Navigant Research Blog

Newcomers Flock to the Energy Efficiency Services Market

— April 18, 2012

In the 1980s and 1990s, vendors of HVAC equipment, oil and gas, and others entered the energy service company (ESCO) market, using end-to-end energy efficiency solutions as a platform to sell “stuff.”  In the early 2000s, many of these service providers divested their service lines to re-focus on their core businesses, leaving integration up to others.

In recent years, however, a range of new players are entering – or re-entering – the energy efficiency services market.  In our report, Energy Efficient Buildings: Global Outlook, Pike Research forecasts that the market for energy efficiency technology and services will grow to $103 billion by 2017, up from $68 billion in 2011.  As the market for energy efficiency services grows, many players are finding that to compete for energy efficiency business – whether through procurement procedures in the public sector or outsourced energy efficiency services for commercial property owners and managers – they need to move further down the value chain and not only sell products, but also integrate those products into a complete solution.

One way to make the transition from manufacturing to integration is through acquisition.  Eaton Corporation, for example, made its move into the energy efficiency services space with its 2010 acquisition of EMC Engineers.  That paved the way for Eaton to achieve a certification as a Qualified ESCO by the U.S. Department of Energy in 2011, allowing it to access the federal energy efficiency services market as well.

Meanwhile, a number of other firms that don’t necessarily fit the traditional HVAC or property services profile have also been building on their product lines with new energy efficiency service businesses.   In February, Hess, the Woodbridge, NJ-based oil and gas giant that’s better known for selling gallons of gasoline, announced the launch of Hess Energy Solutions.

The motivations for getting into energy efficiency services relate mostly to the opportunity to expand further down the energy efficiency value chain and to bring in higher-margin work.  When sales of stuff plateau, or gaining market share becomes increasingly difficult, some firms see services as the logical extension of existing product lines.  The global economic downturn encouraged the development of service lines as many manufacturing firms have had difficulty maintaining product sales levels at pre-recession levels.  In addition, many services offer higher margins than product sales do, so folding a service business into a business’ broader portfolio can yield a higher average profit margin for the business as a whole.


Virtual Power Plants Go Commercial

— April 18, 2012

A Microsoft/OSIsoft survey released in early 2012 ranked renewables integration (43%) as the second most important reason for implementing a smart grid, behind smart metering (71%).

A forthcoming report for Pike Research will show how microgrids are leading the world today in terms of revenues derived from smart grid renewables integration, but recent market activity has intensified in regards to the concept of a Virtual Power Plant, a smart grid optimization platform that still faces skepticism.

The company that first introduced the term to the world, Siemens, is taking the concept of a VPP to the next level in terms of actual market commercialization.

Given that Germany is phasing out nuclear power, the 23 megawatt (MW) “Regenerative Combined Power Plant” (RCPP) experiment carried enormous implications.  A total of 36 wind, solar, biogas, CHP, and hydropower generators were operated as if a single power plant was supplying 24/7 power to the equivalent of 12,000 households.  Project leader Dr. Kurt Rohrig of Kassel University was awarded the German Climate Protection Prize 2009 for his work on this cutting-edge renewable supply management experiment.  While it generated the equivalent of only 1/10,000 of Germany’s total supply, this successful R&D venture has convinced academics and a partnership featuring Enercon GmbH (whose wind turbine provides a unique suite of grid services), SolarWorld AG (a major manufacturer), and Schmack Biogas AG that the entire country of Germany could be completely powered with a diverse blend of complementary renewable energy resources.

Doubters have pointed out that the RCPP project failed to account for grid congestion challenges that might frustrate this sort of VPP under real market conditions.  That’s why Siemens’ recent announcement to work with German utility RWE Deutschland AG (RWE) to fully commercialize this VPP model is so important.

Siemens’ VPP commercial offering is based on is its Decentralized Energy Management System (DEMS), which is designed to enhance both wholesale and distributed generation operations according to pre-defined economic, environmental, or energy-related priorities.  A variety of combinations of supply- and demand-side resources can be optimized, whether the generator is a large wind farm or an on-site biogas unit.  DEMS was first deployed at a small Austrian paper and pulp mill in 2003.

Siemens was one of the first private companies to explore the concept of VPPs, playing a key role in providing the management system for another pioneering effort in Germany.  Since October 2008, this project has aggregated the capacity of nine different hydroelectric plants ranging in size from 150 kW up to 1.1 MW, with a total VPP capacity of 8.6 MW.  The VPP framework opened up new power marketing channels for these facilities that would not have been viable if these distributed energy resources (DER) were still operating as standalone systems.

Operated by RWE from a centralized control room based in Dortmund, the Siemens/RWE project will grow to 20 MW this year by adding combined heat & power (CHP) units and emergency back-up power systems to the existing hydro portfolio.  It will be expanded to 200 MW by 2015 by further integrating biomass, biogas and wind resources into the network, making this an official commercial offering in Germany, where recent market changes have created fertile ground for VPPs.

Since February of this year, power from this VPP has been sold at the Energy Exchange (EEX) in Leipzig, Germany under new amendment terms of the Renewable Energy Sources Act. This is the first direct marketing of renewable power under this new program. Given the proposed reductions in Feed-In Tariff (FIT) rates, the EEX is being viewed as a key new innovation to help optimize growing renewable energy resources in Germany.


Using Telematics to Attract Gen Y

— April 16, 2012

There’s been plenty of bad news recently in the world electric vehicles, mostly related to start ups like Fisker and Azure.  Adding to the mix, Deloitte has released a survey showing that battery electric vehicles (BEVs) are not very popular with Generation Y (ages 19-31).

The reasons appear to be multiple, including high prices for BEVs, a lack of environmental concern (which is a matter of some dispute), and a strong tendency to shop for used rather than new vehicles.  But there are two key points that came out of the survey that point to new mission-critical technology for BEVs:

  • Connected vehicle telematics
  • Wireless charging

72% of those surveyed want access to their smart phone apps in their car.  As I pointed out in my report, Electric Vehicles Telematics, the telematics systems in both BEVs and plug-in hybrid electric vehicles are more likely to be connected vehicle telematics that offer streaming media, cloud application access, and special electric vehicle functions.  This research backs up my findings that these technologies are not only important for the automakers to help build confidence in the vehicles, but also a reason consumers would consider the vehicles.

Survey respondents also stated that they do not want to be physically tied to the electric grid –a very intriguing finding that should help bolster wireless charging advocates.  While I can’t imagine that being tied to gas stations is that much more attractive than being tied to the grid, the time of the connection is likely the issue.  If the standard option is to charge wirelessly by parking-and-forgetting-it, I wonder how those survey results would change?

The survey underlines something I’ve argued for a while: the technology inside the car is what will sell the car.  The drivetrain should be secondary.  Specialty plug-in electric vehicle (PEV) applications have largely to date been focused on extending range and providing charging locations and route planning with ease.  In researching the telematics market for PEVs, similar to the findings in this study, I found that there is a high interest in the more advanced connected vehicle telematics for PEVs.  As a result, I am anticipating that high feature, connected vehicle telematics will grow to about 80% of the PEVs on the road by 2017.

With connected vehicle telematics, automakers and technology providers are just beginning to develop these new social apps and streaming content that will make PEVs a unique vehicle experience for their owners.  What this survey shows is that to attract younger buyers, PEVs will have to be both disconnected (from the grid) and connected (to their social and media world).


Why Upstart Automakers Tend to Fail

— April 16, 2012

Did you hear how GM has had to recall 6,000 vans and SUVs due to faulty steering gear that could lead to a loss of steering control?  No?  How about when the company asked for the roughly 8,000 Chevrolet Volts on the road to be taken to a dealer for adjustments to the battery packaging?  Needless to say, that Volt story got a lot more play than the steering gear recall.  Although this may be unfair, as recalls are incredibly common – the U.S. Department of Transportation has an entire website devoted to them – and the Volt situation was not even an official recall, it is not surprising.   New vehicle technologies will tend to attract extra scrutiny, as consumers look to see whether they work and opponents look for a misstep.

This recall issue highlights just one reason why it is so difficult for a start-up company to succeed in the car market.  Unfortunately, the news has been full of stories on start-up EV and PHEV technology manufacturers and battery companies filing for bankruptcy or experiencing serious troubles.   Aptera Motors, Bright Automotive, Azure Dynamics, Th!nk Global (which was briefly owned by Ford about ten years ago) and Ener1 have all filed for bankruptcy over the last nine months.  The Fisker Karma plug-in sedan has been reportedly been plagued with problems including an embarrassing breakdown during a Consumer Reports test.  These stories confirm to me that it is not merely difficult to succeed as a new entrant in the automotive industry, it’s next to impossible.

To begin with, making roadworthy vehicles is hard. This may seem obvious, but it’s surprising how advocates for new, clean vehicle technologies are willing to convince themselves that a newcomer with little experience in large-scale manufacturing can quickly start producing attractive, safe, reliable vehicles.  Add in the development and integration of a new propulsion technology and this becomes even harder.  Consider the need to make it affordable, and you’ve reached a degree of difficulty that is impossible to surmount without huge financial resources and a lot of time to develop a market-ready product.

The Long View

Because it’s hard, companies have to be equipped to deal with technological hiccups.  GM is in a much better position to ride out its Volt battery problems than Fisker and A123 are with the A123 lithium ion battery recall.  A123 has estimated that it will spend $55 million to replace the battery packs for five of its customers.   That is over one third of the company’s estimated $149.4 million market cap as of today.  By contrast, GM is expected to pay around $9 million to fix the Volt battery issue; the company’s market cap as of today is estimated at $39 billion.

Also, while the bad PR is going to hurt Volt sales, GM is better positioned to recover than a start-up company that may be depending on its one and only product.  To its credit, A123 acknowledged responsibility and has promised to replace the batteries.  However, its stock has fallen and the company is now the target of a class action lawsuit filed by shareholders, leaving some analysts wondering if A123 will be able to secure the additional capital it needs to pay for the battery replacements..  Fisker also quickly fixed the problem with the Consumer Reports’ Karma, but there are lingering questions about the company’s viability, especially given the Karma’s $108,000 price tag.

Finally, even if all goes well with a product introduction, there is a natural risk associated with forecasting demand for a new technology, as noted by my colleague Dave Hurst.  Again, the companies most likely to be able to take the long view on a new technology, withstand bouts of bad PR, and marshal the resources to fix any problems are the big auto companies.  I don’t think we are going to see a start-up company ride in on a white horse and remake the automotive industry.  Like it or not, we have to depend on the big legacy auto companies to make the shift to electrification or other alternative technologies (although whether they have to be pushed or will jump is another matter).  Fortunately, there has been some good news from the auto OEMs recently.  Ford has announced it is expanding its electrified vehicle development facility, and the new Toyota Prius C hatchback is moving briskly in its first three months of sales.


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