Group 8, Week 1: 'Brown to Green' switch, not the best course of action

In this era of carbon taxes, treaties to reduce carbon emissions, and heightened concern about the earth’s climate, the use of low carbon energy sources have become a hot topic. Renewable energy sources like wind and solar have in particular been gaining wider attention recently. In the US alone, wind and solar constituted 60% of added utility-scale generation capacity in 2016 [1]. The topic of whether or not it is reasonable for large scale fossil-fuel power generators to make the switch to renewable energy i.e. the “Brown to Green” switch, therefore becomes an important one. In our series of blog posts over the next couple of weeks, starting with this one, we argue that this switch is not a reasonable one to be made.

Leveraging off NRG Energy’s failure to make the ‘Brown to Green’ switch, the first argument made against the switch is the large investment risk it poses to large-scale fossil fuel companies and their stakeholders. Such companies are usually already benefitting significantly from the economies of scale they have obtained over the years and usually control a significant share of their niche market such that they usually do not have robust competitors. Consequently, these companies are usually already making a comfortable stream of revenue and as Ferris and his colleagues indicate for E&E News, “revenues from large fossil fuel power plants are the backbone of balance sheets and share prices [2].” As was the case with NRG’s failed switch, investors and stakeholders of such large scale fossil fuel power generators will rightfully become concerned about the risks of making such a drastic switch particularly when it initially seeks to juggle both the brown and green side of things. Apart from the fact that this juggling brings about a lot of complexity to operations which may affect efficiency, there is also the issue of how much more competitive the renewable energy sector is. Renewable Energy in the power sector has so many different adoption models - from large investments in wind farms to smaller rooftop solar systems which sell power back to the grid – that one cannot be too certain about the revenue they could bring in. It therefore makes sense that investors in already established fossil power generation would and should not be too willing to make the switch.

A notable exception to the argument against fossil-fuel power generators making the ‘Brown to Green’ switch is Denmark’s Dong Energy company. Yet even though it seems to have successfully made the transition, its model which seeks to do away with any form of fossil fuel power by 2023 and sell off all of its oil and gas operations, underscores the need to pick one side of doing things, and stick to it [3]. It is also very significant to note that the Dong model had a government owner who was willing to make the investments to enable this switch. If we thus consider power producers who are privately owned or who do not have the support of their owners, whether private stakeholders or government, to make this switch, the ‘Brown to Green’ switch does not have enough evidence of success or profitability to be advocated for.  

Even in countries where the government is open to support fossil fuel power generators make the switch to renewable energy as was the case with Dong Energy, it must be noted that there will still always be some demand for fossil-fuel power and consequently large-scale fossil-fuel power generators. Base load power sources like coal, natural gas, nuclear, and oil power plants are systematically called upon to smooth out the variability that occurs from deploying renewable power sources especially since large scale storage options are not yet pervasive enough [4]. In Germany for example, where the highly successful Energiewende policy looks to increase the share of renewable energy in the electricity sector to 80% and the overall energy sector to 60%, there is still a significant reliance on fossil fuels, particularly natural gas, to consolidate both variability and the remaining capacity of energy demand that renewables cannot cover [5]. There is the additional argument that large scale manufacturing processes will always need to be powered by fossil-fuel energy. Therefore, if the push for the ‘Brown to Green’ switch is motivated by a fear of an elimination or drastic reduction in the demand for fossil-fuel generated power, the evidence on the ground shows that there will regardless be significant demand for fossil based energy and thereby opportunities to make profit at least for a few more decades.  

From a policy standpoint, in most instances, large scale fossil fuel generators tend to have significant influence on what types of policies get to be enacted for the power sector. The recent controversy in Nevada where policy makers sought to implement a retroactive tariff system to make electricity more expensive for rooftop home solar owners is a classic example of this [6]. The push for this new system was believed to be backed by the state’s major utility, NV Energy, “which uses fossil fuels to generate more than 80 percent of the state’s electricity,” due to a supposed fear of the utility death spiral [6]. Whether or not, the power that most fossil-fuel generators have in putting in place systems that benefit their continued operations and profit margins is right or wrong is an issue for another day. What is important is that they do have the power to ensure that they are not at the mercy of the utility death spiral and consequently do not need to make a hasty switch to renewable energy.

This first blog post only serves to scratch the surface of why we believe the ‘Brown to Green’ switch is not a reasonable one. Subsequent posts will delve deeper into the reasons for which we make the argument that fossil-fuel generators should metaphorically, stay in their lane. If there really is the burning desire for them to dabble in renewable energy generation, the best thing to do would be to start a whole new subsidiary company focused on just that.  

References

[1]	D. Cusick, "Wind and Solar Growth Outpace Gas," 12 January 2017. [Online]. Available: https://www.scientificamerican.com/article/wind-and-solar-growth-outpace-gas/. [Accessed 1 April 2017].
[2]	D. Ferris, E. Klump and D. Kahn, "Why NRG's green crusade faltered," 7 March 2016. [Online]. Available: http://www.eenews.net/stories/1060033507. [Accessed 1 April 2017].
[3]	P. Clark, "Denmark’s Dong Energy shifts from fossil fuels to renewables," 16 March 2017. [Online]. Available: https://www.ft.com/content/99150262-d368-11e6-b06b-680c49b4b4c0. [Accessed 1 April 2017].
[4]	J. Apt and P. Jaramillo , Variable Renewable Energy and The Electricity Grid, New York : RFF Press, 2014, p. 328.
[5]	S. Amelang, "Germany’s dependence on imported fossil fuels," 11 Feb 2016. [Online]. Available: https://www.cleanenergywire.org/factsheets/germanys-dependence-imported-fossil-fuels. [Accessed April 2017].
[6]	J. Leslie, "Nevada’s Solar Bait-and-Switch," 1 February 2016. [Online]. Available: https://www.nytimes.com/2016/02/01/opinion/nevadas-solar-bait-and-switch.html?_r=0. [Accessed 2 April 2017].