Navigant Research Blog

DER Developments Challenge Incumbent Grid Operating Models

— December 27, 2017

Net metering has been a key driver for the deployment of solar PV distributed generation in the US. The simplicity of net metering—merely deducting the electricity generated during a year from the total electricity consumed, with no regard to the time when these two activities occurred—is easy for customers to understand. It simplifies the design process of installations, lowers the barriers to entry for distributed solar and wind, and has allowed the industry to develop.

But net metering creates an artificial barrier for the adoption of other flexibility-related distributed energy resources (DER) technologies like energy storage and demand response, as utilities are forced to provide balancing at no cost. Although net metering is still leading in the US, regulators in the main solar markets are tweaking it to pass some of the balancing costs to the end user. For example, California is moving toward time-of-use tariffs for all new distributed solar installations, opening the market to flexible technologies.

DER Deployments Increasing and Shifting

Navigant Research forecasts the deployment of all DER technologies in its Global DER Deployment Forecast Database report. We expect North America to install 31.5 GW of new DER capacity in 2017 and 98.1 GW in 2026. The technology mix for 2017 is led by distributed generation (DG), which accounts for 61.9% of the total DER capacity installed. However, by 2026, DG is expected to drive only 31.4% of new DER capacity additions, leaving a large market share to other technologies. These include flexibility, microgrids, energy efficiency, and (driven by the electrification of transport) EV charging, which is expected to lead DER new capacity in 2026 with a market share of 43.2%.

Despite the US leaving the Paris Agreement and its move away from the Clean Power Plan, DER capacity additions in the US are expected to be almost 8 times more than central generation deployments over the next decade. This includes central renewables like utility-scale solar and wind and significant amounts of natural gas power plants. Navigant Research forecasts the US will install 519 GW of DER capacity between 2017 and 2026, while the US Energy Information Administration’s International Outlook projects that the US will add just 66 GW of net new central generation capacity.

DER as Percentage of Annual Additional Capacity, US: 2017-2026

Source: Navigant Research

DER Developments Bringing Challenges and Improvements

DER developments are challenging incumbent grid operating models, requiring a more dynamic and flexible network with advanced communications and orchestration to ensure stability, efficiency, and equality among diverse resources. From a utility perspective, the overarching goal of DER deployments is to integrate these resources effectively to make the electricity grid more efficient, resilient, cost-effective, and sustainable. However, DER is usually deployed behind-the-meter, where customers are more concerned with securing cost-effective and reliable onsite power. This raises questions about who DER should be optimized for and the pace and scale of DER deployments.

Despite the disruption that DER is bringing, it is already possible to see the first sprouts of DER investments: a cleaner, cheaper, consumer-focused, and far more innovative power sector. For this reason, the transition to DER will not be easy for organizations used to the centralized energy model, but focusing on happy customers over electrons will help companies to thrive.

 

Is DER Taking Off in China?

— November 7, 2017

Last month, the Chinese Photovoltaic Industry Association announced that the country had installed a whopping 24.4 GW of new capacity in the first half of 2017. That China broke its previous year’s record once again makes the announcement news in itself. What is interesting, however, is not the final figure, but how China reached it.

In the first half of 2017, ground-mounted installations (installations without any onsite electricity demand) fell 16% to 17.3 GW, while distributed PV—mostly rooftop projects—almost tripled, reaching 7.1 GW in the same period. Of the 7.1 GW, 3.0 GW of distributed PV was installed in June 2017 alone. By the end of June, China had 102 GW of PV capacity installed, of which 83% was ground-mounted and 17.4 GW was distributed.

A highly attractive incentive program drove this growth. China’s distributed PV users (rooftop plants of up to 20 MW) can access a feed-in tariff premium for 2017 of ¥0.42/kWh ($0.06/kWh) on top of the electricity price for 15 years. In addition, some provinces offer further incentives. For example, Hebei provides ¥0.15/kWh ($0.02/kWh) for the first 3 years of the plant (effective in 2015). Jiangsu Province offers ¥0.50/kWh ($0.08/kWh) for 5 years, and the City of Shaoxing gives an additional ¥1.00/kWh ($0.16/kWh).

The national incentive was left at the same level for the last 4 years while PV module prices fell about 40%, so distributed PV became economically attractive. In addition, late in 2016, China’s National Energy Administration proposed a 28%-52% cut to the distributed PV tariff, depending on the region where the system is installed. This was changed in the latest draft, which now proposes a national tariff of ¥0.30 ($0.05) per kWh on top of the electricity price that would take effect in January 2018.

The expected drop in the incentives created a rush to install distributed PV in 2017, but there are other factors in favor of the massive growth. Curtailment is a major issue faced by Chinese PV installations, and it has pushed the country to ban new ground-mounted installations in the provinces that have the most issues—like Xinjiang and Gansu, where 26% and 22% of all the potential generation is lost (at a cost to the system owner) due to curtailment, respectively. A key advantage of distributed PV installations over ground-mounted installations is the offtaker of the electricity produced onsite, as it limits the risk of curtailment.

Opportunities Beyond PV

Other distributed energy resources (DER) technologies are also poised to gain some ground, thanks to the deployment of distributed PV. In March 2017, the National Energy Board issued a draft paper with “guidelines for the promotion of energy storage technology and industry development,” creating some momentum for the country’s storage market. The local PV companies Trina Solar and Xie Xin have also shown interest in this market and have started to invest in storage to complement their product portfolios. China’s vehicle manufacturer BYD also has a long track record producing battery cells and recently launched energy storage systems for residential and commercial applications.

China’s Competitive DER Industry

The development of DER in China could easily reverberate in the rest of the world. Chinese PV OEMs already lead the world in production and are taking an important role in technology innovation in the renewable sector. If the large Chinese inverter and battery players like Huawei, Sungrow, and BYD create innovative DER products for their domestic market that can be adapted to the North American and European markets, this will be difficult to answer. Despite the import tariff, Asian-made PV modules have conquered the market. However, giving Chinese companies some control over energy assets might be too much for Western governments. Huawei, for example, has been blocked from selling to the US telecom industry. But one thing is certain: we can bet the Chinese player will try.

 

It’s a Tie! The USITC Announces Its Section 201 Solar Trade Case Recommendations

— November 3, 2017

On October 31, 2017, the US International Trade Commission (USITC) announced the remedy recommendations that it will forward to President Trump. As we have discussed in previous blogs (here and here), this case has been shaping the future of the US solar industry. Impacts have been felt around the world since May 2017, when Suniva and SolarWorld asked the USITC to investigate.

What Did They Recommend?

The recommendations of each USITC commissioner can be found here. In summary, they recommended a system involving import quotas, import licenses, and a percentage-based ad valorem tariff of up to 35% in the first year of implementation. The commissioners rejected Suniva’s petition to set a minimum import price at $0.74/W; in percentage terms, this would be comparable to a 100% tariff. Like with Suniva’s petition, the tariff will be reduced each year and will drop to up to 32% in the fourth year of its implementation (the best case would set the tariff at 15%).

So, What Will Happen Next?

On one side, even when the highest tariffs are applied, module prices in the United States would regress to those seen about a year ago—when the industry installed 14.6 GW of capacity, doubling its previous installation record. Thus, the effects on the downstream of the solar industry should be minimal. It is unlikely that the protection given by the USITC will be enough to create a boom for solar manufacturing in the United States, but it should be enough to keep a profitable cottage industry focused on the local market with modest growth potential.

On the other side, the tariff and quota limits will stop future global price declines from being reflected in the US market. This will affect the competitiveness of solar and hence, its expansion into areas with lower irradiance.

With China hitting 50 GW of installed capacity this year (3 times the second largest market), India poised to take over the United States as the second largest market, and installations in the global sun belt (Latin America, Middle East, South East Asia, and Australia) soaring, global solar players are unlikely to be affected by the tariff. However, potential mirror tariffs might push out US companies with local manufacturing capacity, like First Solar, from the international markets.

Overall, the recommendations of the USITC commissioners favor the status quo, keeping the solar industry intact but slowing its growth.

 

Sunrun: The Large Solar Provider Dilemma

— September 19, 2017

On August 24, Sunrun—the last of the large independent US solar providers—announced an agreement with Comcast, a leading cable provider in the country. The two companies plan to launch a strategic partnership to offer Sunrun’s services to Comcast’s clients.

Sunrun was founded in 2007 and found success innovating new ways to finance residential solar installations such as solar leases and power purchase agreements (PPAs). It created the solar as a service (SOaaS) business model, which became the foundation for the growth of the sector between 2010 and 2015. Until 2014, it seemed that solar leases and PPAs—grouped as third-party ownership in California’s Interconnection Applications Data Set—were going to be the winning business model in the SOaaS industry. These leases allowed large players to both increase the market size and displace local installers.

Changing Solar Market

In 2015, the market share of solar leases and PPAs in California—which itself represents around 60% of the US market—plunged to under 50% from 75% in 2013. Data for 1H 2017 shows third-party ownership at close to 30%.

Third-Party Ownership Market Share, California: 2005-1H 2017

(Sources: Navigant Research; California Distributed Generation Statistics)

The collapse of third-party ownership has weakened large solar providers compared to local installers. Large solar providers relied on their access to cheaper capital backed by significant margins in their leases to run large business development teams and finance the installations. As residential solar customers moved into cash or loan buys, local installers became competitive again, reducing the profit margin per installation in the industry. This left large solar providers like Sunrun with high customer acquisition costs relative to profit per installation.

Under these circumstances, it is not surprising that Sunrun is looking for new and cheaper ways to attract customers. Even if this partnership with Comcast costs Sunrun its independent status, it may be worthwhile if the strategy is successful.

What Is in It for Comcast?

Comcast has shown interest in the energy sector in the past, and its Xfinity Home service includes a smart thermostat as one of the offerings. However, scaling it into a full-fledged energy solution would be costly, as Comcast would need to build a new team from the ground.

For Comcast, this partnership offers a relatively cheap entry into the solar and energy markets in which it can rely on its core skills (customer acquisition and management) without having to invest significantly in a new product. If successful, Comcast can push a more aggressive strategy into the energy sector either through Sunrun or with its own product.

Benefits and Potential

Customers of Comcast and Sunrun could also benefit from this partnership. The companies can put together a convincing solution for home automation by tapping on their offerings on the two main services around home automation—security and energy.

The success of this partnership will depend of Comcast’s ability to cross-sell energy services to its current customer base. Comcast operates in a market with limited competition and high barriers to entry, which is different from the solar market. The sales process of solar is also different from that of cable. Solar is a long-term investment (even leases and PPAs require long-term contracts). Therefore, customers take long before making a final decision and, in some cases, it will require home visits before the deal is closed. This means that Comcast cannot simply add solar to its bundles. It will have to invest in training its sales force if it wants to sell solar services effectively. It won’t be easy, but if Comcast succeeds, it may signal a new era for energy.

 

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