Navigant Research Blog

Take Control of Your Future, Part VII: Merging Industries, New Entrants, and Colliding Giants

— June 13, 2016

Modern commercial premisesIn my initial blog in this series, I discussed seven megatrends that are fundamentally changing how we produce and use power. Here, I discuss how merging industries, new entrants, and colliding giants are changing our industry.

What Is Happening?

The power energy industry (the generation, transmission, and distribution of electricity) is not the sole territory of the incumbent utility anymore. Several players from other industries, including oil & gas (O&G), technology, retail, telecom, security, and manufacturing, are trying to get into the game. Navigant sees many cross-industry movements, and one of them is increased crossover investments between the electric utility and O&G industries. Besides pursuing mergers and acquisitions, which I discussed in one of my previous blogs, we see investments in new areas of opportunity like renewables, distributed energy resources (DER, including distributed generation, energy efficiency, demand response, storage, etc.), transportation, smart infrastructure and cities, and energy management.

As an example, in April, the French supermajor Total announced the creation of a Gas, Renewables and Power division, which it said will help drive its ambition to become a top renewables and electricity trading player within 20 years. According to a statement by the supermajor, “Gas, Renewables and Power will spearhead Total’s ambitions in the electricity value chain by expanding in gas midstream and downstream, renewable energies and energy efficiency.” Other companies, like ENGIE and Shell, have made similar announcements.

A Total Gas Station in Paris

TOTAL

(Source: Reuters)

Fighting for Future Energy Positions

The large incumbent players in the energy industry are under pressure. And the way things are unfolding now, it doesn’t seem like this will change anytime soon. Time to make some minor tweaks? Change course more drastically? Or completely reinvent ourselves? These are discussions that are taking place more frequently at the board and executive levels of the incumbent players.

Electric utilities are under pressure because consumption growth is minimal and, in many cases, flat to slightly negative. The average consumption per customer (both residential and commercial) is declining due to self-generation, energy efficiency, demand response, etc. As a result, revenue is declining. Costs are increasing because of needed investments in a safe, reliable, cleaner, and more distributed and intelligent electric power grid. Utilities are identifying new revenue streams and thinking through new business models that will bring shareholder value going forward.

Oil companies are under pressure because of the continued low oil price. Ever since the oil price dropped to historic lows in 2014, the struggles of the industry have been daily news. Short-term hopes for a recovery were tempered significantly by the outcome of the recent OPEC meetings in Doha. Oil companies are looking for ways to survive by taking out costs, reducing their upstream capital investments, and shutting down unprofitable assets. They are also looking for new opportunities to grow revenue and future shareholder value.

Industry Giants Are Responding

In the last couple of months, I’ve attended several meetings with CEOs from large utilities and O&G companies. It is remarkable how their views on what is happening in the energy space are so similar. What is even more interesting is that their strategies to address the challenges and opportunities are almost identical.

Here is what they say is happening:

  • Energy consumption and gross domestic product (GDP) growth: Although population and GDP growth (at a slower pace) drive growing energy demand, the trend line between GDP and energy consumption growth has been broken. This is especially the case in developed countries. Energy consumption in the United States flatlined from 2014 to 2015 even as GDP grew by 2.4%. Since 2007, energy consumption has fallen 2.4% while GDP has grown by 10%, according to the 2016 Sustainable Energy in America Factbook by Bloomberg New Energy Finance. At the level of individual utilities, we see this playing out. Utilities with no or limited customer growth see their overall revenue declining. Utilities that still see customer growth are reporting that demand (and revenue) is not growing at the same pace. This is creating an unsustainable situation, with flat or declining revenue, while the costs to serve their customers and investments in the grid are growing.
  • Impacts of climate change: In an earlier blog, we discussed the impacts of the growing number of policies and regulations to reduce carbon emissions. It is now clear that this impact is being felt. Beyond the COP21, Clean Power Plan, and other global or federal policies and regulations, many initiatives at the regional, country, state, and local levels are being designed and implemented in support of carbon emissions reductions. Sustainability objectives between government, policymakers, utilities, and their customers are more closely aligned than ever before. States and regulators will continue to discuss how sustainable targets can be met without affecting jobs and the access to safe, reliable, and affordable power. And utilities and O&G companies will continue to evolve to support cleaner, more distributed, and more intelligent energy generation/exploration, distribution, and consumption.
  • Big power to small energy and the rise of the prosumer: Customer choice is driving a large move from big to small energy. More and more customers are choosing to install DER on their premises. DER solutions include distributed generation, demand response, energy efficiency, distributed storage, microgrids, and electric vehicles (EVs). This year, DER deployments are projected to reach 30 GW in the United States. According to the U.S. Energy Information Administration, central generation net capacity additions (new generation additions minus retirements) are estimated at 19.7 GW in 2016. This means that DER is already growing significantly faster than central generation. On a 5-year basis (2015-2019), DER in the United States is expected to grow almost 3 times faster than central generation (168 GW vs. 57 GW). This trend varies by region because policy approaches, market dynamics, and structures differ. However, the overall move to small power will persist. In other words, the movement toward customer-centric solutions and DER will ultimately become commonplace worldwide.

And here are the strategies of large utilities and O&G companies going forward:

  • Search for shareholder value: Both utilities and O&G companies are looking across the entire energy value chain for future shareholder value. Right now, that value is not in exploration & production or power generation. Yet, shareholders are still interested in natural gas pipelines and transmission that support the movement of natural gas and electricity.
  • Attempts to develop new solutions and businesses: There has been more than just interest from incumbent players in new energy solutions such as renewables and other alternative fuel sources (hydrogen, biofuels, etc.), DER, behind-the-meter energy management, electric transportation, smart cities, etc. With serious profitability and growth pressure on their core businesses, more serious attempts to build new, potentially transformational businesses in this space are increasingly evident.

For example, Total’s Chairman and CEO Patrick Pouyanné states, “The goal is to be in the top three global solar power companies, expand electricity trading and energy storage and be a leader in biofuels, especially in bio jet fuels.” To this end, Total announced last month that it is acquiring Saft, a designer and manufacturer of high-tech batteries for the manufacturing, transportation, and civilian and military electronics sectors. The company reported sales of €759 million ($856 million) in 2015 and employs more than 4,100 people in 19 countries. “The combination of Saft and Total will enable Saft to become the group’s spearhead in electricity storage,” Chairman and CEO Pouyanné said in a news release, “The acquisition of Saft is part of Total’s ambition to accelerate its development in the fields of renewable energy and electricity.”

Transportation and Smart Cities

Transport electrification, the increased use of biofuels (including bio-jet fuels), and the use of hydrogen to fuel vehicles are all on the rise. These alternative fuel vehicles will slowly but surely replace existing carbon-based transportation fleets, which represent approximately 35% of the global demand for oil. Now there are reports of 500,000 committed purchases of the Tesla Model 3. If Tesla can produce 500,000 cars a year, with models that are in the $30,000-$40,000 price and 200-plus-mile range, this will be another tipping point and game changer for EVs.

Meanwhile, as part of the smart city movement, cities are examining the sources and efficiency of their energy in order to reduce their greenhouse gas emissions and energy costs. In the process, cities are becoming more ambitious and proactive in setting energy strategy. They are seizing opportunities to work with utilities and other stakeholders to create new urban energy systems. The emerging vision is of a smart city with integrated large- and small-scale energy initiatives, including major infrastructure investments, citywide improvements in energy efficiency, and distributed energy generation. As a result, both utilities and O&G companies are increasingly interested in becoming even more engaged with new transportation concepts and innovation (well beyond fuel) and smart cities.

So What Does This Mean?

Do the above examples represent some isolated, small adventures in crossover investments, or do they mark a trend toward two mega-industries (electric utility and O&G) colliding across the entire energy value chain and looking for shareholder value? Time will tell. What is certain is that there will be winners and losers.

There is a clear push for new revenue streams and growth opportunities given the current oil price situation. But we see also new, longer-term threats that will force the incumbent players to reinvent themselves and become broader energy companies. The industry giants seem to be in the best position to be the winners—and ultimately, they have no choice. After all, these are still the biggest companies in the world, and they have a huge shareholder interest that needs to be fed into the future. They simply are not going to declare “game over,” return the equity to the shareholders, and then advise them to go find new companies to invest in.

This post is the seventh in a series in which I discuss each of the power industry megatrends and the impacts (“so what?”) in more detail. My next blog will be about the emerging Energy Cloud. Stay tuned.

Learn more about our clients, projects, solution offerings, and team at Navigant Energy Practice Overview.

 

We’re Asking the Wrong Question about Electrification

— September 1, 2015

At the recent Fleet Technology Expo in Long Beach, California, Tesla Motors’ co-founder and founder of Wrightspeed, Ian Wright, delivered a keynote to the gathering of fleet managers, suppliers, and consultants that turned the conventional wisdom of vehicle electrification on its ear. While mandates like the California Zero Emission Vehicle (ZEV) program and various federal and state tax incentives seek to displace millions of fossil fuel-burning vehicles with electric equivalents, Wright says we’re asking entirely the wrong question. Rather than asking how to maximize the efficiency of the mass of vehicles, Wright said we should be asking: “How do we save the most fuel per vehicle per year?”

On the surface, those might seem like the same question. However, when you actually start doing the math, the resulting answer is quite different. Vehicle emissions, including CO2, are directly related to how much fuel is consumed. Unfortunately, most people tend to think of efficiency in miles per gallon (mpg). When we plot fuel consumed versus mpg, the consumption curve asymptotically approaches zero as mileage goes up. In fact, the curve of incremental fuel savings flattens out dramatically at about 35–40 mpg. Beyond that, increasing mileage comes at a very high cost with little to actually show for it in terms of reductions in total energy use and emissions.

The big gains come when you start from very low mpg, where each incremental improvement yields much larger reductions in fuel consumption. That’s where Wright has focused his efforts in recent years. Wright joined Tesla co-founders Martin Eberhard and Marc Tarpenning and financial backer Elon Musk early on in 2003 to help the tech entrepreneurs with the technical aspects of actually building a car. While Wright left Tesla long before the Roadster finally went to customers in 2008, he continued working on electrification.

Different Solutions for Different Applications

Wrightspeed has developed a micro-turbine, range-extended powertrain system for medium and heavy duty trucks, the vehicles with the biggest potential for fuel savings because they use the most fuel. These big trucks typically only achieve 3–4 mpg running on diesel and even less on natural gas. While the Nissan LEAF or Chevrolet Volt can save individual owners hundreds of dollars a year in fuel compared to similar gasoline-fueled models, the actual amount of fuel saved is relatively small.

A refuse truck is an ideal application for hybridization since it operates at relatively low speeds and makes hundreds of stops and starts per day. In order to get the 130–150-mile range needed for its daily rounds, a fully electric version would need to carry so many batteries it would consume more than half its payload; however, a plug-in hybrid with 30 miles of electric range is entirely viable. Wrightspeed developed its geared traction drive, a 250 hp unit that integrates a traction motor, two-speed gearbox, and inverter, to provide propulsion and regenerative braking. In combination with a small 80 kW turbine range extender sized to run at its optimal efficiency, Wright claims the system delivers a 50% reduction in fuel consumption, saving $35,000 in fuel and $20,000 in maintenance per vehicle annually with a 3–4-year payback time.

Navigant Research’s Automotive Fuel Efficiency Technologies report projects that a wide variety of solutions will be required to meet future efficiency and emissions targets. In order to get the maximum overall benefit, we need to ask Wright’s question and pick the best solution for each application—not one solution for every application.

 

Honda Switches from NGV Civic to Supplying CNG

— August 28, 2015

For more than 16 years, Honda Motor Co. was one of the leading proponents of natural gas as a transportation fuel in North America. From 1998 through 2015, four generations of the compact Civic sedan were available with a factory-installed compressed natural gas (CNG)-fueled powertrain. However, despite being one of the best-selling cars in North America, the CNG Civic never caught on and was discontinued earlier this year. Fortunately, Honda has not given up entirely on CNG and has refocused its efforts as a supplier of CNG to its own parts suppliers.

CNG Refueling Station

Recognizing that the natural gas vehicle (NGV) market in North America consists primarily of fleet and commercial customers rather than individual car owners, Honda recently opened a CNG refueling station at its Marysville, Ohio campus. Marysville is the site of Honda’s first and largest North American automotive assembly plant, as well as the headquarters of Honda R&D America. With a capacity of 440,000 vehicles a year, the Marysville plant is one of the largest in North America, receiving hundreds of deliveries every day. This made Marysville an ideal location for the first CNG refueling station at any of Honda’s North America facilities. The fast-fill CNG refueling station was designed, constructed, and is being operated by Chicago-based Trillium CNG, one of the leading developers of CNG refueling infrastructure.

“We designed the station to accommodate 2.5 million gallons per year,” said Honda spokesman Eric Mauk. “It is currently fueling over 1.0 million gallons per year and that translates to 75-80 fueling events per day. At 2.5 million gallons per year we would expect to see roughly 200 fueling events daily.”

According to Navigant Research’s Natural Gas Refueling Infrastructure report, the total number of CNG refueling stations in North America is projected to grow to only a little more than 1,800 over the next 10 years from 1,560 today, a compound annual growth rate (CAGR) of 1.7%. Globally, the number of stations is projected to grow at 4.0% over the same time period.

Benefits for Fleets

The drop in world prices and corresponding reduction in gasoline and diesel retail prices is expected to suppress interest in natural gas for personal use vehicles for the foreseeable future. However, fleet trucks that frequently accumulate 100,000-plus miles annually can still benefit from a switch to natural gas, something that Honda is hoping to stimulate by offering convenient and fast CNG refueling to its suppliers when they are making deliveries. Honda estimates that more than 100 suppliers in the area could make use of the facility, driving 20 million miles annually on CNG. That would save nearly 20 million pounds of carbon monoxide annually compared to running on diesel. This is particularly beneficial for smaller suppliers that may not have fleets large enough to support the investment in their CNG refueling equipment. The refueling station is also open to the public so that anyone in the Marysville area is welcome to use the facility.

Other companies that receive many deliveries daily could also help stimulate demand for CNG by installing refueling infrastructure for their vendor community. Depending on where they are located, they could even take advantage of landfill gas for further environmental benefits. BMW already uses landfill gas to provide half of the power needs for its Spartanburg, South Carolina factory. If sufficient gas was available, it could be used as transportation fuel as well. Innovative approaches like Honda’s CNG station will be needed to keep advancing natural gas as a transportation fuel.

 

Could Privacy Concerns Inhibit Smart Mobility?

— July 6, 2015

Smart mobility is a hot topic in the media, among policymakers, and with non-governmental organizations (NGOs) and startups.  The idea that connected technology is opening up new mobility options that are more sustainable and more available is inherently appealing.  Carsharing, rideshare apps, increasingly sophisticated city mobility mapping services, and smart parking services are all part of the connected, on-demand mobility ecosystem that cities are enthusiastically embracing. In the recent report, Urban Mobility in Smart Cities, Navigant Research forecasts that revenue from smart mobility technologies, infrastructure, services, and solutions will reach $5.1 billion in 2015 and rise to $25.1 billion in 2024.

The appeal of smart mobility to cities is clear. With rising urban populations, city officials are facing pressure to ensure they have a range of readily accessible and affordable transportation options to minimize congestion and to control emissions levels. Budget constraints can make this challenging, so cities are looking to less capital-intensive ways to make transportation improvements. Ubiquitous connectivity offers the potential for crowd-sourced data collection, new transportation services like carsharing and ridesharing, and sophisticated traveler information systems that are truly multimodal. But it’s not a sure thing for all of these new offerings.

In the rush to embrace new mobility options, there is the potential to overlook some issues that could generate backlash. Privacy is at the top of this list.

Tracking Your Movements

Privacy concerns are nothing new in the world of big data, but the multitude of new data-gathering methods for transportation can raise privacy concerns among the public. These concerns can revolve around how data is being gather or how it used. For example, New York-based start-up Placemeter has officially launched its new data intelligence platform, which relies on smartphone video recordings in buildings to track pedestrian traffic. Pedestrian movements have been one of the black holes in the city’s pictures of travel patterns, so the service could prove tremendously valuable. It offers much more comprehensive data collection than current tracking methods. But will the public feel squeamish knowing that there are multiple smartphone cameras trained on them? For cities that have comprehensive security camera installations, this may seem more of the same, but it could be a concern in cities that haven’t already made that adjustment. Placemeter’s video data is anonymized, and the videos are discarded, but since pedestrian don’t opt in to being recorded, it could raise some concerns.

Opting In

Opting in is going to be the main way forward for many companies looking to use crowdsourced data. For example, Ford is unveiling a parking app that uses data from its vehicles’ driver assist sensors to track available parking spaces. Ford figures this will be less expensive than installing sensors throughout parking spots. The company has made a commitment to asking its customers to opt in to data-gathering solutions. Similarly, Uber’s new partnership with Starwood Preferred Guest program lets Uber customers opt in to sharing their data with Starwood for points.

However, these new data collection methods also require trusting companies to handle the data appropriately.  Uber was forced to beef up its internal privacy procedures after a couple of scandals involving inappropriate use of its customer data, so similar breaches could also lead to public backlash.

The reality is that many transportation services used today already rely on personal location data, so we’ve already entered this brave new world. But an incident where customer data is accidentally revealed or used inappropriately could spur the public to place more scrutiny on the how data is being collected and how it is being used.

 

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