Navigant Research Blog

Commitments to Change in the Aftermath of the Paris Conference

— December 18, 2015

In my previous blog about the 2015 United Nations Climate Change Conference (COP21), I said there was cautious optimism that a multilateral deal could be reached. Well, there was in fact good news coming from Paris on December 11. At the conference, 187 countries committed in a legally binding agreement to reduce their greenhouse gas (GHG) emissions.

The commitments in Paris will not immediately deliver the 2°C or 1.5°C  temperature limits suggested by the United Nations’ panel of experts as the maximum allowed to avoid the worst effects of climate change. Instead, the agreement commits to a process of increasing emissions cuts every 5 years to eventually curtail emissions to a level that limits temperature increases within the 2°C-1.5°C range. More importantly, it commits countries to a “balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second half of the century.” In short, this means that the world will need to be net zero emissions early after 2050.

The Paris agreement did push forward the financial agreements to developing nations that were introduced in Copenhagen. There is room to improve in this area, but it’s becoming less relevant as renewable generation becomes competitive with new conventional capacity.

In parallel to the conference, there were a large number of commitments from investors and businesses to move investments to clean energy and even to divest from fossil fuels. For the first time, major businesses and investor groups lobbied for strong long-term goals and stringent rules to increase ambition (and reduce investment risk).

One interesting commitment came from the automotive industry. Led by Renault, a group of 13 CEOs from the industry committed themselves to decarbonizing transportation over the next 2 to 3 decades. They anticipate 2 billion vehicles on the road by 2050, but are clear in saying that, “We cannot continue to rely on fossil fuels to power those vehicles.” If they deliver on this promise, they will break what was perhaps the most successful partnership between two industries in the 20th century. It would hit the transport fuel market, the most important market of the oil industry and one that has been less affected by renewable penetration to date.

Point, Set, Match?

COP21 was successful thanks to the technological advances in renewables in the last decade and a combination of societal changes (i.e., improved economic performance in the United States, the Chinese population facing dreadful air quality issues, and extreme weather patterns in parts of the world) that make political inaction less tolerable.

However, minimizing GHG emissions in the global economy is not going to be easy, especially as some countries might need to shift funding toward adaptation and increased resilience. Until recently, renewables grew on the shadow of conventional sources, barely affecting their business models or hitting their core markets. This has changed in the last few years, and the Paris agreement sets a ticking clock in the face of oil companies and utilities with large generation capacity reliant on fossil fuels that says that these technologies are on their way out (or at least that they will play a minor role in the second part of the century). The problem that arises is how to keep the standards used in the old system while laying the base for the success of the new system. Smart thinking and lots of innovation will be needed to go through this transition without rocking the boat (too much).

 

A User Guide to the Climate Change Conference

— December 1, 2015

The 2015 United Nations Climate Change Conference (COP) held in Paris in the first week of December will be the 21st early session of the Conference of the Parties to the 1992 United Nations Framework Convention on Climate Change (UNFCCC) and the 11th session of the Meeting of the Parties to the 1997 Kyoto Protocol.

Six years have passed since the public debacle suffered by the group in 2009, when all the eyes of the world were turned toward Copenhagen expecting (perhaps naively) to see a global accord binding the countries to reduce greenhouse gas (GHG) emissions enough to prevent a rise in atmospheric temperature of more than 2 °C  by the end of the century.

Climate policy today is increasingly negotiated behind closed doors, depending more often on unilateral commitments and bilateral negotiations that have proven to be as valuable as the all-or-nothing approach used before Copenhagen. Also, technical advances have significantly reduced the cost countries face in achieving their reduction targets. For example, according to the Lawrence Berkeley National Laboratory’s Tracking the Sun VIII report, the cost of solar power has fallen by about 80% since the conference in Copenhagen in 2009. 

In the past, the involvement of the two largest GHG emitters, the United States and China, caused disruption and delays. Now, these two countries are working together ahead of the meeting in Paris. With the United States and China now moving in the same direction, there is cautious optimism that a deal could be reached. That said, there are several different scenarios that might play out in this year’s COP.

Outcome Already Known

The negotiations to sign an all-inclusive agreement will keep people involved in early December. However, some of the outcome is already known. During the process behind this year’s COP, the majority of countries have put forward Intended Nationally Determined Contributions (INDCs), which are essentially climate plans. These countries have pledged reductions that in total will bring 95% of global GHG emissions under some form of policy or regulatory scrutiny.

The next step (even if an all-inclusive agreement is not reached), is to translate country strategies into an executable playbook. It is here that the continuous improvements in low-carbon energy generation and energy efficiency technologies, business and financial models, and the implementation of the Energy Cloud will play a major role in achieving global emission reductions. These continuous improvements represent a necessary step in slowing down global warming and improving resilience during catastrophic events by optimizing power consumption across the grid while increasing comfort levels and providing a decentralized control and management that allows for redirecting energy flows and many-to-many networks.

 

Solar Lessons from the North of Chile

— October 30, 2015

Northern Chile is dominated by the Atacama Desert, and other than its large mining industry, the location is otherwise isolated. To supply this area with electricity, Chile established a local grid called Sistema Interconectado del Norte Grande (SING) that is segregated from the main grid, known as Sistema Interconectado Central (SIC).

Traditionally, electricity generation in the SING network relied on relatively expensive imports of coal, natural gas (NG), and diesel. Of the 4.97 GW of installed capacity in 2014, coal represented 42.2% and NG 47.5%. As solar energy prices dropped, the region became a hot spot for solar developers because it offered a perfect combination of high electricity prices in an area with the world’s leading insulation levels. A significant number of developers pulled the trigger and began the construction of their plants, planning to sign power purchase agreements once the project was commissioned.

The problem is that every company had the same idea at the same time. Solar projects have mushroomed in the past year. By October 2015, SING had 157 MW of installed solar capacity, 80% of which was commissioned in 2015. Solar now makes up 3% of the total generation capacity, and that was before the commissioning of First Solar’s 141 MW Luz del Norte plant, which will be the largest in Latin America. This plant is in the late stages of the construction process and it is expected to begin operations before the end of 2015.

Impact on Electricity Prices

The impact of new solar capacity on daytime wholesale electricity prices has been staggering. The average hourly wholesale electricity price in October 2015 dropped 42% between 8 a.m. and 9 a.m., whereas it fell only 10% in 2014 and 16% in 2013. In October 2014, prices averaged $54/MWh between 9 a.m. and 7 p.m. versus $67/MWh throughout the rest of the day. By October 2015, the average day-to-night differential widened to $48/MWh between 9 a.m. and 7 p.m. versus $78/MWh in the rest of the day.

Solar developers now find themselves in a predicament. Daytime electricity prices are expected to fall even further as the projects currently under construction come online, creating a death spiral that would threaten the economics of all plants and the sustainability of the whole industry. But no company wants to throw in the towel and write off all of its investment to date. The question is, who will move first?

 

Are LCOE Analyses Still Useful?

— September 29, 2015

Earlier in September, the International Energy Agency (IEA) published its 2015 edition of the Projected Costs of Generating Electricity report. Not surprisingly, the report shows a dramatic fall in the levelized cost of energy (LCOE) for solar electricity and a minor fall in the LCOE for wind in comparison to the IEA’s 2010 report.

Several media outlets have highlighted that the cost of a kilowatt-hour (kWh) coming from renewables is now similar to—or even lower than—costs coming from fossil fuel technologies, and therefore are citing renewables as the cheaper option. While this may be true in certain scenarios, what the reporters and the LCOE analysis fail to highlight is that, while all kWh are equal, some are more equal than others.

kWh and World Cup Coverage

Take, for example, the Germany versus Argentina game from the 2014 FIFA World Cup. The price of a kWh in Germany at the end of this game rose to the high of €46/MWh, than dropped €15/MWh 2 hours later. In the evening, electricity production from wind turbines reached almost full capacity from the day’s demand. Then the next day, lacking an event interesting enough to keep televisions on, that demand plunged.  Location, like time of production, can also make a significant difference in the quality of a kWh. There is no data to support the following hypothesis, but demand in Argentina had to have dropped after Germany scored, while demand in Germany likely stayed high for at least a few more hours.

Simplifying LCOE

A traditional LCOE analysis would assume a capacity factor for a turbine depending on the local wind resource data, then aggregate the hours that the turbine is expected to operate in its lifetime, and finally divide the overnight (capital expenditures) and operating costs by the expected hours to get the LCOE. This made sense in a world where wind generation was managed primarily to follow demand. It was enough when the costs were multiple that of other options—like Feed-in Tariffs and basic net metering. In those options, energy quality is not the incentive, and the most common policy support mechanism is allocated toward wind and solar.

But in the world we are headed toward—where supply and demand for solar energy may not match—a newer, simpler metric that media outlets could use to educate people would be useful. For example, something like a revenue generation cost analysis (the cost of producing $1 of revenue) that takes into account the cost of delivering a kWh and the time in which it is delivered, could be more interesting to the public—and could even help in moving renewables policy and innovation forward.

 

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