Navigant Research Blog

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.


The Global Biofuels Industry: A Future in Doubt

— December 11, 2014

In its recent report, The State of the Biofuels Market: Regulatory, Trade, and Development Perspectives, the United Nations (UN) notes that although the emerging biofuels industry has made great strides in the past decade – with ethanol and biodiesel becoming established commodities traded on all continents – significant barriers to commercialization persist across the developing world.  Global biofuels forecasts published in Navigant Research’s report, Market Data: Biofuels, support the view that future capacity deployment is heavily contingent on accessing a shrinking pool of capital investment targeting the industry.

As the UN report notes, conditions in the 2000s that drove annual investment in biofuels in the range of $10 billion per year – including uncertainties related to the price of petroleum products and peak oil speculation – have largely dissipated.  With shale oil & gas production on the rise in key biofuels markets like the United States and the price of crude sliding well under $100 per barrel, market realities have shifted.

Poor Timing

For the emerging advanced biofuels industry, the timing of this macroeconomic shift could not have come at a worse time.  While growth aspirations for the global biofuels industry shifted away from conventional pathways, such as corn starch, to ethanol, palm oil, and biodiesel during the financial crisis of 2008, greenfield biorefinery projects producing advanced biofuels have only just come online in the past year.

The development of these facilities involves capital costs in the hundreds of millions.  Since many of these projects were initiated and financed during a time when macroeconomic realities were quite favorable, a primary concern going forward is whether these first-of-kind facilities can spark additional investment to drive sustained capacity expansion.

This is unlikely given current realities.  To put this into perspective, according to our market data report mentioned above, global biofuels capacity – including conventional and advanced pathways – was just shy of 40 billion gallons per year at the end of 2013.  This represents 4.2% of the global liquid fuel market, or just under 1% of global final energy consumption.

Another $25 Billion Off

Advanced biofuels installed capacity – the focus of current commercialization efforts – accounts for just 1.2 billion gallons, or less than 2% of global biofuels production.  While that’s by no means insignificant, there’s still a long way to go in terms of reducing dependence on liquid fossil fuels, which account for 35% of global final energy consumption, according to data published by the Energy Information Administration (EIA).

In order for advanced biofuels to meet projected production capacity requirements by 2020 under expected biofuels supply mandates in key markets like the United States, European Union, China, and India (Brazil relies mostly on blending quotas), $25 billion to $35 billion in annual investment will be needed over the next 6 years, according to Navigant Research estimates.  This is a tall order for a suite of technology platforms that are not yet at price parity with petroleum-based fuels.


Severe Drought Hastens Hydropower’s Slow Decline

— November 4, 2014

Coal retirements, the shale gas bonanza, post-Fukushima Daiichi nuclear curtailments, the rising adoption of distributed generation, and emerging price parity for solar PV and wind – the dynamic changes affecting electricity grids worldwide are many.  Now, with prolonged droughts affecting leading global economies, like Brazil and California (the world’s seventh and eighth largest economies by gross domestic product [GDP], respectively), a slow decline in the prominence of hydropower is in the mix.

Historically, hydropower has been the primary source of clean and renewable energy in both economies.  Its decline has had a more severe impact on Brazil’s grid, but in both places, this development is expected to continue to coincide with a further rise in gas-fired generation and renewables.  Due to the current cost of renewables, the consequences of this shift may be a rise in greenhouse gas emissions in each country’s electric power sector.

California Copes

With a fleet of 300 dams, California is among the nation’s leaders in hydropower generation.  However, hydro in the state has declined from peaks in the 1950s, when it was responsible for more than half of the state’s generation mix, to just 9% in 2013.  Having prepared for hydro’s decline by broadening its generation mix over the last several decades, the California grid remains mostly insulated from the worst effects of nearly a half decade of severe drought.

California generates around 55% to 60% of its power from natural gas and has seen a 30% increase in gas-fired generation since 2002.  Meanwhile, California’s leading investor-owned utilities across the state – Pacific Gas and Electric (PG&E), Southern California Edison (SCE), and San Diego Gas & Electric (SDG&E) – are on track to meet or exceed their 33% renewable procurement obligations by 2020 under the state’s Renewable Portfolio Standard (RPS) policy.

Brazil Gasps

Facing its worst drought in 40 years, meanwhile, Brazil has been more severely affected by reduced hydropower generation than California.  Currently, the second leading producer of hydroelectric power in the world, trailing only China, Brazil relies on hydro for more than three-fourths of its generation.  According to data published by BP earlier this year, hydropower consumption fell 7% in 2013.

This rapid decline has prompted severe rationing in 19 cities, undermined hydropower generation, and resulted in blackouts across the country.  In the run up to the 2014 World Cup, the Brazilian government provided more than $5 billion to subsidize electric utilities, replacing lost hydroelectric generation with fossil fuel-fired generation, including large amounts of liquefied natural gas.  While this helped stabilize the grid during the event, it has nearly doubled greenhouse gas emissions from the power sector.

Brazil’s experience provides a harsh lesson for drought-stricken areas with a high dependence on hydropower.  Although natural gas is a low-carbon alternative relative to coal-based generation, it may stall or reverse carbon mitigation efforts when used in place of hydropower.  Renewables can help make up the difference, but even with sharp declines in the price of solar PV and wind, they remain far more expensive than hydropower or natural gas.  While both California and Brazil are in a hole with respect to water supply and hydroelectric generation, persistent drought is unlikely to result in a significant increase in new renewables spending without the introduction of new subsidies.


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