Navigant Research Blog

Europe’s Energy Transition Megatrends and Tipping Points, Part III: Shifting Power-Generating Sources

— August 17, 2016

Energy CloudJan Vrins coauthored this post.

In our initial blog on Europe’s energy transition, we discussed seven megatrends that are fundamentally changing how we produce and use power. In this third blog in the series, we discuss the shift in power generation fuel mix and how this is transforming the European power industry.

European electricity-generating facilities that use oil, coal, and nuclear are devaluing and at risk of becoming stranded as generation sources shift to less expensive renewable generation and natural gas generation. This shift is playing out in different ways across Europe.

Generation Fuel Mix Shift Is Accelerating

According to the US Energy Information Administration (EIA), net European generation capacity will increase by 7 GW in 2016. Much of Europe’s new capacity TippingPointcomes from renewables, with close to 75% of new capacity coming from wind (44%) and solar (29%). While new coal (16%) and gas (6%) capacity was added, far more coal assets were decommissioned. As a result, net new capacity in Europe is virtually 100% renewables. While recent subsidy cuts have tempered solar’s growth, wind is marching onward. There is still no effective utility-scale solution to the inherent intermittency in renewable generation, as storage solutions and grid interconnection/active management are still lacking penetration at scale. Natural gas is the bridging fuel during the shift to renewables, supported by the abundance of natural gas available globally, lower long-term prices, and increasing import capacity in Europe.

What Are the Drivers Behind This Shift?

We see five main drivers for the shift in generation resources described above:

1. Climate Change Policy: Europe has taken definitive steps to decarbonize its power generation, including relatively generous support for renewables and economic penalties for carbon emitters via the EU Emissions Trading System (EU ETS). See our previous blog on the rising number of carbon emissions reduction policies and regulations.

2. European Market Coupling: A second aspect of Europe’s power sector is the physical and economic integration of markets. Interconnection growth has been strong, and the economic incentives via use of power exchanges for dynamic price signaling has provided further support for low-carbon generation.

3. Generation Economics: While policy and regulatory support for low-carbon generation has taken centre stage, the economics of various forms of generation have also been shifting. Within 7 years, solar power has gone from a heavily subsidized resource to a key component of the generation mix, even with zero or minimal subsidies. Europe continues to lead the world in development of offshore wind, particularly in the North Sea. Thermal generation economics have also changed—despite relatively low gas and coal prices, low marginal cost renewables are increasingly forcing thermal plants to shift from stable baseload operation to less efficient cycling and reliance on ancillary service contracts.

4. Decentralization of Generation: The scale of distributed energy resources (DER) is not yet huge across Europe; however, this trend is already shaking the traditional utility business models. The rise of the prosumer is gathering momentum, be it an industrial customer who invests in combined heat and power, a new commercial building with a biomass boiler, or a housing development with rooftop solar panels.

5. Public Sentiment: This driver cannot be underestimated given the prevalence of democratically elected governments in Europe. Public support for action to curb climate change despite the costs has been most obvious in Germany, where the changes via nuclear shutdowns and solar growth have been massive—and expensive. In the UK, it is more expensive to construct offshore wind than onshore, but the public and political preference is that location trumps economics.

How Does This Play Out Across Europe?

Navigant Research forecasts that 66% of European installed renewable generation capacity in 2016 will be in five countries—Germany, Italy, France, Spain, and the UK. In the struggling economies of Portugal, Italy, and Greece, the rate of renewable growth has slowed to just 0%-2%. Countries that are still dependent on coal as a fuel source face economic and fuel supply obstacles.

Beyond the recognized elements of the shifting power generation trend in Europe, there are a series of potential tipping points that will have pronounced consequences depending how they fall:

  • New Nuclear: This is a topic of much debate in the UK and France. Germany has all but made its mind up, barring a major political reversal. Until recently, the UK Department of Energy and Climate Change (now part of the Department of Business, Energy and Industrial Strategy) was a strong supporter of new nuclear in a portfolio of low-carbon generation. The new Hinkley Point C nuclear facility was planned to begin a renaissance of new nuclear, but with new skepticism rearing its head in the UK media, there is still a chance that the nuclear renaissance will stall and the UK will turn to a mix of more gas and offshore wind. France is another country to watch given its historic strength in nuclear power. Unless the struggling Flamanville facility can turn the corner soon and get commissioned, the growing renewables may get a massive boost that goes beyond current political support. Public sentiment is also an important card to play in the nuclear game. As the power system shifts from the traditional centralized model toward a more dynamic, distributed environment, there are both significant strengths and significant weaknesses in retaining large inflexible baseload generators. Ultimately they are likely to look increasingly out of place in the new world order.
  • Electricity Storage Technology and Economics: Elements of storage in the electricity system are not new, but pumped hydro storage and fuel storage to provide thermal generation are increasingly being surpassed in the perceptual stakes by other new technologies. The recent National Grid Enhanced Frequency Response tender in the UK was massively oversubscribed. Among all the disruptive technologies that affect the electricity system, a breakthrough in electricity storage technology and economics offers perhaps the greatest potential to radically change the power system of the future. The US Department of Energy is so convinced of this that it is funding 75 breakthrough research projects developing electricity storage solutions. These include radical new options such as organic flow batteries, which avoid the need for costly and rare metals such as lithium and vanadium. The race is on to find ways to bring storage costs down below $100/kWh or €90/kWh at present exchange rates.
  • European Shale Gas Developments: Shale gas has proven revolutionary in the United States; however, it remains questionable in Europe. Even though it is highly unlikely to have the same supply and economic characteristics as it does in the United States, it may indeed prove a further tipping point in favour of gas-fired generation if significant quantities of shale gas are produced within Europe. Security of supply is always of paramount importance, so the notion that countries in Europe would produce then export most of their supply would be hard to comprehend. Whereas coal is struggling to find favour other than in countries with little alternative, Europe has a great deal of relatively modern gas-fired generation that is not being well utilized. There may be a trend toward smaller, more flexible plants, but gas-fired generation has a viable future under most scenarios for many decades yet.
  • Carbon Target Commitments for 2030: While COP21 was a major milestone in global climate change, when the microscope is turned on European national commitments to decarbonize power generation, the image is less rosy. Some countries such as Spain and Italy appear to have reached peak renewables, where their appetite to push on and manage the ongoing system impacts are not high. Germany is struggling to digest its huge solar investment and accept the consequences on battling local firms such as RWE, E.ON, and Vattenfall. The UK has repeatedly backed away from committing to 2030 carbon targets, preferring to stick with existing 2020 and 2050 numbers. Until firm 2030 commitments by country are made in early 2017, there is insufficient muscle to power Europe forward.
  • Interconnect and Brexit: No article about Europe is complete without a mention of Brexit. The immediate question and a potential tipping point is how European interconnect developments will fare, especially those proposed in the North Sea to connect Scandinavia, Germany, the Netherlands, France, and the UK. These projects greatly affect the larger renewable generation economics, allowing easy and unrestricted export and import of power between countries as wind, sunshine, and other renewable sources vary between nations. Most commentators assume that the UK will retain its close ties to European energy markets; however, if this changes, it could precipitate an unravelling of arrangements with far-reaching consequences.

What Does This Mean for Generators?

More traditional generation assets, particularly coal and nuclear, face an uncertain future. For coal without carbon capture and storage, every scenario looks at best bad and at worse grim. As evidenced by Navigant’s Generation Knowledge Service (GKS), the average capacity factor of coal plants has declined by 20%-30%, which translates to a 20%-30% drop in gross revenue opportunity. To deal with the combination of lower realized revenue and higher operating costs, companies are evaluating their plants to determine if they can survive in the new world. They are actively seeking new ways to reduce costs through staffing changes, fewer planned outages, and higher operating efficiencies while maintaining high reliability to support the increased use of variable generation. Older coal plants are being phased out and others converted to burn biofuel. Revenue support from capacity contracts and better ancillary service contracts such as black-start capability is also becoming crucial.

Nuclear power today accounts for 25% of all European electricity produced, and any change in nuclear’s role in the generation mix will take time to implement. However, nuclear also highlights the significant differences in national energy policies across the EU and the wider European context. Nuclear was effectively killed in Germany, yet may still enjoy a renaissance in the UK; new plants are under construction in France, Finland, and Slovakia.

As a result, the economics have changed and some of the existing (coal and nuclear) assets are experiencing eroded profit margins. These margins are resulting in challenging economics and, in some cases, significant devaluation. More generation assets are increasingly at risk of becoming stranded investments, as the fuel mix is shifting more quickly than envisioned.

And to Make Things Worse: The Move from Big to Small Power

With the rapid growth of distributed generation (DG), all central generation (coal, gas, hydro, nuclear, and wind) will face more changes in its role on the grid. DG installations are expected to reach 256 GW in 2016; thus, DG is growing faster than central station generation (7 GW additions, minus 8.5 GW retirements, using the EIA forecast). On a 5-year basis (2015-2019), DG in Europe, with some variance by region, will grow almost twice as fast as central generation (47 GW vs. 28 GW), excluding retirements.

Path Forward

As a path forward, generators must clearly define the mission of each generating unit to understand their new role and how to survive economically. To succeed, we believe companies must do the following:

  • Conduct a strategic review of generating assets and determine what, if any, changes need to be made in their generation portfolio and/or how these assets are managed under several regulatory and commodity pricing scenarios.
  • Find innovative ways to reduce O&M costs while maintaining the reliability required by the independent system operators during target operating periods (for plants that will continue to run in the near term).
  • Seek new sources of revenue to replace the capital-intensive position for large generating plants by considering investments in renewables and DER, particularly energy storage, and optimizing commercial contract opportunities with system operators.
  • Have a strategy to manage significant reductions in staffing levels and loss of critical experience across the board, including dealing with the impacts on funding pensions and local economies when plants are retired.
  • Plan for a changing workforce that will include deeper knowledge of digital technology and an understanding of how to optimize operations in a more variable power market.
  • Assess options for global asset diversification given the changes and new opportunities in traditional parts of the value chain such as transmission and distribution.

An understanding of the above disruptive trends and how they affect your company and the rest of industry is crucial to shaping our energy future. Navigant aims to help our clients understand, progress, and protect their business’ future in the context of this massive amount of change.

This blog is the third in a series discussing how industry megatrends will play out across Europe as well as at the regional and country level. Stay tuned for our next blog in this series.

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

 

Europe’s Energy Transition Megatrends and Tipping Points, Part I: Take Control of Your Future

— August 3, 2016

Energy CloudThe pace and impact of change in the utilities industry globally is unrelenting. Europe is no exception, and you could argue that the pace of the energy transition in Europe is faster than anywhere else in the world. The European Union (EU) as a market is the largest energy importer in the world, importing 53% of its energy at an annual cost of around €400 billion (~$447 billion). This drives many aspects of energy policies, including placing the EU at the vanguard of grid reform over the past decade. In this blog series, we will share our view on the energy transition in Europe by describing the megatrends and tipping points. Each of the following megatrends is changing the way we produce and use power in Europe. Together, these megatrends are revolutionising the energy industry.

1. Rising number of carbon emissions reduction policies and regulations: The long-term impact of the Paris Climate Agreement will be significant. The agreement will focus on limiting global warming to well below 2 °C (3.6 °F) by the year 2100. A record number of countries (175) signed the agreement, which they must now each ratify and approve, which could take some time. But European countries, provinces, cities, and utilities are not waiting. They are taking actions now toward the outlined objectives and targets of the agreement. In fact, sustainability objectives between government, policymakers, utilities, and their customers are more closely aligned than ever before. Globally, numerous cities have committed to 100% clean energy, including European cities like Copenhagen, Denmark; Malmo, Sweden; and Munich, Germany. The EU has shown no signs of slowing down in its ambition to standardise reform across unique markets through regulatory and policy momentum. A single energy market for EU member states is an enabler—if not a necessary condition—in a policy of an “ever greater union,” with or without the UK. Meanwhile, the UK has enacted legislation to deliver emissions reductions consistent with the 2 °C target through the Climate Change Act of 2013 and the commitment to remove 100% of coal-fired generation from the UK system by 2025. As the EU moves with ever greater momentum, Navigant believes other European countries in the hinterland around the EU will also be swept along. This is in part because these counties will seek to gain from the triple bottom-line benefits (climate sustainability, increased efficiency and productivity, and greater energy security), and in part because the EU as a trading partner will require compliance with these standards, policies, and regulations.

2. Shifting power-generating sources: According to the U.S. Energy Information Administration (EIA), net European generation capacity will increase by 7 GW in 2016. Much of Europe’s new capacity now comes from renewables, with close to 75% of new capacity coming from wind (44%) and solar (29%). While some new coal (16%) and gas (6%) capacity was added, far more coal and gas assets were decommissioned. As a result, net new capacity in Europe is virtually 100% renewables. While recent solar subsidy cuts have tempered its growth, wind is marching inexorably onwards. There is still no effective utility-scale solution to the inherent intermittency in renewable generation, with storage solutions and grid interconnection/active management still lacking penetration at scale. Natural gas is therefore the obvious bridging fuel during the shift to renewables. Given the abundance of natural gas availability globally, lower long-term prices, and increasing import capacity in Europe, we expect more natural gas generation capacity to come online in the future, at least for the mid-term. More traditional generation assets, particularly coal and nuclear, face an uncertain future. For coal, every scenario looks dark—at best bad and at worst grim. Older coal plants are being phased out; others are being converted to burn biofuels. Nuclear power accounts for 25% of all European electricity consumed, and any change in nuclear’s role in the generation mix will take time to implement. However, nuclear power highlights the significant differences in national energy policies across the EU and the wider European context. Nuclear was effectively killed in Germany, yet still may enjoy a renaissance in the UK if the British government decides to move forward, and new plants are under construction in France, Finland, and Slovakia. Germany has undergone the most significant generation source transition in Europe: it leads the market in renewables capacity, while its nuclear decommissioning programme has been accelerated. As a result, its two largest utilities are separating their businesses to focus on the one hand on renewables, grid modernisation, and distributed energy resources (DER), and on the other hand traditional generation and trading. Germany has become a net exporter of power and the knock-on effects of this shift in power generation sources means neighbouring countries have had to significantly change their networks to manage the impact of intermittency on their own systems and more investment in their own grid.

3. Delivering shareholder value through mergers and acquisitions (M&A), restructuring, and divestment: New industry ventures, M&A, and divestitures are happening at a rapid pace. In the search for shareholder value through scale, increased synergies, and reducing exposure to less performing businesses, this is a path that utilities will continue to explore. European renewables leader DONG Energy became the largest IPO in 2016 with a valuation of approximately €13.5 billion (~$15 billion), and RWE Innogy is slated for its own IPO by year-end. Engie and Centrica are investing billions in creating new DER and energy services businesses with numerous acquisitions. EDF, Enel, and others continue to acquire assets outside Europe in a search for global expansion and shareholder value. All this has been occurring while much of the 2016 M&A activity so far has been the divestment of non-core assets, with 1 GW of utility-owned wind assets sold to investors in 2016.

4. Globalisation of energy resources: The EU actively seeks to deliver Europe’s 2030 climate and energy targets while ensuring security of supply and affordable prices. The EU also seeks to be a world leader in renewable energy. Achieving these goals requires a transformation of Europe’s electricity system, including the reconfiguration of individual member state electricity markets into a single energy market. The EU must also achieve a balance with meeting consumers’ expectations, delivering benefits from new technology, and facilitating investments in renewables and low carbon generation while also recognising the interdependence of member states. A critical part of this initiative is connecting isolated national and regional electricity systems to secure supply and helping to achieve a truly integrated EU-wide energy market—a key enabler for the continent. While the UK’s vote to leave the EU raises a number of questions about future policy, it is too early to call what impact Brexit will have on the UK’s participation in the EU’s future single energy market. What is clear is that a focus on greater levels of interconnection (both offshore and onshore) and energy efficiency will continue to be necessary aspects of EU energy policy and will continue to receive much scrutiny.

5. New entrants and converging industries: With €1.3 trillion (~$1.5 trillion) in new industry value up for grabs globally, new entrants see value in European power markets, which is disrupting the traditional utility industry and taking market share away from utilities. These new entrants include manufacturers; technology companies (from startups to global powerhouses like Apple, Amazon, and Google); telecommunications and other data, content, and network providers; and even some oil & gas companies (like Total). For utilities, it will become more expensive to address a smaller market with the resulting impact on margins. Europe is no exception, and with significant opportunities for growth across the value chain and new energy and digital technologies available, we see new entrants investing in renewables, DER (distributed generation, energy efficiency, demand response, energy efficiency, etc.), energy management, smart cities and infrastructure, and transportation. Navigant sees many cross-industry movements between utilities and oil & gas. Shell getting back into renewables and Total announcing the creation of a Gas, Renewables and Power division—which the company has said will help drive its ambition to become a top renewables and electricity trading player within 20 years—are examples of this new competition’s encroachment on traditional utility markets.

6. The power of customer choice and changing demands: Whether residential, commercial, or industrial, customers want to control their electricity usage and spend, as well as when and what type of power they buy. But beyond having supplier options (in competitive markets), customers now want the ability to self-generate and sell that power back to the grid. Many residential customers in Europe have and will continue to install rooftop solar, and despite the reduction of subsidies in some countries, overall residential distributed generation will continue to grow. On the commercial and industrial side, large corporations like Amazon, Apple, Cisco, Google, HP, Mars, and many other large energy buyers in Europe have increased their focus on sustainable energy solutions. For example, Swedish furniture retailer IKEA plans to completely shift to renewable energy by 2020 and will invest up to €1.5 billion (~$1.7 billion) in wind and solar energy as part of new safeguard nature strategy. The company does not rule out becoming a net energy exporter, potentially selling the surplus of energy to suppliers or customers. The key question is who will capture the value of more local (distributed), broader (energy management), and individualised energy—the incumbents or the disruptors?

7. The emerging Energy Cloud: Old infrastructure is being replaced, and the trend toward a cleaner, distributed (flexible), and smarter energy infrastructure, known as the Energy Cloud, will accelerate. The Energy Cloud is an emerging platform of two-way power flows and intelligent grid architecture expected to ultimately deliver higher quality, greener, and more affordable power. While this shift poses significant risks to incumbent power utilities, it also offers major opportunities in a market that is becoming more open, competitive, and innovative. Fuelled by steady increases in DER, this shift will affect policy and regulation, business models, and the way the grid is operated in Europe. The work by EU member states in decarbonising and digitalising the grid has made the region a global leader in energy transition and puts Europe at the forefront of testing Energy Cloud reform through policies that mitigate carbon emissions, expand the role of distributed generation, and promote smart grid initiatives.

These megatrends cannot be underestimated. They are accelerating transformation in the European energy industry, enabling the entry of new players, putting pressure on incumbent players, and altering traditional strategies and business models. Organisations will need to adapt, and there will be winners and losers as this transformation takes shape. Our advice to senior leadership of energy companies is to take an integrated, holistic view of the opportunities and challenges that are flowing from these megatrends. Only then will you be able understand the full impacts and path forward—and that is the only way you can really take control of your future.

This post is the first in a series in which we will discuss each of the megatrends and the impacts (“so what?”) in more detail. We will attempt to discuss how these megatrends play out at the European level as a whole, as well as within the diverse set of regions and countries. Stay tuned for our next blog in this series.

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

 

Keeping Cool Without Climate Change

— August 3, 2016

HVAC VentAs a heat dome lingers over much of America, many are grateful for air conditioning. Though some credit air conditioning with shaping our history, evidence is emerging that it may also be putting humanity at risk. Globally, stationary air conditioning systems account for nearly 700 million metric tons of CO2-equivalent emissions, roughly the same emissions as all of Germany. The future may herald even more emissions as the growing wealth and growing populations of developing countries prompts the greater adoption of air conditioning.

Changing the current environmental influence of air conditioning is imperative to avert the catastrophic effects of climate change. In a new report published by the U.S. Department of Energy, Navigant outlines the changes in air conditioning technology needed to reduce greenhouse gas emissions and highlights the R&D pathways to get there.

From Air Conditioning to Energy System

One of the next-generation air conditioning technology research areas highlighted in the report is the integration of air conditioning and other building systems. Fundamentally, air conditioning is the transfer of heat from inside a building to outside a building, which requires the use of energy. Meanwhile, additional energy is spent creating heat for other needs: domestic hot water, cooking, and manufacturing processes. At times, buildings may require both heating and cooling just for thermal comfort. This happens during temperate days where the sunny side of a building may need cooling while the shady side needs heating, or in the scenario of the notorious space heater under the desk.

In a perfect building, waste heat could be reused productively. This is a fundamental shift from individual building processes to a building energy system. Indeed, this is already beginning to happen. Ground-source integrated heat pumps that provide space heating, space cooling, and water heating are already commercially available. Energy recovery ventilators similarly transfer thermal energy between air that is exhausted from a building and fresh air brought into a building.

Deeper building integration is not only necessary, but forthcoming. Axiom Energy, Ice Energy, and CALMAC all have solutions that turn air conditioning and refrigeration systems into energy storage, folding these systems into the Energy Cloud. Moreover, air conditioning controls are beginning the transition into the Internet of Things as more data from different sources can be used to optimize performance. This pivot to an energy system and deeper integration can transform air conditioning from a threat to humanity into a resource that meets the changing energy needs of the world.

 

Energy Efficiency Is Not Lost in the Supermarket

— July 18, 2016

ControlsLast month, national grocery store chain Trader Joe’s made headlines when it agreed to reduce greenhouse gas emissions from refrigeration equipment at 453 of its stores. The federal government alleged that Trader Joe’s had violated the Clean Air Act by failing to repair leaks of R-22, which is used as a coolant in refrigerators but which also depletes the ozone and has 1,800 times more global warming potential than CO2. In addition, the government alleged that the company failed to keep appropriate service records.

Under the proposed settlement with the U.S. Department of Justice and the U.S. Environmental Protection Agency, Trader Joe’s will spend an estimated $2 million over the next 3 years to reduce its leak rate to less than half the average in the grocery store sector and to use non-ozone depleting refrigerants at all new stores. It also agreed to improve its leak monitoring and recordkeeping. This is the third settlement federal authorities have reached with a national supermarket chain over refrigeration practices. Previously, Safeway agreed to pay $600,000 in penalties and reduce its emissions in 2013. The following year, Costco also agreed to pay $335,000 in penalties and take similar emissions-reducing actions.

Reducing Operating Costs

An average-sized grocery store releases 1,900 tons of carbon emissions annually. By reducing the amount of ozone-depleting refrigerants and potent greenhouse gases, the Trader Joe’s settlement will help address major global environmental problems. An added benefit of repairing refrigerant leaks is improved energy efficiency of the system, which can save electricity. In fact, supermarkets are one of the most electricity-intense types of commercial buildings due to the large amount of power needed for food refrigeration. Refrigeration accounts for around 50% of electricity consumption in supermarkets. Every year, an average-sized grocery store spends more than $200,000 on energy costs. Consequently, energy efficiency technologies that help reduce energy consumption can significantly reduce operating costs and improve profit margins. According to ENERGY STAR, a 10% reduction in energy costs can boost net profit margins by as much as 16%.

Fortunately, there are ample energy efficiency and emissions-reducing investment opportunities for the retail sector. Some efficiency upgrades specifically target the supermarket segment and refrigeration practice. For example, Axiom Exergy’s Refrigeration Battery stores cooling, not electricity. The battery stores refrigeration when electricity costs are the lowest and deploys it when electricity costs are the highest, reducing on-peak demand by up to 40%. Thermal storage tanks and software optimizing the charge cycle can be easily added on to an existing system.

The Retrofit Market

The average supermarket size in the United States is 47,000 square feet, placing these stores in the small and midsize building class. Navigant Research defines small and medium commercial buildings (SMCBs) as those ranging from less than 10,000 square feet up to 100,000 square feet, and most supermarkets fall under this class. While approximately two-thirds of the global building floor space is occupied by SMCBs and more than 90% of commercial buildings are small or midsize, SMCBs have not yet seen the same penetration of energy efficiency technologies as larger facilities. However, with the largest commercial buildings already engaged in energy efficiency retrofits, the focus is expected to shift to SMCBs. According to Navigant Research’s Energy Efficiency Retrofits for Small and Medium Commercial Buildings report, the SMCB retrofit market is expected to grow from $24.1 billion in 2016 to $38.6 billion in 2025.

 

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