Navigant Research Blog

In the U.S., Marine Energy Founders

— March 5, 2012

The allure of marine and hydrokinetic (MHK) energy is clear:  water is 800 times more energy dense than wind, MHK technologies have two to three times the capacity factor of solar, and the growth in offshore wind has demonstrated that despite the unforgiving marine environment, energy can be harvested offshore.  But, as we point out in Pike Research’s recently released report, Marine and Hydrokinetic Energy, it’s time for the industry to deliver.  A brief look at the markets on both sides of the Atlantic highlights the opportunities and challenges facing the nascent MHK industry.

The United Kingdom recently approved leases for 1.6 gigawatts (GW) of wave and tidal projects toward its target of 2 GW of installed marine and hydrokinetic capacity by 2020.  The U.K. currently offers 5 Renewable Obligation Certificates (similar to U.S.  Renewable Energy Credits) per megawatt-hour (MWh) of MHK electricity generation and has a four-tiered MHK feed-in tariff scheme that extends out to 2021.  The U.K. is home to multiple grid-connected marine energy testing centers that host a dozen prototypes.  In February, Siemens announced it was acquiring Marine Current Turbines, a leading technology company in which Siemens has been investing in for several years, and is now heading toward large scale deployment.  Over the next six years, the a series of “phase 1” commercial scale deployments ranging between 50 MW and 200 MW will determine the feasibility for scaling projects up to as much as 1 GW.  The questions are: Will these “phase 1” deployments perform as well at scale as they have over the past several years at testing centers? And can these massive arrays survive for 20+ years underwater without maintenance costs sinking ROI?

Meanwhile, in the latest version of the proposed 2013 budget, the United States reduced its funding commitment for marine energy by 66%.  Over the next six years, only a few projects at limited capacity will move forward, despite years of testing.  Three “National Marine Renewable Energy Centers” have been designated, but have very limited financial resources.  The most experienced U.S. MHK company, Verdant Power, recently received FERC’s first-ever issuance of a commercial license for tidal power – for a whopping 1 MW tidal project.  This came six years after Verdant became the first company in the world to install a grid-connected tidal array.  Lockheed Martin is the only major corporate entity that has seriously delved into marine energy – but with ocean thermal energy conversion technologies that are not likely to see broad commercial viability before 2020, if ever.  U.S. river hydrokinetic companies may fair better in the next six years as Pike Research forecasts up to 300 MW installed by 2017. The questions are: Can the US government create an adequate enabling environment to green light quality MHK projects? And if so, how many US companies will remain by the time they get through the extremely long (and costly) permitting process?

Both countries have insisted, correctly, that given the immense technical and environmental challenges presented by MHK, it is critical to “get things right”. But the bottom line is that in the U.K., the industry is getting a clear shot at proving its muster, while the nascent U.S. MHK industry is falling into a familiar pattern that has prevented other clean-tech industries from reaching their full potential: lack of investment certainty, lack of policy direction, inconsistent federal funding, and severe regulatory restrictions.


Zero Energy Buildings: Closer Than You Might Think

— March 2, 2012

It’s probably a safe bet to assume you’ve never been in or even passed by a zero energy building.  The U.S. Department of Energy lists only eight zero energy buildings in the U.S.  on its high performance building database (though there are a few others scattered across the U.S.).  A number of developers, such as Meritage Homes, have started building zero energy developments around the U.S.  In Europe, the Passivhaus standard has been used to build over 40,000 residential and commercial buildings, and the city of Frankfurt, Germany requires it in construction of new public buildings.  Still, these represent only a tiny fraction of the total building stock and, for most of the construction world, zero energy design represents an all but unattainable challenge given the up-front costs of deep energy efficiency and renewable energy systems.

Zero energy building, however, is expected to increase dramatically in the construction industry in the next few decades as a set of regulations around the world come into effect.  As soon as 2016, the United Kingdom will require zero carbon construction for all residential buildings.  Newly constructed dwellings will need to achieve deep levels of energy efficiency (45-60% lower than a comparable building built in 2006).  That’s just four years away.

Major plans for zero energy buildings are underway throughout the European Union, too, as the EU Energy Performance of Buildings Directive (EPBD) will require all new commercial and residential buildings to achieve “nearly zero energy” design for public buildings starting in 2019 and all new building construction in 2021.  Individual EU Member States are busy defining “nearly zero energy” today and, by the end of the decade, will be implementing nearly zero energy building codes for all new buildings.  Assuming that construction activity in the EU rebounds to or near pre-recession levels by then,  this will become a more than $1 trillion market, as described in Pike Research’s Zero Energy Buildings report.

Similar legislation targeting specific sectors has been proposed around the world, including Japan and the states of California and Massachusetts, as shown in the above chart.  While voluntary zero energy building will continue to grow outside these regions, demand for it will be guaranteed when zero energy is the law of the land, and regions with zero energy codes will represent the largest markets.

Given the new and innovative design approaches required to deliver a zero energy building, companies on many sides of the building industry, from developers and contractors to building equipment and materials vendors, are already developing new strategies to address these markets when these regulations come into effect.  This shift is particularly notable in the construction industry, which is hardly considered fast-moving and responsive to change.  As these laws come into effect, though, there will be little choice for the industry but to evolve toward zero energy building design.


Data Centers Could Turn Microgrid Markets Upside Down

— March 2, 2012

After compiling numerous reports on the status of emerging markets for microgrids, I have concluded that not a single national government has developed an integrated or comprehensive policy creating a viable, vibrant market for customer-driven commercial sector microgrids.  In fact, according to the most recent Pike Research 2012 report on the global microgrid market, commercial/industrial applications (C/I) are lagging behind all other segments: campus environments, community/utility, military, and remote.  That could change within the next few years, if plans on the drawing boards for data centers in Singapore , India and other parts of the Asia Pacific region – and the United States – move forward.

Until recently, data centers largely relied on uninterruptible power supply (UPS) systems consisting of large banks of dirty diesel generators to maintain 99.999% reliability of power service.  As data centers begin to green their operations due to environmental pressures, air quality regulations and the increasing cost burdens of diesel fuel, though, the appeal of microgrids – along with the broader notion of aggregating distributed energy sources into virtual power plants – is looking more and more compelling.

The Asia Pacific region already is projected to lead the world in microgrid annual revenues, but this is due, in large, part to anticipated growth in the remote microgrid sector, especially in countries such as India, which recently deregulated its markets to accommodate remote microgrids of less than 1 megawatt (MW) in capacity.  Rumors are swirling about projects as large as 500 MW in one Asia Pacific country – and data center microgrids of similar scale in others – indicating that the C/I sector may be the sleeping giant. Due to low labor costs and lack of permit obstacles, the rapid construction of data center projects of this scale in Asia could blow Pike Research’s current market forecasts out of the water.

Today, the commercial and industrial segment represents the least developed market for microgrids worldwide.  Currently, it is illegal around the world for a residence or business to sell self-generated electricity to anyone apart from the local utility through net metering.  This makes the concept of creating and carrying out self-sustaining microgrids in multiple-owner C/I complexes extremely difficult in markets such as the United States.

On the other hand, microgrids may hold the most value for commercial and industrial users, since power outages kill productivity as well as revenues, especially at data centers.  The cost savings offered by microgrids to this sector is not limited to the free resources tapped by distributed renewables; they also include the reduction of downtime, as islanding capabilities allow microgrid-protected commercial data centers to maintain power when the larger grid fails.  Furthermore, the advantages of direct current (DC) microgrids for data centers are being extolled by a variety of companies, backed up by a recent study by EPRI showing a 15% efficiency gain at a data center in North Carolina.

Perhaps a sign of things to come is represented by the Niobrara Energy Park proposed near Loveland, Colorado.  Boasting a potential capacity of more than 200 MW of planned natural gas, solar and wind generation, Niobrara is still seeking an anchor data center tenant, but has cleared virtually all key regulatory hurdles.  This single microgrid – if successful – could dramatically transform this segment.  The logistics of managing and controlling a microgrid of this scale, though, are unprecedented.

Swiss industrial giant ABB is especially keen on the data center microgrid market, creating a new “best of breed” consortium that includes software innovator Ventyx, as well as less known firms such as Validus DC (for DC data center applications) and Power Assure (for data center smart grid energy management.)  Not only do these companies hold the potential to develop state-of-the-art microgrids, but they also have the capacity to do something much more radical: build out virtual power plants (VPPs) for far-flung data centers.

Imagine this: Data centers operating worldwide, but owned by a single enterprise, leveraging smart grid intelligence and their sizable loads to engage in demand response arbitrage, shutting down centers where prices are high during the day, and shifting loads to markets where prices are low at night.  These enterprise level VPPs could also become a microgrid, islanding in times of emergency or peak demand.

The team and tools that ABB has assembled – most recently the smart switches of Thomas & Betts, LLC — could transform electricity management for commercial operations at the distribution level.  Throw in some storage, and data centers not only help back-up variable renewables, but when not used for that purpose, sell ancillary services to grid operators.

This kind of fun is what the smart grid is supposed to be about!


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.


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