Navigant Research Blog

In Election’s Wake, California Launches Cap and Trade

— November 27, 2012

Now that the 2012 presidential elections are well behind us, investors and developers with their sights on clean energy technology markets are settling down to figure out the regulatory and policy landscape moving forward into 2013.  As always, California could provide a glimpse of the future for much of the rest of the country.

In the election’s aftermath, the launch of the nation’s first “cap and trade” auction – occurring in California – seems serendipitous.  The auction is one of many programs helping to implementing the state’s 2006 landmark AB 32 law, also known as the Global Warming Solutions Act.  Will this market-based attempt to price carbon become a precursor for the rest of the country, or will it fall flat and give Republicans a political edge in the 2014 midterm elections?

Put another way, given the still fragile state of today’s economy, is now the time to impose a de facto tax on carbon?

If one listens to the California Chamber of Commerce, the answer is no.  Interestingly, the state Chamber actually endorses taking action to respond to climate change.  But this business advocacy group has filed a lawsuit taking issue with provisions of the law that require businesses to divert a portion of auction revenues to fund state programs.  Ironically enough, the California Public Utilities Commission is now proposing that a portion of these same revenues be rebated back to residential consumers, echoing the theories of “cap and dividend” first floated by Peter Barnes in his 2003 book, Who Owns the Sky? Early auction results showed a low carbon price of $10.09 per ton, a result of competing bids that sold out and an auction design that awards allowances on the lowest clearing price.

The results of these policy debates in California may influence the fate of the federal production tax credit (PTC) for wind power, a policy that clearly was caught in the crossfire of election-year politics.  The stop and go nature of policy support for renewables in the United States is costing the nation jobs, as several factories have laid off staff, and the American Wind Energy Association claiming that 37,000 new jobs hang in the balance.

Rumor has it that one “grand bargain” that may appeal across both sides of the aisle might be a longer extension of the current PTC for wind of around $0.02 per kilowatt-hour (3 to 5 years) in exchange for a final sunset on the subsidy (or a decline in the subsidy rate over time).  The rationale is that both wind and solar are now dropping in cost, and therefore “permanent” subsidies should not be necessary.  This may all be wishful thinking, however, as record low natural gas prices have made it more difficult for renewables to compete.  The renewable energy lobby also points out that fossil and nuclear technologies have received government assistance for decades, and could still balk at such compromises.

In any case, the election results, and the launch of the nation’s most advanced carbon reduction market, will likely prove to be fertile ground for new policy reform next spring.  And California’s cap and trade program could reveal some populist twists that will influence decisions made in Washington, D.C.


Looking for Future Growth, Itron Names New CEO

— November 20, 2012

U.S.-based metering giant Itron has named a new president and CEO from within its own ranks, tapping veteran Philip Mezey, who’ll take control starting Jan. 1, 2013.  Mezey will guide a company seeking to expand on its recent successes in the North American market, while also looking at new overseas opportunities to leverage its prowess.  Mezey is currently president and chief operating officer (COO) of Itron’s global energy segment, a post he assumed in March 2011.

In his initial comments, Mezey said the company’s “most exciting opportunities are bringing the integrated work that we’ve done in North America – metering, communications, software and services – these large engagements; … What we are starting to see, of course, emerge are opportunities, and you’ve heard about South Africa, we’ve talked about Japan, but there are a number of other markets in which this kind of integrated solution, and sometimes with partners as well, I think are going to be the most exciting growth opportunities for the company.”  Though he did not specifically name some of those other markets, they are likely to include Europe, Latin America, and countries in Asia Pacific beyond Japan, where utilities in coming years are expected to upgrade to smarter meters and more advanced infrastructure.

Mezey also said his focus will be on helping shape “market-moving deals that open up new markets and build our backlog.”  Another Itron veteran, John Holleran, will become executive vice president and chief operating officer (COO) of the company’s global Energy and Water segments.

Mezey has a background in enterprise software: he first joined Itron in 2003, when it acquired Silicon Energy, where Mezey was vice president of software development.

Mezey’s appointment does not come as a big surprise since he takes over from current CEO LeRoy Nosbaum, who is retiring from that position for a second time.  Nosbaum came out of retirement a little more than a year ago to help stabilize Itron after it suffered a significant stock decline in the global financial crash.  It seemed clear that his tenure this time would not be a long-term one.  Nosbaum will stay on as an advisor to the company for at least the next six months after Mezey assumes his new role.

The choice of Mezey makes sense for Itron.  He is a respected company leader, with a technical background and a vision of how innovation and partnerships can help keep Itron at the forefront of the market.  He takes over a company that is poised to leverage its North American smart grid experience in other markets that are on the cusp of new growth.  But Itron faces stiff competition, particularly in Europe where large-scale meter deployments are taking place (in the United Kingdom and Spain in particular), and where vendors like Landis+Gyr, Elster and General Electric are formidable players.  It may be that Asia Pacific markets become more fertile ground for Itron, especially in light of its recently announced strategic partnership with Panasonic to develop a smart meter platform aimed at the Japanese market.  And in water metering, Itron has already established a beachhead in India, where it’s supplying 250,000 meters to the Delhi water system.  Foreign markets can be quite volatile, with few guarantees; but odds are good that Itron has the right team of people and assets to remain a long-term market force.


With C-Max Energi, Ford Aims for Prius-Level Success

— November 19, 2012

Ford executives who have watched Toyota sell hybrids by the boatload clearly put their Prius-envy to work when designing the C-Max Energi.  At a press event on November 13, Ford took every opportunity to compare its newly launched plug-in hybrid electric vehicle with Toyota’s hot-selling plug-in hybrid, the Prius.

Though it may look larger from the outside, the C-Max Energi is comparable in size to the Prius – a few inches taller and wider, but a few inches shorter and with slightly less cargo space.  It also has higher MPG, a longer total driving distance, and nearly double the all-electric range (21 miles).

Ford executives emphasized that the C-Max Energi, at $29,995, costs less after the federal tax credit than both the Chevrolet Volt, which has been leading all PHEVs in monthly sales in the United States, and the Prius PHEV.  They added that after the California rebate, the C-Max Energi only costs $1,000 more than a C-Max Hybrid with the similar package and trim level.

If my experience during an 80 mile test drive through San Francisco and lovely Marin County is any indication, the C-Max Energi’s performance will attract many customers who put driving pleasure high on their priority list.  It feels much more substantial and peppier than the smaller plug-in vehicles I’ve driven, and while it’s not quite a Tesla Roadster, it’s a comparable driving experience to the Volt.  The car has three settings for the amount of battery power provided: auto (the car decides what is best), EV Now, and EV Later.  The EV Now mode may not be available depending on how full the battery is.  During my test drive, I achieved 73.6 MPG despite going up and down a number of hills, which is remarkable for a vehicle of this size.

Ford is hoping to control its vehicle production cost by using the same hybrid equipment on both the Energi and the hybrid C-Max, with the exception of the much larger battery pack in the plug-in model.  Ford says the company expects to sell around 3 times as many hybrids as Energis, and that the company is tripling its overall production of hybrid and plug-in vehicles for 2013.

Ford is continuing to work with Microsoft and utilities to enable consumers to “value charge” their vehicles by specifying only charging the battery pack when electricity rates are lower.  Ford’s Mike Tinskey said that the company has pricing data from more than 800 of the largest utilities, which represents 80 percent of the U.S. population.  While utility “time of use” pricing may change the behaviors of owners of Ford’s Focus battery electric vehicle, which has enough battery to meet drivers’ daily needs and can be fully charged overnight, Energi drivers will likely want to keep the batteries topped off whenever possible to avoid paying for gas.  Utilities face a significant challenge because as long as the cost of driving electric is cheaper than gasoline (it can be 25 percent of the cost or less), drivers will plug-in whenever they can if they plan on using the car during the day.

Ford’s decision to develop its hybrid, PHEV and BEV platforms simultaneously will likely garner the company the largest share of plug-in electric vehicle sales in the U.S. starting in 2014, according to Pike Research’s 2012 Plug-In Electric Vehicle Report.


In Obama’s Second Term, Hopes For a Meaningful Climate Change Policy

— November 19, 2012

In the wake of super-storm Sandy and President Obama’s re-election, the subject of climate change and even the term “global warming” are back on the table, if not fully on the political agenda.  Speculation as to whether the United States will finally adopt a national climate policy abounds in the media.  During his acceptance speech, Obama proclaimed: “We want our children to live in an America that isn’t burdened by debt, that isn’t weakened by inequality, that isn’t threatened by the destructive power of a warming planet.”

The possibilities range from extracting natural gas through hydraulic fracturing or “fracking” without causing environmental harm, to cementing the EPA’s role in regulating carbon emissions from new power plants, to stricter federal oversight of deep-water oil exploration and production, to a final decision about the Keystone XL oil pipeline, and even to a carbon tax as part of tax code reform.  Given the mounting federal deficit, the possibility of a cap and trade policy is not to be easily dismissed: a new report from the Congressional Research Service (CRS) cites one study that claims that a modest carbon tax of $20 per metric ton would generate approximately $88 billion in 2012, rising by 64% to $144 billion by 2020.

Pressure Mounts

Yet the general consensus is that carbon tax won’t be enacted, though there will most likely be a significant debate about various alternatives.  At least, the subject is no longer taboo.  The day after the election, Senate Majority Leader Harry Reid (D-NV) expressed his expectation that Congress would make progress on climate change action.  “Climate change is an extremely important issue for me and I hope we can address it reasonably,” Reid continued “… as we’ve seen with these storms that are overwhelming our country and the world, we need to do something about it.”

Despite the renewed hopes that the United States will finally take meaningful climate change action, it will undoubtedly be an uphill battle for the White House.  Opposition to any form of climate change initiative that might affect U.S. businesses has not wavered in the GOP-controlled House, and a number of Democrats from oil-producing states have joined Republicans in opposing climate legislation.  Instead, it’s more likely that lawmakers will push for less controversial proposals, such as expanding green energy and energy-efficiency programs to help reduce carbon emissions.

Although the prospect for any major change on climate policy on Capitol Hill looks slim, it’s not hopeless.  With no re-election worries, Obama should be free to tackle environmental issues in his second term. Yet, when asked about climate change at a November 14 press conference, he endorsed taking action to mitigate carbon emissions, especially if it would create more jobs, but provided no details.  Moreover, international pressure is mounting, as the second Kyoto Protocol (Kyoto 2) is under consideration.  In this new round of the Kyoto Protocol, nations are asked to commit to a target of 5% reduction of carbon emissions between 2000 and 2020.  While Australia has joined the European Union and smaller economies by announcing its commitment to this goal, the United States, together with China – the two highest emitters of greenhouse gases – have merely signed a non-binding pledge and are working toward a new agreement that will not take effect until 2020.  One wonders how many natural disasters it will take before all nations face the facts and take action.


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