Navigant Research Blog

New York Details Its Energy Vision

— August 27, 2014

The New York State Public Service Commission (PSC) has released its latest straw proposal on its Reforming the Energy Vision (REV) proceeding.  It includes recommendations that incumbent utilities take on the central Distributed System Platform (DSP) role, at least in the short term.  This was one of the most controversial issues in the REV plan, with the potential for the utilities to be stripped of many of their responsibilities by the PSC and replaced by a new independent entity.  PSC staff decided to stick with the utilities – partly for substantive reasons, partly out of expediency.

The paper includes a table comparing the roles of a utility versus a DSP, exhibiting a great deal of overlap.  So the utilities can breathe a major sigh of relief with that recommendation, knowing that they will maintain many pivotal duties.  But the paper does point out that utilities do not currently have all of the capabilities and competencies needed to successfully operate the DSP and will need to hire new staff with different skill sets, as outlined in my earlier blog on utility hiring trends.

Seeking Alignment

Also noteworthy, from the standpoint of demand response (DR) and distributed energy resources (DER), is the recommendation that all utilities be required to develop DR tariffs, including fees for storage and energy efficiency.  PSC staffers are wary about the potential effects of the pending U.S. Circuit Court case on Federal Energy Regulatory Commission Order 745 on DR compensation, which could complicate DR participation in wholesale markets like the New York Independent System Operator (NYISO).  On the other hand, the report is rather light on recommendations for expanding time-of-use rate structures, which may also encourage increased DR participation.

Addressing the concern about a lack of coordination between retail and wholesale markets, the report states that market rules allowing DER participation in both markets must be aligned to ensure that DER interaction is efficient and properly valued.  The PSC argues that this goal can be accomplished with DSPs acting as aggregators in NYISO programs.  That’s a threatening statement to the third-party DR aggregators that would not want the utility/ DSP to compete with them in the wholesale markets.

Are Smart Meters Necessary?

From the consumer perspective, the report references a recent survey of residential electricity customers in New York that found that, although few customers say they are knowledgeable about their electricity usage, many place a high value on easy access to information regarding their energy use, the price of electricity, and methods for controlling their energy costs.  This indicates the potential for substantial increases in residential customer adoption of home energy management and DER products.

Notably absent from the REV plan is a recommendation regarding advanced metering infrastructure (AMI).  Electricity cost and rate increases are sticky political issues in New York currently, and PSC staff did not highlight AMI as a requirement for achieving REV goals.  The only reference to AMI actually speaks to how to avoid it: “To the extent that the cost of advanced metering equipment presents a barrier to customer adoption of DER programs or time variant pricing, utilities and market participants should consider alternatives to AMI technologies to enable program delivery.”  In other words, the report acknowledges that AMI functionality may be useful for REV purposes, but doesn’t say how that functionality can or should be achieved.

Comments on the straw proposal are sure to be plentiful from all sides.  I view this plan as less aggressive than the original REV paper, but ultimately, it is more achievable in the short term – which may help build momentum for the longer-term transformation.

 

As Commodity Prices Slide, Big Miners Seek a Sustainable Strategy

— August 22, 2014

Navigant Research’s report, Renewable Energy in the Mining Industry, summed up the state of the global mining business: “In the last decade, increased demand from countries such as China and other emerging economies pushed the price of many metals and minerals upward, which stimulated investment in the mining industry. More recently, the global economic downturn and the collapse in a number of metal and mined commodity prices forced the mining industry to scale back investment into new mine sites, reduce operating mine lives, and scale back their investment into more capital expenditure-heavy renewable energy.”

Since that report was published in the fourth quarter of last year, commodity prices have stumbled further, and the pressures on mining giants like Rio Tinto, BHP Billiton, and Vale Brazil have intensified.

On the surface, so to speak, it’s a great time to be an extractive company with worldwide operations in iron, copper, coal, and other minerals that are essential to the functioning of the modern industrialized economy.  The rise of China and India has created a seemingly bottomless well of demand, particularly for iron ore for steelmaking; technological advancements have cut the costs of large-scale mining operations (while eliminating thousands of well-paying jobs); and governments in places desperate for economic growth, such as Mongolia and Sub-Saharan Africa, have proven pliant to the demands of multinational mining corporations.

The Bottom of the Well

Rio Tinto’s profits in the first half of 2014 doubled from the same period a year before.  BHP Billiton made $13.4 billion in profits in the 12 months leading up to June 2014.  Brazil’s Vale, the world’s largest producer of iron ore, reported second quarter profits of $1.43 billion – slightly below Wall Street estimates but still a healthy increase over the year before.

A closer look, though, shows that big miners are playing a risky and ultimately unsustainable game.  The term of fashion in the mining industry today is “de-diversification” as mining companies sell off low-margin mines that they invested in during the commodities boom of 2002-2008, before the global financial systems crashed and growth in China ground almost to a halt.  To keep profits up, the companies are slashing costs and adding new production – a short-term strategy that could spell long-term disaster.

Rio Tinto’s results “showed that the strategy of carving into costs while ramping up volumes that are being pursued by the major miners has worked to offset commodity price declines,” wrote Stephen Bartholomeusz in the Australian business publication, Business Spectator.  “The key question – worth billions of dollars – is whether it will continue to work.”

Twilight in the Mines

Ultimately, the dilemma facing miners of low-margin commodities like iron and coal is that as economies like China’s and India’s develop, they need less basic stuff.  It takes less iron to make an iPhone than it does to assemble an airliner.  Despite slowing demand, Vale plans to double its exports of iron ore to China over the next 5 years.  Pumping more iron and coal into markets that need less of them is not a winning strategy over the long run.  Goldman Sachs analysts have estimated that the rate of growth in the supply of iron ore is 3 times the rate of growth in demand.  That’s a recipe for a glut and a price crash.  Already, iron prices are on a downward slide.

Asian iron ore spot prices have fallen 31% this year, according to Reuters, and “the consensus is that they will remain below $100 for the foreseeable future as big miners such as BHP, Anglo-Australian rival Rio Tinto and Brazil’s Vale ramp up output even as Chinese demand growth weakens.”

As with coal, iron ore could be entering a downward spiral that could overwhelm the major miners as they narrow their focuses:  “Iron ore risks becoming another coal,” remarked Reuters’ commodities columnist Clyde Russell, “where miners pursue output gains in order to lower costs, but in the end the resulting supply surplus just depresses prices even more, resulting in a no-win situation for producers.”

Like the coal era, the age of iron and steel is nearing its twilight.  That’s not good if you’re a multinational mining outfit.

 

Bill Gates: How to Fund Energy Miracles

— August 21, 2014

Through the Gates Foundation, Bill Gates has taken a stand on improving global public health, investing in programs focused on basic advances such as developing a next-generation condom to prevent the spread of sexually transmitted diseases, creating a standalone vaccine cooler for communities that are stranded without electricity, and inventing a toilet that can solve sanitation issues by pyrolizing human refuse into something more usable (using solar power, no less).  Meanwhile, Gates is also challenging U.S. energy policymakers and their funding practices for energy R&D.

In a June blog post titled “We Need Energy Miracles,” Gates called for the United States to look hard at R&D allocations, potentially redirecting funding from the military and healthcare sectors toward energy research and pilot projects (presumably renewable ones).  Given the imperfections (intermittency, inefficiency) of existing renewable resources, Gates argued, this research is necessary to establish an equitable energy mix, both in the United States and abroad – especially in developing nations that must increase energy use to grow their economies.  He stressed the need to invest in projects that are “high risk/high reward” in order to achieve the sort of miracle needed to support growing demand and limit climate change.

Memo to Bill: DIY

Responding to Gates, Solar Wakeup (republished by Clean Technica) noted that Gates has been active in investing in energy storage with Aquion and LightSail but challenged him to be the major financer of the next energy miracle.  Why?  Simply put, it’s unreasonable to expect increased investments (private and public) in risk-agnostic energy R&D, and if one of the world’s richest men wants it to get done, he should do it himself.  Payoffs are slow for energy projects, the uncertainties many: macroeconomic conditions, volatile energy and resource markets, policy reversals, infrastructure needs, and high operating and maintenance costs.  Solar Wakeup’s challenge is based in reality.

But the cleantech and renewable energy sectors are already substantial in countries all over the world, and growth is accelerating.  China has recognized this.  In recent years, China’s public and private investments in cleantech, both at home and abroad, have explodedReports by Azure International explore the drivers for increasing investment in cleantech in China.  Risk is inherent in investors’ strategies for expanding their energy-related portfolios, and intangible values, such as technological and innovative prestige, sometimes compete with return on investment (ROI).  Encouraged by the government, Chinese investors have become increasingly willing to fund energy efficiency and conservation projects such as smart grids and smart buildings.

The topic of investment in renewables and smart grids is thorny, with many caveats and nuances that tend to shape the potential for ROI – but it’s safe to say that with China’s example, maybe Gates has a point in his stance against being risk-averse toward investing in potential energy miracles.

 

Time for Automakers to Get Real on Vehicle Security

— August 21, 2014

Recently, the annual Black Hat and DefCon computer security conferences took place in Las Vegas, and this week the National Highway Traffic Safety Administration (NHTSA) announced a notice of proposed rulemaking regarding vehicle-to-vehicle (V2V) communications.  Hacking cars was once again one of the hot topics at the two security conferences this year, in part because automakers don’t appear to have done much to improve the security of the vehicles we drive.  Each year researchers announce some newly discovered vulnerability that gets blown out of proportion by the mainstream media.

Fortunately for drivers everywhere, none of the issues discovered so far have actually amounted to anything worthy of concern.  However, as vehicles continue to get increasingly advanced in the coming years, the potential for attackable flaws will only increase.  Automakers are notoriously quiet when it comes to publicly discussing anything that might potentially be deemed a flaw in any of their products, but it’s time to change that attitude when it comes to electronic security.

Calling All Cars

Over the past half-decade, advanced driver assist systems such as adaptive cruise control, automatic parking systems, and lane departure warning and prevention have rapidly migrated down-market from expensive European luxury models to mainstream, high-volume family cars, such as the Toyota Camry and Ford Fusion.  With the addition of just a few extra sensors and a lot more software, these are the building blocks for tomorrow’s fully autonomous vehicles.

One other piece of that puzzle is the V2V communications that the NHTSA would like to mandate.  Along with vehicle-to-infrastructure  communications, cars will be able to send and receive messages that can influence the behavior of the vehicle.  Initially, the plan is to send these alerts only to drivers.  However, it’s only a matter of time before that expands to include autonomous vehicle capabilities like automatic braking or steering to avoid a collision.

Anyone who’s ever worked on software will acknowledge that it’s virtually impossible to write absolutely perfect and bug-free code, and the task gets exponentially more difficult as systems get more complex.  Automakers often like to brag about how many millions of lines of code are in the latest and greatest new vehicle and how many gigabytes of data are processed every second.  They neglect to mention how every additional byte of code means more potential for mistakes or security flaws.

No Such Thing as Bug-Free

Companies with vast software engineering expertise, including Google, Facebook, and Microsoft, have acknowledged that they cannot possibly find every potential issue in their products.  The impact of a Facebook or Google breach can be annoying, and potentially expensive, but not life threatening.

It’s time for automakers to follow suit and acknowledge that despite their best efforts to secure vehicles, the potential does indeed exist for security vulnerabilities.  Tesla Motors started on the right track this year with the hiring of security expert Kristin Paget away from Apple.  The company also sent a team of recruiters to the Black Hat and DefCon conferences to find more talent.

Each automaker should also set up a bounty program similar to those established by the big tech firms, which pay researchers cash rewards for disclosing security vulnerabilities to the companies.  The corporate lawyers might not be crazy about the idea, but with the recent flood of vehicle recalls from General Motors and other manufacturers, the increased focus on safety and quality might actually make this an ideal time to do this.

 

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