Navigant Research Blog

China Looks to Cap Energy Consumption

— March 1, 2012

In a webinar earlier this year, my colleague Kerry-Ann Adamson forecast that that governments will move toward a more prescriptive approach to energy policy.  In other words, they will not simply set broad efficiency or emissions targets but will specifically identify the clean energy technologies to reach those targets.  Examples are Australia, with its recommendations for distributed generation and solar power to meet energy efficiency goals, and the EU countries, which Kerry-Ann says will adopt increasingly prescriptive policies to achieve the EU’s mind-boggling goal of cutting carbon emissions by over 80% by 2050.

We can add China to that list, if reports are accurate that the country is considering putting a cap on energy consumption.  You read that right: a national cap on energy consumption. 

It’s challenging to pin down details of this reported proposal.  From my reading of China’s 12th Five-Year Plan, which covers 2011 to 2015, the country is still focused on energy-intensity targets, not absolute caps.  The highlights from the English translation that I found are that, from 2010 to 2015, energy consumption per unit of GDP is targeted to drop by 16%, while CO2 emissions per unit of GDP will decrease by 17%.  Another major goal over the next five years is energy diversification.  The plan sets a target for non-fossil fuel resources to rise from 8.3% to 11.4% of primary energy consumption between 2010 to 2015.

Reports of the possible national cap seem to have come from public statements by officials at China’s National Energy Administration (NEA).  According to China Daily, in 2011 a National Energy Administration official said that China was considering a limit on energy consumption for localities, with a goal of “cap[ping] its total energy consumption at four billion tons of coal equivalent by 2015.“  Other reports confirm this.  It has also been reported that renewable energy will be excluded from the cap. 

As yet, I have not seen an official policy announcement with details as to how the cap would be implemented.  Certainly the five-year plan goals confirm that China is hoping to shift from a pure growth mode to a sustainable growth model: the five-year plan also calls for a much less heated 7% growth rate in GDP to go along with the focus on decreasing energy intensity.  But setting a cap on the total energy consumption would be an extraordinary step, albeit one that seems to fit within China’s form of “communist capitalism.”  But in trying to build a more sustainable economy, China still faces many of the same pressures that capitalist democracies face.  For example, large swathes of the country have not developed to a modern standard of living and are not likely to be willing to slow their efforts to do so.  Moreover, energy consumption in China is dominated by coal, one of its few domestic energy sources, and it will not be easy to wean the country off this plentiful energy source.  The Guardian recently reported that the energy cap is provoking much debate from provincial governments that want to grow faster than the national government target would allow.  This will be a fascinating story to watch this year, and even more fascinating to see how China might implement a national cap should such a policy come to fruition.


IBM Tackles Transport Snarls in China

— March 1, 2012

IBM has announced its first major customer for the Intelligent Transportation solution it introduced last year. The project is with the Chinese city of Zhenjiang, where IBM is working with the local municipality to deliver an integrated transport management system as part of the “Smarter Zhenjiang, Smarter Tourism” project. Zhenjiang is a city of 3 million people in eastern China and is an important regional hub situated near the Yangtze River and the Grand Canal.

The new system is based on IBM’s Intelligent Operations Center for Smarter Cities (IOC) and will provide a real-time picture of the city’s traffic network with the aim of alleviating congestion, improving traffic management, and providing a better travel experience for citizens and visitors.

A core component of the project is a bus scheduling system that will help increase the efficiency of public transportation. The system will help Zhenjiang manage over 1,000 public transportation vehicles, over 80 city bus routes and 400 upgraded bus stations. A sensor system will collect data from smart devices in buses and bus stations and feed these to the IOC, where the data will be analyzed to help transit personnel adjust bus routes, frequencies, and bus station locations.

IBM China Research Laboratory is working with the city to create what it calls a Transit Route Network Optimization Planning System (TOPS). TOPS will provide a simulation platform for transit fleet and passenger flow on the network. It will draw on a variety of historical and real-time data sources and use predictive analysis to enable proactive management of the transport and transit system.

Amidst the stream of smart city project announcements, this one stands out for a number of reasons.

First, the project is concrete evidence of how China is looking to smart solutions to address the challenges of urban growth. Most analysis of the smart city market, including our own, presumes that China will eventually be at the forefront of smart city development, but to date, actual projects on anything approaching city-scale have been thin on the ground so far. Our report, Smart Cities, identified transport as the segment of the market where Asia, and particularly China, would grow fastest because of the impact of congestion on economic growth and sustainability. According to IBM, China is building more public transit systems than the rest of the world combined, and the country can’t cope with its rising transport demand without more intelligent management.

Second, the project builds on and develops some key innovations in transport management. This will be a state-of-the art system that not only monitors congestion but also uses predictive analytics to proactively manage traffic flows – through the routing of buses to meet demand and avoid bottlenecks, for example. Based on its work with Singapore and other cities, IBM claims its systems can now predict congestion build ups between 5 and 30 minutes ahead of problems arising, allowing traffic managers to take mitigating action.

Third, this is an early vindication for IBM of its IOC model for city management. The base of the system is the IOC platform, customized to meet the needs of the city and enhanced with the new capabilities being developed by its research arm in China.  IBM has the opportunity to build a positive feedback loop as innovations made in Zhenjiang feed back into the solution set and make it even more relevant to the issues facing other cities.


U.K. and U.S. Energy Policies Poles Apart

— February 28, 2012

Beverly Simpson, the new consul general at the British Consulate in Denver, hosted a lunch in downtown Denver today featuring special guests Vice Admiral (ret.) Dennis McGinn, now the president of the American Council on Renewable Energy (ACORE); and Rear Admiral Neil Morisetti, the climate and energy security envoy for the United Kingdom.  I had a particular interest in hearing the naval officers speak since Pike Research has published a few reports, including last year’s Renewable Energy for Military Applications, on cleantech and the military.

The admirals’ comments were a strong indicator that the military has moved far beyond civilian elected officials, at least in the United States, in thinking about the future of energy security and innovation.  Morisetti called climate change a “threat multiplier” that will fuel conflicts and promote instability in many parts of the world, particularly Africa and the Middle East.  And he joined McGinn in lamenting the absence of a coherent and forward-looking energy policy in the United States.  “My faith in the U.S. system, quite frankly, had taken a hit over the last two years as I’ve been traveling around with Admiral McGinn,” said Morisetti.  “I had always known the United States as a place where, when there’s a problem, the intellectual and financial resources were harnessed and the problem was taken on directly.  I haven’t seen that in regards to energy security.” (Morisetti did mention that, in the last 36 hours of his visit to Colorado, “my faith has been restored.”)

Interestingly, much of the conversation over lunch centered not on renewables but on natural gas – specifically, the implications of the surge in domestic natural gas supplies that has brought the price down to below $5 per million BTU and is pricing many wind and solar generation projects out of the market.  McGinn, for one, was sanguine about the long-term prospects for renewables competing with natural gas plants.

“We’ve been down this road before, of falling in love with a single energy source,” the former vice admiral said.  “I think there’s a natural synergy between renewables, particularly wind and solar, and using low-cost natural gas generation for firming.” McGinn added that given the environmental challenges the natural gas industry is facing, particularly around fracking, he doesn’t expect the price to stay this low forever.

The other theme of the gathering was the sharp differences between the United Kingdom and the United States around the challenges of climate change and energy security.  “We have a broad political consensus” around the need to face up to climate change and devise sensible and effective policies to limit it, Morisetti said – something that cannot be said about the U.S.  “I’m always amused when I hear a BMW dealer in the U.S. talking about his models that get 25 miles to the gallon.  If you go to Germany, you’ll hear them talking about 70 to 80 kilometers [42 to 48 miles] to the gallon.  And it’s the same company.”

“If I were king of the world for a day,” McGinn stated, “I’d do two things:  Eliminate all subsidies, for fossil fuels, renewables, everything.  And institute a carbon tax that would enable a smooth transition to sustainable sources of energy.”

Strong talk from a former naval officer.  Let’s hope someone in Washington, where ACORE is based, starts listening.


Has the Time Come for Prepaid Electrical Service?

— February 28, 2012

Everyone is familiar with prepayment, especially when it comes to prepaid wireless phone services.  But, in the United States, the concept of prepayment for electric services is not yet well understood. By contrast, electric prepayment is a common practice in many other nations, especially in the United Kingdom, Ireland, South Africa, and many parts of Asia Pacific.  In South Africa, for example, over 50% of the residents use electric prepaid programs that are offered by its major utility, Eskom, the largest producer of electricity in Africa and among the top seven utilities in the world in terms of generation capacity.  With the oldest prepaid program in Europe, the United Kingdom has approximately 14-15% of all households on an electric prepaid plan – usage of which, according to Ofgem, increased by 5% in 2010.  Recognizing that these types of services represent an essential part of the electric metering market, the U.K. authorities have mandated that the nation-wide roll-out of smart meters will include a prepayment functionality. 

In the United States. some observers estimate that less than 10% of the 3,200 utilities in the country offer prepaid electric services.  Texas, Arizona, Oklahoma, Vermont, State of Washington and a few states in the Southeast have been frontrunners, especially among cooperatives and municipalities. The large independently-owned utilities (IOUs) have, on the other hand, been reluctant to adopt prepaid plans – in part because they are more constrained than the other utilities to comply with state utility commission rulings.  As a result, the overwhelming majority of prepaid programs in the country are run by smaller utilities, frequently serving rural and low-income communities with many transients like college or university students. 

The oldest and best known prepaid program is the Salt River Project (SRP) in Phoenix, Arizona, which initiated its prepaid program – the M-Power Program – in 1993.  In 2011, its program enrollment rose by 16% to a total of 125,000 participants. This is an especially remarkable achievement because SRP does not advertise its prepaid services.  Oklahoma Electric Cooperative (OEC) offers another, albeit younger, example of a prepaid program with somewhat more than 10% of its total customer base currently enrolled as prepaid participants, i.e. about 5,122 customers. Every resident is eligible to become a participant in this program, though it is most popular among its student population.

Barriers to electric prepaid services have primarily stemmed from objections from consumer advocacy groups, public utility commissions (PUCs) and regulatory agencies.  One fear has been the possibility of utilities shutting off power to certain “disadvantaged” customers.  In November 2011, the Iowa Gazette ran an article pointing to the threat of electrical disconnections from prepaid programs for vulnerable residents, such as the elderly, individuals with disabilities or life-threatening medical conditions.  Another objection has been that prepaid programs might encourage low-income customers to disconnect electric service in order to keep money available for other necessities like food and clothing.  In some instances, PUCs have accused utilities of targeting low-income consumers for prepaid programs, fearing that they are stigmatizing these consumers.  Some time ago, these concerns may have had some validity, but they have begun to make less sense today as prepayment is increasingly becoming the preferred payment method among consumers in a wide variety of situations, especially among mobile phone users. 

In addition, there is growing evidence that the benefits of electric prepaid programs far outweigh any of these concerns.  Customer surveys have consistently shown high customer satisfaction – around 80-90% of prepay customers are happy or very happy and would recommend the program to others.  Prepay consumers tend to feel that they are in control of their electricity bill and can better manage their budget by being able to choose when, how, and what they pay each month for their electricity. As one prepaid customer put it:  “It is easier to pay $25 every week than $100 at the end of every month.”  Because prepaid programs encourage consumers to pay attention to their use of electricity, many utilities, such as SRP and OEC, have been able to demonstrate improved energy efficiency behavior among their prepay customers.

Utilities also benefit from prepaid programs, through better revenue protection and cash flow.  With a traditional post-pay system, some consumers may owe hundreds or even thousands of dollars before they are disconnected, whereas with prepayment, a much smaller amount of less than $50 is owed before they are disconnected.  For example, at Brunswick Electric Municipal Corporation, reduction in write-offs has averaged between $1,000 and $2,000 per month. Moreover, in a prepaid system utilities can achieve significant administrative cost savings by not having to support resources to track and collect deposits for initiating electricity for customers, to send monthly bills and to collect reconnection fees from consumers that have been disconnected.  In many cases, electric prepaid services are a win-win. 

The growing realization of the value proposition of such services, together with the increasing deployment of advanced smart meters that will greatly facilitate prepaid programs, has become a powerful incentive for U.S. utilities to seriously consider adoption of such plans.  And unlike programs in the past, which frequently targeted low-income residents, the prevalent goal today is to make these programs available to every utility customer.  As better customer choice becomes a key strategic focus among utilities, electric prepaid services will eventually become the new norm – even in the United States. 


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