Navigant Research Blog

Honeywell Steps into Smart Grid Fray with Elster Acquisition

— July 29, 2015

Honeywell’s purchase of smart meter maker Elster is a sign that the smart metering business still has some attractive runway for companies willing to endure the somewhat lengthy procurement process of utilities. The $5.1 billion deal gives Honeywell a solid global competitor for the next wave of smart grid investments.

The Deal

Honeywell is purchasing Elster from its current owner, Melrose Industries, a British investment firm that specializes in buying manufacturing businesses, turning them around, and selling them for a profit. In this case, Melrose did that after paying approximately $2.3 billion for Elster in 2012, suggesting a profit of nearly $3 billion. Melrose said it generated a 33% internal rate of return in the 3 years since acquiring Elster.

Here is what Honeywell is getting by purchasing Elster: a global manufacturer of gas, electricity, and water meters; communications equipment; and software solutions, including data analytics. It is also taking on about 6,800 employees of Elster, which is based in Mainz-Kastel, Germany. The company has operations in 39 countries, including the United States, the United Kingdom, and Slovakia. Honeywell is also taking on about $1.4 billion in pension liabilities.

Fits with Plans

While this move raises some eyebrows for its premium price, the acquisition fits with Honeywell’s stated plans last year that it would target some $10 billion to buy companies over the next 5 years. And while the smart meter business has slowed, particularly in the United States since federal stimulus money dried up, Elster has been active, picking up business in France as part of ERDF’s deployment of 35 million meters, and scoring a deal with CFE in Mexico earlier this year for about 300,000 meters. In addition, earlier this year, Elster launched an enhanced gird software platform called Connexo that integrates utility workflows, business processes, and grid data from multiple devices and vendors into a unified solution. According to Honeywell, Elster is attractive for several reasons: its high- and low-temperature burner products and residential heating components complement Honeywell’s existing business within its Environmental Combustion and Controls group; Elster’s presence in high-growth regions aligns with Honeywell’s strategy; and the existing Elster customer base presents an opportunity to cross-sell legacy products.

For Elster and its employees, the deal makes sense. Honeywell already has some synergies in the gas sector, and is no stranger to the way the utility industry operates. Elster’s electricity and water businesses give Honeywell a broader set of technologies it can leverage as those sectors grow in ways different from gas. Nonetheless, Honeywell will be facing some experienced meter manufacturers. Companies like Landis+Gyr, Itron, and General Electric are formidable global players, not to mention lesser known Chinese manufacturers, such as Holley Metering, that want to move beyond their domestic markets.  By acquiring Elster, Honeywell has the vehicle to be competitive now, and with skill can stay among the leaders as the market evolves.

 

Smart Grid Demo Results Reveal Efficiencies, but More R&D Needed

— July 17, 2015

The Pacific Northwest Smart Grid Demonstration Project (PNW-SGDP), one of the largest in the United States, has been completed, and the project’s latest report shows a variety of new technologies can indeed reduce costs and improve energy efficiency. Additional research is required, however, to advance smart grid deployments elsewhere, according to project managers.

Transactive Control

One of the focal points of the 5-year PNW-SGDP was to evaluate a transactive control system in which decisions are distributed across the grid, even allowing consumers or individual devices to make informed choices about usage. This system is based on a two-way communication process that uses signals about the delivered cost of electricity and the amount of power needed by end devices, such as a smart appliance. The system shares information along the grid, from generation sources like dams or wind turbines to a residence. According to one of the models developed by IBM, peak demand in the Northwest could be reduced by 7.8% if 30% of the region’s grid used the necessary demand response (DR) equipment.

Saving Money, Energy

Some of the cost savings shown in the project were significant. For instance, smart meters with remote turn-on and turn-off functionality could eliminate more than 2,700 service calls a year and save an estimated $235,000 annually for Avista Utilities in its Pullman, Washington, service area. Avista also tested controls that lowered distribution system voltage by 2.1%, which would translate into about 7.8 GWh of annual energy savings, or about $500,000 in reduced annual costs for its Pullman distribution power lines.

Challenges

The project also uncovered some challenges for utilities. For instance, some of the participants were not prepared for the large amounts of data generated by the equipment, and occasionally data was mislabeled with incorrect units or times. In addition, a lack of technology standards made it difficult for various equipment to interoperate, which required extra effort to get products from different vendors to work together. Also, the relatively nascent market for the equipment created issues, especially when some manufacturers went out of business or stopped servicing their gear, and some of the equipment just failed outright.

The $179 million project, which was led by Battelle, included 11 utilities across five states (Idaho, Montana, Oregon, Washington, and Wyoming), the Bonneville Power Administration (BPA), two universities, and multiple technology companies. Funding came from the federal American Reinvestment and Recovery Act (ARRA), through the Department of Energy’s (DOE’s) Office of Electricity Delivery and Energy Reliability, and from matching money from participants.

The PNW-SGDP lays a foundation for further grid modernization. Other utilities and stakeholders can leverage these findings and adapt them for their own future needs. And though the research is not fully conclusive, as the report authors point out, there are useful baseline results to work from which can enable the next wave of grid innovation.

 

Time-Based Rates: What Works, What Doesn’t

— June 30, 2015

A new interim study of time-based or time-of-use (TOU) electricity rate programs shows that certain approaches and technologies get better results than others and that utilities in the planning stages can learn some valuable lessons before they launch their own versions. For instance, the average peak demand reductions for customers on critical peak pricing (CPP) programs were nearly twice the amount (21%) compared with the average reduction among customers in critical peak rebate (CPR) programs (11%).

Opt-In or Opt-Out

The study also explored the process of enrolling customers in programs, employing either opt-in or opt-out approaches. The results showed that enrollment rates were much greater and peak demand reductions were generally lower with an opt-out approach, but retention rates were nearly the same (91% opt-out vs. 92% opt-in) for both. Given these results, there appears to be an overall cost-benefit advantage to opt-out approaches versus opt-in, though additional analysis is needed to validate and replicate this conclusion, the report authors noted.

In-Home Displays Make Little Difference

The use of in-home displays (IHDs) was also scrutinized, and results showed these devices made little difference to enrollment or retention rates. Moreover, Sacramento Municipal Utility District (SMUD) found that its program offerings without IHDs were more cost-effective for the utility in all cases than those with IHDs. This has led SMUD officials to say they do not intend to offer IHDs in the future.

PCTs Show Better Results

The use of programmable communicating thermostats (PCTs) yielded generally better results than among customers that did not have this type of device. Peak demand reductions for CPP and CPR customers with PCTs (27% to 45%) were higher than among customers without a PCT (-1% to 37%). Results from Oklahoma Gas & Electric (OG&E) showed that rate offers for customers with PCTs were more cost-effective for the utility than for those without the device.

Besides SMUD and OG&E, the study involved eight other U.S. utilities that were part of the Department of Energy’s (DOE’s) Smart Grid Investment Grant (SGIG) program: Cleveland Electric Illuminating Company (CEIC), DTE Energy (DTE), Green Mountain Power (GMP), Lakeland Electric (LE), Marblehead Municipal Light Department (MMLD), Minnesota Power (MP), NV Energy (NVE), and Vermont Electric Cooperative (VEC). The DOE plans to publish five more reports using data from these utilities in the coming months, with a final report expected in the first quarter of 2016.

Given the wide variety of options, designing effective time-based rate structures and processes can be a significant challenge for utility managers. What works for one utility’s customer base might not work for well for another. Yet, these interim results do provide some solid guidance, and with careful planning (noting what has and has not worked), a reasonably positive outcome is a likely result for both the utility and its participating customers.

 

Transition Away from Coal-Fired Power Plants Keeps Building

— June 29, 2015

The transition away from coal-fired power plants continues among a number of U.S. utilities both in an effort to comply with carbon reduction standards and for cost-cutting reasons. In the last few months alone, several thousand megawatts of coal-generated capacity have been taken offline. The trend is similar in other industrialized countries, with a key exception.

In the United States, Columbus, Ohio-based American Electric Power (AEP) has ceased generation at 10 of its coal-fired plants across five states. Operations were halted in May at coal units in Indiana, Ohio, Kentucky, Virginia, and West Virginia; combined, these units generated more than 5,500 MW. AEP intends to close two more of its coal-fired plants in 2016 in Oklahoma and Texas. Similarly, PacifiCorp, the Berkshire Hathaway-controlled utility operating in several Western states, shut down two coal units at its Utah Carbon Plant (172 MW) in April. Also, the company laid out plans to take nearly 3,000 MW of capacity offline by 2029. As part of PacifiCorp’s long-term resource plans, the company expects to add more renewable energy resources, further reduce its use of coal, and meet most of its expected generation needs with increased energy efficiency over the next decade.

Though no recent plant shutdowns have taken place in North Carolina, Duke Energy did announce that its controversial Asheville plant (which was part of a recent federal criminal settlement related to groundwater contamination) would shift from coal to natural gas and solar generation over the next 4–5 years. A new 650 MW plant would replace the 376 MW coal-fired facility and would significantly reduce emissions, the company said. In Arizona, Salt River Project officials have agreed to buy the Los Angeles Department of Water and Power’s portion of the coal-fired Navajo Generating Station plant as a next step in the eventual closure of one of the three generators in order to comply with U.S. Environmental Protection Agency (EPA) regulations. Overall, the U.S. Energy Information Administration expects the proposed federal Clean Power Plan could lead to about 90 GW of coal-fired generation being removed by 2040 under one scenario, which would be more than double the amount taken offline if no new carbon standards were in place.

A Global Trend

This trend away from coal is playing out in most other major industrialized countries as well, with one exception. Canada and the United Kingdom have implemented policies for phasing out coal. In France, Italy, and Germany, the markets for coal are weak, according to E3G, a European public interest non-profit organization that conducted research for Oxfam on the topic among the G7 countries. For instance, France has shut down seven units in 2015 and is now down to a total of four. Japan is the exception; plans in the country call for an increase in coal-fired electricity generation in part due to the Fukushima Daiichi disaster, which led to the shutdown of nuclear power plants that made up 30% of Japan’s energy supply, with coal filling the gap for now.

With the exception of Japan, the shift away from coal-fired plants is underway in leading nations, though not fast enough nor in the way environmental groups like the Sierra Club and others would like. Nonetheless, the direction away from coal seems clear.

 

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