Navigant Research Blog

With Developer Program, Nest Raises Questions

— June 30, 2014

This week Nest Labs introduced its Nest Developer Program, which integrates smart devices for both home and lifestyle uses.  The results suggest that energy efficiency is going mainstream without most people even knowing it.  This program, which has already enrolled partners such as Mercedes-Benz, Whirlpool, Jawbone (UP24 maker), LIFX, and Logitech, allows communications between smart devices in order to influence and optimize their overall functionality.  For example, the Nest thermostat could receive better information on a homeowner’s sleep/wake cycle, whereabouts, and habits from data transmitted through the UP24 bracelet.  It can then incorporate this information into its intelligent algorithm for determining household heating and cooling patterns.

But that’s only a small part of it.  Nest has already taken a stab at utility-scale demand response (DR) through its Rush Hour Rewards program for climate control, but the program can now enroll other energy-heavy appliances, such as washers and dryers, in the same DR events.  Following device trends in electric vehicle charging, where smart communications are increasingly integrated and relied upon, it’s fair to speculate that this type of developer program has the potential to solve a lot of the problems utilities are currently facing as growing renewables penetration causes instability along the distribution grid.

Privacy Pushback

The potential to optimize energy usage will grow significantly as cloud-based home energy management advances technologically and adds functionality.  But the market is likely to experience setbacks as privacy issues are raised.  Nest and Apple have both created privacy guidelines for data as it is communicated between devices, but protection and control over this information will still be an issue for customers.  As public utilities incorporate software platforms for managing connected devices, it’s unlikely they will be able to avoid the type of pushback (seen here, here, and here) that has hindered the deployment of smart meters.

Another question inherent in this move to a connected life is how the interaction between devices and software will take shape.  Nest and its associated partners have built value propositions off the premium quality of their networked thermostats and the software that controls them.  But competitors like EcoFactor and EnergyHub build value off the ability be flexible in the devices they connect to – asking if premium devices are really all that necessary to realize the same gains.  When you involve multiple customer demographics (with different levels of income and values) and budget-conscious public organizations, different needs and limitations will require different solutions.  There’s no denying that people become emotionally connected to well-made, well-designed hardware – and they will pay a premium for it.  But, as the cellphone industry has shown, there are limitations in terms of hardware development.  So how long will the novelty last for thermostats?

 

Gasification Projects Drive Smart Waste Evolution

— June 27, 2014

As the waste industry slowly evolves toward more integrated solutions for municipal solid waste (MSW) management, increasing volumes of trash are now being handled by so-called smart technologies.  Waste-to-fuels (W2F) – a subsegment within the energy recovery market that converts MSW into finished fuels, like ethanol and jet fuel – has become especially active, with advanced gasification technologies reaching important commercial milestones.

Enerkem, a Canadian company that recently gained first-mover status with the opening of a 10 million gallon per year (MGY) waste-to-methanol plant in Edmonton last month, is the first pure-play W2F project in development to reach the commissioning stage.  The company plans to add an advanced ethanol module later this year.  In April, British Airways and U.S.-based Solena Fuels (which are jointly developing GreenSky London, a 19 MGY facility converting landfill waste into jet fuel, bionaptha, and renewable energy) announced the selection of a site to commence commercial development and commissioning by 2017.

Faced with high capital costs, both projects depend on the low cost and widespread availability of waste as a feedstock to drive initial viability and future expansion.

Landfilling

According to World Bank estimates, nearly 1.5 billion tons of MSW is generated globally each year.  This total is expanding rapidly due to urbanization and rising levels of affluence in developing economies across Asia Pacific and Africa.

While 16% of MSW generated globally is never collected in the first place, and 27% is diverted for either material or energy recovery, more than 50% is still dumped in landfills, according to Navigant Research estimates.  Although there is plenty of trash to go around for higher value applications like W2F, market development depends on tightening regulations driving landfill diversion, since landfilling is typically the lowest-cost solution in areas where waste is actively managed.

In Western Europe, and to a lesser extent, North America, where waste diversion is gaining the most traction, momentum appears to be increasingly on the side of emerging companies like Enerkem and Solena Fuels commercializing breakthrough energy recovery conversion technologies.

Smart Waste

As forecast in Navigant Research’s report, Smart Waste, annual revenue in the smart MSW technology market – of which, energy recovery is a key subsegment – is expected to more than double from $2.3 billion in 2014 to $6.4 billion in 2023.  Annual revenue from smart MSW technologies is expected to surpass conventional technologies by 2019.

Annual MSW Management Revenue by Technology Type, World Markets: 2014-2023

 

(Source: Navigant Research)

While Waste Management in North America remains an active investor in Enerkem and other early-stage companies commercializing smart MSW technologies and solutions, traditional waste haulers face a revenue decline similar to that faced by traditional electric utilities.  As more MSW is targeted as a strategic feedstock, there is less trash for waste haulers to manage, resulting in less and less revenue.

Despite this evolution, companies like Enerkem and Solena Fuels still have a long road ahead.  These companies must compete for municipal contracts – in most cases, with traditional waste haulers – often pitting the high capital cost of an advanced energy conversion facility against landfilling on one hand and relatively inexpensive fossil fuel refineries on the other.

Enerkem’s Edmonton facility is estimated to cost $7.50 per gallon of production capacity to build.  GreenSky London, which incorporates the Fischer-Tropsch gasification process to convert MSW to synthetic gas (syngas), is expected to cost more than $14.00 per gallon of production capacity.  While the initial capital cost of such facilities is expected to decline over time, both platforms will depend on multiple revenue streams to be commercially viable.

 

Business Community Wakes to Climate Change Risks

— June 27, 2014

Attempting to reframe the climate change debate in terms of profit and loss, instead of politics, a bipartisan group of business and political leaders has released a report that says the United States faces billions of dollars in economic losses due to global warming.  Titled Risky Business: The Economic Risks of Climate Change in the United States, the study was produced by the Rhodium Group, an economic research firm, in association with a committee headed by former Treasury Secretary Hank Paulson, former New York City Mayor Michael Bloomberg, and Tom Steyer, the billionaire former hedge fund manager who has devoted his fortune to the effort to limit climate change.

Essentially, Risky Business makes the point, through an exhaustive database of the probable economic downsides of rising seas, drought, higher temperatures, and crop failures, that regardless of politics, it is irresponsible to ignore the risks of climate change – especially if you’re a businessperson, investor, or money manager.  With its high-powered lineup of Republican and Democratic financial heavyweights, Risky Business is the latest signal that the business community is awakening to the grave consequences of ignoring anthropogenic climate change, even as political leaders fail to act.

Ignored Rule

“Viewing climate change in terms of risk assessment and risk management makes clear to me that taking a cautiously conservative stance — that is, waiting for more information before acting — is actually taking a very radical risk,” wrote Paulson in a New York Times essay earlier this week.

In 2010, the U.S. Securities and Exchange Commission (SEC) established a rule requiring publicly traded companies to divulge their exposure to climate change risks in their reporting.  That rule has mostly been observed in the breach.  A February study by the Ceres Group, a Boston non-profit that looks at the financial implications of climate change, reported that, “A large number of companies fail to say anything about climate change in their 10-K filings. Forty-one percent of S&P 500 companies failed to address climate change in their 2013 filing.”

That is changing, as business leaders, driven by regulators and shareholders, have started to factor in likely climate-related effects on their businesses.  Large investors, meanwhile, have started to punish companies that produce or continue to rely on fossil fuels.  The announcement by Stanford University in May that it would eliminate fossil fuel investments from its $18.7 billion endowment portfolio is the most significant victory to date of the divestment movement.

Popping Sound

In an update to its 2011 report, Unburnable Carbon, the Carbon Tracker Initiative calculated that only 20% to 40% of the total listed reserves of the world’s fossil fuel companies can be burned if the world is to avoid catastrophic climate change.  Current fossil fuel company valuations represent a carbon bubble.  Eventually, the initiative stated, some form of price will be put on the carbon represented by those reserves, dramatically reducing their value.

“The scale of this carbon budget deficit poses a major risk for investors,” wrote the report’s authors, Jeremy Leggett and Mark Campanale.  “They need to understand that 60-80 percent of coal, oil and gas reserves of listed firms are unburnable … Capital spent on finding and developing more reserves is largely wasted. To minimize the risks for investors and savers, capital needs to be redirected away from high-carbon options.”

Politicians have utterly failed to come to grips with the environmental crisis of climate change.  Now, by framing it as an economic crisis, the business community is having a go.

 

Tesla’s Patent Giveaway Paves the EV Freeway

— June 26, 2014

Tesla’s move to open up its patent portfolio is undoubtedly risky, and it could erode Tesla’s competitive advantage.  But the potential rewards outweigh the risks.  The thinking behind Elon Musk’s move is that by allowing the major automakers to use Tesla’s technology, it will help lead to Tesla’s ultimate goal: a comprehensive network of cars, batteries, suppliers, components, and charging stations that utilizes electricity for transportation.  In other words, since Tesla is one of the top electric vehicle (EV) players currently in the market, the company stands to benefit from a vastly expanded network of EV infrastructure based on Tesla’s technology.  The more people that are connected to a network of vehicles relying on electricity, the better it is for Tesla.

Rivals and Collaborators

BMW and Nissan have already expressed interest in collaborating with Tesla on their supercharger technology to potentially create global vehicle charging standards.  BMW has also reportedly considered lending its expertise in carbon fiber technology in exchange for powertrain development and supporting infrastructure.  A partnership between BMW and Tesla could prove to be very powerful, bringing together the highly successful Model S with BMW’s electric city car, the i3, and its soon to be released i8 plug-in hybrid supercar.  Currently, Tesla, BMW, and Nissan account for roughly 80% of the world’s plug-in electric vehicle (PEV) sales.

Car charging companies are also looking to benefit from the technology transfer, with Car Charging Group, Inc. announcing its intention to integrate Tesla’s EV charging technology into its Blink EV charging stations.  Car Charging Group is one of the largest owners, operators, and providers of EV charging services in the United States and is also the owner of the Blink Network, one of the most extensive EV charging networks.

On the Sidelines

While the patent release by Tesla will surely increase collaboration with the major car manufacturers already producing EVs, it’s much less clear that open patents will move the dial on the major automakers that have largely steered clear of EVs in the past.  Toyota, GM, and several other major players are hedging their bets on EVs, and Tesla’s patent release is unlikely to change their position.

Navigant Research’s report, Electric Vehicle Charging Equipment forecasts that cumulative global sales of electric vehicle supply equipment (EVSE) will reach 25 million units by 2022.  Increased collaboration between the major EV players could lead to this figure being achieved ahead of schedule.

Cumulative EVSE Unit Sales by Region, World Markets: 2013-2022

(Source: Navigant Research)

 

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