Navigant Research Blog

In the Power Sector, the Lawyers Are in Control

— April 23, 2013

During a recent thunderstorm, a power surge fried the motor of my pool pump.  With prime algae-growing season nearly upon us in Texas, this was suboptimal timing.  Still, being a smart grid researcher, I thought I’d write to my co-operative power supplier, CoServ, and find out what happened.  So I sent a short note via their “Contact Us” web page, asking if they could look into their distribution management system for that Sunday morning and see if there had been a power swell in my neighborhood.  This was purely out of curiosity – this is what I do for a living, right?  Here’s the reply that I received about 4 days later:

 Thank you for taking the time to contact CoServ Electric. As you are aware there were adverse weather conditions in your area at the time of the service abnormalities.

CoServ Electric works hard to ensure all our members receive reliable service. However, because of the nature of the electric utility industry, continuous service cannot be guaranteed. (For example, situations involving animals on the lines, unforeseeable equipment issues, or weather events such as happened in your case.) Because this event was an “Act of God” and not something we could have foreseen or prevented, we cannot accept liability for any reported damage. We recommend contacting a qualified electrician to make sure your electric service beyond the point of service (the electric meter) is properly protected from common outside disturbances.

Thank you again for your report and for allowing us to serve you as a member of CoServ Electric. If you would like to discuss this situation further, feel free to contact me.

Okay, I admit that lots of people walk around with an entitlement mentality.  Still, it would never occur to me that my power utility is responsible for lightning strikes.  Is CoServ up there in the sky hurling thunderbolts at my pool?  Of course not.  They bear no liability for the pump.  So why such a defensive response?

Litigation Phobia

Here’s my theory: because their lawyers made them to do it.  In its 108-page tariff for electric service, CoServ already states that it is not responsible for acts of God.  Nor should it be.  Making any utility liable for all acts of God in its service area would most likely render that utility bankrupt.

And that’s the problem.  I have seen (but will not link here) job postings for “NERC Compliance Manager” where one of the essential candidate requirements is a law degree.  An analysis of NERC CIP v4, which added additional clarification of the term “critical cyber asset” (CCA), shows 17 new clauses to define a CCA.  Each of those clauses gives a utility enough wiggle room in a courtroom to escape penalty.

I’m currently researching cyber security for smart grid telecommunications.  As ever, the overriding investment theme for cyber security emerges as avoidance of fines or litigation.  After 23 research interviews I have a consensus response that there are a handful of utilities in the United States that proactively address cyber security, in each case because of a single individual that really cares.  The remaining utilities are characterized by my contacts as doing the minimum necessary to avoid legal consequences.

Don’t get me wrong – I’m all for keeping our utilities healthy financially.  From a purely selfish perspective, researching those utilities puts bread on my table.  But – can we please focus on operations and reliability, not legal ramifications?


Facing an Uncertain Future, Advanced Biofuels Seek New Markets

— April 18, 2013

With a debate over the efficacy of the U.S.’ Renewable Fuel Standard (RFS) reopened on Capitol Hill in Washington and policymakers in Brussels wrestling with conflicting reports about whether biofuels impact the environment and global food prices, it’s just another day in the in the office for the global biofuels industry.  While the questions remain the same, the temperature of the debate feels different this time around.

Last year, severe drought prompted the UN to urge U.S. policymakers to scale back or waive mandated volumes of corn starch ethanol production.  In January, a U.S. federal appeals court ruled in favor of the American Petroleum Institute (API), arguing that the Environmental Protection Agency (EPA) could not require refiners to buy credits for cellulosic fuel since there has yet to be any gallons produced commercially and at scale.

Meanwhile, across the pond, European policymakers are struggling to align alternative fuel ambitions with strict sustainability standards.  Progress has been clouded by recent reports complicating an already contentious debate over the land use impacts of increased biofuels production.  Clarity on the issue appears increasingly elusive.

These events have cast considerable doubt on the future of biofuels production in the United States and the EU, the first and third largest markets for biofuels respectively.  Current production offsets just 4% to 5% of petroleum consumption despite outsized ambitions from end-users like commercial airlines, defense, and ground transportation.  The mandates have been likened to filling a swimming pool with a thimble.

Shifting Gears

At the core of biofuel ambitions over the next decade is the commercialization of a host of conversion technologies targeting everything from agricultural residues to algae.  While conventional biofuels like ethanol and biodiesel derived from commodity crops are widely commercialized, advanced biofuels are still clawing their way toward commercial relevance.

First-of-kind biorefineries have come online in the past year with dozens more currently under construction, but the process has been slow, expensive, and arduous.  Navigant Research’s recently published study forecasts that just 9 billion gallons of advanced biofuel will be produced globally by 2020, a far cry from the lofty targets set by current mandates.

If the climate of uncertainty flowing from developments in Washington and Brussels persists, a mass exodus among advanced biofuel interests away from fuels production and toward bio-based products can be expected.  This migration is already several years in the making, but up to this point, most stakeholders have been content to hedge their bets in multiple markets.

Currently, the bio-based products market offers shorter runways to revenue than the fuels market.   In the low-margin, high-volume business of fuel production, profitability is predicated on economies of scale, which in many cases, are still a decade away for market interests.

By comparison, the bio-products market offers lucrative interests in high-margin, low-volume markets like food, feed, pharmaceuticals, chemicals, polymers, and paper.  Algae players are a key constituent in this group and are chasing high-value omega-3 fatty acid production.  Selling north of $2,000 a ton, omega-3s are a popular nutritional supplement, made more so by the increasing cost of seafood products due to overfishing.  By comparison, biofuels generate anywhere from $200 to $500 per ton.

The consequence of all of this is that advanced biofuels production at scale (for the sake of argument, greater than 7.5 billion gallons annually, or 1% of global petroleum fuel consumption) remains perpetually stuck on the horizon.  This will likely force policymakers to dial back biofuel ambitions to assuage public outcry for support of “snake oil.”  With Washington and Brussels jumping headfirst back into the debate, one wonders whether the biofuels industry has already reached this point.  Nevertheless, bio-based products and materials could provide a key stepping stone to advanced biofuels production profitability at scale.


Diesels Set for Surge in the United States

— April 17, 2013

Automotive analysts – including this one – have been predicting a comeback for diesel cars in the United States for several years.  Demand in the United States has indeed been steadily rising in recent years.  According to the HybridCars Dashboard, sales rose from just over 58,000 in 2009 to 125,522 in 2012, a compound annual growth rate of 29%. Despite these rising sales, though, diesel’s share of total passenger car sales has persistently remained well below 1%.  In 2010, diesels captured 0.7% of U.S. passenger car sales, while in 2012, diesels captured 0.87%.  So why the hype over clean diesels in the United States?

First, the reality is that all alternatives to conventional gasoline cars are but a tiny portion of the total U.S. car market.  Hybrids are selling around 3 times the number of diesel cars – which means that, more than 15 years after the Prius was introduced, hybrids still only capture 3% of the market.  Plug-in vehicles are receiving a huge amount of attention, as they represent the potential to be a disruptive technology.  However, while we’ve seen a significant uptick in sales in the United States, from roughly 18,000 in 2011 to 53,000 in 2012, PEVs are an even smaller percentage of the U.S. car market than diesels.

Annual Sales of Clean Diesel and Hybrid Passenger Cars, United States: 2009-2012


(Source: HybridCars Dashboard)

Second, as has been discussed in this blog, automakers must come up with an array of fuel-efficient options to meet the stringent federal Corporate Average Fuel Economy (CAFE) standards for 2017 and beyond.  While automakers will primarily focus on modifications to conventional gas cars, diesels may well appeal to a different demographic than small, fuel-efficient gas cars.  The diesel Chevrolet Cruze, to be introduced for model year 2014, offers an example.  The diesel Cruze gets 42 mpg on the highway.  While this is the same highway mpg as the gasoline-powered Chevrolet Cruze Eco, the Eco is equipped with a manual transmission, and U.S. drivers are not big fans of manual transmissions.

Volkswagen (VW) just released the results of a survey that found that the likely clean diesel customer is also different from the average hybrid customer.  VW’s survey indicated that, while both groups are concerned with fuel efficiency, diesel buyers tend to be more concerned about torque and acceleration, while the hybrid drivers are more motivated by the car’s eco-friendliness.  These results suggest that the soon-to-be-introduced hybrid Jetta will not compete with the diesel Jetta – the best-selling diesel in the United States – but will expand VW’s appeal to a different type of efficiency-conscious consumer.  This survey will be heartening to automakers as they marshal a combination of diesel, hybrid, start-stop, plug-in technology, and other options to meet the CAFE standards.


Wireless Building Controls Standards Emerge

— April 17, 2013

Wireless communications for building control systems have been available for more than a decade.  However, these product lines – focused on specific single building system (lighting, HVAC, etc.) – have achieved acceptance only in small market niches.  Wireless controls have always had what seemed to be a strong business case: reduced labor costs thanks to less wire pulling, more flexible sensor placement, and the ability to adapt as building interiors are rearranged over time.  In practice, however, these benefits were offset by the initial costs, lack of training, and often poor performance characteristics of the proprietary, non-standard market offerings.

This is changing rapidly, as two particular wireless controls standards have emerged with strong multivendor support:  ZigBee Commercial Building Automation (ZBA) and EnOcean.   Our recently published report, Wireless Control Systems for Smart Buildings, forecasts that these two standards will battle each other for share in a growing global market.   Interestingly, these two successful standards evolved from very different approaches.

Wireless Building Controls Penetration Rate by Region, World Markets: 2012-2020


The ZigBee Alliance was founded in 2002 to develop an open standard for wireless sensor networking, with commercial building automation a key application target.  While market attention has focused on an Internet Protocol (IP) version of ZigBee for Smart Energy (i.e., smart meter and home area networks), other groups quietly, steadily, and quite slowly, inched toward a ZigBee implementation for commercial building control systems.  It took more than 10 years and several detours, but the working groups ultimately adapted the popular BACnet building control protocols to the proven ZigBee PRO networking stack to deliver a mesh networking solution that most industry participants are now embracing, including Trane and Schneider Electric, among many others.  Ultimately, a long, multi-vendor effort has produced an acceptable general wireless standard that spans lighting, HVAC, fire & safety, and security & access building controls systems.

The EnOcean specifications have emerged by a completely different path that started from a proprietary single-vendor product set targeting a specific problem; it subsequently opened up to multiple vendors and a broader solution space.  EnOcean GmbH was spun out in 2001 from Siemens AG as a provider of self-powered wireless lighting controls, whereby the energy inherent in physically toggling a light switch is harvested to power wireless communications to the lighting system.  This avoids the battery maintenance problem associated with battery-based wireless switches.   EnOcean the company initiated the creation of an industry alliance, and though the technology has been accepted as a ISO/IEC standard, the underlying technology remains essentially sourced by a single vendor.  Yet, the EnOcean solution has garnered broad industry support and customer acceptance, particularly in Europe – enough to cause the ZigBee Alliance to develop a similar energy harvesting specification.

Despite the very different pedigrees, the stage is set for a battle between ZigBee, EnOcean, and proprietary solutions.  Other standards and semi-standards including Wi-Fi, Z-Wave, and LonWorks will also look for mindshare, but we see these are secondary to the larger battle between ZigBee and EnOcean.  This competition should benefit the consumers of these technologies: building controls vendors, integrators, installers, and ultimately, building occupants.


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