Navigant Research Blog

Going Green a Win-Win For Fleet Operators

— February 7, 2012

Over the past few weeks I’ve been crunching some numbers on how alternative fuel vehicles compare on lifetime ownership costs.  I am doing this not because I am a masochist, but for an upcoming Pike Research report on Total Cost of Ownership (TCO) estimates for fleet operators.  The initial results demonstrate yet again the basic advantage of going small for fleets that want to save on fuel costs – but they also reveal that small isn’t the only way.

My analysis dovetails nicely with a recent report by Automotive Fleet on the top five concerns facing commercial fleet operators.  According to the survey, three of the top five issues that fleet operators expect to grapple with in 2012 are:

  • Cost-reduction.
  • Fuel price volatility
  • Implementing green fleet initiatives

As Pike’s past analysis on the potential market for hybrid electric vehicles in fleet operations makes clear, fleet operators have been struggling with these issues for several years.  Fleet operators are increasingly looking to reduce their fleets’ environmental footprint, either as part of their own “green ethos” or due to legislative or regulatory requirements.   At the same time they need to keep an eye on costs, since their primary responsibility is the bottom line.  So, are these priorities in conflict or can they work together?  The simple answer is , a bit of both.

Fuel costs are one of the biggest, if not the biggest, items in fleet operators’ annual budgets.  So, if going green also means lower fuel costs, fleet operators win on both counts.  The preliminary results from my analysis confirm that if fleets want to go green and keep costs down, their best bet is to stay small.  This analysis looked at vehicle cost, maintenance, fuel costs, and available tax incentives  – in order to keep the comparison focused on the trade-offs in switching fuels and propulsion technologies.  Two of the lowest cost options were the small hybrid cars (sized like the Honda Civic, for example) and the compact gas car.  Even at today’s low gas prices, the small hybrid managed to best a comparably-sized gas car in total ownership costs over a 120,000-mile life, and if gas prices rise, as they almost certainly will, this benefit will increase.  Some of the other very low TCO options were the compact CNG (compressed natural gas) sedan and the small to mid-sized battery EV with its $7500 federal tax credit.

But it wasn’t just the small cars that could help fleet operators reduce fuel costs while operating cleaner.  At the mid-sized sedan level, the hybrid option still showed lower lifetime costs than a comparable gas car. And this is without the benefit of a tax credit, as these have expired for conventional hybrids.  Hybrids will, of course, pay back their price premium even more quickly with higher fuel prices – making hybrid adoption a strategy for hedging against future increases in the price of gas, and addressing fleet operators’ third major challenge, fuel volatility.

The final note here is that, while operating costs and total lifecycle costs may be lower with hybrids and other alternative fuel options, the fleet operators still face a challenge in fronting the initial higher vehicle costs.  This is where the desire to go green and watch the bottom line come into conflict.  And why fleets look for grants that can offset the initial price premium and help them make the business case for buying hybrids.  What my analysis shows so far is, hybrids can pay off the investment for fleets that keep their vehicles for a long time.


SAVE Act Could Be a Game Changer for the Housing Industry

— February 6, 2012

Despite attempts by the Federal Reserve, and billions of dollars in stimulus money that have been brought to the market, the cornerstone of American growth – consumer spending on homes and new construction – lingers in a diminished state. In uncertain economic times, the value proposition of home ownership is changing as a new generation of home owners reach the buying age and as traditional families change the way they think about their real estate investments. Perhaps it’s time for the housing market to reflect those dynamics.

For many decades the value of energy efficiency in residential properties has been relegated to an afterthought. Obscured by low energy prices and ever-expanding notions of universal home ownership, residential energy consumption now makes up roughly 20% of the U.S.’s energy consumption, according to the EIA. But the market for energy-efficient homes has struggled along with the housing market as a whole, but because lenders don’t acknowledge the value of energy-efficient designs or retrofits.

Senators Michael Bennet (D-CO) and Johnny Isakson (R-GA) have sponsored legislation that aims to change the lending industry, taking particular aim at attaching value to energy efficiency measures. The SAVE Act would change the way lenders assess a home’s value and a buyer’s eligibility for a loan. The potential impacts are significant and wide ranging. Not only would mortgage practices change – the full costs of homeownership over time will be reviewed under the act’s provisions, presumably reducing lending outside a buyer’s range of affordability – but the bill would also grant consumers access to more detailed information about how the home operates. This adjustment to appraisal practices would also reflect the value of energy-efficiency improvements made to existing homes, boosting the value of investments made by homeowners.

If the housing market can find a way to assign a monetary value to energy efficiency – an area where utilities are increasingly investing as well – consumers might be more inclined to make purchasing decisions that favor energy efficient products and services. Changing one aspect of the housing market dynamics, as the SAVE Act would if passed, could unlock untapped value in the housing sector. More energy efficient homes would be good for both the economy and for the planet.


In Smart Buildings, Co-opetition is on the Rise

— February 2, 2012

The building equipment and services industries have always been highly fragmented.  While leaders such as Honeywell and Johnson Controls have large, multinational presences, most of the market is divvied up among thousands of smaller companies with a relatively narrow regional or technological focus.  Even CB Richard Ellis, the real estate firm with the largest footprint of space under management (2.9 billion square feet), has only captured less than 1% of the world’s 400 billion sf of commercial space.

The result is an industry that has historically consisted of an overwhelming array of service providers, each with different capabilities.  This has posed a challenge to tying building systems together into single solutions, as I explained in my last blog.  In the past, vendors designed products such as building automation systems, controls, and certain types of equipment specifically so that they would not work with other vendors’ products, ensuring the vendor a long-term market for replacements and upgrades.

These vendor-specific fiefdoms are starting to break down as demand for building energy management systems (BEMS) as well as comprehensive, end-to-end solutions for energy efficiency including new capabilities such as demand response and energy procurement continue to grow.  The word of the decade in the building sector is convergence: the integration of building control technologies with ICT.  No single player on either the HVAC or IT side can do it all, so the drive toward convergence has resulted in “co-opetition” – i.e., partnerships between competitors that would have been pitted squarely against each other in the past, and in some cases still are.

This week Schneider Electric and Cisco announced that they were expanding their partnership efforts to deliver better enterprise energy management solutions.  The partnership will pair the strengths of Cisco’s EnergyWise platform, which is ideally suited for data center and IT energy management, with Schneider Electric’s building management system (BMS).  The union is mutually-reinforcing, as the BMS can be used to monitor and control parts of the information and communication technology (ICT) network, and vice versa.

This is not the only example of this we’ve seen over the last few years.  IBM made one of the earliest moves toward co-opetition in smart building technology when it launched the Green Sigma Coalition in 2009, an industry alliance that has helped tie smart building technology into enterprise energy management and includes Honeywell, Siemens, Johnson Controls, and others.  There are also countless sub-rosa partnerships between rivals to enable a wider range of offerings in RFP responses and major contracts. 

The co-opetition trend, however, isn’t all about vendors deciding to play nice.  It’s about vendors finding that the combined capability of two systems – whether ICT systems linked with BMSs, demand response services tied with energy procurement services, or one of the dozens of other possible permutations – is often greater than the sum of the parts.  Combining two powerful solutions from separate vendors can open up new opportunities that are impossible to achieve individually.

Make no mistake; competition is still alive and well in the building sector, and that’s a good thing for the industry as a whole.  But these co-opetion arrangements demonstrate that the highly fragmented building industry is finding opportunities to pair technologies in novel ways to deliver smarter buildings in mutually beneficial ways.


Solving Renewable Energy’s Integration Challenge

— February 2, 2012

Judging from industry hype, it might seem that the smart grid will solve virtually all of our problems relating to energy, transportation, and the economy moving forward.  Smart meters, distribution management automation, and other smart grid technologies will not only reduce both customer and utility costs and optimize the power grid akin to an Internet of Energy, but also is portrayed as vital to efforts to increase renewable energy production.

Last month, I attended the “Wind and Solar Integration Summit” in Scottsdale, Arizona, as a starting point for my research on a forthcoming Pike Research report.  There was plenty of discussion about wind and solar forecasting, different types of energy storage, and the different challenges that face regional grid operations across the United States.  Interestingly, I rarely heard the term “smart grid.”

Part of that, no doubt, is because the focus of efforts to date on integrating variable wind and solar power has been at the wholesale, transmission level of grid service, instead of at the distribution level, where smart grids, microgrids and virtual power plants are absolutely vital for integration.  It’s at the wholesale level where the money is right now, integrating bulk renewable energy into so-called organized markets managed by entities known as independent system operators (ISOs).

The summit did provide some good data points, among them the fact that wind integration costs generally run from $3 to $12 per megawatt hour (MWh), which at today’s wind penetration levels adds up to $270 million to $1 billion in just the United States. Less data is available about solar integration costs since utility scale solar PV is a rather recent phenomenon, but one can assume roughly the same order of magnitude.

Iberdrola, the Spanish operator, has more than 3 gigawatts (GW) of wind power capacity in current operation in the Pacific Northwest.  The company is among the leaders in investigating how better forecasting can reduce integration costs.  According to the company, so-called “day ahead” forecasts are already about as accurate as they can get, with error rates ranging from zero to as high as 18% for Iberdrola in the Bonneville Power Administration’s (BPA) grid control area spanning Washington, Oregon, Idaho and Montana.  (The equivalent forecasting error rate for day ahead forecasts in Europe is closer to just 5%, reflecting, perhaps, a more mature technology/policy integration.)

Better Forecasts

The real challenge for wind and solar forecasting is in the “hour ahead” and “intra-hour” data.  Within this forecasting envelope, error rates can exceed 30% for wind power.  The shorter the scheduling interval – e.g., every five minutes, as is the case in Texas – the more accurate the forecast.  (This is one reason why BPA has struggled in the past is that it used to only schedule wind hourly, and even today schedules wind power every 30 to 60 minutes). 

Which variable renewable energy technology offers the greatest integration challenge?  While wind power is less predictable than solar power, the output from the utility scale solar PV project can ramp down instantaneously with cloud cover.  In contrast, wind turbine ramps tend to be more gradual due to spinning machinery. 

Beyond forecasting, the most heated discussions at the Summit pertained to energy storage.  It became clear that the perception that energy storage was too expensive may not always be true.  Energy storage is not a monolithic resource, but rather an emerging grouping of technologies that can offer long-term and short-term solutions for variable renewable resources.  The cost of a flywheel providing frequency regulation is a completely different animal than a compressed air storage unit offering long-term energy storage.  The storage firm A123, working with AES Storage, has bragging rights to a 32MW storage project offering frequency regulation services in the Pennsylvania-New Jersey-Maryland (PJM) grid control area today, as well as a 12MW spinning reserve service project in Chile, South America.

The most provocative take away from the Scottsdale conference was a recently released study by Alstom Grid that surveys the world about solutions to the challenges of wind integration.  This report actually does reference the smart grid, highlighting the role of demand response, dynamic line ratings and transformer load management as keys to moving forward with planned wind project integration throughout the globe. 

The truth of the matter is that the integration of renewables is not a reliability issue, as these resources are being integrated around the world without a smart grid.  It’s really all a matter of costs to ratepayers.  The far larger challenge is at the distribution level, which is where microgrids and virtual power plants come in.  I’ll have more on that topic in a future blog post. 


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