Navigant Research Blog

The Problem With Pay as You Go

— April 7, 2013

A “pay as you go” strategy for critical infrastructure, such as power supply – wherein infrastructure is financed incrementally, during the construction process – could make sense when applied to small remote microgrids supplying small solar systems in the developing world.   End-users in these countries often earn subsistence wages and need only enough juice for lights, computers, and cell phones.

When applied to nuclear power, though, the pay as you go concept dramatically increases the risks to end-users.   Just ask residents of Florida, where ratepayers are discovering that utilities can actually make more money – and consumers pay more for electricity – the longer it takes to build nuclear power stations.  The culprit is something called “construction work in progress,” or CWIP.

The Nuclear Energy Institute (NEI) has made a convincing argument that CWIP should actually save consumers money.  By collecting funds from ratepayers in advance of actual power production, sudden rate shocks can be avoided.  Financing costs for such large infrastructure projects can be reduced under CWIP, since investors have more certainty that debts will be paid off.  Since the investment ratings of utilities are protected, borrowing costs also shrink.

In the case of a proposed nuclear reactor by Progress Energy in Levy County, Florida, NEI estimated that CWIP program financing would save consumers $13 billion over the life of these nuclear reactors.  When Florida passed a bill in 2009 authorizing CWIP, it sailed through the state legislature with only a single dissenting vote.

After 6 years of CWIP financing, residential customer bills in Florida are projected to increase by $50 a month this year, even before the nuclear reactors generate a single kilowatt-hour of electricity.  Progress Energy originally estimated that building the two unit reactors would cost $5 billion and would be generating carbon-free power by 2016.  Instead, the construction costs have ballooned to $22.4 billion, and the plant – if ever completed – will not be generating power until 2021.

Ironically, this revised price tag and construction schedule mean that Progress Energy will generate more – not less – revenue the longer it takes to build the nuclear reactor.  If the project were cancelled today, the utility would still walk away with $150 million in profit.  So far, ratepayers have committed to over $1 billion dollars for a nuclear plant that won’t produce any power  for almost a decade.

If nuclear power could be financed in a way that makes economic sense, then proceeding down that path might make sense.  “Distributed nukes” – which would be deployed at a much smaller scale, reducing large investment risks – could be a better fit for CWIP and provide the form of financial innovation that might lead to a nuclear renaissance.  (Both water and transmission facilities have deployed CWIP with little controversy).  Unfortunately, the experience in Florida is turning former nuclear advocates and supporters of CWIP into skeptics, though the practice still has its defenders.

All eyes are on Florida to see if and when the plug is pulled on CWIP for large-scale nuclear power plants, with Republican state representative Mike Fasano, who voted for the CWIP state legislation in 2009 and supports nuclear power, leading the charge to shift financial risks away from ratepayers and to utility shareholders with new state legislation.


Tipping Point Near for LED Lighting

— April 7, 2013

Like children in the back seat on a road trip, many LED enthusiasts keep asking: “Are we there yet?”  The promise of LED lighting has been clear for a number of years, with high expectations that at some point LEDs will take over a significant share of the lighting market.  But when, exactly, will that point come?

The primary barrier is cost.  LED prices have fallen dramatically in recent years, but the cost premium over traditional lighting technologies can still be significant.  A 14W, standard type A screw-in LED bulb retails for around $20.  That is a huge drop from previous years but still far more than an equivalent incandescent or compact fluorescent bulb.  The comparison is even worse for 4-foot linear tubes, the dominant form of lighting in commercial buildings.  An LED product can sell for $65 or more, while the equivalent fluorescent product is less than $2.

Fortunately for the LED industry, it will not be necessary for LED prices to match those of traditional technologies before wide-scale adoption can take place.  Increasing efficiency and a host of other benefits will make LEDs the clear choice in many applications, as long as the upfront cost can be paid back through electricity savings in a reasonable time.  The real question is not when an LED tube will cost less than $2, but rather when will the payback period fall under 2 years?

The answer, needless to say, is not simple.  Subsidies and rebates in countries around the world are already reducing LED payback periods to a point where the economics are favorable.  The wide range of electricity prices between and within countries also affects the value of electricity savings.  Furthermore, some end uses will become attractive targets for LEDs before others.  Cold storage facilities, for example, are already adopting LED lighting en masse.  In those spaces, low temperatures negatively affect fluorescent performance and other lighting types generate far too much heat, leaving LEDs the clear winner.

Navigant Research has synthesized all of the factors affecting LED adoption in a newly updated report titled Energy Efficient Lighting in Commercial Spaces.  The chart below shows the share of LED lamps used in commercial lighting retrofit projects increasing from only 5% in 2013 to 63% by 2013, while fluorescent and other lighting types quickly fall off.

Share of Lamps in Retrofit Projects by Lamp Type, World Markets: 2013-2021

(Source: Navigant Research)



Research Shows Prepay Pays Off

— April 1, 2013

Although utility prepayment programs are not yet a major market in the United States, which lags behind many other countries that have offered such schemes for decades, Navigant Research has forecast that the North American electric prepaid metering market will grow rapidly over the next several years, expanding at a robust compound annual rate of about 23% from 2013 to 2018.

The Salt River Project (SRP) in Phoenix, Arizona, a prominent trailblazer of prepay, has operated prepaid electric services under the M-Power brand for 20 years. Today, about 126,800 residents are enrolled in SRP’s prepay plan, more than 12% of the residences that it serves.  M-Power customers have consistently demonstrated a high level of customer satisfaction in surveys by the utility, but most noteworthy has been their overall reduction in electricity use: around 12%.  Despite SRP’s results and similar finding by other utilities, establishing a reliable and statistically proven link between prepay and energy usage is still difficult.  However, a recent study led by consulting firm DEFG shows a strong positive correlation between prepayment of energy bills and conservation behavior.

Impressive Savings

Using consumer data from Oklahoma Electric Cooperative (OEC), which launched prepay services in 2006, to compare post-pay and pre-pay customers, the study concludes that participants in prepaid plans on the average reduce their energy usage by 11% (about 1,690 kilowatt-hours per year for an OEC customer) ‑ very similar to SRP’s findings. Compared to other energy efficiency measures ‑ and considering the relatively low cost of implementation, from a utility standpoint, and the ease of adoption for customers (there’s no need to purchase a special energy efficiency device, for instance) – this is an impressive figure.  Since the average monthly bill for OEC’s customers is $146, an 11% energy saving translates into a $192-per-year reduction on the customer’s utility bill.

The energy use reductions can be attributed to several factors, including increased awareness of when and how electricity is consumed.  The study also demonstrates that regular (even daily) communication from the utility to the customer that provides actionable information (usage tied to dollars and cents) changes consumption behavior.

This data provides strong evidence that electric prepayment is a winning proposition for both utilities and consumers, and it should convince more utilities to offer prepay options.  What’s more, according to a recent national survey of 1,000 individuals, 38% said that they were interested in prepaid electric services.  This shift is long overdue.


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