Navigant Research Blog

Microgrid Merger Highlights New Business Models

— May 28, 2013

The market for microgrids is attracting increasing attention from a variety of institutions, ranging from state governments such as New York, which is requiring an islanding functionality for new combined heat and power (CHP) facilities funded by the New York State Energy Research & Development Authority, to the World Bank, which is seeking clarity on new business models that wrap remote microgrids around cell phone towers popping up in Africa, India, and the rest of the developing world.

One of the least noticed, but significant, developments in the microgrid arena for North America, the global hot spot for grid-tied microgrids, is the recent merger between Horizon Energy Group and Green Energy Corporation.  While large players such as General Electric, ABB, Siemens, and Lockheed Martin – just to name a few – tend to grab the headlines, I find the smaller players in the space the most interesting.  Why?  Unburdened by selling legacy systems, they can come to the microgrids controls challenge with a fresh approach.

Shipyard Grid

Both Horizon Energy (including its sister company Horizon Microgrid Solutions) and Green Energy Corporation have been working out a software-as-a-service concept for microgrids, so the merger makes sense.  Furthermore, both companies are committed to an open source controls platform.  Perhaps the most unique differentiator for the new combined company is its application of the power purchase agreement (PPA) model that has fueled the recent boom in solar photovoltaic (PV) systems to microgrids.

The vast majority of microgrids tracked in Navigant Research’s Microgrid Deployment Tracker are either funded by government agencies or academic institutions as R&D projects, or by the asset owners themselves.  The newly expanded Green Energy Corporation will instead serve as an integrator/developer, absorbing any performance risk for the microgrid while taking care of the financing.  The combined company claims in excess of 15 projects on the drawing board, with one 11-megawatt (MW) project in Connecticut under current development that incorporates diesel, CHP, solar PV, small wind, and advanced energy storage, and which will save significant money over the long run.

I had lunch with Steve Pullins, a microgrids guru and the former president of Horizon Energy Group, at an Infocast microgrid conference occurring in Arlington, Virginia on April 29th.  Unlike some firms quickly expanding their portfolios of microgrids by focusing on high value aggregations of existing fossil assets, such as Blue Pillar, his efforts with Horizon have focused on retrofits that green up operations and also rely upon sales of ancillary services to utilities as part of the business model.  Pullins claims the sweet spot for grid-tied microgrids is 2 MW to 40 MW.  Anything smaller, and microgrids don’t really pencil out – unless they focus on renewables.

While it may seem counter intuitive, Pullins claims the lack of maintenance and ongoing fuel risk exposure with diesel generators or natural gas-fired capacity adds uncertainty and cost over the 20- to 25-year life of the microgrid PPA.  With solar or wind and storage, the operating costs are minimized for projects as small as 500 kW.



Davids, Goliaths Collide in the Fuel Cell Industry

— May 28, 2013

The fuel cell industry has seen numerous tie-ups, acquisitions, and investments in the last 6 months.

This industry covers a huge range of applications across the stationary, portable, and transportation sectors, so trying to discern broad industry trends is a bit of a fool’s errand.  Nevertheless, two things jump out about these moves, and they tell two very different stories about the state of fuel cell markets.

One is the strength of the “pure play” fuel cell companies over the large multinationals.  Ballard, Plug Power, and ClearEdge are all focused exclusively on fuel cell technologies, in contrast to UTC and the auto OEMs.  Large companies would seem to be at an advantage in an emerging market because they have the resources to wait for the market to develop.  In my analysis of EV charging equipment vendors, for example, I noted the strength of the large multinationals who are able to wait out the early days of the electric vehicle supply equipment (EVSE) market while demand ramps up.

Pay to Quit Playing

But the pure play companies are rather more, ahem, motivated to find a way to make the market work, and will tend to be more flexible and nimble.   In the case of ClearEdge, you have a very small fish swallowing up the fuel cell assets of a very big fish, UTC Power.  Even odder, United Technologies was so anxious to shed its fuel cell business that UTC actually paid ClearEdge to take it.  It seems that UTC simply lost patience with the slow development of its two target markets, prime power and buses.  (UTC’s bus business thus far is a casualty of this deal, as it does not appear to fit into ClearEdge’s business plan and, to date, there has been no announcement of a buyer.)

One conclusion here is that whether a large conglomerate persists in an emerging market depends on whether it sees the new technology business as complementary to its core business.  In the case of multinationals in the EVSE market, EV charging becomes one more offering in its portfolio, serving its existing customer base.  For UTC, although the company had long-standing expertise in fuel cell technology, executives are increasingly focused on its aerospace, elevator, and cooling products.

The second story is about another group of large multinationals – the automakers.  Practically speaking, it is challenging for a dedicated fuel cell manufacturer to compete in the passenger car market – just look at the troubles that battery vehicle companies have had.  The global auto companies are able to spread their bets among a range of clean technologies.  However, they are finding the pathway to a cost-competitive FCV challenging to navigate.  Thus Daimler’s partnership with Nissan and Ford, which will allow the companies to order components at much higher volume and spread their costs among more vehicles.  Unfortunately, Daimler has also pushed back its commercialization date from 2015 to 2017.  Let’s hope that this deal, along with the Toyota-BMW and Volkswagen ones, does not turn out to be a paper-only partnership that never sees real products introduced.

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Fleet Managers Seek Alternative Fuels

— May 28, 2013

To meet federal, state, and local mandates for alternative drive vehicle adoption and fossil fuel reductions, local fleet managers must find replacements for traditional gasoline-powered vehicles that are both economically and environmentally beneficial.  At the Green Transportation Conference hosted by TransEnergy Solutions recently, it was clear that finding the optimum alternative drive vehicle replacement for any given fleet is not easy.

Advanced technologies for alternative drive vehicles come with a price premium, alternative fuel infrastructure requirements, and the need for driver training programs on how best to operate and refuel the replacement vehicle.  The fuel cost savings of the replacement vehicles have to pay back the aggregated costs of those items in as few as 3 years to make the alternative drive vehicles appealing to fleet buyers.

Adding to the difficulty is the fact that there are many alternative fuels and drive technologies for fleets to choose from.  Technologies featured at the conference included regular hybrids, hydraulic hybrids, compressed natural gas (CNG), liquefied natural gas (LNG), liquefied propane gas (LPG), plug-in electric vehicles (PEVs), and fuel-cell vehicles (FCVs).

Find Your Niche

Choosing the wrong technology for the wrong application can turn potential savings into costs.  For instance, purchasing a light duty hybrid to replace a low-mileage light duty fleet vehicle would not likely pay back the cost of the advanced technology, as hybrid technologies accrue the greatest savings per city-mile driven; the more the vehicle is driven on city roads with stop and go traffic, the quicker it pays back its premium.  Equally economically inefficient is purchasing an LNG-powered medium duty truck for inner-city applications, as the evaporative nature of LNG reduces the fuel economy of the technology considerably when the vehicle is idling.

In other words, each alternative drive technology is best suited for a particular market niche.  LPG is particularly suited for smaller fleets with medium duty vehicles and for school bus fleets, since the infrastructure costs are low.  LNG is best suited for long distance heavy duty trucks whose idling time is minimal.  Hydraulic hybrids produce the best returns for fleet vehicles used for stop and go driving, like shuttle buses, refuse trucks, and mail delivery.  The hydraulic hybrid system works like a spring, compressing hydraulic fluid when braking and releasing when accelerating, capturing 70% to 80% of the accumulated energy.  The hydraulic system provides fuel savings and faster acceleration than diesel or CNG-powered vehicles.

The alternative drive vehicle industry still has a long way to go to convince fleet managers of the benefits of transitioning from gasoline and diesel power.  Though lower greenhouse gas (GHG) emissions are great benefits of alternative drive adoption, educating fleet managers on the options that will give them the greatest financial return is the best way to achieve market growth for all alternative drive technologies.


When in Doubt, Take a Survey

— May 28, 2013

Cecil Adams of The Straight Dope once supposedly wrote, “Around here, we don’t vote on the facts.”  That was before the age of online surveys.  Once again I have in my inbox a request to participate with other executives in a survey of the current sentiment and outlook of the smart grid industry.

When I see these surveys I wonder, “Who really cares what we think?”  The electrons don’t care.  The untrimmed trees under the high voltage lines don’t care.  The hostile nation-state hackers certainly don’t care.  The ratepayers – sorry, I meant to call them customers – don’t care.  And if someone thinks that I am a “smart grid executive,” then I hate to think who else has been identified as an “executive.”

As a market research professional, I admit that I look down my nose at surveys.  They are not primary research, as many losers in last November’s U.S. elections are now aware.  My research involves a lot of time on the telephone, asking questions of key stakeholders in a given research area, then synthesizing diverse responses into one or two theses.  This is rarely straightforward.  One slide from my conference presentation deck asks, “What is the No. 1 cyber security problem facing utilities?”  During one research project I asked 33 people this question and got 28 distinct answers.  It takes three slides to answer what you’d think is a really simple question.

Not Another Monkey

That is what research looks like.  The notion that you can just run another SurveyMonkey to an anonymous audience, arbitrarily designate your audience as executives, and therefore develop conclusions about the industry… just doesn’t sit well with me.

But surveys produce numbers.  Numbers can be analyzed, operated upon, correlated, summarized.  And no matter the source, numbers somehow convey an air of certainty.  Especially if you have a large enough sample size and can claim a statistical error margin of +/- 3%.  That’s just got to be right, doesn’t it?

Not always.  Surveys of sentiment are qualitative.  This particular survey asks questions such as whether my company’s smart grid investment is going to increase, decrease, or stay the same.  Whether the increase is by $100 or by $1 billion, I tick the same box.  There is nothing quantitative going on here.  Yet we often ascribe to survey results the same strength as weather measurements or time signals.

In the spirit of full disclosure, Navigant Research does publish and sell an annual Smart Grid Consumer Survey.  We are open that we are measuring consumer sentiment, nothing more.  And I have used some of the survey results as supporting data for my research.  But I would never draw conclusions solely from anonymous surveys.

For us, research begins with lots of telephone time discussing issues with key stakeholders.  That research continues with our all-star research associates who spend their days tracking down untold quantities of obscure but useful information.  That is how you begin to understand the direction of a market.


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