Navigant Research Blog

In Shanghai, Carbon Goes on the Market

— August 30, 2012

This month Shanghai began an ambitious emissions trading system (ETS) intended to curb carbon dioxide emissions.  Approximately 200 local companies will participate in the program, which targets industrial firms that produce more than 20,000 metric tons of carbon annually, and non-industrial firms that produce more than 10,000 metric tons a year.  Carbon permits will be free during the program’s initial phase, but then market forces will set the price.  The scheme will be based on the mechanics of the Shanghai Environmental and Energy Exchange, with significant funding from the Asian Development Bank.

Similar programs are planned in Beijing, Chongqing, Hubei, Guangdong, Shenzhen, and Tianjin.  While the nuances of each program will vary, these initiatives will act as pilot projects for a nationwide carbon trading scheme, set to be implemented by 2015.

Shanghai’s energy demand is forecast to nearly double by 2020 and, considering the country’s vast coal reserves, a corresponding increase in greenhouse gas emissions would be inevitable without some effort at reduction.  The question becomes: by choosing an ETS, has China selected the most effective policy to combat pollution while minimizing the social impact?

The two most popular policies for emissions reductions are carbon trading schemes and carbon taxes.  They are fundamentally different, and therefore, neither is considered a “one size fits all” solution.

Carbon trading, as in the Shanghai scheme, creates an absolute maximum to the emissions of a region or company (the “cap” in “cap and trade”) and allows the market to sort out the most efficient means for achieving that goal.  Trading systems create dynamic economic efficiency by allowing companies with the lowest abatement costs (the cost of reducing their pollution) to do so, and then profit by selling their unused permits.  Companies with high abatement costs can purchase these credits if the credits costs less than retrofits required to meet the cap.  The European Union launched its Emissions Trading System in 2005.  The scheme aims to reduce total emissions 21% below 2005 levels by 2020; results so far have been mixed.  California plans to roll out a carbon ETS in 2013 that will cover approximately 85% off all carbon emissions in the state, including utility and transportation fuels.

The Tax Option

Carbon taxes, on the other hand, place a fee on every ton of carbon produced by specific industries, or on all emissions in a country, region, or state.  Taxes are simpler to implement because their mechanisms are already well understood by both politicians and the general public, and they are relatively easy to enforce.  Unlike a cap and trade system, taxes incent carbon emitters to reduce pollution as much as possible, whereas an ETS only requires reductions to a specific level.

Furthermore, some creative manipulation of the existing tax code can result in minimal economic impacts.  British Columbia has a revenue neutral carbon tax in place, which it has recently increased to $30 per ton.  Revenues from the carbon tax, levied against all the carbon from fossil fuels, are used to reduce corporate and individual income taxes; which have resulted in some of the lowest rates in the G8.  Despite economic growth, the tax has significantly reduced carbon output and fossil fuel demand.

China’s ETS is another signal of the country’s slow but steady shift to free-market capitalism.  From an economic perspective, a trading scheme may be the most logical path to curtail China’s carbon emissions, given the rapid economic expansion of the country, and the corresponding exponential demand for energy. True, the ETS introduces some complications into carbon emission compliance, but its smaller economic impact on businesses, compared to a carbon tax, should help bolster China’s continued growth.  If structured correctly, the scheme will allow China to integrate its carbon markets with Europe, Australia, and others, further incorporating the once-secluded Middle Kingdom into the world economy.

(Photo Copyright Douglas Janson)


The Too Much Power Problem

— August 29, 2012

A new term is entering the demand response lexicon – “generation response,” or GR for short.  GR is similar to DR in that its main objective is to achieve the necessary balance of supply and demand of electricity on the grid.  But, unlike DR, which focuses on what happens when demand outpaces generation, GR addresses the generation side, seeking to control both generation variability and times when generation outpaces demand.  A surplus of power is just as serious a problem as a shortage of power, because grid operators, in order to maintain a supply/demand balance, must either store or disconnect the oversupply when it exists.

So far, utilities and grid operators have not had to address this situation very often, but as more and more renewables, such as wind power, are integrated into the grid, the operators must frequently deal with surplus of energy when the wind is blowing briskly for any length of time.  This is especially true in cases where wind generation accounts for more than 20% to 25% of the available power, such as in the Pacific Northwest and in Canada’s Maritime Provinces.  In these and other parts of North America, wind power is rapidly becoming a serious variable that can lead to excess energy supply.

How are grid operators addressing this issue?  Without the use of storage technology, such as batteries, which are currently expensive and have never been scaled to the level needed, Bonneville Power Administration, has, for example, been compelled to break its “must take” contracts with its wind power producers in order to limit the amount of power it receives.  In 2011, Bonneville was forced to pay a penalty of around $15 million to the producers of the wind energy that it turned down. It’s not surprising, then, that many wind farms are forced to shut down in order to avoid or reduce power oversupply. According to a Greentech Media article, approximately 25 terawatt-hours (TWh) of wind energy was curtailed or idled in the United States in 2010 (the amount of electricity used each year by 2.25 million U.S. homes!), a figure projected to exceed 40 TWh in 2011. Fortunately, there are other and better solutions.

One solution is to time-shift the energy use of certain appliances or equipment in homes and commercial businesses to take advantage of available power. This idea – akin to virtual storage – is currently being tested by three utilities in Canada’s Maritime Provinces in a collaborative research project, PowerShift Atlantic.  In this project, the utilities are able to directly control thousands of residential water heaters and commercial equipment like HVAC systems and large commercial freezers by either pre-heating or pre-cooling the equipment, for the sole purpose of increasing energy usage at times of excess power.  The goal of the project is to find acceptable ways to deliver the excess power in homes and businesses at times when it isn’t needed with minimal or no disruption to the customer.  This type of load management, or GR, is made possible by hardware with embedded software technologies provided by Sequentric Energy Systems and advanced predictive analytics and control software by Integral Analytics.

This innovative GR approach, which is considerably more affordable than battery storage technology, could be the answer to the dilemma of excess power on the grid.


Data Analytics for the Distractible

— August 28, 2012

The massive rivers of data streaming off of the smart grid can be used for multiple purposes.  They can lead to more effective business, customer, and operational decision-making.  But information graphics are often misused by visual enthusiasts who combine complex data with ornamentation.   If those tendencies penetrate the utility industry, we may be in for infrastructure challenges of epic proportions.

In his seminal work, The Visual Display of Quantitative Information, Edward Tufte described what he called “chartjunk”:

The interior decoration of graphics generates a lot of ink that does not tell the viewer anything new.  The purpose of decoration varies — to make the graphic appear more scientific and precise, to enliven the display, to give the designer an opportunity to exercise artistic skills.  Regardless of its cause, it is all non-data-ink or redundant data-ink, and it is often “chartjunk.”

The biggest danger with chartjunk is not only that it is often downright silly, but that what is trying to be informative may instead be misleading or totally devoid of meaning.

In an earlier blog on, titled “Smart grid data analytics in the real world,” I talked about the dangers for operational decision-making and fatigue if mental models don’t align with the information that is being conveyed.  But smart grid data analytics holds hazards for business stakeholders as well.  In a related example, the Harvard Business Review recently described marketing-oriented “data hounds” as dangerously distractible.

Helping consumers save energy, with targeted programs based on consumption information combined with detailed marketing information, could be among the biggest wins for utilities in driving ROI from their smart meter investments.  With consumer behavior changing so quickly, though, manipulating dials and chasing bright shiny lights could divert utilities from their key strategic goals.   The analyst who buries her head in a data dashboard is likely to miss the big picture, erratically changing direction and wreaking havoc in the organization by zigzagging from decision point to decision point.

Utilities have new opportunities to use advanced analytics to help secure our energy supply by personalizing the delivery of energy.  But it’s critical to remember that the people who use the systems matter as much, if not more, than the systems themselves.  New opportunities in data analysis will drive better decision making, but the business goals must be paramount.  In fact, most program managers will likely underuse data in creating new programs in the initial stages of data availability.  Utilities looking to improve their data analytics capabilities are advised to consider that top performers are those who not only own a statistics book, but are able to filter out the noise that might prevent them from accomplishing their strategic goals.


Energy Storage in Search of Integrators

— August 28, 2012

A123 Systems of Waltham, Massachusetts, recently announced a definitive agreement with Wanxiang Group Corporation, under which Wanxiang will invest up to $465 million in the struggling battery maker, including an initial credit extension of $25 million.

Press coverage of the deal has focused on “the prospect of Chinese control of an American battery maker that benefited substantially from taxpayer dollars,” as The New York Times’ “Wheels” blog put it.   But that misses the point.   Although this injection of financing will undoubtedly help A123 weather the ups and downs of the storage market, these types of deals treat the symptoms of the problem and not the source.

Fundamentally, the grid energy storage supply chain is not fully developed.  This critique refers not to components for energy storage systems themselves (although in some markets this may also be a stumbling block), but to the fact that sustainable business models will remain elusive in the energy storage industry until specific pieces of the supply chain are fleshed out.


Energy Storage Supply Chain


(Source: Pike Research)

As a result, many technology vendors are struggling to balance the inherent technology and financial risks of the storage industry.  Technology companies should be focused on activities related to technology, including R&D, proving concepts, and engineering.  However, because the “systems integration” part of the supply chain is underdeveloped, technology companies frequently find themselves fulfilling this role as well.

Systems integrators are critical because these organizations bridge the technology-side and the customer-side and deliver solutions to market.  These firms take on some technology risk (by purchasing technology from developers), cultivate clients, find financing, and deliver integrated systems.

Intermediaries are a good thing in cleantech because they balance technology, business, and financial risk.  At the moment, there are not enough intermediaries in the storage industry.  Over the next 18 months I would expect this to change.  Otherwise, it will not matter how much financing goes into the storage industry.  Technology firms, even ones with deep-pocketed Chinese backers, will continue to struggle.


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