Navigant Research Blog

The Spanish Energy Transition Might Speed Up, but Where Should It Go Now?

— July 5, 2018

Just a couple of months ago, I wrote a series of blog posts (Part 1 and Part 2) about how the Spanish distributed energy resources (DER) market was gathering momentum as technology costs come down. While energy markets move slowly, the political situation in Europe can change fast.

Shakeup in Spain

In an unexpected change of events, the conservative government led by Mariano Rajoy—the one that introduced the so called “Sun Tax”—was ousted by a successful no-confidence motion, and with it, a government that supports a faster energy transition took the helms of the country.

With power in their hands and with a pledge to fight the Sun Tax, the new government could simply scrap the tariff and move to the next thing. But if they do this, they will fail to put the distributed energy industry on a sustainable path.

Past Renewables Integration Is Not Enough

While Red Electrica De Espana (REE) did a good job at integrating renewables build in the late 2000s, Spain’s energy regulatory model is still geared toward a world in which centralized generation is dominant and electricity demand is considered inelastic. If Spain wants to put its DER industry on a sustainable path, it needs to unlock the value of all the energy assets connected to the grid.

The Sun Tax was an attempt of fitting distributed generation (DG) into the old mold, by charging DG for using the grid. While it is true that using the grid has a cost, having DG in the distribution grid also has benefits that were not accounted into the Sun Tax.

Aggregation Access Is an Obstacle

Currently, Spain has one of the poorest regulatory regimes regarding demand response (DR) and asset aggregation. Aggregated DR does not have access to the balancing market, nor to ancillary services. Spain does have a program for interruptible contracts, but it is open only to consumers with contracted power above 5 MW.

The only asset group in which aggregation is permitted is generation. Since 2016, DG and renewable energy resources have been able to prequalify and participate in the tertiary reserve. Another issue in Spain is that its capacity market is only open to generation assets, while excludes energy storage (and with it solar and wind + storage) from this market.

To successfully launch its distributed energy segment, Spain needs to restructure its markets to introduce the aggregator figure into its market and treat DR and storage as equals to generation. These changes have been implemented in several European markets; there is no technical reason why they can’t be implemented in Spain.

A First Step for DER

Addressing these issues and not scrapping the Sun Tax will empower the DER sector in Spain. Hopefully the new government will have the vision (and time) to overhaul its electricity market regulatory framework (not just patch it) to satisfy their supporters.

 

New Solar Records Bring the Real Energy Transformation into the Light

— June 19, 2018

Not long ago, utilities fought the introduction of renewables into their markets. Then, they didn’t really understand that the real energy transformation we are seeing today is consumer choice, including the potential of full individual energy independence in some markets driven by technology innovation.

Now utilities are exploiting the falling costs of solar to fend off the upcoming competition.

PPA Prices Are Crashing, despite New Tariffs

Despite all the talk about the new import tariffs and their effect on the installed cost of new PV installations, it appears that developers have squeezed procurement costs to continue breaking records for the lowest cost projects in the country. On June 11, Central Arizona Project (CAP), a local utility, signed a 20-year public-private agreement (PPA) with Origis Energy’s subsidiary AZ Solar 1 for a record low $0.0249/kWh.

A new record came only a day later. On June 12, NV Energy managed to break the $0.024/kWh floor, with a 25-year PPA signed for $0.0237/kWh. The Eagle Shadow Mountain solar project will have a total capacity of 300 MW and is being developed by 8minutenergy. This project is part of a 1 GW solar PV procurement process run by NV Energy as part of its strategy to become the first 100% renewable utility in the US. The procurement process also called for 100 MW/400 MWh of battery storage.

Saving the Monopoly

NV Energy’s push for 100% renewables does come with a caveat. The final green light to invest in these projects depends on the result of an energy choice initiative that will be voted on Nevada this year. If it is accepted, the project could be cancelled. NV Energy was also behind another controversial law, which eliminated net metering in the state in 2015.

This is part of a wider trend, where US utilities are increasingly deliberating not between new conventional generation or renewables, but between central or distributed resources. Behind this issue, utilities are also examining control of the end consumers relationship.

Maintaining control of the end user is key as the industry transitions from one in which the value was in the generation and transmission of electricity, to one in which the value will lie on the services that can be provided in addition to electricity.

Central Renewables versus Distributed Renewables

NV Energy understands that—at least in a resource-rich state like Nevada—the future is solar. Consequently, it wants to position itself as a clean and potentially cheap provider of electricity in the state in the eyes of the ballot voters this year. If it succeeds, it might dodge what is the most dangerous bullet for a utility—the opening of the retail market to competition and the potential race to the bottom that could spark. But even if NV Energy succeeds in maintaining its monopoly status, consumers will retain some choice—installing their own solar and producing their own electricity.

 

California’s Energy Code Update Benefits Some More Than Others

— May 22, 2018

In a move to reduce energy use by more than 50%, the California Energy Commission (CEC) voted on May 9 to support on a series of reforms designed to require that new homes comply with standards of self-sufficiency. This includes requiring solar—a first globally.

Green Vision Is 2020

The new requirement will take effect on January 1, 2020 and will focus on four areas: residential and non-residential ventilation requirements, non-residential lighting requirements, updated thermal envelope standards, and—what interests me most—smart residential photovoltaic systems.

On the last topic, the CEC aims to “promote installing solar PV systems in newly constructed residential buildings. The systems include smart inverters with optional battery storage.”

The solar requirement is well-timed. The ITC step down will have its first decline in 2020, from 30% to 26%, and that will disappear for residential systems in 2022.

CEC Plans Include DER 

The requirements go beyond solar; the CEC also included other DER technologies in the mix. It also aims to “encourage battery storage and heat pump water heaters that shift the energy use of the house from peak periods to off-peak periods.” This aligns well with previous time-of-use electricity pricing regulations in California with mandates for solar installations.

While the solar industry will benefit from this requirement, some parts of the industry will benefit more than others:

  • OEMs: OEMs will be the clear winners from this initiative. California adds between 70,000 and 100,000 new housing units per year—or an extra demand for solar equipment of between 490 MW and 700 MW (assuming 7 kW systems). This effect will be similar for batteries and smart HVAC and heat pumps. Here we have two groups. Those OEMs that have products and brands that can add value to the property will benefit the most, as they will be able to work with real estate developers to create premium housing. Tesla leads this group, but others like SunPower, LG, and First Solar could benefit as well. The other group will have to compete to create low cost solutions to partner with real estate developers that target the poorer segments of the real estate market, or try to build a recognizable brand.
  • Installers: For installers, the new requirement is not a clear victory. While the extra demand is generally welcomed, in this specific market segment the real estate developers will have the upper hand. Therefore, installers will face deals that sacrifice margin for volume to become sub-contractors. In the medium-term, it’s more likely that real estate developers will build their own teams in charge of DER installations.
  • Financiers: Financiers face the same problem as installers. While the extra demand might bring new deals in which the person that buys the house decides to have a mortgage on the house and a separate loan or lease on the DER installations, the most likely outcome is that mortgages will cover the house and the DER equipment.

An Opportunity for a New Type of Residential DER Company

Initially, the outcome after the CEC energy code reforms does not seem to change for companies involved in installation and financing of solar systems in California, like SunRun or Vivint Solar. They do have a skill that real estate developers do not—the ongoing servicing they offer their customers. Companies with strong servicing arms could sacrifice part or all of their margin in the installation in exchange for long-term servicing contracts and potentially the rights to operate the equipment as an aggregator to offer services to the grid.

 

Google Has Reached 100% Renewable Energy, so I’m Issuing a New Challenge

— April 19, 2018

As consumers press companies to be more conscious of their environmental impact and sustainability, corporate procurement of renewable energy has gained momentum around the world. Some 130 companies have signed the RE100 pledge to make their operations run on 100% renewable energy. One of the companies that started this trend was Google.

Google’s First Renewable Steps

In 2010, Google started a journey to replace the electricity it uses with renewable sources by signing its first power purchase agreement (PPA) with a 114 MW wind farm in Iowa.

To ensure that its purchases have a meaningful impact on the environment, Google has followed the concept of additionality, which means that all the electricity it buys is funding new renewable energy projects.

In 2017—2.6 GW over 20 projects and 7 years later—Google announced that it reached its 100% renewables target. This is a massive achievement, especially considering that Google began these plans when grid parity was little more than a dream for wind, and solar energy was a technology that only rich Californians and Germans put on their roofs.

My Challenge to Google

While Google’s achievement should be applauded, I believe it is possible to move that target further afield. It is true that Google is buying all its electricity from renewable sources, but it is unlikely that all the electricity it is using comes from renewable sources. This is because solar and wind, Google’s choices for renewable sources, are both variable, while Google’s electricity demand is not. In other words, there are times and locations when Google must use electricity that comes from traditional sources, while simultaneously the electricity generated from the renewable projects funded via Google’s PPAs is curtailed and lost.

So, here is my challenge to Google (or any company willing to accept it—looking at Apple, Amazon, Microsoft) to move its energy program forward:

  • Work with the 20 projects it has funded to ensure they have onsite storage, which reduces the chance of curtailments and increases impact on the grid. This also means the balancing cost is not passed to other ratepayers.
  • Ensure all energy assets (distributed generation and loads) are part of demand response programs or virtual power plants, which makes the flexibility of these resources open to grid operators.
  • Make sure any new electricity procured is locally generated, and has no impact on the grid (or that the sites at least fulfill bullets 1 and 2 above).
  • Encourage employees to take their own energy consumption choices along the same journey!

Major Companies Should Continue to Set a High Bar

This is not an easy challenge, but it’s also not impossible. It’s probably as difficult as the goal to achieve 100% procurement of renewables seemed in 2010, when Google embarked on this mission. Google addressed these concepts in a white paper released in 2016, but mostly in a future tense. In my opinion, the technologies and regulations to make this possible are already here and are starting to reach scale. Now it is up to Google and other visionary organizations and individuals to make this happen.

 

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