Tellimer Insights
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Tellimer Insights

Looking for the next Tesla? Skip EV; start where Nikola Tesla left off: The grid

Tesla has solved the EV problem: an EV is a battery plus software on wheels, not a standard car powered by batteries

Investors seem obsessed with finding the next big thing in the energy transition. Who will match Vestas in wind turbines, Ørsted in wind power or Tesla in electric vehicles (EVs)? This is the wrong question: these companies produced outsized returns and seized leading positions precisely because they were first movers solving unique problems.

Vestas’s former CEO, Anders Runevad, could have a big impact, if activist investors succeed at getting him elected to ExxonMobil’s board, by helping ExxonMobil to finally find its place in the new energy economy. Investors in energy technology need to think the same way and look for unique niches in the new energy economy. These niches will be defined by the problems of today, not replicating the solutions of the past.

The world will need many more companies that manufacture wind turbines, deploy renewables at scale and manufacture EVs. But Vestas, Ørsted and Tesla have shown the way by identifying the problem and proving the technology and the business model. The next Tesla, whether a disruptive new entrant like Tesla itself or an established company that successfully reinvents itself like Ørsted, will need to do the same for the next problem in the energy transition.

Before looking for the next Tesla, remember the original: Nikola Tesla

Making an AC electricity system work, which now powers the entire world except for some parts of San Francisco, relies on three core services:

  1. Generation — electricity production, whether through thermal generation or renewables
  2. Stability — ensuring that the grid has a stable three-phase AC waveform at the target frequency (eg 50hz in Europe) without harmonics or distortion and with sufficient inertia to remain stable through short-term disruptions
  3. Distribution — poles, wires, transformers and substations to bring that power to the final consumer

Most people intuitively understand generation and distribution — every market needs supply and demand — but system stability is less commonly understood. Before renewables, stability was a side effect of generation. The mass of a thermal generator spinning at 3,000rpm provided inertial stability and a stable AC waveform. Indeed, Nikola Tesla designed the AC system precisely because of the stability benefits and the ability to easily change voltage with a transformer. The logic of the AC system is so powerful that it enabled Tesla and Westinghouse to beat the shrewder Edison, who wanted to preserve a system based on DC. Edison went as far as publicly electrocuting stray animals with AC current to try to show that it was more dangerous. The so-called current wars were finally settled in 1893, when Westinghouse powered the Chicago World’s Fair with AC power and won the contract to light Buffalo, New York, with AC hydropower from Niagara Falls.

Two of the great names of finance today preserve the legacy of these two fundamental technologies that underpin AC energy: the thermal powerplant and the transformer. John Pierpont Morgan financed Edison and his Pearl St power station. Although William Stanley, the inventor of the transformer, did not live to see the scale of the revolution that he unleashed, his success helped to launch his son Harold’s finance career, culminating in Harold’s partnership with John Pierpont’s grandson Henry: Morgan Stanley.

Tesla’s AC grid is no longer fit for purpose

Solar farms, wind turbines and modern Teslas are now creating big problems for Nikola Tesla’s AC grid. With the exception of hydropower, which is effectively a thermal power plant driven by water pressure rather than steam, renewable energy is natively DC, so it does not provide stability as a side effect. There is no rotating mass, so no inertia. When generation is natively DC, the AC waveform needs to be mimicked synthetically by an inverter. Intermittency problems with wind and solar are generally understood, but many observers fail to understand that this means that they have, at best, a limited ability to provide frequency response: fast adjustments in output to match demand and maintain a stable frequency. Indeed, there are limitations to the ability of nuclear energy and hydropower to provide frequency response, although neither of these is subject to the same intermittency concerns as wind and solar. And these problems are interrelated: with less inertia, the frequency of the system changes faster, increasing the need for frequency response.

Figure 1: Stability services vary dramatically between different types of generation

While DC transmission may be a niche solution for certain high-voltage, long-distance transmission applications, it is simply impractical, not to mention potentially undesirable, to try to return to a DC grid. Instead, we need to find a way to allow an AC grid to support an increasingly DC world, connecting demand from EVs and supply from renewables, both of which are natively DC.

Climate change and the US-China Tech War are driving renewables and EVs

The world is trying to ramp electricity generation as quickly as possible. Not only are rolling-out electric vehicles and electrifying heating compelling ways to address climate change, but governments also see EV technology as an extension of the US-China Tech War. China is expected to control 70% of the world’s lithium ion battery production capacity in 2023, and the Biden administration’s Department of Energy is ‘doubling down’ on support for EV and battery R&D to prevent China from cornering the US$23tn marketing in low carbon technology.

Figure 2: China is expected to control 68% of the global lithium ion megafactory capacity by 2023

Without new technology, costs will rise while stability falls

But we are actually pulling out the grid stability by switching to renewables at the same time as ramping up electricity production and demands on the grid. Ten years ago, the UK had c80 points of generation, most of which contributed inertial stability and could provide frequency response. In the past decade, the UK has added more than a million new points of renewable generation, none of which provide inertial stability or frequency response. This leaves three options with current technology:

  1. My native Texas, where the system occasionally collapses spectacularly to enable consumers to benefit from the low cost of renewables most of the time.
  2. The UK or Germany, where consumers pay to maintain a huge amount of standby generation. In the UK, this is provided by Drax, which has a great website justifying its role in the system. Even if Tesla installed massive battery farms for when the sun doesn’t shine and the wind doesn’t blow, the UK would still need Drax to keep the AC signal alive.
  3. Australia, where the government is restricting renewable connections and slowing the transition to avoid having to make the same decisions that Texas, the UK and Germany have had to make.

Plugging renewables into the upstream and electric cars into the downstream of the current AC system is like connecting modern server farms and web devices to the copper wire switched network of the 1990s. It is not just the scale that the system cannot cope with — the whole architecture does not work.

Investors should be cautious about the grid’s ability to support renewables and EVs and should look for the next Tesla to solve this problem

Investors need to be wary of scaling renewable generation and EVs on the assumption that we will figure out the grid. Rather, the grid problem will continue to grow, and the cost of balancing services and stability will continue to rise. As long as the cost of balancing services continues to rise, there will be a role in the grid for responsive thermal power, whether from hydrocarbons, biomass or hydrogen.

Investors looking for the next Vestas or Ørsted or Tesla need to stop looking at those companies’ competitors: those companies have won the big prizes and established the core technology leadership in their spaces. Rather, they need to look for the next Tesla where the original Tesla left off: the grid itself.

This report first appeared on Tellimer.com. To read it in full, go here.

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