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Energy is the bedrock of the global economy. Any disruptive changes in areas such as electricity generation will open the door to myriad new investment opportunities. Interestingly, trends are emerging now at lightening speed within those energy markets and this, of course, presages the concomitant emergence of a potential wealth creation event such as we have never seen.

U.S. residential electricity prices have been rising steadily for at least a decade. This is somewhat perplexing in that we have had a tremendous surge in natural gas inventories since about 2006 which, by conventional wisdom, would suggest that prices should have abated. But they have not.

In January 2012, when natural gas prices plunged to under $2/mcf, utilities that had the capacity to switch between coal and natural gas did so, taking advantage of the low pricing. This, unfortunately, was not a long lived exercise. As gas prices began to rise again, utilities simply switched back to coal use and natural gas has since traded in a range of about $3.50-4.50/mcf. making it extremely difficult for operators to break out of the pricing dilemma in which they have found themselves. Industry projections, initially, were that natural gas would effectively replace coal and gain the greater portion of the electricity generation market. There was very little talk of renewables factoring into that equation.

Instead, shale gas operators found themselves trapped in a scenario where the average commercial breakeven for most shale gas plays was about $6/mcf. But utilities were only willing to ride that price wave to about $4.50/mcf. thereby creating a significant shortfall in the price needed to breakeven for operators. Obviously, some plays have better cost parameters than others. The Haynesville, for instance, is quite expensive to drill and complete. The Marcellus, on the other hand, is more cost efficient. But what is interesting is that in spite of all the industry claims about consumer savings on electricity, electricity costs have instead risen relentlessly for over a decade with no end in sight.

Or perhaps there is an end in sight.

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Examining wholesale electricity prices, one sees that they too have risen quite considerably. But perhaps most interesting to note is the correlation between prices and the location of the largest shale gas plays in the US and the largest concentrations of renewable energy.

For instance, in the Pacific Northwest, where consumers enjoy considerable hydroelectric generation, wholesale costs rose only about 3% according to the most recent data from EIA. But on top of the Marcellus shale, the lowest cost shale gas play in the US and the Utica another touted shale play, wholesale electricity costs rose a staggering 39% year over year. Further, EIA states that the lion’s share of this rise did not come from increased infrastructure or plant costs but came instead from the energy portion. In other words, from greater fuel costs which in turn creates an inflationary paradigm for consumers.

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Interestingly, while wholesale and residential costs were rising in large part due to fuel costs for utilities for natural gas and coal, renewable utility generation costs were falling…rapidly…especially for wind and utility scale solar PV. A new report authored by IRENA (International Renewable Energy Agency) states that solar costs have halved since 2010 which has in turn impacted utility generation costs of solar PV. IRENA stated:

“The most competitive utility- scale solar PV projects are now regularly delivering electricity for just USD 0.08 per kilowatt-hour (kWh) without financial support, compared to a range of USD 0.045 to USD 0.14/kWh for fossil fuel power plants. Even lower costs for utility-scale solar PV, down to USD 0.06/kWh, are possible where excellent resources and low-cost finance are available.”

This is an emerging new energy paradigm.

On shore wind too has become increasingly cost competitive with even the newest combined cycle natural gas plants. We estimate the cost of onshore wind to be slightly lower than that for natural gas making it the cheapest form of electricity generation in the US. And this is without subsidies taken into account. While our estimates at Energy Policy Forum have come in about .06 cents per KWh, IRENA estimates them to be even cheaper. Their report states:

“Onshore wind is now one of the most competitive sources of electricity available…The best wind projects around the world are consistently delivering electricity for USD 0.05/kWh without financial support.”

Clearly, a new energy economy is emerging and with it the possibility for huge wealth creation. Other areas of opportunity include storage, electric vehicles, smart grid and smart home technology just to name a few. But what they all have in common is their potential ability to disrupt. And such multiple disruptive possibilities are all converging on one point: our use of hydrocarbons.

The concept of stranded assets in oil and gas no longer seems so implausible.