Navigant Research Blog

In D.C., Running on Natural Gas

— January 18, 2012

As a resident of Washington, D.C., I have the privilege of griping about the state of our nation’s capital. However, I have recently noticed several D.C. government vehicles that are fueled using natural gas, and I have to say – I think they’re pretty cool.

My colleagues on Pike’s Smart Transportation team have done research on natural gas vehicles, but it wasn’t until my colleague Lisa Jerram began researching her latest report on total cost of ownership for fleets – including natural gas vehicles – that I appreciated why a city would consider alternative fuel vehicles. Then, I started noticing government natural gas vehicles all over the city.

Since existing natural gas infrastructure is limited, and many natural gas vehicle fleet operators choose to install compressed natural gas infrastructure onsite, the low fueling costs typically make up for the high capital expenditure. According to the U.S. Department of Energy’s Clean Cities group, October 2011 prices for compressed natural gas were $2.09 per gasoline gallon equivalent (gge). Compare those prices to gasoline ($3.46) or diesel ($3.42) and it’s easy to see why cities that are concerned about air quality and operating budgets might take the long view and decide to build fleets around natural gas.

Considering that the United States will likely have a surplus of natural gas for the next 20 years – and the fact that the country is unlikely to be able to export the entirety of that surplus since natural gas export infrastructure has not been upgraded in recent years – natural gas prices will either stay steady or decrease over time. What’s more important in this case is the price of natural gas compared to alternatives such as diesel and gasoline. As the DOE October 2011 prices indicate, the differences between the fuels is large enough and will likely remain consistent enough to make natural gas fleets appealing.


At NAIAS, The Beginning of the End of the Battery Wars

— January 18, 2012

After attending the North American International Auto Show, I can state one thing for sure: the number of nickel metal hydride (NiMH) battery hybrids is shrinking fast.  Ford has made a bold move that will likely have other automakers following suit: it has stopped producing a NiMH-based battery hybrid.  All their hybrids will be lithium ion (Li-ion) based batteries, starting this year for the 2013 model year.  Ford claims that this will enable the new Fusion to achieve fuel economy numbers (44 mpg highway/47 mpg city) that are higher than smaller cars like the Honda Civic hybrid (44/44) and well ahead of similar segment cars like the Toyota Camry Hybrid (39/43) and Chevrolet Malibu Eco (which also uses a Li-ion battery in its eAssist system, to achieve 37/25).  The larger Fusion may even start to pinch some demand from the current reigning eco-leader, the Prius (48/51), thanks to its size and sedan body-style (the typically preferred style in the U.S.).  Of course, all this depends on the price, which was not announced at the show. 

Joining the current users of Li-ion batteries in hybrids (BMW, GM, Honda, Hyundai, and Mercedes), the two potential big-volume hybrids announced at the show this year, the Fusion and the Jetta Hybrid, are now both Li-ion based.  With Ford now shifting to Li-ion batteries in all its hybrids, the ranks of NiMH based hybrid vehicles are shrinking fast, with two major exceptions: the Toyota Synergy drive system and the Honda Insight/CR-X.  So, while this may point to the end, the NiMH vs. Li-ion competition is not over… yet.

Two other interesting reveals at the Auto Show were the Lexus 2+2 hybrid coupe and Toyota NS4 plug-in hybrid.  These vehicles, while just design and technology showcases, almost certainly have the underpinnings of the next generation of Toyota’s hybrid system.  Toyota wasn’t talking about this, but I expect we will hear more about the next generation of hybrid in the coming year.  Toyota has put a great deal of effort and money into developing a Li-ion supply chain with its current hybrid battery partner, Panasonic, and is offering that battery in the Prius PHV.  As we have seen Honda do with the Civic, I would expect Toyota to shift some low-volume hybrids (perhaps Lexuses) to Li-ion in the very near future.

It’s clear that this move by Ford will usher in new pressure on competitors to make big jumps in fuel economy.  NiMH producers will see new competitive pressures as a result.


China Launches Major Energy Storage Project

— January 17, 2012

China made news earlier this month in the energy storage sector with the announcement that a 6-megawatt (MW)/36 megawatt-hour battery has been installed alongside a 40-MW solar PV installation and a 100-MW wind installation in Hebei Province.

The storage system may seem oversized, but according to the State Grid Corporation of China, which is one of the two major utilities in China (China Southern Power Grid Company is the other) and Chinese battery manufacturer Build Your Dreams (BYD), the site will eventually incorporate 300 MW of wind and 100 MW of solar.  Pike Research has hypothesized that China will be a great market for energy storage if vendors can get the secret sauce right: reasonable value for energy, power and a proven ability to deliver renewables integration services, and ideally, a manufacturing presence in China.

China’s energy mix is dominated by coal, followed by hydro and nuclear.  Although the country has a significant installed capacity of renewables, not all of this capacity is online.  Overall, renewables in China currently account for a small portion of energy generation (approximately 2%). 

China does not have significant natural gas resources, and as a result has prioritized coal as its primary fuel, including so-called clean coal plants.  The country’s leaders seem to have seen the writing on the wall where energy security is concerned. China is aggressively pursuing wind, even though two-thirds of its current wind installations are not connected to the grid for fear of the instabilities wind can cause on the system.

In China, the opportunity for storage might not only be a wind integration benefit, but also a transmission benefit – which is typically easier to attach a dollar value to. It will be interesting to see which benefits China decides are most valuable – and in turn which technologies end up as winners in the Chinese market as a result.

With $500 million in state funding, this isn’t exactly a commercial project. But it is the next step beyond the energy storage technology being tested at the China Electric Power Institute (CEPRI), which is coincidentally a subsidiary of State Grid.  CEPRI has experimented with several different technologies and renewables.

It’s no big surprise that State Grid has chosen to install a 6 MW iron phosphate battery from a domestic manufacturer. What’s encouraging is that China is trying to understand storage technologies and their benefits.


Biofuels Rulings Shift Geopolitical Landscape

— January 17, 2012

A series of recent policy-related developments within the biofuels industry may have set the stage for what could prove to be a significant shift in biofuel geopolitics over the next decade. 

To recap: the European Court of Justice (ECJ) affirmed an earlier ruling that held the imposition of carbon taxes on flights touching down or taking off on EU soil did not infringe international law or the Open Skies Agreement; a U.S. District Court ruled that California’s Low Carbon Fuel Standard (LCFS) violates the U.S. Constitution; and the long-standing U.S. ethanol producer credit (aka “VEETC”) slipped quietly into the history books.   

Where do these developments leave the industry? 

While the inclusion of airline emissions in the EU’s ETS indicates that the buzz around aviation biofuels won’t fade anytime soon, the threat of costly trade wars by the United States and China in response to the ruling could put a crimp on the expansion of international biofuel trade flows. 

Meanwhile, just as the expiration of VEETC eliminates an estimated $6 billion worth of annual subsidies to the ethanol industry, the lucrative California fuel market is (at least for now) once again open for Midwest ethanol producers, and likely at the expense of Brazilian ethanol (more on this below).

On the whole, the decisions are generally good for advanced biofuels and corn-based ethanol alike. 

Aviation Biofuels Lack Production Volumes, Not Willing Buyers

In the case of advanced biofuels, the decision to uphold the carbon fee suggests that international carriers will not escape the added costs associated with doing business in Europe, adding further incentive to integrate carbon-cutting technologies.  As I discussed in an earlier blog, the combination of impending offset purchases and high oil prices appears to be forcing the aviation industry’s hand when it comes to fossil fuel alternatives, which has been signaling strong demand for sustainable advanced biofuels in recent years (note that first-generation biofuels lack the performance characteristics necessary to power commercial and military aircraft).

Although expected, the ruling is generally good news for energy feedstock producers looking to commercialize next generation feedstocks like camelina, jatropha, switchgrass, and algae, and seeking reliable markets and off-take contracts to offset the risk associated with growing relatively unknown crops.     

But the advanced biofuels story is not about lack of demand, which suggests that the ECJ decision may actually not have much impact at all.  In the case of the aviation industry, rising oil prices mean that demand for biofuel alternatives is deep, durable, and widespread.  Even without the EU tax, assuming adequate supply, price parity with petroleum-based fuels, and sufficient distribution logistics, aviation fuel buyers would be clamoring to lock-up every last drop of advanced biofuels production.

Meanwhile, with the threat of trade wars from the United States and China among others, costly tariffs and other punitive measures could actually stifle biofuels development, an unintended consequence of the aviation tax.      

Corn-based Ethanol Gets a Boost

Over on the other side of the pond, Judge Lawrence J. O’Neill’s December 29 decision declaring California’s carbon fuel standard unconstitutional represents a significant victory for Midwest corn ethanol producers (see my 2010 article on the LCFS and Green Federalism for more on the legal issues).  The California Air Resources Board’s (CARB) policy, introduced in 2007, aims for a reduction in the “life-cycle carbon intensity” of fuels consumed in the state by 10 percent over the next decade.  Due to corn ethanol’s inherent inefficiencies, the policy excludes most of the corn-ethanol produced in the United States from one of the world’s largest fuel markets. 

Implementation of the policy had led to the peculiar situation where Midwest ethanol producers were shipping their offending product 6,000 miles to Brazil to make up for a shortfall in sugarcane ethanol production.  Midwest corn’s exclusion from California, coupled with a national blending wall policy, put a serious constraint on U.S. producers’ scale-up ambitions.  The ruling may put corn ethanol back in the domestic driver’s seat, at least for now.      

Looking Beyond 2012

As discussed in Pike Research’s report, Biofuels Markets and Technologies, we expect the production of conventional biofuels – namely corn- and sugarcane-based ethanol – to increase steadily over the next decade as demand for alternatives to petroleum-based fuel outstrips advanced biofuels production volumes.  The corn-based ethanol industry appears to have established viability, and even without the VEETC, we foresee an increase in production as access to markets like California and the likely raising of U.S. blend walls (e.g. implementation of E15 or expansion of E85) opens up new opportunities for producers. 

The key question raised by these decisions: where will the production go over the next decade?  As corn-based ethanol ventures beyond VEETC, the industry will need to fight for market access at home and abroad despite this most recent victory.  Meanwhile, the EU may be positioning itself as the primary market for advanced biofuels at the expense of U.S. and China.     


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