Is Energy the New Tech?
After almost two decades of booming, the tech industry finally shows some signs of slowing down, sparking concerns about a potential tech recession. What I have heard and read recently reminds me of Ray Dalio’s “Big Cycle” theory, in which he discusses why nations have risen and fallen across recent centuries. His theory provides valuable insights into the driver of “the changing world order” and suggests ways to respond, especially during transitions. Perhaps I can pivot his theory to the industry level to explain what is happening and hopefully also show you why I believe the energy sector is the new tech.
The Market
The energy industry, especially the renewable sector, is growing at an unprecedented speed. Despite the recent high inflation and supply chain hiccups, the general direction of moving towards a clean energy future has become a consensus globally and will not revert. According to Precedence Research, the global renewable energy market is expected to grow at a registered CAGR of 8.6% from 2022 to 2030, doubling its size from $952 billion in 2021 and about $2 trillion by 2030. The growth in the market size is primarily driven by the solar segment (13.5%). As a critical component to overcoming renewable output intermittence, the stationary energy storage market is growing at an even higher CAGR of 24.9%. The increasing market size and high CAGRs signal a strong demand, eventually leading to job opportunities from offices to the field. According to a recent DOE analysis, the overall energy jobs in the U.S. grew 4% in 2021 despite the COVID hit and the rising inflation. This is higher than the domestic economy’s overall employment growth of 2.8%. Notice that although the high growth is not shared across the entire energy industry — employment in the technology of the traditional fuel such as gas, coal, and petroleum actually declined by ~3.1% — moving forward, the clean energy sector is expected to create more jobs to offset the fossil fuel job losses.
The Industry
The energy industry has an interesting “loose at the ends and tight in the middle” structure. The upstream generation sector has been deregulated since 1996, allowing generators to bid into an energy market operated by an ISO/RTO to serve the load. For the downstream, non-traditional players such as Community Choice Aggregators (CCA) and solar providers have recently shared the distribution/end-use market with utilities, which was long been known as the only electricity provider of an area. Unlike Generation and Distribution, the middle section — Transmission — is still regulated because of reliability and security concerns.
Thanks to the energy transition initiative, today’s energy industry is moving towards a cleaner and smarter energy future for which Decarbonization, Digitalization, and Decentralization are the catalysts. Yet, shifting the power industry — a 150-year-old industry is never meant to be easy. The energy transition and the 3-Ds have challenged traditional resource planning and grid operations practices in many ways, leaving numerous opportunities for new players to rise and shine.
Because energy, specifically electricity, is used essentially everywhere in our lives, the industry is virtually recession-proof. Even with all the energy efficiency products and a macro-environment like now, the annual load growth is still significant in some areas. In fact, most utilities in California just witnessed their record peak loads in the past September. This is because even though today’s appliances are more efficient than years ago, we also have far more of them! Take EVs, for example: California’s cumulative EV and PHEV sales in 2021 are almost 140 times higher than that in 2011. Assuming an average battery size of 50 kWh per car and a 15% annual vehicle attrition rate, we are talking about over 40,000 MWh increase in energy consumption, introduced just by the EV market.
In the short term, such a booming market will attract more investment and more players, increasing the competition on the consumer/end-user side. However, entering the energy industry requires intensive capital investment and specialized knowledge, making the industry only feasible for legit players with deep pockets. The good news is: once you are in the club, energy projects usually come with long-term contracts, which translate into stable cash flow, ideal for investors looking for long-term and predictable ROI. For the above reasons, industry consolidation through M&A is expected to take place over the long term, mainly for large incumbents to acquire new green technologies while remaining competitive.
In addition, there is strong support for an energy transition from the Government and Congress, both at the Federal and State levels. In December 2021, President Biden signed an executive order aiming to “reduce emissions across federal operations, invest in American clean energy industries and manufacturing, and create clean, healthy, and resilient communities.” Most recently, on November 22, a $550 Million Clean Energy Funding was announced by the Biden-Harris Administration to support “community-based clean energy in the state, Tribal, and local governments”, helping achieve a net-zero economy by 2050. In addition, various grants are available from the U.S. DOE in support of clean energy research and implementation, grid innovation and resilience, and energy infrastructure development. The U.S. Government is also helping the global energy transition. On November 9, the White House launched a New Public-Private Effort to Unlock Finance to Accelerate the Energy Transition at the COP27, accelerating the deployment of renewable power, and retiring fossil fuel assets in developing countries.
The Value
The profound value of the energy transition is not only relevant to booming this 150-year-old energy industry. The transition will create jobs and drive the economy of historically underdeveloped areas through energy project development and construction. It will also promote the development of peripheral industries such as construction, information technology, AI, and many more. Most importantly, the transition has a set timeline and an end product of a clean energy future that will deeply benefit our and future generations.
If Energy Is the New Tech, Why Haven’t I Felt It?
To answer this question, I would like to ask you to think about your cell phone for a minute. When the cell phone was initially introduced to the market in the early 90s to replace pagers (in case you are too young to know what a pager is, I have included the Wiki Page), people had high hopes and yearned for all the possibilities a cell phone could bring to our lives. Unfortunately, most were disappointed after several years of waiting as the development of cell phones did not live up to the hope — they were merely a pager with a better text and call function. They were supposed to support Internet browsing, but the tiny black-white screen made it painful to navigate even the simplest website, not to mention online shopping! Over the years, people gradually got used to it, and even after the introduction of the smartphone in the early 2000s didn’t change much of the perception that a phone should be used (only) as a phone. I still remember how the iPhone 4s ruined the supposedly memorable pictures after my dissertation — that was in 2013! However, today’s cell phone is a totally different story. It has penetrated so deeply into our lives that most cannot live without it! And — most interestingly — if you ask me since when I became so dependent on my phone, chances are I will not have a definitive answer. It just happened, silently. Maybe that is how technologies really impact our lives, as Roy Amara wisely pointed out.
If I could predict, the energy transition should have a similar process. For a long time, utilities have been just some companies to set up auto payments and forgot about it. But, things will change and are changing. Today, many utilities have offered multiple energy products by differentiating the seemingly homogeneous electricity services to better meet their customers’ needs. Some are on their way to transforming the electricity business by building innovative business models and partnerships, which are expected to further enrich the customers’ experience for a dawning net-zero grid. Perhaps one day, when you enjoy family time in your smart house powered by a smart grid and controlled by a smart operator (maybe an AI), you just cannot remember exactly when everything happened, just like the feeling about the smartphone today.
Why Am I (Cautiously) Optimistic?
When the 33% RPS — the standard to move California from 18% renewables to 33% in 2020 — was adopted in California in 2011, many people, including power system professionals, didn’t believe it would happen. I was one of them. Guess what, on a normal day in 2020, a 33% renewable share was quite unimpressive. The thing is: we tend to evaluate things in the future based on today’s technology level (the reality) and tend to forget that reality also evolves, making extremely challenging tasks today possible for the future. With the boom in energy, one can expect more investment to fund top-quality research and commercialization, which will eventually help achieve a net zero. That being said, we must be thoughtful to avoid complacency and plan strategically throughout the journey. Only in this way will the transition be feasible and smooth. After all, a net zero grid with frequent power interruptions is not the energy future to be settled for.
Is energy the new tech? What do you think?
