Navigant Research Blog

Russia-China Gas Deal Narrows Window for U.S. Exports

— May 30, 2014

Russia and China’s grand bargain on energy, a 30-year, $400 billion deal to pipe natural gas from Russia’s Far East to China, has prompted much commentary on the agreement’s potential to reshape global energy markets and tilt the balance of influence in Ukraine and, more broadly, in Europe.  The deal has “upped the ante for Europeans to diversify their gas imports away from Russia,” said Erica Downs of the Brookings Institution; it means producers of liquefied natural gas (LNG) “may face more competitive markets in Japan and South Korea, which together bought more than half of the world’s supply in 2013,” wrote Chou Hui Hong, a Singapore-based reporter for Bloomberg News; “the implications are potentially huge for Russia, for China and much of Asia, and also for Europe,” declared Keith Johnson, covering all the bases in Foreign Policy.

All the bases, that is, except one: the United States.  The shale gas revolution in the States has led natural gas producers to envision an export boom in which U.S. companies become key suppliers to East Asia while countering Russian influence by shipping large amounts of LNG to Europe.  President Obama said in 2012 that the U.S. is becoming “the Saudia Arabia of natural gas.”

Better Hurry

Indeed, U.S. petroleum exports reached 3.5 million barrels a day in 2013, roughly double the level of 5 years ago, according to the Energy Information Administration.  Proponents of increased LNG exports argue that the gas export boom will bring in billions in profits for American companies, create thousands of high-paying jobs, and reduce the influence of undesirable LNG suppliers, i.e., Vladimir Putin’s Russia.

All of that is, potentially, true.  But there are signals that, even before the Russo-Chinese gas deal, natural gas advocates were overstating the potential market.  And with China building pipelines to ship LNG across Central Asia, the market opportunity is dwindling fast.

The United States has been slow off the mark in building export capacity.  Thirty-one applications for LNG export licenses have been approved since 2011; only seven have been approved, six conditionally.

In 2012, on assignment for Fortune, I visited the Sabine Pass natural gas terminal on Texas’ Gulf Coast.  Built by Cheniere Energy in the 2000s as an import facility, the port had been retooled to load LNG on big tankers for export to Europe and Asia.  Cheniere is the only producer that has won full DOE approval to export gas; and the window for an export boom may already be closing.

The Shrinking Spread

U.S. supremacy in international gas markets depends largely on the wide spread between the cost of producing natural gas in this country and the prices that countries like Japan, South Korea, and Germany are accustomed to paying.  As Karim Rahemtulla, the chief investment strategist at Oil & Energy Daily, points out, that spread narrows rapidly once you liquefy the gas and ship it, via tanker, overseas.

Competition in the international gas markets is bound to heat up, and the United States may have already missed its opportunity for an LNG export bonanza.  Expanding pipelines, more export terminals, and better technology for liquefying and shipping natural gas will all help globalize the natural market, in the way the crude oil market is already globalized.  Already, the relatively low price that China will pay for Russian gas (around $350 per thousand cubic meters, analysts estimate) is putting downward pressure on higher prices for Japan and South Korea.

Earlier this month Dominion Resources won approval from the U.S. Federal Energy Regulatory Commission to build an LNG export facility at Cove Point on Maryland’s Chesapeake Bay.  The company said the $3.8 billion terminal could begin shipping gas as early as 2017.

That could be too late.

 

Virtual Power Plants Harness the Power of the Energy Cloud

— May 29, 2014

Among the elements of the emerging energy cloud – i.e., the assembly of dynamic networks that can enhance the efficient allocation of distributed energy resources (DER) benefits across a broad customer base – virtual power plants (VPPs) are among the most powerful and flexible.  Enabling power providers to take advantage of economies of scale through aggregation and optimization, VPPs maximize the value of electrons flowing across the system.  Schneider Electric, which is among the long list of companies exploring the VPP opportunity, , likes to use the analogy of Amazon when discussing VPPs: while the store may be virtual, the assets delivered, whether books or CDs or electricity, are real.

The primary goal of a VPP is to achieve the greatest possible profit for asset owners while at the same time maintaining the proper balance of the electricity grid.

Navigant Research’s new analysis, which tracks spending on software networking products and services for VPPs, forecasts that the market will grow from just over $1 billion in annual revenue in 2014 to more than $5.3 billion by 2023.

Total VPP Vendor Annual Revenues, Base Scenario, World Markets: 2014-2023

 

(Source: Navigant Research)

Unifying the Cloud

Vendors such as Ventyx, a subsidiary of ABB, now offer asset performance software for managing assets, operations as well as smart grid analytics as a cloud-based software-as-a-service (SaaS) – the ultimate virtualization of our energy services.  Today, virtually every major regional power grid in the United States relies on Ventyx’s software analytics to manage complexity at the transmission level.  Yet the company is moving away from customized software solutions to a more standardized, unified smart grid architecture that reaches down to the retail customer level.

In May, Ventyx announced that it will roll out some of its product offerings via Microsoft’s Azure cloud platform.  Asset Health, the predictive analytics component of Ventyx Asset Performance Management, is already available as SaaS on the Ventyx website.  It’s offered under a single quarterly subscription fee, delivered via Azure and accessed from the customer premises using the Internet.  Its cloud-based demand response management system service, developed in collaboration with Deutsche Telekom, has also been commercialized at the T-City project in Friedrichshafen, Germany.  Additional Ventyx Asset Performance Management applications will be available in the cloud over the coming months.

This move is significant for the growth of VPPs because it will enable electric utilities and power generation companies to invest in smart grid functionality without costly investments in IT infrastructure, workforce, and ongoing maintenance.  According to Ventyx, the cloud model is also highly configurable, highly secure, and highly scalable.

Navigant Research’s webinar, “The Energy Cloud,” will explore VPPs and other elements of this emerging distributed architecture, on June 3rd at 2 p.m. ET.  Click here to register.

Taylor Embury contributed to this blog.

 

U.S. Wind Market Buffeted by Boom-Bust Cycles

— May 28, 2014

The wind energy market in the United States operates in a boom and bust environment that, this year, once again, highlights the absurdity of U.S. policies around clean energy – or the lack thereof.  The Production Tax Credit (PTC) and its accompanying Investment Tax Credit (ITC) are the central pillars of government support for the U.S. wind market.  The PTC provides $0.23/kWh for 10 years from project commissioning, while the ITC provides a roughly equivalent cash grant.  Both credits are worth approximately 30% of the full installed cost of a wind plant, although the PTC is more valuable in areas of high wind speed (more kilowatt-hours relative to installed cost).

Both of these incentives are currently expired.  And yet, the wind industry is booming, with as much as 13 GW in various stages of construction in over 20 states and over 95 projects.  This is the result of the PTC being enacted on January 1, 2013, for 1 year.  Special safe harbor guidance from the Internal Revenue Service (IRS) allows for wind plants that began construction during the enacted PTC to qualify, as long as developers either began construction in 2013 – the physical work test – or spent at least 5% of the project capital costs.  Projects that went either route then have 2 years to come online in order to qualify for the PTC or ITC.

Time Running Short

In an ideal scenario, the 13 GW of construction reportedly underway may come online by the end of the 2-year window ending December 31, 2015.  Navigant Research forecasts around 12 GW of the 13 GW will come online, roughly split between 2014 and 2015.  A few items of uncertainty around this build cycle are in play.  Around 9 GW of power purchase agreements (PPAs) were signed during 2013 and through 1Q 2014.  PPAs, in almost all cases, are essential for wind plants in the United States to secure financing.  That’s not to say a further 3 GW to 4 GW of PPAs cannot be signed for this build cycle, but time is running out.

Time is also running out for turbine purchases, with top executives of major turbine vendors saying that only a few months remain to secure turbines for end-2015 installation.  They also worry that many developers that started construction, but did not put down payments on turbines by the end of 2013, may ultimately not secure PPAs, turbines, financing, or qualify under the IRS safe harbor stipulations during this build cycle.

Start Up, Again

Would that be a disaster?  Not necessarily.  If just over 9 GW is commissioned between 2014 and 2015, that still represents a healthy baseline of wind installation.  But it shows again the inefficiency of the U.S. system of stop-start development cycles, driven by the federal government’s inability to provide the wind industry long-term stability.  Most tax and other subsidy incentives for the fossil fuel sectors are written into permanent tax law and do not require contentious re-authorizations from a dysfunctional Congress every 1 or 2 years.

The PTC doesn’t have to exist forever.  Wind is increasingly competitive with new national gas plants in windy areas of the country.  But for now, the PTC needs to be extended to continue wind’s momentum.  In the longer term, the PTC should be reduced in value in exchange for a long-term multiyear phaseout when gas prices have recovered to realistic and sustainable cost levels.  Otherwise, the insane and inefficient boom and bust cycles will continue.

 

Excitement Tempered Around Self-Driving Cars

— May 28, 2014

In recent weeks, Google has been publicly discussing the progress of testing its self-driving cars in more challenging environments.  Most of the original testing was done on California freeways, so the driving was relatively straightforward.  The more recent test routes have included a lot of local driving and urban challenges, like pedestrians and cyclists.  These scenarios have made the company more confident that its technology is getting close to being ready for production.

However, some of the original optimism has been tempered by reality.  In 2012, when the project was first made public, Google’s estimate was that the self-driving car was about 5 years away (2017).  At the time, some technology commentators and the media got very excited about the potential and were forecasting production rollouts would begin well before 2020.  In Navigant Research’s report, Autonomous Vehicles, released in the summer of 2013, we forecast that it would be 2025 before the technology would be ready for public use.  Today, Google estimates the technology will be ready in 6 years (2020).  Our forecast has not changed.

More Maps Please

It’s quite possible that Google will consider its technology ready for commercial launch in 2020, but that doesn’t mean that automotive manufacturers will have satisfied their own testing by that date.  The automakers know that everyone will be watching autonomous technology very closely, and they cannot afford any mishaps.  The testing will have to be very comprehensive.  For example, GM has been testing its own Super Cruise system for 2 years already, and the production launch was recently described as “within the next 5 years.”

But it’s not just the testing that is holding up production release.  The current Google vehicles have a rotating lidar scanner on the roof that not only costs more than the rest of the vehicle combined, but also is visually unacceptable for most, if not all, manufacturers.  The hardware development has a long way to go to be able to achieve the necessary accuracy and blend into the vehicle styling.  The Google system needs a high-resolution scanner and also relies on highly accurate digital maps.  So far, the company has developed detailed maps of lane markings, traffic signs, and signals for about 2,000 miles of road in the United States, mostly around Mountain View in California.  The United States has about 4 million miles of roads.  A lot more digitization will be required for Google’s autonomous vehicles to be used anywhere in the country, never mind all over the world.

Navigant Research believes that self-driving cars will become a reality, but that the technology will be rolled out incrementally over the next 10 to 15 years.  It’s great to see serious progress being made, but we still do not expect any major manufacturers to rush autonomous technology into production before 2025.  More details on this will come out in our updated Autonomous Vehicles report, slated for publication later this summer.

 

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