Navigant Research Blog

The Untapped Potential of Qualified Energy Conservation Bonds

— March 2, 2012

There are dozens of ways to finance energy efficiency in a way that benefits all parties involved – building owners, energy service companies/energy efficiency service providers, and financiers.  One of the largest untapped programs in the U.S. is the Qualified Energy Conservation Bond (QECB) program, which provides public sector entities with a low- or no-cost debt instrument to pay for energy efficiency and renewable energy projects in state, municipal, and tribal facilities. 

In 2008, Congress passed the Energy Improvement and Extension Act, which authorized the use of qualified tax credit bonds to serve energy efficiency and renewable energy projects and set a bond volume limitation of $800 million, to be doled out to the 50 states.  The American Recovery & Reinvestment Act (2009) expanded the bond volume cap to $3.2 billion.  Using these funds, government agencies can issue bonds to private investors to finance energy efficiency and renewable projects.  The “interest” on those bonds is paid from the U.S. Treasury, either through federal tax credits to the financiers or through cash subsidies from the Treasury that bond issuers use to pay off interest owed.  The allowed bond volume is allocated to individual states, large municipalities, and tribal governments based on population. 

The project provides a net benefit to government agencies as well as to financiers.  Government agencies benefit because the QECB program increases the amount of agency debt that can be financed through federal tax credit bonds, which are used for a range of other government investments such as public schools and forestry projects, which are among the lowest-capital tools available to fund improvements.  It also saves government agencies on energy costs.  Financiers benefit from the low-risk returns provided by the bonds. 

However, the path to adoption of QECBs has been slower than one might expect.  Just over $500 million of projects have been funded over the last four years – less than one-fifth of the total program allowance.  Only about 21 states have even initiated QECB-funded projects.  Of the five largest states, only California and Illinois have made significant inroads toward deploying QECB-financed projects.  A few states, such as Kentucky and Kansas, however, have nearly exhausted their limits. 

The QECB program can be applied in other ways to fund not only public buildings but also privately-owned buildings.  For example, the city of Boulder, CO financed its ClimateSmart Property Assessed Clean Energy (PACE) financing program through QECBs.  In addition, some government agencies have paid for the administration costs of QECB programs through other sources, such as the Department of Energy’s Energy Efficiency and Conservation Block Grants (EECBG), another provision of the stimulus package, thereby facilitating the deployment of QECBs in constrained state budgets.

Although uptake of QECBs has been slow to date, expect continued growth of QECB-financed projects in the next few years.  The program will not sunset under current federal law, and there is no shortage of energy efficiency investment opportunities in state and local government buildings.


SCADA Monitoring Enters the Cloud… Sort Of

— March 2, 2012

Among the documents buzzing around Pike Research offices is a press release from DN2K, “DN2K Receives Significant Funding for Advanced Remote Monitoring, M2M and Management Systems”

At its root, DN2K’s product is cloud-based SCADA alert and response.  I give DN2K credit for market savvy because they nowhere use the C-word.   They don’t even abbreviate software-as-a-service.  A surface reading of their press release might suggest that they are hunkering down for battle against established data historian products.  Such is not the case however – they announced a product that applies business rules against data to communicate alerts and responses.  Via a cloud.

The elephant in the parlor here is “cloud”.  Doing anything cloud-based in smart grids raises the hackles of quite a few cyber security practitioners who really ought to know better.  Unless an entire grid is within the confines of the headquarters’ razor-wire, there will be remote management of grid elements.  Clouds are remote and so is most of a grid, by its very nature.  It’s past time to live with that.  If we don’t believe it’s possible to secure such a basic connection as corporate HQ-to-cloud, then what are the odds that connection to every distribution cyber asset will be secure?  And at least clouds are hosted in physically secure environments, unlike substations or pole tops – just to name two places that are seeing new smart grid components.

Clouds get a bad rap, partly because so few people accurately understand cloud computing.  Let us begin by stating unequivocally, “There is no single ‘Cloud.’”  Repeat that out loud several times.  There are thousands or millions of clouds – some well-implemented, some poorly so.  A cloud is any network-based IT environment that follows certain rules – well summarized by the National Institute of Standards and Technology (NIST).   Those rules do not include accessibility by all of humanity.  Private clouds can strictly limit access – sometimes operating only within the bounds of a corporate firewall – yet provide sought-after benefits such as reduced capital expenditure and hands-free storage elasticity.  There are also hybrid clouds and community clouds, both well described by the NIST document.

Private clouds can bring all manner of security discipline that has often been shortchanged by in-house deployments.  One example: user identification and authentication.  Clouds focus attention on knowing who is accessing your cloud.  Once inside a cloud, any user with a standard browser can access any application in the cloud.  Meaning, if users have not been correctly authenticated on entry, your only remaining protection is whatever security exists inside the application itself – which is often not very much.  Who knows?.. A company deploying a cloud might finally be able to justify multi-factor authentication.

It remains to be seen whether a product such as DN2K’s will take flight.  To be sure, there are still unresolved issues, such as North American Electric Reliability Corporation (NERC) compliance in a cloud.  No one knows how NERC auditors will react to a cloud-based solution.  Even clearing that hurdle, the competition could be fierce and clouds may remain emotional topics no matter what NERC says, but the business case for low-CAPEX solutions can be extremely compelling to the levels of management that control funding.  Eventually someone will find a middle ground between compliance and efficiency.

I will leave it to others to assess whether or not the $1.5 million announced by DN2K constitutes a “significant” investment.  Yet even here, cloud computing changes the discussion.  Gone are the days when investors’ first chore was to bankroll a data center.  Conversely, last year OSIsoft announced a “minority” investment of $135 million.  Either way, it’s encouraging that investors continue to see Industrial Control Systems as worthy investments of their clients’ funds, and that cloud computing continues to figure in innovation.  Without that, the smart grid industry may continue to focus too much on infrastructure expense and not enough on innovations in reliability and customer service.


Hawaii Becoming a Test Bed for Clean Technology

— March 1, 2012

Earlier this month, the government of Hawaii and Korean partners (the Republic of Korea Ministry of Knowledge Economy and the Korea Smart Grid Institute) signed a letter of intent to pursue mutual interests in smart grid development in the Hawaiian Islands.  While the project scope and specific practices for the Hawaii project are not clearly defined in the announcement, it’s safe to assume that projects included in the Jeju Island smart energy program, including smart meters, renewable energy development, and electric vehicles, would be implemented in Hawaii.

Hawaii comprises more than 120 scattered islands and is far from the nearest mainland (1,860 miles).  Electricity is expensive, and Hawaii is the most fossil fuel-dependent state in the nation.  Thus, the need for switching to renewable sources of energy is as much an economical imperative as it is an environmental one for the islanders.

With regards to policy, Hawaii is deeply committed to developing a clean-energy economy.  The island state has made great progress in aligning regulatory policies with clean energy goals; encouraging development of next generation, clean energy technologies; and deploying renewable generation and grid infrastructure.  As a result, the state has been building energy efficiency, increasing photovoltaic capacity, and creating green jobs.  The following figures show how much Hawaii has been deploying clean-energy technologies relative to the other 49 states.

Further, the state has bold goals: to achieve 70% of its energy from renewable sources by 2030.  Hawaii aims to serve as a clean energy model for the U.S. and for the world. As the graph below indicates, 66 renewable energy projects are currently in progress and more are in development in bio-energy, geothermal, hydro, solar, and wind, etc.

I’ve written several blogs about the Jeju projects.  As of now, over 170 Korean companies are engaging in specific projects, including advanced metering infrastructure (AMI), electric vehicles, solar and renewable generation, and energy storage test beds.  In the case of AMI, 6,000 household are participating in a smart meter test. The Ministry of Knowledge and the Smart Grid Institute are leading the project with investments totaling more than $240 million between 2009 and 2013.

In fact, South Korea is an exceptional country. With a sole utility service provider – KEPCO – and its current advanced electricity grid capabilities, South Korean camps are targeting oversea markets, rather than domestic markets, from the first phase.  Focusing on overseas smart grids markets will help Korean players find more lucrative opportunities.  Thus the partnerships with Hawaii should help Korean providers gauge their current capabilities by applying Jeju’s outcomes in a similar environment in the United States.  Jeju and Hawaii both have clean, year-round, and renewable energy resources, including abundant sun and wind.  Tourism is the major industry in both places, and Hawaii and Jeju both hope to maintain their unique ecosystems with clean energy sources.

Japanese partners already initiated a joint U.S.-Japanese smart grid demonstration project in November, 2011 on Maui. Those two projects with Asian players could make progress to achieve Hawaii’s goals.


Rise of Megacities Brings Waste-to-Energy Opportunities

— March 1, 2012

In a recent article in the Guardian profiling the rapid rise in the number of cities home to more than 10 million people, Paul Webster and Jason Burke explain that the scale and speed of urbanization worldwide have reached unprecedented levels.  Estimates to be published in Pike Research’s forthcoming waste-to-energy (WTE) report indicate that the global population living in urban areas will reach 4.5 billion in 2022 – nearly one billion more than in 2011. 

According to some experts, the number of such “megacities” will double over the next 10 to 20 years.  Less well-known cities, particularly in south and east Asia, will see the biggest growth.

China is in the midst of a well-documented urbanization stampede.  Visiting Beijing five straight years in the early 2000s, I observed the scale of construction and expansion firsthand.  Highways were laid down in weeks and a forest of construction cranes dominated the skyline.  During that time, Beijing’s famous ring roads (now numbering 7) rippled outward, swallowing up the surrounding areas and transforming hastily-built residential settlements into massive steel, glass, and concrete multi-use high-rises. 

Last month, Chinese authorities announced that for the first time more than half of the country’s population lives in cities.  Current estimates put the total urban population at 691 million, more than double the entire U.S. population.  This number is projected to reach at least 800 million by 2022, according to Pike Research estimates, or enough people to populate 80 megacities.  In 2011, there were just 27 megacities worldwide. 

An inevitable byproduct of urbanization, and the corresponding consumerism that accompanies it, solid waste generation is projected to increase in lockstep with megacity growth over the next decade.  Again, China leads the way.  Pike Research analysis shows that municipal solid waste (MSW) in China will reach 472 million tons annually by 2022, or 17% of global estimates. 

As in most of the world, most of this waste ends up in landfills.  Globally, some 73% of all MSW is either landfilled or dumped in open pits.  Without landfill gas capture, these sites are notorious producers of methane gas (CH4), a greenhouse gas nearly 64 times more potent than carbon dioxide (CO2).

Waste-to-Energy (WTE) technology, which can extract the valuable energy contained in waste streams for the production of electricity and heat, offers an attractive alternative.  WTE facilities, the bulk of which are combustion plants, currently treat an estimated 205 million tons of MSW a year in urban areas worldwide.  This represents just 11% of the MSW treated around the world in 2011.  Nearly 40% of global WTE capacity is currently concentrated in the EU, which has been the outright leader in waste management and landfill diversion.

The growth of megacities in China and elsewhere presents an important opportunity for the bioenergy industry, which, as I discussed in an earlier post, is on the hunt for low-cost feedstocks for renewable power and oils.  As a number of advanced thermal early stage companies have recognized – Plasco Energy and Greenlight Energy Solutions on the power side; Enerkem, Fulcrum Bioenergy, and Solena Group for fuels – MSW is a vastly underutilized resource and low-hanging fruit option in the advanced feedstock pool.  Available at negative cost – companies get paid to process the waste – MSW can address many of the challenging obstacles associated with bioenergy feedstocks, including high cost, aggregation, and proximity to end markets. 

Facing an avalanche of garbage, China is on the march to expand installed WTE capacity, and could be followed by Brazil, India, and other developing countries if sufficient political and economic will materializes.  Already proving to be particularly adept at large-scale infrastructure build-outs, China is projected to increase its existing capacity base by at least 250% over the next decade.  The country already accounts for 14% of global WTE capacity today.  That number could grow significantly over the coming decade.


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