Navigant Research Blog

Oil-Gas Price Swings Slow New Energy Investment

— February 18, 2015

As I wrote in this blog in 2012 and in 2013, rising volatility in the oil-to-gas ratio points to a substantial shift in market dynamics for clean energy. Even if short-lived, this shift will have substantial implications for investment in new energy technologies.

In recent years, as the price of oil climbed to over $100 a barrel, the oil-to-gas ratio—which compares the price of a barrel of crude oil to that of a million Btu (mmBtu) of natural gas—spiked to as high as 52:1 in a single month from a relative constant of around 10:1. While this apparent equilibrium had held steady since the mid-1980s, the widening gap between the price of oil and that of gas seemed to represent a new reality, with natural gas prices holding below $3 per mmBtu (Henry Hub).

In the last several months, as oil prices have slid to less than $50 per barrel, that ratio has come crashing back down to Earth. At a current 13:1, the oil-to-gas ratio is once again nearing historic levels—and again reshuffling the deck for a cleantech industry yearning for macroeconomic certainty.

Ratio of Crude Oil to Natural Gas: 1990-2015

Oil-Gas

(Source: Navigant Research)

While the boom in shale oil and gas recovery (among other factors) has ushered in an apparent return to historical equilibrium, experts are divided on what the future holds. Some argue that the recent spike in the oil-to-gas ratio was a short-term anomaly and that forces will continue to act to bring prices back into their long run equilibrium. Others question whether a stable long-term relationship between crude oil prices and natural gas prices even existed in the first place.

While the jury is still out on the putative correlation between oil and gas prices, we can expect continued volatility in the oil-to-gas ratio. This creates a challenging environment for new energy technologies going head-to-head with existing infrastructure.

The Incumbent Edge

Volatility dampens growth in new energy technologies in several ways. First, it cools investors’ appetite for clean energy ventures, due to the potential risk that seemingly profitable investments one day may turn out to be unprofitable due to changing fuel costs. Building natural gas infrastructure may look attractive in 2012 if you’re in the United States, for example, but not so wise when the price of a barrel of crude oil drops by more than 50% in 2014. This is an issue of asset stranding.

Second, it lowers customers’ tolerance for risk. As noted in our recently published report, Combined Heat and Power for Commercial Buildings, the impact of price swings are most acutely felt by consumers looking to hedge with one fuel against the other. When oil prices accelerated past $100, consumers of heating oil and gasoline, for example, began looking to natural gas alternatives. These decisions can be straightforward when price signals are stable, but actual (or even perceived) volatility favors a wait-and-see approach.

The Underminer

Third, it undermines the role of incentives and other mechanisms for stimulating the deployment of new energy technologies. Still more expensive than incumbent technology in most cases, clean energy has enjoyed incentives that put emerging energy technologies on an even playing field with fossil fuels. Fuel price volatility can make it especially challenging to establish reasonable incentive levels for the long term.

While Navigant Research’s forecasts for distributed generation technologies like solar PV (see our Global Distributed Generation Deployment Forecast report) and energy storage (see our Community, Residential, and Commercial Energy Storage report) in the United States remain strong despite lower energy prices, volatility is likely to mostly benefit the status quo.

 

The Future of Energy: Open or Closed?

— January 20, 2015

Among technology giants, two predominant business models dictate the way in which consumers connect (and interact) with the broader Internet and the way in which innovation unfolds: open and closed.  This tug-of-war between open versus closed has been going on ever since the Internet first started to hit the mainstream.  As described by GigaOM, “It’s a battle that has been at the heart of the technology industry for most of its modern history.”

Open models seek to facilitate universal access and maximize creativity, but potentially breed chaos, error, and design catered to the lowest common denominator.  Closed systems limit the number of participants and exert more control over the flow of information, but can make it easier to roll out dynamic products while minimizing the potential for error.  In more specific terms, it’s a battle between the Google, Android, and Adobe business models and those of Facebook, Apple, and Microsoft.  Each carries with it specific advantages and disadvantages.

Advent of the Cloud

Although still in its infancy, in the emerging Energy Cloud, the battleground is divided similarly, with advocates of open and closed models both beginning to stake claims.

The Energy Cloud – the end result of an evolutionary shift away from a financial and engineering model that relies on large centralized power plants owned by utilities to one that is more diverse, in terms of sources of generation and ownership of assets, and enables the integration of new, distributed energy resources in addition to traditional generation – provides a rich ecosystem for breeding innovation as energy becomes increasingly democratized.  As depicted in the graphic below, the hallmark of the Energy Cloud is a shift away from one-way power flows to bidirectional flows in which consumers become both consumers and producers of power:

The Energy Cloud

(Source: Navigant Research)

Lessons from the Revolution

There are many lessons from the Internet revolution that can be applied to the Energy Cloud.  Open and closed Energy Cloud models alike must balance the need for access, reliability, safety, and ultimately, innovation.

The question comes down to this: will the Energy Cloud take the form of a walled garden, as CompuServe and America Online attempted in the early days of the Internet and Facebook is doing today, or will it remain an open landscape?  Or, perhaps of more relevance to stakeholders, which model best serves the goal of fostering a thriving, ubiquitous Energy Cloud?

Likely, both open and closed models will play key roles, as the Energy Cloud will serve multiple objectives simultaneously.  According to an essay on the topic from PricewaterhouseCoopers, innovation is almost never an either/or choice.  As most companies have discovered, their innovation goals involve a complex mix of closed and open models that is uniquely tailored to their specific innovation objectives.

Customers and Providers

For the incumbent utility, for example, objectives remain focused on preserving market share and maintaining safety and reliability while also growing profitability.  For the consumer, access to inexpensive and reliable power around the clock and choice in how and by whom their energy is produced remain key objectives.  Some stakeholders will seek to maximize either one of these positions, while others will seek to bridge the two.

In either case, the emergence of the Energy Cloud will require a rethinking of standards, protocols, and relationships among stakeholders.  With a slew of innovative technologies gaining market share – solar PV, distributed storage, home energy management systems – the integration of these assets into an efficient and resilient system remains among the greatest challenges ahead for all Energy Cloud stakeholders, and will likely be where the greatest emphasis on innovation will occur.

 

In Review: Energy Metatrends

— January 14, 2015

In Navigant Research’s 2013 white paper, Smart Energy: Five Metatrends to Watch in 2013 and Beyond, we discussed key shifts in the energy landscape.  In this post, I’ll review those trends and discuss which have come to pass and which have yet to materialize or have fizzled out.

The white paper covered the following metatrends:

  • Energy is becoming increasingly democratized
  • The role of government innovation funds is changing
  • Technologies are converging
  • The Southern African Power Pool is becoming the new BRIC
  • The role of utilities is changing

Energy Democratization

Distributed generation (DG), which lies at the heart of the energy democratization shift, has gained significant traction in recent years.  The growth of DG – spurred in part by greater consumer awareness, cost reductions for technologies like solar PV, and improved financing models, among other things – is one of the most dynamic factors driving the evolution of the traditional utility business model.  In Navigant Research’s report, Global Distributed Generation Deployment Forecast, we state that between 2014 and 2023, DG is expected to displace the need for at least 321 GW of new large-scale power plants, valued at more than $1 trillion in power plant construction revenue.  Annual DG capacity additions are expected to outpace centralized generation capacity additions by 2018, underscoring the importance of this metatrend going forward.

Government Innovation Funds

The white paper argued that quasi-governmental funds would step in to fill the void left by private equity and venture capital exiting the energy sector.  The role of government funds would expand to drive innovative technologies from R&D to commercialization.  While this has proven to be partly true, significant capital has exited the energy space, leaving many fledgling companies (and technologies) exposed to market realities.  Spectacular flameouts have rocked the cleantech financing landscape.  That said, governments remain key sources of funding across the innovation lifecycle, so the jury is still out with respect to this metatrend.

Technologies Converging

As discussed in our recent webinar on January 13, Energy Storage for Renewables Integration, storage reigns supreme within this metatrend, allowing for greater flexibility in managing electrons across both space and time.  Whether in an electric vehicle battery or advanced batteries deployed as peaking plants on the grid, energy storage has proven to be a linchpin technology unlocking the potential of distributed wind, solar PV, and microgrids.  For example, hybrid solar and storage deployments create exciting opportunities for energy consumers at the edge of the grid.  This is certainly a trend that has begun to emerge in a significant way.

Southern African Power Pool = the New BRIC

This metatrend is among the more difficult to measure, as specific goals remain longer term.  Economic growth appears to be gaining momentum across the region, but developments in Brazil, India, and China continue to overshadow the emergence of dynamic energy economies in Africa.  There is a general sense that investment to date in emerging energy technologies and infrastructure throughout emerging BRIC markets is just the tip of the iceberg.

Utility Role Changing

The changing role of the utility remains the most dynamic metatrend overall.  While predictions of a “utility death spiral” may prove to be overly dire, most acknowledge that utility business models will need to adapt to changing electrical grid realities.  In most cases, this will entail more complex partnerships with customers as utilities move toward more integrated service offerings.  In other cases, utilities may narrow their focus on one or two aspects of the grid, essentially becoming ”poles and wire” companies.

Summarizing, three out of five of these metatrends have materialized in significant ways.  While it is still too early to tell with the others, heading into 2015, we can expect a sustained global shift toward localized power generation and increased pressure on utilities to adopt (or at least explore) alternative business models.

For more on these dynamic changes and others, please see Navigant Research’s free white paper, Smart Grid: 10 Trends to Watch in 2015 and Beyond.

 

The Global Biofuels Industry: A Promising Future

— December 17, 2014

As I described in my previous blog, the global biofuels industry faces an uncertain future amid declining crude prices and a surge in shale oil production in key markets like the United States.  Creating even greater uncertainty, the Environmental Protection Agency (EPA) recently announced that it is abandoning 2014 rulemaking around production quotas for biofuels under the Renewable Fuel Standard (RFS2), a clear concession to the controversy that has plagued the rule in recent years.

While these shifts will likely further dampen investor appetite for biorefinery projects focused on producing biofuels for ground transportation, the industry continues to advance on several fronts.

By Air

The commercial aviation industry, for example, has played an important role in driving research and development investment as well as providing a strong demand signal to producers.  More than 25 international carriers from all global regions have tested or piloted biofuels programs in the last 3 years.  These efforts have resulted in more than 60,000 biofuel miles flown according to Navigant Research’s report, Aviation and Marine Biofuels.

 Commercial Airline Biofuel Miles Flown by Flight Type, World Markets: 2008-2013 

(Source: Navigant Research)

Earlier this month, Boeing completed a test flight using a blend of 15% green diesel – a synthetic, drop-in substitute for diesel – and 85% petroleum jet fuel.  To meet growing demand, several high-profile, dedicated biojet biorefinery projects have begun construction.  Led by the Oslo Airport’s commitment to receive 660,000 gallons of biojet fuel beginning in March 2015, emerging bioports also demonstrate a commitment to ensuring that biofuels play a permanent role in future aviation.

The advantage commercial aviation offers the advanced biofuels industry is consolidated infrastructure and like-minded potential off-take partners.  According to the International Air Transport Association (IATA), 1,600 airports worldwide fuel 95% of the world’s flights.  This compares to more than 161,000 gas stations in the United States alone.  This lowers the capital needed to invest in infrastructure to bring fuel to the customer and streamlines contracting opportunities that should accelerate commercial deployment of biojet fuel under favorable market conditions.

By Sea

The U.S. Navy is also moving forward with its goal of sailing its Great Green Fleet in 2016, a fleetwide overhaul aimed at integrating energy conservation into the U.S. fighting fleet, in part by powering ships and aircraft using biofuels.  In anticipation, the Navy has procured nearly a half million gallons of advanced biofuels to support early testing and certification initiatives.  Biofuels were also included in the Navy’s annual procurement for bulk fuels this year for the first time ever.

But non-road transportation applications are not the only area where biofuels are gaining ground in energy applications in recent months.

Primary Energy

In the developing economies of Sub-Saharan Africa, Southeast Asia, and Latin America, the wide availability of biomass, combined with limited access to reliable sources of energy, provides significant opportunities to expand the utilization of bioenergy as a primary energy source.  Conversion of agricultural waste into biogas that is consumed in gas-fueled generator sets, for example, can help anchor community microgrids.  These opportunities build off an already established tradition of utilizing biomass for traditional energy (e.g., burning wood or dung for cooking and as a source of heat) and well-established technological processes.

As discussed in the United Nations’ report, The State of the Biofuels Market: Regulatory, Trade, and Development Perspectives, the developing world remains a significant growth opportunity for biofuels.  Biofuels used in off-grid cooking applications to industrial power generation continue to gain traction as key target opportunities for ethanol fuels, biodiesel, and emerging advanced biofuels.

Bio Niches

Supply chains to support these opportunities have begun laying the early foundation for an emerging global bioeconomy centered on renewable biomass for economic activities, including commodity and food trade, the IT and automotive industries, and environmental technologies.

While the refocus of investment away from ground transportation applications to a wider range of opportunities will mean less biorefinery capacity built through 2020, these niche opportunities are expected to result in the development of specialized capacity expansion in spite of cheap and plentiful oil.

 

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