Navigant Research Blog

Proposed Bill Would Revive U.S. Rare Earths Industry

— February 28, 2014

Attempting to solve two energy security crises at a single stroke, Missouri senator Roy Blunt in early February introduced the National Refining Cooperative Act of 2014 (NRECA), which would create a federally chartered corporation to build and operate a processing facility for rare earth elements.  Used in a variety of cleantech, defense, and telecommunications technologies, rare earths have become increasingly valuable over the last decade even as producers in China have established an effective world monopoly on their production.

Until the early 2000s, the United States was the world’s leading supplier of lanthanides, scandium, yttrium, and other rare earths, and the Mountain Pass mine on the border of Nevada and California was the world’s largest producer of the minerals.  Dogged by environmental issues and flat world prices, the Mountain Pass mine shut down in 2002, and rare earths production in the United States evaporated.  As I reported in Fortune in 2011, a Denver-based company called Molycorp has restarted Mountain Pass and is attempting to carve out a place as a significant producer of rare earths.  However, China still controls 95% of the market and has demonstrated its willingness to curtail exports in order to control the world’s supply.

Critical Elements

“We are here to state the importance of the need to bring back the rare earth industry to the U.S. to protect and grow jobs as well as to control our own sources of rare earths that are so important to green technologies, aerospace, and defense, and energy-efficient motors and generators,” testified Robert Strahs, the VP and general manager of Arnold Magnetic Technologies, before a U.S. House Committee on Foreign Affairs hearing in 2011.

Backing NRECA is a loose coalition of developers, miners, and alternative energy activists, including the Thorium Energy Alliance, which for the last 5 years has been promoting the development of nuclear reactors that use thorium, a radioactive element, rather than uranium.  As I documented in my 2012 book SuperFuel, thorium is cleaner, safer, and more abundant than uranium and is effectively impossible to fashion into explosives.  It’s also nearly always found in association with rare earths.  NRECA would create a private corporation that would store the thorium left over from rare earths production and formulate and market it for commercial uses, including energy generation.

Thorium is almost ubiquitous in the Earth’s surface, and the United States possesses enough readily available thorium to produce ample electricity for hundreds of years.  Scientists at Oak Ridge National Laboratory in Tennessee pioneered thorium reactor research in the 1960s, but the program was abandoned under the Nixon Administration.  Other countries are moving forward.  The Indian Atomic Energy Commission recently debuted the prototype of the advanced heavy water reactor (AHWR), which is designed to run on solid thorium fuel.  The AHWR is being developed at the Bhabha Atomic Research Centre, outside Mumbai, which has become one of the world’s centers of thorium reactor research.

The Refining Cooperative bill is designed to end China’s monopoly on strategically important rare earth elements and to provide a consistent supply of thorium to fuel low-risk, zero-carbon nuclear power for generations.  Nevertheless, NRECA’s backers have faced a multiyear uphill struggle just to get the bill introduced.  The current bill, introduced in the Senate, could be matched in coming weeks with a similar piece of legislation introduced in the House as part of the 2014 National Defense Authorization Act, the annual budget bill for the Department of Defense.

“We have strong bipartisan support in the House and on the Senate Armed Services Committee,” Jim Kennedy, a Missouri developer and one of the bill’s leading proponents, told me.

They’ll need it.


Six Questions Regarding Tesla’s Gigafactory

— February 27, 2014

This week, Tesla revealed the first details about its plan to build an enormous battery factory to provide cells for its future electric vehicles.  Among the revelations: the factory will be powered primarily by its own solar and wind power parks; it will produce more than 50 gigawatt-hours (GWh) of battery packs a year; and it will cost $6 billion to build.  To kick things off, Tesla also filed to sell $1.6 billion worth of convertible bonds today.

While these are intriguing details, there’s still a lot to determine about what this factory will actually look like.  Here are my questions about the Gigafactory:

Why isn’t California one of the states being considered for the plant?  The company named Nevada, New Mexico, Arizona, and Texas as potential host sites.  To build the batteries in a different state and then ship them to California, even by rail, will add considerable cost to the batteries.  Why not locate the factory at or near the company’s vehicle assembly plant in Fremont, California? My guess is that environmental regulations for such an enormous factory are one negative factor weighing against California.  That leads to a second question: Where will the cars be built?  The batteries coming from this factory will be going into Tesla’s next-gen passenger car, not the Model S or Model X.  That means that a car factory could also come along with the battery plant.

How much wind and solar will be needed to supply power to the plant? A battery factory making 50 GWh of batteries will require enormous amounts of electricity – some for the actual making of the batteries and some for the initial charging of the batteries that is the last step in the manufacturing process.  This could require as much as 1 GW of renewable energy projects.  Is the price of those installations factored into the stated $6 billion cost of the factory?

Where will the extra 15 GWh of batteries come from? In the slides that Tesla distributed, the manufacturing capacity of cells was stated as being 35 GWh.  But the manufacturing capacity of packs was stated as being 50 GWh.  So where will the extra 15 GWh of cells come from?  From other battery company factories throughout the world? From more Gigafactories?

Why is this factory so cheap? $6 billion doesn’t sound very cheap.  But it actually pencils out to a little more than two-thirds the cost, on a per GWh basis, of other large battery factories.  Clearly, the large scale of the factory will make equipment purchases cheaper.  Nevertheless, the estimated cost of the factory seems extremely low and brings into question whether Tesla and its battery partners have some new manufacturing innovations up their sleeves.

Why wasn’t Panasonic mentioned in the news release? Most observers assume that Tesla will build the factory with Panasonic, which makes all the cells for the Model S and the upcoming Model X.  However, the news release only stated that the car company’s “manufacturing partners” will help finance and build the factory.  Is it possible that another battery supplier is inserting itself in between Panasonic and Tesla?

How much will the cells cost once the factory is up to scale? Tesla CEO Elon Musk has stated in the past that Tesla buys its cells for between $200 and $300 per kilowatt-hour (kWh).  The slides distributed with the Gigafactory announcement claim that the facility will be able to cut the costs of the battery packs by 30%.  But how much of that comes out of cell costs versus price cuts in the other equipment in the pack?  Does this get Tesla down to $175 per kWh? To $100 per kWh?

There’s no denying that this is a bold venture.  If the company manages to follow through on these plans, it will construct the biggest factory in the world (not just for batteries, but for anything).  And it will yet again echo Henry Ford’s spirit with a 21st century version of the original megafactory, the River Rouge complex.


Like Telecoms, Utilities Must Adapt or Perish

— February 25, 2014

I’ve read many articles from pundits that suggest the electric utility industry today is facing challenges similar to those the telecom industry faced 20 years ago.  Frequently, commenters vehemently disagree.  From where I’m sitting though – having spent 20 years as a telecom industry analyst – I see key similarities and some important takeaways for utility management teams.

Both industries operate in a critical infrastructure business that Uncle Sam long ago determined would best serve the American public in a regulated monopoly model – one designed to ensure availability of service to all, at a reasonable price, while allowing a fair return on investment to the utility/telecom.  Massive networks were built across the country and the farmer in Middleofnowhere, Iowa didn’t have to pay an order of magnitude more for his kilowatt-hours or voice minutes than the customer in downtown Des Moines.  Both businesses are subject to federal and state level oversight, and both have been deregulated in the last couple of decades.

Solar = Cellular

Both have also seen emergent technologies threaten their business model.  However, while electric utilities are still in the early days of grappling with the demands of distributed generation (mostly solar) and electric vehicles, the once-dominant landline telephone companies have struggled for years to reinvent themselves.  Today, wireless connections account for more than 80% of the voice market (ignoring VoIP, more on that below).

Telecom Providers: Then and Now

Telecom Providers Then and Now 2-20-14

(Sources: Navigant Research, Securities and Exchange Commission, AT&T, and Verizon)

The irony?  Incumbent telecoms were given wireless spectrum for free in the early days of cellular.  A lot of telecoms sold off their wireless divisions, plowing that money into their landline networks.  Still, as recently as 10 years ago, telecom valuations were strong and the deal market was hot.  Even as the Verizons of the world began selling off their regulated access lines to (later bankrupt) buyers like FairPoint Communications and Hawaiian Telcom, many companies firmly believed that cellular would never overtake the ubiquitous, five-9’s service provided by POTS – Plain Old Telephone Service.

Today, wireless spectrum is worth billions; Verizon is paying Vodafone $120 billion for the 45% of Verizon Wireless that it doesn’t already own.  Meanwhile, telecoms like CenturyLink, which acquired the former Qwest in 2011, have seen their share prices fall as much as 20% in the last year.  CenturyLink, which sold its wireless division to Alltel in 2002, has focused on broadband, data/business services, and fiber.  And guess what?  Broadband and business services are going wireless too.

The point is, old school technology companies need to embrace the disruptors, not fight them – especially not via lawyers and regulatory restrictions, which is what electric utilities seem to be trying when it comes to the solar industry.  In the end, technology advances get cheaper and better, and consumers change their behavior and their spending habits.  As detailed in Navigant Research’s report, Solar PV Market Forecasts, solar is expected to reach grid parity without subsidies in a few years.

In other words, you’re not going to beat ‘em, so you’d best join ‘em.  In my next blog I’ll describe a few fledgling efforts on the part of electric utilities to enter the solar installation and electric vehicle charging businesses and explain why more should do so.


EnerNOC Drives Demand Response in Europe

— February 25, 2014

EnerNOC, one of the largest demand response (DR) integrators and service providers in the world, made two big acquisitions last week that deepen its strategy for expansion into new markets.  The first was the acquisition of Entelios, the main DR integrator in the nascent DR market in Germany.  The second was the purchase of Activation Energy, the leading provider of DR software and services in Ireland.  Although financial terms were not disclosed, EnerNOC CEO Tim Healy stated on the company’s most recent earnings call that the company spent $30 million on business development-related activities.  With these additions, EnerNOC establishes itself as the main player in these respective country markets, thereby dramatically altering the competitive landscape for DR in Europe.

The European market for DR lags far behind the United States in terms of capacity and revenue.  The main reason is a regulatory landscape that lacks the scope and diversity of the market in the United States, where independent system operators (ISOs) have created robust DR markets.  However, the need for new resources to help manage the grid are just as pressing as countries like Germany continue to add renewable energy and the intermittency created by solar and wind creates more demand for balancing resources.  As a result, there remains significant untapped potential, which EnerNOC and other players in Europe are working to unlock.

Barriers Broken

However, the European electricity grid contrasts dramatically with that of the United States, making it difficult to export some practices and technologies across the pond.  Whereas much of the DR market in the United States is focused on reducing summer peaks created by air conditioning demand, one of the drivers for demand response in Europe – particularly the large markets in Northern Europe, where air conditioning capacity is limited – is winter peaks due to high heating demand.  And, long-term projects such as the European supergrid would further open up a diversity of opportunities for flexible assets to provide benefits to the electricity system overall.  These differences make it all the more critical for a player like EnerNOC to enter the market via acquisition of players that have sifted through the technological and regulatory barriers to create viable DR markets, rather than trying to build a business from scratch.

EnerNOC already maintained a presence in the European DR sector, primarily in the United Kingdom, Europe’s most advanced DR market.  Other firms, such as London-based KiWi Power, are already active in that market, whereas other country markets are still in the more tumultuous early stages, allowing outside players such as EnerNOC to enter.  As DR becomes a higher-demand grid service in Europe, we expect to see the competitive landscape heat up with further merger and acquisition activity.


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