This is part of my new UDEMY course on Micro-Renewable energy. If you are interested please contact me for more details. Here you will learn to sell micro-renewable energy using metrics from capital budgeting rather than payback times which are generally off putting to anyone who is in the know.

1. ENERGY RATE RISES
Finance for Micro-Renewable
Energy Professionals
Lecture 5
(c) Perimetr Films John Clarkson (2017)
By John Clarkson
https://www.udemy.com/finance-for-micro-renewable-energy-professionals/

2. Energy Rate Rises
LECTURE 5
What you will learn
(c) Perimetr Films John Clarkson (2017)
Whenever a micro-renewable energy system
replaces other sources of energy, such as energy
from national grid supplies, it saves money.
However, this saving is never constant. It tends to
rise mostly over time. This means we can never
apply a 0% rate rise. If we do our estimate is
simply inaccurate!
This lecture will teach you how to choose the most
appropriate rate rises. It is linked to our next
course ‘The Bigger Picture’.

3. Choosing a Rate Rise
(c) Perimetr Films John Clarkson (2017)
OUR GOAL
Our goal is to find the most appropriate
estimate for a future rate rise over the
life span of the micro-renewable energy
system we will hopefully install.
There are two main ways to choose
this: 1. Use historical data in the belief
that what has happened in the past is
going to happen in the future 2. Use
research or correlation to determine
the rising prices by using forecasts
made by researchers
As we can see from the graphs, prices don’t just rise, they also fall. However, we have
to note that if we averaged out the rises and falls, there is trend of rising prices!

4. Long-Term Historical Trends
(c) Perimetr Films John Clarkson (2017)
WHY DO PRICES OF ENERGY TEND TO RISE?
We undoubtedly live in the age of oil. This age
started around 1900 when it took 1 barrel of
oil to extract 100 barrels. Now 1 barrel only
extracts 7 barrels! The Energy Return on
Investment of Energy (EROIE) has fallen from
100:1 to 7:1. Prices fluctuate due to
demand/supply but the trend is generally up
due to geological constraints!
We feel the shudders of oil price rises and
falls throughout our economy, and when
they happen vigorously as in the 1973 OPEC
oil crisis they can have an enormous impact
on our daily energy needs. This is because all
other energy sources are extracted or
ultimately built and deployed using oil energy.
Source EIA, USA – Crude Oil First Purchase Price
https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=F000000__3&f=A
*However within this we can also see the OPEC oil crisis of 1973, the
1991 Gulf War, the stagnation of the Japanese economy which led to
a fall in oil prices in 1998, the growth of the Chinese and Indian
economies from 2002 onwards, until the global economic crash of
2008, followed by the fluctuations in oil prices as Saudi Arabia began
to compete with Iran, following the lifting of sanctions.
By graphing the data from the EIA and adding an exponential trend line we can clearly
see that y=e 0.0681x which means a rise of 1.07 or 7% per year. i.e. doubling every
decade.*
Crude Oil first purchase
price $/barrel

5. Long-Term Historical Trends
(c) Perimetr Films John Clarkson (2017)
CAN WE BASE OUR ESTIMATED AVERAGE ANNUAL PRICE RISE ON HISTORICAL DATA?
Basing our rate rise using historical trends
assumes the patterns of history will continue.
The evidence for this that once a pattern is
established it tends to continue for a long
time.
The counter-evidence to this is that the future
is largely unknown. We never know what is
going to happen to change the price of oil.
However, over history, we do know that
despite events like the OPEC oil shock of 1973,
prices of energy have tended to rise.
Source: EIA

6. Forecasting using Nominal or Real Prices
(c) Perimetr Films John Clarkson (2017)
Should we use Nominal Vs Real Price Energy rate rises?
Nominal prices (called current prices) measure
the value at the time of production; whereas
real prices are adjusted for general
inflation/deflation.
The Real Price of Gas equals the Nominal Price
divided by the CPI (the Consumer Price Index).
Real prices are used by governments for
economic measures such as Gross Domestic
Product and assessments of personal incomes.
They help governments work out if their fiscal
policies are working to control inflation and
stimulate economic growth.
However, because CPI is calculated against a
particular index base they tend to mask what
customers experience!
Year Nominal
Gas Price $
CPI Real Gas Price $
1978 0.663 0.652 1.017
1979 0.901 0.726 1.241
1980 1.269 0.824 1.540
1981 1.391 0.909 1.530
1982 1.309 0.965 1.357
Question: What happens to the real
price of gas if the nominal price of gas
stayed roughly the same, but the CPI
rises?
What does this tell you?

7. Forecasting using historical data
(c) Perimetr Films John Clarkson (2017)
Source: US Energy Information
Administration (EIA)
(2.2% pa rise using
Nominal data)
Real prices are unsuitable for our purposes as they are too dependent on inflation
rates. We should therefore only use nominal prices. Here we can see that by putting a
trend line in EXCEL on nominal prices, there has been a 2.2% per year rise in
electricity prices. You could use this figure for electricity price rises over the next 20
years.

8. Forecasting using historical data
(c) Perimetr Films John Clarkson (2017)
Leaving historical trends, let us look at forecasting. To forecast price rises we need to
know how grid energy is generated. When demand increases for electricity in the
United States of America, the generator companies generate more energy from their
power plants in the following order:-
1. Hydro-electric (8%) 2. Nuclear power stations
(20%)
3. Coal Power stations
(50%)
4. Natural Gas powered
stations (20%)
The generators do this order because the cheapest
comes first, the most expensive last. Thus the
MARGINAL PRICE of electricity is the price that ALL
generators get paid based on the cost of natural gas.
Electricity price rises are well correlated to natural gas
prices due to this fact.

9. Forecasting the Future
(c) Perimetr Films John Clarkson (2017)
The forecast here shows that
natural gas in the USA will rise
in price.
2030 – 2018 = 12 years
2030: 10 c/mmbtu
2018: 7.5 c/mmbtu
(10 – 7.5) / 7.5 = 0.33 /12 =
2.7% per year rise
You could use this figure as
the probable rise in residential
and business electricity prices
over the next 20 years.
US Natural Gas Prices as a
correlation for Electricity prices

10. Summary – how to chose energy rate rises
(c) Perimetr Films John Clarkson (2017)
Summary
In our example we have to choose between 2.2% and 2.7% for estimating the energy
savings your micro-renewable system will save by your customer not using grid energy,
when it is functioning.
1. Research historical
energy type price inflation
2. Obtain a long-term
trend by analysing the
Nominal price data
1. Research the fuel. Is its
price correlated to a
primary energy like
natural gas?
2. Consult research into
the fuel type or its
correlated fuel type and
analyse the data
Decide which is better:
the historical trend or
the forecast? Which is
more likely given what
you know?
To summarise the methods shown here can be applied to any fuel type. They are not the
only methods. As long as you justify why you chose the rate rise and put this into the
notes, so the customer knows your reasoning, your forecast should be fine.
Historical Method
Forecasting Method