Navigant Research Blog

The Demise of the Uber Leasing Program

— August 22, 2017

Recently, Uber announced that it will discontinue the vehicle leasing program it has offered to drivers for the past 2 years. Average losses of $9,000 per leased vehicle were cited as the reason, but this only serves to highlight the problem that independent transportation network companies (TNCs) like Uber, Lyft, and Didi are likely to face as the transition to automated vehicles (AVs) begins. Companies that currently operate with minimal physical assets, relying instead on independent contractors, will face a huge challenge surviving as standalone businesses when confronted with building or buying massive fleets of costly AVs.

The leasing program was designed to provide drivers operating on the Uber platform with access to new, well-maintained vehicles at a relatively affordable price that also included unlimited mileage and free maintenance. For passengers, knowing that a ride won’t be a broken-down rattle trap makes using the service much more appealing. Many of the drivers operating on these services don’t have the financial wherewithal to get a loan or a lease on a new vehicle, so the program seemed like a great path toward earning more money.

Since Uber doesn’t manufacture vehicles, it has to acquire them before leasing them to drivers. Wall Street banks loaned the company $1 billion in 2015 to get the program launched, but Uber’s lack of vertical integration means added costs at every level in the value chain. Losses originally projected to be about $500 per leased car increased 18-fold. This is not a formula for a building a sustainable enterprise.

Not Just Uber

Uber is not the only company acquiring cars. Following General Motors’ (GM’s) $500 million investment in Lyft in early 2016, the automaker launched Express Drive to provide low cost rentals of GM cars to Lyft drivers. Unlike Uber, GM has a ready supply of relatively new off-lease vehicles available. GM tapped this supply for Express Drive as well as its more traditional carsharing service, Maven, that also launched in 2016.

Like most other automakers, GM has a captive finance arm through which it could fund the program at lower cost than Uber. Repurposing off-lease vehicles for these mobility services reduces the supply of used vehicles in the market, helping residual values. Having these relatively new vehicles in the field also exposes people to contemporary GM products that may have a marketing benefit. The network of thousands of GM dealers can provide maintenance and repair services, something for which a TNC would likely have to pay a premium. In spring 2017, GM added Maven Gig, which provides similar low cost rentals to drivers on platforms beyond Lyft.

Vertical Integration Is Key

GM may be losing some money on the current Express Drive and Maven Gig programs. However, unlike the TNCs, the automaker is profitable and can afford to subsidize this effort. Doing so also helps to reduce potential losses in other parts of the business. For a TNC without this level of vertical integration, it’s unlikely such a program would aid in reaching net profitability in any realistic timeframe.

The same factors that benefit an automaker in this regard also come into play when looking at the deployment of automated mobility services. If Uber has to pay Volvo or some other automaker for very expensive vehicles, plus cover insurance maintenance and fuel, even eliminating the cost of drivers may not lead to profits. It’s likely that only acquisition by an automaker can save TNCs from extinction. Yet, that may only happen if their inflated valuations collapse.

 

What Would a Perma-Eclipse Do to Solar Power?

— August 15, 2017

On August 21, a total solar eclipse will captivate millions of observers across the United States. Early on its 1,800 mph path across the country, the moon’s shadow will block 5.6 GW worth of solar power plants in California, the top solar state. The California Independent System Operator (CAISO), the state’s grid operator, is well prepared to respond with increased flex-ramp usage and regulation service procurement—essentially a combination of demand management and flexible natural gas and hydropower units. CAISO is aided in part by lessons learned from the 2015 eclipse in Europe, which has higher renewables penetration than the United States.

The eclipse reminds us that the sun’s rays can experience volatility beyond known daily and annual cycles and begs the question: what would happen if the sun stopped shining? Though the question may sound alarmist, it is not entirely trivial. A significant impact event would have solar-blocking potential, with impacting objects above 1 km (about half a mile) in diameter potentially ejecting large masses of pulverized rock into the stratosphere. Solar-blocking geoengineering projects, while intentionally limited in scope, are specifically designed to block the sun’s rays. Movie buffs will remember that humanity scorched the sky and purposefully blocked out the sun to battle solar-dependent robots in The Matrix trilogy.

Solar PV accounted for just about 2% of global electricity production in 2016 but was also the world’s leading source of additional power generating capacity. With some grids anticipating 30%, 50%, or higher eventual PV penetrations, the potential degree of vulnerability is significant—though the probability of diminished insolation is low.

Utility-Scale Solar PV Generators and Path of August 21 Solar Eclipse

(Source: US Energy Information Administration)

A Portfolio Approach

The appeal of solar PV, especially when combined with storage, is undeniable. A clean, distributable, and increasingly inexpensive energy source, solar PV will be a crucial source of power globally. But, much like a contrarian stock market investor, it is worthwhile to look beyond the hype to see what risks loom. To use another stock market analogy, asset diversification is important on the electric grid.

Most of our energy ultimately comes from the sun, and this is especially true of today’s zero-carbon resources. Wind energy is partially driven by daily solar cycles and experienced a 10% decline during Europe’s eclipse. Hydropower, a flexible generation resource that will help ramp during California’s eclipse, is also driven by the sun’s ability to evaporate water. Biopower, another important carbon-neutral dispatchable resource, is driven by the sun, though on the longer scale of months to years. Compared to solar power, each of these should be less directly affected by potential solar-blocking phenomena. Meanwhile, nuclear, geothermal, tidal, and carbon-captured fossil fuel power are not dependent on the sun’s rays. A vague threat to the availability of solar energy does not suggest these should be adopted en masse. However, some consideration should be given to adopting a diversified, risk-mitigated portfolio of generation.

What would happen if a heavily solar-dependent Earth suddenly lost that energy source? Our collective gaze would undoubtedly turn from the sky back to the ground—to the likes of nuclear, geothermal, and for the quickest fix, fossil fuels. Being prepared ahead of time with a diversified, efficient, and clean energy mix could help mitigate that risk.

Still, this month’s eclipse will affect the US grid little since fossil fuels still account for most of the national power supply. For now at least, we can use plenty more renewables to diversify our energy portfolio.

 

Customers Hold Keys to Growth of Turnkey Energy as a Service Solution Providers

— August 15, 2017

A recent Navigant Research blog highlights how corporate commercial and industrial (C&I) energy and sustainability managers are choosing to apply new technology and business model innovations to meet their energy management and sustainability needs. These new customer choices are giving rise to the growth of energy as a service (EaaS) solutions. Navigant Research’s recently released report on the evolution of EaaS defines specific solutions that make up a comprehensive EaaS solution offering:

  • Energy portfolio advisory solutions: Comprehensive, enterprisewide strategic guidance to help customers navigate their unique procurement, energy management, financing, business model, and technology opportunities across all energy management and sustainability needs
  • Onsite energy supply: Distributed generation solutions like solar PV, combined heat and power, diesel and natural gas gensets, microturbines, and fuel cells that improve energy supply
  • Offsite energy supply: Including electricity procurement options from offsite sources in retail choice deregulated electricity and gas markets and from emerging large-scale, offsite renewable energy procurement business models
  • Energy efficiency and building optimization solutions: Comprehensive energy efficiency assessment, business case analysis, financing, implementation, monitoring and verification, and building commissioning services to reduce energy spend and use
  • Load management and optimization solutions: Comprehensive, end-to-end energy management solutions to optimize energy supply, demand, and load at the site and enterprisewide, including demand response (DR), distributed energy storage, microgrid controls, electric vehicle charging equipment, and building energy management and building automation systems and software controls

Turnkey Solutions to Drive Growth

C&I customers that begin to take advantage of these new solutions will increasingly look to turnkey solutions providers that can provide not only strategic advice across their property portfolios, but execution expertise as well. The key driver to enabling the growth of turnkey EaaS solutions vendors will be the ability to deliver comprehensive financing solutions to help customers avoid spending capital on energy projects. However, there are two additional drivers that vendors who are considering creating and delivering turnkey EaaS solutions will need to consider:

  • Historically, C&I customers have needed multiple regional partners to manage even a portion of their energy management needs. Turnkey EaaS vendors seeking to address C&I customers’ portfolio-wide needs for EaaS will require widely trained and deeply experienced advisory capabilities to address their customers’ complex energy procurement, financing, and technology deployment needs. For example, in the United States, a turnkey provider will need to have the depth of regional expertise under one roof necessary to address customer strategic needs in diverse energy markets and climate zones like Texas, California, New York, the Southeast, or the Midwest.
  • Experienced C&I energy and sustainability managers have endured years of disappointment from energy use and cost reduction claims that never materialized. Moreover, many of these managers have still not yet even tried to reduce energy spend. What C&I customers truly want is guaranteed lower energy costs, whether from solar PV, energy storage, energy efficiency, or DR. Vendors that blend execution expertise across all EaaS solutions with financing tools to guarantee cost savings through a single point of sale will be best positioned.

To date, with customer-sited distributed energy resources, too much emphasis has been placed on trying to figure out where to sell technology outside of a focus on solving customer problems. For turnkey EaaS vendors, market growth will not necessarily be led on a technology-first basis. For at-scale revenue generation, these vendors should start with the customer experience and work backwards to the technology. Navigant Research anticipates that vendors that place a keen eye on how to bring turnkey, customer-focused EaaS solutions into the market through a trusted, single point of contact with a financed savings guarantee will be at a competitive advantage.

 

Installation and Customer Support Play Vital Role in Creating Smarter Homes

— August 10, 2017

The novelty of having a smart home is driving connected device adoption among consumers, but the novelty is wearing off as the concept of a smart home becomes a reality. The smart home market, however, still has a long way to go before it reaches mainstream adoption. One of the major issues this market faces is that many consumers do not understand the value of connected devices. Many customers avoid the market entirely or exchange smart devices for dumb counterparts due to premium prices and installation challenges.

Providers Exploring New Methods

This is an issue that smart home technology providers are trying to tackle by providing additional support to customers. For example, Vivint and Best Buy recently announced a partnership to roll out Vivint employees in more than 400 Best Buy stores around the country. The Vivint employees will be able to give customers advice about smart home devices and even provide installation services. Vivint has traditionally sold its solutions through a direct-to-home approach. The company believes its partnership with Best Buy further develops this approach and its core belief in consultative sales—or human interaction to explain how smart home technologies actually work in the home. This move may help increase adoption by not only providing customers with more support and information, but also making smart home solutions more visible and accessible through availability at a large retailer.

Vivint and Best Buy are not the only companies exploring this method. Amazon is taking a similar approach to increasing smart home customer support by preparing an in-house fleet of experts to offer free Alexa consultations, professional in-home installations of smart home devices, and Wi-Fi networking systems. The fleet, which is part of Amazon Home Services, has been compared to that of Best Buy’s Geek Squad and is currently available to consumers in Seattle, Portland, San Francisco, San Diego, Los Angeles, Orange County, and San Jose.

Professional installation is not an entirely new concept in the smart home space. For example, Comcast requires its Xfinity solutions be professionally installed. It has expanded further into the space with its recent acquisition of iControl, new combination Wi-Fi router smart home hubs, and voice-activated remotes, which can control connected lighting.

Installations Are Key to the Integrated Smart Home

Professional installations and enhanced customer support are key to transitioning the smart home from an early adopter’s market to mainstream. They will also play a role in creating more dynamic, integrated homes that can play a role in a more digitized grid. Though there is no specific definition for a smart home, Navigant Research believes the more integrated connected devices become with the home, the more likely the home can be used for additional purposes like shedding load and stabilizing the grid.

Currently, the market is focused on standalone systems, point solutions, and further developing interoperability between devices to form greater connected ecosystems. However, players like Vivint, Best Buy, Amazon, and Comcast are progressing the reality of the smart home by offering more comprehensive, integrated solutions with professional installations and enhanced customer support.

 

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