The trend of energy production is changing, where consumers are comfortable and do not care about the production as long as it is economical and accessible. This trend has compelled the large energy production companies to introduce small-and-less complicated forms of production. As a result, the production of electricity on a commercial or wholesale scale is moving away from big-and-complicated machines.
The decarbonization of electricity production around the world today is part of a technological shift, where majority of the people wants electricity or its immediate benefits like cell phone charging.
Therefore, it can be assumed that no more gigantic projects that take 10 years to complete will be considered in the coming years. This is interesting to witnessing a reversal of the idea of economies of scale with respect to both production of electricity as well as the optimal size of the distribution grid itself. The trend will fairly shape the industry for decades.
After having a discussion with the engineers of the last centuries, a few questions were asked, such as “If economies of scale really prevail was that a good reason to upsize electric power plants?” The response was economies of scale did in fact prevail and utilities should go forward with big projects as long as they were certain about four key aspects relating to the project:
• Ultimate completion costs;
• Duration of construction;
• Total capital costs (equity plus debt); and
• Expected market or demand for electricity at time of completion. What this asks, to borrow a phrase is, if you build it will they come—at the prices you ultimately have to charge?
The concept of economies of scale for utilities might be ripe for revision. Sextet of European and Canadian academics has conducted a recent study which supported this view (Science, 3 April 2020) by examining the trade-offs of costs versus complexity concluding that in their terms granularity has advantages over lumpiness.
If we translate these findings into concrete business policy, we understand two key benefits of decarbonization technology. First, it’s cleaner and cheaper (with zero fuel costs). And there is the possibility of reaping these benefits at far smaller, less capital intensive scale. Second benefit is the bigger and better/economy of scale thinking still pervades much utility industry thinking and capital planning.
This is changing slowly. What we believe accelerates this change is a growing understanding that the traditional concept and hub grid system is simply no longer necessarily an optimal business model.
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