Navigant Research Blog

A Better Way to Extract Shale Oil

— November 5, 2014

Last month the Colorado Fuel Cell Center (CFCC) at Colorado School of Mines hosted the first public demonstration of IEP Technology’s Geothermic Fuel Cell (GFC).  This innovative technology uses the waste heat produced by fuel cells to convert the kerogen in oil shale into unconventional hydrocarbons onsite.

Using standard fuel cell technology, the GFC flips the application on its head by taking a heat-first, power-second approach.  The system uses solid-oxide fuel cells, manufactured by Delphi Automotive, in tubular modules that can be linked end-to-end to create a long string of fuel cells encased in a steel cylinder.  The long term plan is to insert vertical stacks that are up to 1000 feet long into oil shale formations, spaced 10 to 15 feet apart in a grid pattern.  In this configuration, the fuel cells can generate temperatures of up to 1200 degrees Fahrenheit, which will be used to heat the formation and drive pyrolysis (thermal decomposition of the oil shale).

Giving Shale Oil a Better Name

Currently, shale oil is most commonly extracted ex situ, or offsite.  The oil shale is mined and taken to an above-ground processing facility where it is crushed, heated to temperatures suitable for pyrolysis (500-1,100 °F), and the unconventional hydrocarbons (shale oil and natural gas) are collected, cooled, and refined.  This process is expensive, inefficient, and extremely damaging to the environment, and it has earned shale oil extraction a bad name.

IEP’s technology, on the other hand, performs the processing in situ, or onsite, by applying heat underground and extracting the shale oil and natural gas via wells that sit among the boreholes, leaving the formation intact.  The only byproducts are electricity that can be sold back to the grid, small amounts of clean water, and CO2.  It may seem odd to think of the electricity as a byproduct, but that’s the beauty of IEP’s approach.  If a single 1000 foot stack contains 100 to 300 of Delphi’s 1.5 kW fuel cells, you’re talking 150 kW to 450 kW of baseload power per stack over a projected 5-year lifespan, which is no small thing when you consider the potential revenue.

IEP estimates that the gross capital and operating costs of a GFC installation will be less than $30 per barrel of shale oil when the revenue from the sale of electricity and surplus gases are taken into consideration.  This would give GFCs a significant cost advantage over the competition.  More significantly, IEP’s technology allegedly has an energy return on energy invested (EROEI) of 22:1, which would be a monumental improvement on the current best-in-class EROEI for oil shale, which is closer to 5:1.  The technology seems easy enough to replicate, but IEP has patented their idea, which should give them some protection from competitors.

The Real Cost

However, a couple of questions come to mind.  First, what will the actual installed cost of the systems be?  It could take thousands of fuel cells to develop a single formation.

Second, you have to run a fuel source out to the site, which is probably fairly remote, in order to run the GFC.  You also have to run transmission lines out to the site and build a substation in order to sell power back to the grid, and the fuel cells will only be running at that site for 5 years, so it’s a temporary installation.  How many utilities would be interested in doing that?  These questions must be addressed, and we won’t know how the economics and EROEI shake out until mid-2015, when the GFC is expected to be field-tested.  But this appears to be a very promising technology.

 

Solar Subsidies Attract Financial Schemes

— October 20, 2014

Arizona Public Service (APS) and Tucson Power have recently come under a lot of scrutiny for their proposed rate-based solar programs.   The complaint from private sector companies is that rate-basing (i.e., the utility practice of raising funds for capital investments by increasing electricity rates) would create an uneven playing field in the solar industry, because rate-basing a capital expenditure gives utilities a guaranteed rate of return.  As SolarCity’s VP Jonathan Bass put it, “If there were ever a reason for a regulatory body to exist, it would be to stop a state-sponsored monopoly from unfairly competing against the free market in an entirely new industry.”

That’s hard to argue with.  However, I would add that another reason for a regulatory body to exist is to stop the free market from abusing the subsidies that are so crucial to an entirely new industry.  In the spirit of fair-minded analysis, let’s take a closer look at the solar industry and at how level the playing field actually is.

Pump and Dump

First, let’s examine the solar developers (SolarCity, Vivint, SunRun, Clean Power Finance, etc.) whose solar lease and solar loan programs are responsible for catapulting the industry into the period of rapid growth we’re seeing today.  Critics argue that solar developers base their business models around building solar arrays on the cheap and claiming an inflated fair market value (FMV) of the systems.  The FMV is supposed to reflect the fair price of a system, and it’s ultimately used by the government to determine the monetary value of the 30% income tax credit (ITC) that goes back to the owner of the system.  Ironically, the FMV is becoming increasingly difficult to determine as more solar companies are vertically integrating, which has made the true system costs less transparent.

For systems that are being leased (which are most systems), the owners and thus recipients of the ITC are actually third parties.  These third-party owners tend to be financial institutions, such as Morgan Stanley, Goldman Sachs, Credit Suisse, Google, and Blackstone, that are constantly looking for tax credits, and they have found a slam dunk as financiers of residential and commercial solar arrays.  Typically, the developers bundle a group of solar customers together into a tranche (essentially a bucket of leases), which is then backed by the third-party ownership groups.  The financial firms own the leased systems for 5 years and then dump them, but not before taking advantage of the Modified Accelerated Cost Recovery System (MACRS), which is a method of depreciation that allows third-party owners to recoup part of their investment in the solar equipment over a specified time period (5 years) through annual deductions.  Basically, MACRS represents an additional subsidy, with a net present value of 25% of the initial investment.

The Treasury Steps In

So between the 30% ITC and the 25% MACRS, the owners should be getting a 55% subsidized investment; but with the inflation of the FMV, it turns into a much larger subsidy, on the order of 80%.  Then consider the high rate of return (up to 15%) that investing in solar offers on top of all these subsidies, and it starts to sound pretty good to be a solar financier.  Solar developers readily admit that their business models are dependent on government subsidies, but this sounds like manipulation of those subsidies.  Indeed, this practice is currently under investigation by the Department of the Treasury.  While the developers claim they haven’t done anything wrong, if the government tightens the rules around the ITC or tries to recoup the inflated subsidies, it could be a major blow to the solar industry.

What’s more, the developers themselves don’t seem to be reaping the rewards of their innovative business models that have brought solar to the masses.  If anything, they seem to be bearing all the risk while the third-party owners reap most of the profits.  Is there some merit to rate basing solar?  In my next blog, I’ll examine this question.

 

From NRG, a Solar Storm

— June 12, 2014

According to David Crane, NRG Energy’s outspoken CEO, residential solar power will be cost-competitive with retail electricity in about 25 states next year.  As a result, NRG is making some big moves in residential solar installation and financing.

In March, NRG announced that it is acquiring Roof Diagnostics Solar (RDS), which is the eighth-largest residential solar installer in the United States, employing 475 people.  NRG already has a small but growing residential solar installation and financing business called NRG Residential Solar Solutions (RSS), which mainly consists of licensed dealers and operates in Arizona, California, Connecticut, Hawaii, Maryland, Massachusetts, New Jersey, New York, Texas, and Vermont.  RSS has a fleet of several thousand residential systems installed, but it hit a sales plateau in 2013.  The company showed that it’s serious about becoming one of the largest solar installers and financiers in the United States by acquiring RDS, which will be rolled into RSS.  NRG hopes to maintain its existing installer network despite some channel conflicts with RDS, which operates in New Jersey, New York, Massachusetts, and Connecticut and has expansion plans for California.

Undercutting the Customer

NRG is also planning to eventually use the growing underground network of pipes that delivers gas to about half the homes in the United States to complement its residential solar business.  According to Crane, the company wants to provide customers with fuel cells and microturbines, which produce electricity from gas, to fill in the gaps of solar generation.  Plus, NRG is dabbling in energy storage and microgrids on Richard Branson’s Necker Island.

In some cases, NRG is making bets against its traditional customers (and its own traditional business).  It has become the largest power provider to U.S. utilities, with 25 GW of natural gas power plants, 13 GW of coal generation, 448 MW of wind farms, and 1.2 GW of utility-scale solar systems.  Some of this power goes to NRG’s own service territory, but more than half of the company’s revenue comes from power sales to other utilities on the wholesale market.  With its 47 MW of distributed solar panels on rooftops, NRG is actually undercutting the business of the utilities it serves.

A Lot to Lose

Why is NRG pursuing such an aggressive strategy?  As the largest power generator in the United States, NRG has a lot more to lose than transmission and distribution (T&D) oriented utilities with the proliferation of distributed generation (DG).  DG directly affects NRG’s bottom line, since every kilowatt-hour not provided by the company is a kilowatt-hour that’s costing NRG revenue.  This doesn’t affect utilities that are focused on T&D as much, since they’re still providing the same interconnection services (at least for the time being).  As a power provider, it’s in NRG’s interest to own as much of the utilized generation capacity as possible – and that now includes DG capacity, especially when you consider that DG output is always utilized due to policies like net metering.

Having an aggressive strategy also seems to be part of having David Crane as a CEO.  According to Crane, future power customers will be able to disconnect from the grid as they use residential solar coupled with energy storage and a gas-powered fuel cell or microturbine to provide for their own power needs.  This was the subject of Navigant Research’s recent webinar, The Energy Cloud.  Crane is positioning NRG to be the supplier of solar arrays, fuel cells, and microturbines to power customers in this age of grid obsolescence.  It’s remarkable to see a utility betting on the grid’s eventual obsolescence, but it’s important to note that within that framework, NRG is still maintaining its core business as a power provider.

 

Enabling Remote Microgrids in the Developing World

— April 4, 2014

In my last blog, I wrote about the success mobile network operators (MNOs) are having with electrifying rural communities in developing regions, such as Latin America and Africa, by partnering with companies that sell solar home systems.  Much credit must go to the pico systems themselves, which are a cheap and reliable way to provide for the customer’s basic energy needs (cell phone charging and lighting).  However, there are two greater forces at play that reach far beyond the business of rural electrification: MNOs have found an effective business model in pay-as-you-go (PAYG) and they have employed an effective money transfer technology, known as mobile money.

These two forces answer the question: What has enabled the exponential growth of cell phone usage in the developing world?

Phone Bank

PAYG is a prepaid mobile phone plan.  You pay for a phone with a certain amount of airtime on it and you refill the time in your account as needed.  There’s no contract or monthly rate.  If you run out of time, your service is cut off, plain and simple.  This model works well for the off-grid rural poor who live on an inconsistent daily budget and who typically don’t have bank accounts.  It should be noted that some utilities in developed parts of the world are also experimenting with PAYG meters and they are finding that it is the only model that has successfully led to a change in consumer behavior (in the form of energy conservation).  As my colleague Peter Asmus details in his recent blog, this isn’t the only example of how the developed world can learn about energy solutions from the developing world.

Returning to the unbanked poor of the developing world, MNOs spotted an opportunity to capitalize on the lack of banking infrastructure in remote communities, and they have leveraged vendor networks and mobile technology to offer basic banking services to their customers.  To purchase airtime in the developing world, customers visit their local mobile airtime vendor and pay cash upfront for a scratch card of a certain value.  They enter the code from the scratch card into their phone to redeem the value of the card as mobile money, which goes directly into the mobile money wallet in their phone.  The mobile money wallet is protected by a PIN and acts essentially like a debit account, which can be used to purchase more airtime, along with other goods and services, to send and receive money, and to pay bills.  The MNO charges the customer for transactions made, so it is a lucrative new revenue stream for them.  More significantly for nanogrids, mobile money has opened the door to provide financing to unbanked customers.

Nanogrid Frontiers

Historically, one of the greatest barriers to off-grid households purchasing solar arrays has been the high upfront cost.  Investors, whether they’re vendors, microlenders, or nongovernmental organizations (NGOs), have had a hard time offering PAYG lending schemes to consumers due to the difficulty of collecting a long stream of small payments from a remote village, as well as the inability to monitor the systems.  Mobile money can provide a platform that enables lenders to conveniently offer PAYG schemes to off-grid consumers for the purchase of nanogrids, among other things.  More importantly, mobile money could turn remote parts of the world into profitable frontiers for the nanogrid market.  Many residential solar vendors (such as Simpa Networks in India) already see them that way, and these vendors are finding investors to finance PAYG systems as well as partners to handle the mobile money transactions.

While there is some variability in what these PAYG schemes look like, the keys to success seems to be the ability to track payments and usage easily and the ability to cut off service if a customer falls behind.  To view a list of nanogrid PAYG case studies, check out Navigant Research’s report, Nanogrids, and to learn about other business models that are being used to electrify remote parts of the world, view the replay of our Remote Microgrid Business Models webinar.

 

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