Navigant Research Blog

Climate Plan Promises Brighter Future for U.S. CHP Market

— June 28, 2013

President Obama’s climate change speech this past week signaled a revamped effort by the Administration to tackle emissions from industrial facilities.   To date, the effort by the Environmental Protection Agency (EPA) to set regulations targeting boiler emissions from new coal plants and industrial facilities has carried the Administration’s climate change torch.   But the President’s speech signaled a willingness to use broad executive authority to clamp down on existing facilities, expanding opportunities for a combined heat and power (CHP) industry that has seen a sharp drop off in new growth from its PURPA heyday.

Achieving greater levels of efficiency by simultaneously generating electricity and useful heat, CHP allows facility owners to reduce their fuel expenses while also cutting emissions.   According to the U.S.  CHP database, maintained by ICF International on behalf of Oak Ridge National Lab (ORNL) and the Department of Energy (DOE), 82 gigawatts (GW) of CHP capacity was installed across the country by mid-2011.  Industrial facilities represented 88% of total capacity, with refineries processing petroleum and manufacturing chemicals accounting for nearly 40 GW.

Although hosting a relatively broad base of CHP deployments across a number of applications, the U.S. CHP industry has room to run as measured against leading markets like Denmark, the Netherlands, and Finland.  Installed CHP capacity accounts for  around 30% of total generation capacity in these countries; CHP represents just 8% of generation capacity in the U.S.

Drumbeat Continues

Presaging Obama’s double-down on climate change, a drumbeat of executive orders and state-level commitments over the past 12 months has renewed interest in exploiting CHP opportunities across the U.S.

In August 2012 Obama issued an executive order that called for 40 GW of new CHP capacity to be deployed in the industrial sector.  Although non-binding, the effort seeks to stimulate $40-$50 billion in new capital investment.  A corollary executive order directs federal facilities to use CHP when life-cycle cost analysis indicates energy-reduction goals will be met.  Meanwhile, a surge in natural gas production, along with the stabilizing of Henry Hub prices – a useful proxy for tracking national movements in the price of NG – is expanding the field of potential viable projects.


In the oil- and gas-rich state of Texas, the CHP industry has thrived despite low electricity rates and narrow spark spreads (the difference between the delivered electricity price and the total cost to generate CHP, and a widely used measure of CHP viability).  The state accounts for 17 GW of installed CHP capacity, or 21% of total U.S.  capacity.  In Texas, home to 5% of the world’s refining capacity – facilities that produce commodity products and have high around-the-clock thermal load demand – efficiency plays a key role in driving profitability.

Recent bills signed into law by Texas Governor Rick Perry supporting CHP technology dovetail with the Obama Administration’s broader climate change agenda.  The bill removes regulatory barriers and improves the business climate for cogeneration facilities in Texas.

For the U.S. as a whole, the transition away from coal-based power generation is opening up opportunities for technologies like CHP to expand power generation capacity while reducing demand-side pressure on the grid.  After annual capacity growth declined 92%, from an average 2,700 MW from 2000 to 2004 to 207 MW a year from 2005 to 2010, the CHP market appears to be responding to positive signals.


California’s Timely Demand Response Roadmap

— June 27, 2013

With the announcement by Southern California Edison that the San Onofre Nuclear Generating Station will be permanently closed, one would think that the California Independent System Operator (CAISO) – responsible for maintaining grid reliability for the world’s ninth-largest economy – would be alarmed.  Not so, according to Steve Berberich, CAISO’s president and CEO.

Berberich points out that CAISO will rely upon flexible capability resources such as demand response (DR), which can offset rising demand for power by timely reductions in loads based upon smart grid technology, to help fill in the gaps.  In fact, DR will be vital to not only replacing the 2,200 MW of the now shuttered San Onofre plant, but to help integrate substantial new renewable energy capacity necessary to meet California’s renewable portfolio standard (RPS), which calls for 33% of the state’s power to be supplied by renewable sources by 2020.

Coincidentally, CAISO released its first draft of its long awaited research roadmap on DR earlier this month.  DR is a lower cost option than adding traditional supplies to the grid, but carries its own set of risks, especially in a market as large and sophisticated as California.  The roadmap lays out a vision for how California can integrate utility DR programs into wholesale markets, reducing the need for relying upon fossil generation to fill in gaps when the sun doesn’t shine and the wind doesn’t blow.

Good Timing

While California has often been seen as a cutting edge leader on energy innovation, the initial failure of the state’s effort to deregulate retail markets that resulted in the infamous rolling blackouts of 2001 has put the state at a disadvantage in pursuing DR.  Consider the following: none of the over 2,300 MW of available load reduction capacity created by state utility reliability and price-responsive programs – different kinds of DR resources – participated in CAISO markets in 2012.  This is in stark contrast with the Pennsylvania-New Jersey-Maryland (PJM) balancing authority, which has significant third-party DR participation, with over 5,463 MW secured in its most recent auction to provide capacity over a 1-year period ending in May 2017.

Of course, many of these DR resources deployed in PJM are backed up by diesel generators, which would not comply with California’s tough air quality regulations, and therefore are not applicable here. But without a deregulated retail market, CAISO is forced to seek alternative means of addressing the most aggressive goals in the country for large- and small-scale renewables (as well as electric vehicles), while also phasing out a fleet of 6,000 MW of natural gas plants that rely upon ocean water for cooling. DR, along with microgrids and virtual power plants (VPPs), will be vital to efforts to reach these lofty goals while also keeping the lights on.

CAISO is seeking stakeholder input because it is not in full control of its own destiny.  Historically, CAISO has relied upon the California Public Utility Commission (CPUC) procurement processes for each of the state’s investor-owned utilities to address the state’s peak demands for electricity.  The planning processes used by the California Energy Commission to estimate energy efficiency gains are also different than the CPUC’s, adding more complexity and uncertainty to the resource adequacy calculations.

Earlier this month I attended the first conference put on by Ventyx, a software pioneer purchased by Swiss industrial giant ABB.  The focus of the conference was on how on the software of Ventyx and the hardware of ABB will help enable IT/OT convergence necessary to translate the hype surrounding the smart grid into near term business value, including integrating DR into markets with high levels of renewable energy.  The organizers probably didn’t think about it in this way, but the timing was ideal, given the San Onofre and CAISO announcements that same week.


Indian EV Market Falling Short

— June 26, 2013

On paper, India has many of the characteristics that would indicate a market where electric vehicles should thrive.  With 1.2 billion inhabitants, the country has several of the world’s most congested and polluted cities (Bangalore, New Delhi, Mumbai, etc.)  as well as a low cost of manufacturing labor and many highly educated engineers.

Reality, however, is falling far short of the potential, as fewer light duty plug-in electric vehicles (PEVs) will be sold in 2013 in all of India (less than 2,000) than in the state of Oregon.  Only one domestic PEV, the Mahnidra e20, is currently on sale in India, and international companies have not pursued the Indian market due to the many challenges facing PEVs in the country.

Annual Electrified Vehicle Sales by Vehicle Type, India: 2013-2018


(Source: Navigant Research)

The e2o is the first Indian-made electric car in nearly a decade, and Mahindra plans on adding a second model, an electric version of the Verito sedan, in 2014.  But even if there were more PEVs to choose from, demand would likely be minimal due to the higher cost and lack of EV infrastructure.  The power grid in India is notoriously unstable, with many regions suffering daily power outages, which could potentially strand PEV owners needing to recharge their batteries.

As described in Navigant Research’s new report, Electric Vehicles in India, the supply of PEVs in India could be ignited if the Indian government establishes a multiyear subsidy for electric vehicles to get the cost of PEVs closer to conventional vehicles.  While the government’s National Electric Mobility Mission Plan 2020 promises support for PEVs and charging infrastructure, the government has had a pattern of giving and taking away incentives within the same year, which has made auto manufacturers wary of entering the market.

It’s somewhat understandable that PEVs are not a top spending priority for the Indian government as it is dealing with an economy that is on the verge of slipping into crisis.  However, the weakness of the grid in India could actually be turned into a selling point for PEVs.  Vehicle-to-grid (V2G) technology could enable PEVs to be used to address grid instability, as a car’s battery pack could keep a house running when the power is out. That, however, would require purchasing additional equipment.

The market for hybrids (HEVs) in India isn’t much better, with fewer than 1,800 expected to be sold in India in 2013, also partially due to a lack of available models.  In the short term, selling two-wheeled electric vehicles is clearly the larger opportunity.  As the Navigant report shows, more than 500,000 electric bicycles, scooters and motorcycles will be sold this year in India ‑ a figure that will rise to more than 1.1 million by 2018.


CO2 Emissions in the U.S. on the Rise Again

— June 26, 2013

In his landmark climate change speech on June 25, President Obama noted that “our economy is 60% bigger than it was 20 years ago, while our carbon emissions are roughly back to where they were 20 years ago.”  The United States is the second-largest emitter of CO2 in the world, after China; yet, with the exception of 2010, emissions have declined every year since 2007 – and in 2012, as Obama boasted, they were the lowest in the United States since 1994. The largest drop in emissions in 2012 was due in part to less coal generation and increased power generation from natural gas, which emits half as much COas coal when burned with the same efficiency.  The switch to natural gas by utilities was driven primarily by low natural gas prices, making coal power generators less competitive.


(Source: U.S. Energy Information Administration)

However, carbon emissions from coal-fired plants have increased by over 7% in the first 3 months of 2013 compared to the same period in 2012.  According to the U.S. Energy Information Administration (EIA) the levels are projected to continue to increase, as natural gas prices have begun to go up – to an average of $4.04 per MMBtu in May 2013 – encouraging the use of more coal.  EIA expects that coal-based generation will increase 8.7% over 2012, though it will not reach the peak levels of 5 to 10 years ago.  Even with volatile natural gas prices, many utilities are likely to expand their reliance on gas in the coming years.  For example, Dominion Power plans to significantly expand its use of gas at its Virginia utility – to as much as 40% of its total generation by 2017, from 25% in 2012.

CO2 emissions vary significantly from state to state.  From 2009 to 2010, only 14 states experienced a decrease in emissions as the U.S. economy rebounded, fueling increased energy use in most states.  With respect to energy-related emissions per person by state, Wyoming tallied the most emissions – primarily because of very cold winters – while the state of New York had the lowest per capita CO2 emissions in 2010, according to EIA.  One reason is that a large portion of the state’s population lives in New York City metropolitan area where mass transit is widely used and most residences are multi-family units, providing efficiencies of scale in terms of energy for heating and cooling.  In addition, the New York economy is mainly based on low-energy intensive activities, such as financial services.

U.S. utilities are mitigating the impact of coal-fired power through various energy efficiency measures, including demand response, and by shifting to renewables and natural gas.  Obama’s renewed emphasis on reducing greenhouse gas emissions will help accelerate that process.  Nevertheless, EIA projects that U.S. emissions will increase 2.6% in 2013 and 0.5% in 2014.


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