. But, as I described above, they’ll depend on infrastructure to carry that captured carbon to it’s final resting place, which will sometimes be very far away.

As far as I can ascertain today, there’s no universal winner among electric power lines, hydrogen pipelines, and carbon pipelines. The feasibility & cost of siting, building, and repurposing existing energy infrastructure depends on all kinds of project-specific factors, from the geographical to the political.

Transportation end uses: Point-source CCS is not an option for mobile end-uses, like cars, trucks, and airplanes (duh). Hence the competitive battle lines in this field will mostly be drawn between electricity and hydrogen. Hydrogen has some obvious advantages: It can be compressed to hold about four times as much energy in the same volume as a Lithium-ion battery, and can be pumped into vehicles at rates similar to gasoline or diesel. Meanwhile, both energy-density and charging speed have proven to be stubborn deficiencies for electric vehicles, as I outlined in a prior piece.

Yet sometimes the best solution is the first reasonably viable one, and today that’s electricity. Electricity is already the heir-apparent in the light duty vehicle segment, and it’s gaining ground in medium-duty vehicles too. Hydrogen appears unlikely to catch up. On the other hand, electricity is essentially a non-starter at the other end of the transport spectrum, in big container ships & intercontinental airplanes. In those segments, hydrogen or some derivative thereof is almost certainly the superior choice. In the middle of the transport spectrum — i.e. big trucks — we’re likely to see more hand-to-hand combat for market share, though perhaps we’ll also see some cooperation among batteries and hydrogen fuel cells.

There is one more option for transport. One more approach that might compete with both electricity & hydrogen for some of the big, long-haul use cases is CCS using “direct air capture”, or DAC. Rather than capturing carbon from an industrial flue in which carbon-dioxide is highly concentrated, DAC technology aims to siphon carbon out of ambient air, at about 410 parts per million (and rising). For airlines and shipping companies, the idea is that it might end up being cheaper to just keep burning jet fuel and bunker fuel, while paying a DAC provider to capture an equivalent amount of carbon somewhere else.

Do you have a yard? If you’ve ever tried to pick up handfuls of leaves in your yard before raking them into a big pile, you’ve already got an intuitive handle on the challenging economics of DAC. But, it’s worth keeping in mind regardless of its implications for air travel, because we’re probably going to need it when we inevitably overshoot our global carbon budget.

Space & water heating for buildings: Because of the magic of electric heat pumps, this is electricity’s sector to lose. That said, upgrading all of our electric infrastructure to accomodate a three-to-five-fold surge in demand during the coldest days of the year — when air-source heat pumps lose their magic touch— could prove extraodinarily expensive as a maximalist electrification strategy. Next-generation geothermal heat pumps could help in suburban & rural settings. Yet there may still be a path for hydrogen, especially in dense urban areas and in larger buildings that are harder to retrofit for fully electric heat. In these settings, we may find it cost-effective to add some large electrolyzers & hydrogen storage tanks — at either the building or district level —plus hydrogen boilers to serve as a form of distributed energy storage and backup heating source.

Industry: Here’s where coopetition will get especially chaotic. Most industrial plants already rely on a mix of energy inputs: fossil fuels for high-grade heat, electricity for specialized equipment, and so-called “feedstock energy”, which is needed first and foremost to supply molecules that end up in material products…but also simultaneously provides energy to catalyze various reactions.

In a decarbonized future, this potpouri approach is likely to persist. One plant might call for, say, hydrogen as a feedstock, electricity for robotic arms, and natural gas combustion with CCS to run a furnace. Some industries, like chemicals & cement — which can potentially serve as a sink for carbon-dioxide — might also become demand centers for carbon captured from other sources.

Quoting Michael Liebreich again: “What we’re going to see, therefore, is a fight, plant by plant”. The outcome of these mini-battles will be different for each individual facility, depending on site-specific energy & feedstock requirements, and site-specific costs for various types of electric power lines & pipelines. In most cases it’s going to be a scrum with multiple winners that end up leaning on each other to some degree after all…in other words, “coopetition”.

Iteration. Innovation. Coopetition.

Then Scrambling?

The 2010s will be remembered as a decade of super successful iteration for clean energy. The 2020s are shaping up to be a decade of tremendous innovation. Hopefully many of these innovations will be successfully commercialized, leading to a couple decades of intense coopetition in the 2030s and 2040s.

Beyond that? Probably several decades of what can only be described as “scrambling” — scrambling to close the gap that still exists between where our emissions are still heading, and where they need to go.

I didn’t talk much about the third big reason we still need more innovation for a successful energy transition, which is inertia. There aren’t many solutions to all of the fossil fuel plants under construction today, whose useful lives could stretch for many decades to come. What we don’t capture from these facilities on the front-end through point-source CCS retrofits, we’ll need to decarbonize on the back-end through much more expensive ‘direct air capture’, or mass reforestation, or perhaps geo-engineering. Like I said: scrambling.

So, here’s to more innovation today, to avoid scrambling tomorrow!

Energy Impact Partners

Leading the transition to a sustainable energy future

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