Navigant Research Blog

The Customer Interface in the Cloud

— May 12, 2015

As described in Navigant Research’s recent white paper, The Energy Cloud, the power grid is undergoing a fundamental transformation to a decentralized architecture. This shift will bring profound changes to traditional stakeholder relationships. Specifically, the broad array of residential consumers—most of whom are beholden to their utility service providers and lumped together as a monolithic entity in traditional rate design—are emerging as one of the key underlying drivers of this change.

For utilities and stakeholders responding to this shifting market, early battles are being waged to lock-in consumer engagement. As Tesla’s recent Powerwall announcement demonstrates, in this emerging landscape, brand matters. Interface matters. Ultimately, as described in a recent article in Intelligent Utility, future customer engagement strategies will have to be diverse, flexible, and multichanneled. But above all, these strategies must seek to facilitate a connection between the residential consumer and the products and services they demand.

Prosumer Defection

Empowered by greater access to tools and direct marketing from intrepid companies, residential customers are exercising more control over their electricity usage and spending and over when and what type of power they buy. In some cases, these consumers are demanding the ability to self-generate and sell onsite power back to the grid. The dramatic rise of solar PV has demonstrated that, at the right price, consumers will embrace choice and ownership over their energy consumption patterns.

A growing minority of energy prosumers, meanwhile, are cutting out the utility entirely. As zero-energy homes demonstrate, when the capabilities of rooftop solar and other distributed energy resources (DER), energy efficiency improvements, and home energy networks are integrated, the resulting network can render the traditional utility-customer relationship obsolete. When aggregated across a distribution network, utilities take notice—which is exactly the scenario described in the Rocky Mountain Institute’s Economics of Grid Defection report.

Renew and Replace

Customer empowerment is not unique to the power sector. As markets mature, the industrial model of companies owning and people consuming is often undermined by technology innovation. This typically results in a power shift in favor of customers. In the power sector, companies like NRG Home are positioning for just this scenario.

While the initial adoption phase of customer empowerment has ushered in a broad transformation on the grid through energy efficiency and DER, the next phase, replacement, will bring about a far more profound shift. Ford’s Model T proved that customers were willing to embrace the automobile over horse and buggy, for example. As disruptive as this was, the next hundred years proved that customers will exercise greater scrutiny and demand for product diversification, giving rise to a $1 trillion dollar industry.

During this replacement phase, companies invest to compete both for existing customers and for the customers of competing entities. They refine their product lines and cater to increasingly specific segments of the market. Some bundle services to drive value. Others sell no tangible products at all and instead provide access or an interface.

Who Needs Products?

Meanwhile, residential consumers are moving beyond the static behaviors accounted for in traditional utility rate design. Regardless of the market or circumstances, over time, consumers become more sophisticated and knowledgeable about the products they consume. They exercise greater scrutiny around quality and sourcing. They seek value and convenience. Eventually, they come to expect that technology will cater to their preferences.

Ultimately, presented with more choice with respect to price, quality, attributes, and features, consumer’s preferences and demands begin to define product lines. It’s the coming replacement market for demand-side energy solutions. In the home, for example, consumers have responded to product diversification in seemingly banal appliance markets like washers and dryers and more recently thermostats and smoke alarms.

It takes a long time to break down something as longstanding—and with as many private sector and government interests—as the power sector. But as the emerging energy cloud demonstrates, it’s happening; people are opting for more control over their energy dependence.

As customer engagement strategies mature in the energy cloud, there are important lessons to glean from the fast-expanding sharing economy where consumer entrepreneurs are competing with well-established entities. Interestingly, some of the fastest-growing companies facilitating these transactions—Uber, Facebook, Alibaba, and Airbnb—own no products at all.

 

Iowa Key to Biofuels’ Future

— May 12, 2015

With presidential candidates from both parties descending on Iowa to gear up for the 2016 general election, the state is quickly becoming ground zero for the ongoing debate around the future of biofuels in the United States. Earlier this year, Iowa Governor Terry Branstad announced a major new bipartisan campaign called America’s Renewable Future to promote the Renewable Fuel Standard (RFS) in the 2016 Iowa presidential caucuses.

The backbone of the country’s biofuels industry, RFS is an ambitious regulation first introduced under George W. Bush and later revised and expanded in 2007. Iowa has benefited mightily from the mandate, serving up a sea of corn and soybeans, both commodities that have played a crucial role in fueling America’s first-generation biofuels capacity growth. Since the revised standard went into effect, biofuels production in the United States has doubled. According to Navigant Research estimates, first-generation biorefineries concentrated throughout the Midwest currently account for just under half of global biofuels production capacity installed today.

New Reality

For an industry that to this point has enjoyed broad regulatory support across Europe, Brazil, and North America, biofuels are quickly losing momentum.

Although corn starch ethanol and soybean-derived biodiesel have been popular with both political parties over the last decade, times have changed. The price for a barrel of oil today is roughly a third what it was in 2008, when Barack Obama was first elected. Meanwhile, capacity build-out for next-generation facilities has been slow to materialize, resulting in advanced biofuel production totals that significantly trailing targets established under the RFS.

While Branstad’s campaign will focus on the economic benefits associated with biofuels industry development, the number of critics who say the RFS is not working continues to increase. Last month, Jim Stock, former White House economic advisor, released a report that proposes several reforms to RFS. A combination of forces, the report observes, are imposing costs on the market while failing to provide the future benefits associated with domestically produced advanced biofuels.

To put it bluntly, the industry to this point has failed to make the leap from first generation biofuels to next generation alternatives. Facing a similar reality, policymakers in Europe have signed off on reforms that cap the production of first generation biofuels and opted to extend only reforms targeting next generation fuels out to 2020.

Seeking a Niche

Still struggling for traction in a rapidly shifting market, advanced biofuel producers are examining niche opportunities such as biomethane or renewable natural gas (RNG) production and other biofuel applications that can be integrated with the power grid.

Amendments to the RFS last year, for example, have allowed RNG—biogas upgraded to natural gas specs—to count toward cellulosic biofuels quotas in certain applications like fueling an electric vehicle or being consumed as liquid natural gas. In isolated markets like Hawaii, where generation infrastructure includes a high percentage of facilities that burn petroleum products shipped across the ocean, locally grown biofuels can provide a plug-and-play renewable alternative and help the state move toward a proposed mandate of 100% renewables by 2045. Further down the road, algae conversion platforms that utilize carbon dioxide as a feedstock may offer coal producers that face tightening emissions regulations another tool for cleaning up their operations. Both options mitigate the investment needed to replace existing infrastructure.

Meanwhile, back in Iowa, companies are changing course. Fiberight, which sought to build first-of-their-kind facilities converting waste to advanced cellulosic biofuels, recently announced plans to switch to producing biogas. Considering the scale of investment needed to upgrade the power grid, presidential hopefuls may find a willing partner in a biofuels industry grasping for strong market signals.

 

Regulating the Energy Cloud

— April 8, 2015

As discussed previously on the Navigant Research blog (Offense and Defense and Open or Closed?), the electrical grid is evolving toward an energy cloud model in which two-way energy flows support distributed energy resource (DER) integration, transactive energy, and other complex market structures and transactions. Representing a platform on which stakeholders will engage to facilitate greater coordination and sophistication in selling and consuming energy, this network of networks has the potential to be far more flexible, dynamic, and resilient than the traditional grid. These changes are detailed in Navigant Research’s recent white paper, The Energy Cloud.

But ensuring reliable, safe, and cost-effective service—the core focus of utilities—is not guaranteed merely by the energy cloud’s emergence. An enforceable regulatory model will need to emerge that balances innovation and the economic benefits of open market competition with the need to maintain interoperability and coordination across a network made up of many layers of disparate elements.

Avant Garde

Today, we’re witnessing a period of rapid experimentation with respect to regulating utilities of the future in the energy cloud. The dramatic rise of DER on the grid has pressed regulators and utilities alike to respond.

Although many factors will determine how the energy cloud will evolve across different markets, states like New York, Hawaii, and California remain at the vanguard of regulatory experimentation in the United States.  In New York, for example, regulators have proposed initiatives to transform utilities into so-called distributed systems platform providers that would act as the interface between consumers and the bulk power system. Other states (e.g., Massachusetts, Minnesota, and the Carolinas) are beginning to explore alternative models as well, but have yet to challenge the utility’s role as the owner and operator of the distribution system.

The issue of who ultimately owns the distribution grid is at the heart of the energy cloud’s evolution. On one hand, the government and the public want to increase competition to achieve lower cost and additional service for customers. On the other hand, the increased complexity and cost to manage distributed intermittent resources across the grid could drive reregulation and consolidation.

Independent Operator

In the latter case, few challenge the need for a centralized authority to do so. Proponents of this approach, such as former Federal Energy Regulatory Commission (FERC) chairman Jon Wellinghoff, support the creation of an independent distribution system operator to manage the distribution grid even if utilities ultimately own the system.

This trend stands in direct opposition to a historic transition toward deregulation in the United States that is already underway. Deregulated markets are expected to allow for more experimentation with respect to business models, thus creating a competitive market for power generation and allowing retail customers to decide who supplies their electricity. However, a lack of standardization and coordination within these markets could make it much more difficult to ensure reliable, safe, and cost-effective operation due to a high level of market fragmentation. The growing footprint of DER, for example, requires much tighter integration and a stronger coordination of demand and supply across the energy value chain.

While it might seem that over-regulation or reregulation would stifle innovation, with respect to the energy cloud, the opposite may in fact prove true. Regulated markets, it turns out, may provide more stable platforms for a coordinated rollout of energy cloud infrastructure and capabilities.

Jan Vrins contributed to this blog.

 

In Golden Age, Natural Gas Becomes Generation Workhorse

— March 9, 2015

The promised golden age of natural gas has begun to take hold globally. Fortunately, rising natural gas demand will not require a corresponding increase in infrastructure spending across the United States, according to a recent report from the U.S. Department of Energy. These findings hold even as the U.S. electric power sector—currently the largest consumer of natural gas in the country—saw generation from natural gas replace that of coal in recent months. This corresponds with a sharp increase in demand for natural gas from multiple end-use sectors.

With the Henry Hub reference price for natural gas in the United States lingering below $5 per million Btu (mmBtu) since the early part of 2014, a demand surge is expected to continue across the power generation sector.

Renewables and Gas

The United States, already the largest consumer of natural gas in the world, is expected to see a 33% increase in demand by 2040, according to the U.S. Energy Information Administration’s Annual Energy Outlook 2014 reference case. Growth is expected to be 42% for the electric power sector between 2012 and 2040 under the same scenario.

Living up to its promise as a bridge fuel to a low carbon future, natural gas is helping backfill baseload generation, especially in areas where coal plant retirements are highest. The combination of wind or solar power and gas-fired generation, meanwhile, has emerged as an option for states looking for more access to lower-carbon electricity. This hybrid approach is playing out across the expansive areas of the West, where electrical grid transmission bottlenecks have made it difficult to export renewable generation from areas of high productivity (e.g., Wyoming) to population centers on the West Coast, for example.

Not Laying Pipe

The increased use of natural gas in the electric power sector, however, is not without potential challenges. Unlike competing fuels, natural gas is delivered as it is consumed, and cannot be stored onsite like coal. Furthermore, adequate infrastructure is needed to maintain electric system reliability. The investment of $65 billion in new interstate pipeline construction over the past 18 years appears to be sufficient to deliver natural gas from producing regions to end users across the country without substantial new investment.

Unlike the U.S. electrical grid, natural gas power plants and natural gas production are both broadly distributed rather than geographically concentrated, reducing constraints on interstate pipeline capacity. What’s more, lower-cost investment options, such as improving the utilization of existing infrastructure and rerouting gas flows, are far cheaper than building new pipelines.

As the U.S. power sector faces several concurrent transitions—retirement of coal-fired generation, aging electrical transmission infrastructure, and a surge in the use of intermittent renewables—these findings suggest that natural gas will continue its emergence as the workhouse on the modern electrical grid.

 

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