Navigant Research Blog

Should We Worry About Carbon Dioxide Emissions From Natural Gas Surpassing Coal?

— September 13, 2016

Smoke StacksAccording to the US Energy Information Administration, in 2016, CO2 emissions from natural gas are expected to surpass coal emissions in the United States for the first time since 1972. As CO2 emissions from natural gas increase due to growing natural gas consumption in the energy sector, major concerns have developed among environmental groups and others about natural gas becoming a threat to climate change. However, to generate the same amount of power, natural gas emits only 55% of the CO2 compared to coal. As natural gas displaces coal, CO2 emissions that could have come from coal will be cut by half. As long as the growth of natural gas is at the expense of coal consumption, it will help the fight against climate change.

It would be ideal if both natural gas and coal could be replaced with renewable energy such as solar and wind. However, when the sun doesn’t shine and wind doesn’t blow, electricity still needs to be generated. Even with cutting edge technology on energy storage, demand-side management, and energy efficiency, the need for stable electricity generation from reliable sources cannot be fully eliminated. Natural gas is by far the best option for such a reliable source due to its affordability and abundance in the United States. Besides the benefit of fewer  emissions, the price of natural gas is also competitive with coal. The United States is also the largest natural gas producer in the world thanks to the boom of shale gas. In general, as more renewable generation capacity will be added than fossil fuel capacity this year (and likely in the next few years), natural gas is essential as a backstop for grid operators to address the intermittency of renewable energy.

The Problem of Methane Leakage

Nevertheless, natural gas is not perfect. The methane leakage problem could seriously undermine the climate benefit of natural gas. At the same time, the US Environmental Protection Agency is making crucial progress in setting regulations on restricting methane leakage. With proper regulatory incentives and continuing technology improvement, the effects of methane leakage can be contained to make natural gas a viable complement to a lower carbon future.

 

Europe’s Energy Transition Megatrends and Tipping Points, Part VII: The Power of Customer Choice and Changing Demands

— September 9, 2016

Energy CloudJan Vrins coauthored this blog.

In our initial blog on Europe’s energy transition, we discussed seven megatrends that are fundamentally changing how we produce and use power. Customer choice and rapidly changing customer demands are one of the megatrends driving Europe’s energy transition. In this blog we discuss how utilities and new entrants are competing for customers and market share through new energy products and services, as well as how they are implementing new business and revenue models in search of growth and shareholder value. We also discuss a path forward, which we call the Energy Cloud Playbook.

What’s Happening?

Whether residential, commercial, or industrial, more customers want to control their electricity usage and spend, as well as when and what type of power they buy. Historically, customer choice was restricted to switching suppliers. However, the European market is rapidly changing, and utilities will have to prepare themselves for far more complex customer demands and relationships. For example, many customers now want the ability to self-generate and sell that power back to the grid. Many European homeowners have installed rooftop solar and are interested in storage. Additionally, despite the reduction of subsidies in some countries, overall distributed energy resources (DER) will continue to grow in the long term. On the commercial and industrial side, large corporations like IKEA, BMW, Metro AG, Unilever, Swiss Re, Roche, Aviva, and others are increasing their focus on sustainable energy solutions. The key question moving forward is who will capture the value of more local (distributed), broader, energy management and individualized energy—the incumbents or the disruptors?

Increasing Competition

The European power markets are struggling to balance the requirements to reduce prices, invest in renewable generation, secure supply, and improve the customer experience. European electricity customers pay some of the highest prices in the world, yet many customers receive substandard service from their current utility provider. The move toward a single European energy market is the cornerstone of EU energy policy; thus, there is an expectation that power markets will become more competitive, not less. Competition has many consequences for a utility’s customer relationships, which can directly affect the utility’s business model. However, it is not the only factor: consumers are becoming increasingly aware of the financial and environmental cost of their power consumption. They are also increasingly expecting better, more personalised service from suppliers. As a result, customers will engage with the power industry in new ways, demand new services, and seek out alternative suppliers and options (like self-generation, energy management, etc.).

A New Deal for a New Breed of Customer

The European Union wants to put consumers at the heart of the power market. In the second half of 2016, a set of legislative proposals for a new energy market design will be published. This new deal for energy consumers is based around three pillars: saving money through better information, a wider choice of actions when participating in the power market, and maintaining the highest level of consumer protection. The market design will enable customers to actively participate in the market, adapt their consumption according to the requirements, create clearer bills, and accurately compare prices to improve switching rates. The European Union also reiterated its desire to tackle the issue of residential price regulation that hampers competition. Finally, the market design will try to remove barriers stopping customers from generating their own power and selling excess generation back to the grid.

Commercial and industrial (C&I) customers are central to Europe’s transition to a low-carbon economy. Many corporations have incorporated sustainable energy consumption within their corporate responsibility agendas. 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 its 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.

Most customers—both residential and commercial—who generate their own power will do so with solar PV (potentially combined with storage). Until a few years ago Europe dominated the market for solar PV installations, driven largely by a range of different subsidies. These subsidies have largely been removed, and the market has flattened. However, we could be witnessing a short-lived consolidation period for solar: the market could soon pick up as the cost continues to decrease and if current import tariffs on cheap Chinese panels are lifted.

Other DER will further transform the way customers consume power. Locally available battery storage will help customers become more self-sufficient; EVs will dramatically change how, when, and where customers use energy; and peer-to-peer trading networks will help customers decide to whom they will buy or sell their power.

A New Business Model for the New Deal

These new customer demands are already reshaping the utility market. The more forward-thinking utilities are making significant investments into new business models, and competition is increasing. Time is running out for the less adventurous: smart metering will be a reality in the majority of European countries by 2020. Those companies that have prepared for a more connected, digital, and personalised customer relationship will be at an advantage against those that have not.

One of the most significant business model changes is the shift from a commodity-based supply business to an energy service provider. Many utilities have expanded their product offerings beyond the regulated power supply model and broken into new areas—smart home technologies, boiler maintenance or replacement, insurance, home appliances, and security systems are just some of the services offered. One other important area is the relatively new phenomenon of broadband and other communications services. Dutch utility Delta sells broadband, fixed-line, and pay TV services alongside power and gas.

The market is not immune to new entrants. Some telecommunications companies such as Croatia Telecom are now bundling energy with their more traditional services. Other telecoms, such as Deutsche Telekom and O2, are heavily investing in smart home technologies. New models of buying power—including collective switching groups and energy cooperatives—are appearing. In the United Kingdom where the model of municipal-owned utilities was scrapped years ago, councils are setting up their own energy businesses to offer low-cost power to their citizens.

Battle for the Grid’s Last Mile

LastMile

(Source: Navigant Research)

Competition will not end there, as many companies will likely enter the market with radically new business models. For instance, as solar PV and battery storage technologies become cheaper and more efficient, many customers could be taken completely off-grid by new entrants. Retailers, technology companies, and telecoms are also looking at smart home technologies that could ultimately cut utilities out of many customer relationships.

New Business Models Need Better Customer Understanding

As new technologies—smart meters, EVs, distributed generation, energy storage, and smart home devices—proliferate and mature, so will the opportunity to develop deeper and more complex relationships with customers. However, as these opportunities grow so does the threat from competition. To create the right products and services and market them in the most effective way, utilities must better understand their customers’ needs. New technologies will bring deep insights into each customer’s requirements. By using advanced analytics, utilities have a unique opportunity to put the voice of the customer at the heart of their business planning.

What Does All This Mean for Utilities?

Utilities have to adapt. Customers will look for better, greener, and cheaper alternatives, and more and more of these alternatives are becoming available. What’s more, the fight for large C&I customers is going to change dramatically. If only a small percentage of large C&I customers switch over to local distributed generation and energy management solutions, current suppliers and network operators will be in trouble. This will affect their revenue streams, roles, and the cost versus value of the centralised managed grid.

Facing declining revenue as customers consume less and produce more of their own power, utilities are confronted with potential stranded generation (and eventually transmission and distribution) assets. This makes it even harder to make large investments aimed at improving reliability and resilience in their current grid while also making it more intelligent. Utilities also have to make investments in developing DER capabilities, offerings, and businesses.

Given these challenges, utilities must play both defence and offense. An updated defensive strategy requires suppliers to engage with customers to understand their changing demands regarding price, sustainability, and reliability. They also have to continue to improve customer service at the lowest prices possible. Network operators must engage with regulators to find equitable ways to charge net metering customers for transmission and distribution services that fairly address the cost to serve. They have to continue to improve grid reliability at the lowest cost possible and streamline asset management and operations, while also developing utility-owned renewable assets to appeal to environmentally conscious customers.

Playing offense is even more important. Suppliers must create new revenue streams through the development of new business models, products, and services. They also have to transform their organisations and culture in order to fully integrate sales, customer service, and operations. Network operators must upgrade the grid and operations to facilitate the integration of DER and explore new revenue streams as a network orchestrator.

There is no going back to the old ways of doing business. Utilities must lead—by playing both defence and offense—or they run the risk of being sidelined.

Utilities conducting strategic planning must embrace an agile mindset focused on achieving two objectives: accelerating the time to market readiness and reliably producing high quality results. This will be crucial to remaining competitive, as value moves down the value chain and barriers to entry are decreased/eliminated. The opportunity lies in continuously shaping DER portfolios, embracing the rise of the digital prosumer, and capitalising aggressively on platform opportunities for unbundled solutions. We believe that utilities must begin transforming their operations and business models today by simultaneously pursuing risk mitigation capabilities and making bold bets on potentially high-growth product offerings. In our newest white paper, we describe how businesses develop and implement a strategic identity and growth plan (10-15 years), as well as an agile Energy Cloud Playbook (6-12 months) that will help them navigate the path forward and take control of their future.

This is the seventh in a series of posts in which we discuss each of the power industry megatrends and impacts (“so what?”) in more detail. Our next blog will cover the emerging Energy Cloud. Stay tuned.

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

 

Europe’s Energy Transition Megatrends and Tipping Points, Part VI: New Entrants and Converging Industries

— September 6, 2016

SmartCityJan 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. This blog discusses how converging industries and new entrants are changing our industry, specifically focusing on smart cities as a key area where this convergence and disruption is occurring at an accelerated pace. Finally, we will discuss what this means for the many market players that want to participate and survive in the Energy Cloud.

Our latest white paper describes how changing customer needs, evolving policy and regulation, and accelerating technology innovation and integration drives a more sophisticated two-way grid platform and a rapidly evolving ecosystem. Smart cities—dynamic, localised platforms that recombine technologies and services around energy, transportation, and data communication—provide fertile testing grounds for the industry incumbents and disruptors going after the nearly $1.3 trillion of forecasted new annual industry revenue by 2030 globally.

What’s Happening?

Europe’s focus on the interdependent goals of creating a low-carbon economy, ensuring energy security, and enabling competitive energy markets make it a test bed for many of the developments associated with the energy transition. This is reflected in the European market’s attraction for players across the energy value chain, including many new entrants who see an opportunity to disrupt the traditional utility industry and take market share away from incumbent utilities.

The role of energy companies, including utilities, network operators, and oil & gas companies, is being transformed by a series of fundamental shifts, including the following:

  • Energy consumption and 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 in absolute terms in EU countries. Primary energy consumption in the EU countries was almost the same in 2013 as in 1990 according to the European Environment Agency (albeit partly as a result of economic recession). This dynamic puts pressure on all players in the energy sector. 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: utilities with flat or declining revenue yet growing costs to serve their customers and maintain the grid.
  • 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 clear that this impact is being felt, as Europe is on target to meet its 2020 goals for renewable energy and carbon emissions reductions. However, member states now face the challenge of meeting more challenging new targets if they are to make progress towards the grand goal of making Europe a low-carbon economy by 2050. In the meantime, cities and large corporations are not waiting—they are setting their own sustainability targets and investing in programs that reduce their carbon footprint. Power generators, network operators, and energy retailers are all active in this transformation but also face significant, and in many cases unknown, challenges as they try to understand the new demands placed on their businesses and operations.
  • Big power to small energy and the rise of the prosumer: Commercial, industrial, public sector, and residential energy consumers are all becoming more actively engaged in energy management and energy generation. More and more customers are choosing to install distributed energy resources (DER) on their premises. DER solutions include distributed generation, demand response, energy efficiency, distributed storage, microgrids, and EVs. Europe is expected to have the greatest percentage of new DER capacity deployed compared to centralised generation throughout the next decade. New energy retailers are also taking advantage of these changes and the development of smart energy applications and online service models to provide more innovative and lower-cost solutions for customers. These new entrants are further challenging the established position and profitability of the incumbent players.

How Industry Giants Are Responding

As a consequence of these changes, electricity utilities are under pressure. As revenue declines, costs are increasing due to needed investments to provide safe, reliable, and affordable power while also supporting an emerging, cleaner, and more distributed and intelligent grid that is required to provide needed flexibility. Therefore, utilities are looking for new revenue streams and thinking through new business models that will create shareholder value going forward. Oil & gas companies, under additional pressure because of the continued low oil price, are looking for ways to survive by taking out costs, reducing their upstream capital investments, and shutting down unprofitable assets. However, their long-term future also requires them to find new opportunities to grow revenue and shareholder value in new energy businesses.

Both utilities and oil & gas companies are looking to turn the challenges of the energy transition into their advantage through entry into new markets and the delivery of new energy platforms and services. Total’s Chairman and CEO Patrick Pouyanné has stated that the company’s goal “is to be in the top three global solar power companies, expand electricity trading and energy storage and be a leader in biofuels.” Meanwhile, French energy giant, Engie (formerly GDF Suez) has been investing heavily in renewables and storage technologies, developing its energy services business, and establishing its Cities of Tomorrow programme to target the growing smart cities market.

European utilities have also been embracing DER and developing alternative business models to capitalise on new technologies and the changing resource mix. This is especially true in Germany, where there are high levels of DER, and utilities like RWE and E.ON have begun transforming their business into a more capital-light, DER-based model by shedding centralised generation assets and positioning themselves as enablers and integrators of new DER resources. For example, RWE has invested in and formed a rooftop solar partnership with German solar developer Conergy and is white labelling Sonnenbatterie’s behind-the-meter battery systems for solar-equipped German homes. As DER penetration in Europe accelerates, we see more value in moving from generation to distribution and beyond the meter.

Energy market incumbents are developing strategies to position themselves as the leading force in creating the new order. At the same time, other players—from giants in the transport, IT, telecommunications, and engineering sectors to energy service and technology startups—are looking to increase their share of these emerging opportunities. For example, Europe is seeing the emergence of a new class of DER aggregators aiming to take advantage of these new technologies and the utilities’ evolving business models. LichtBlick, Caterva, Next Kraftwerke, and Ampard are just a few of the companies establishing virtual power plant business models to provide additional value from the integration of DER into the European grid. Many other, much larger players also see the potential in brokering the new relationships emerging between energy companies and their end customers.

Cities at the Heart of the Energy Transition

The continuing interest in developing smart cities is closely aligned to the transformation in the energy market and provides an important example of how the energy landscape is evolving. More than any other region, Europe has recognised the importance of smart city developments to its energy transition programme. Cities are examining the sources and efficiency of their energy 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.

Across the continent, city leaders have been signing up for ambitious carbon emissions targets and are taking an active role in encouraging utilities and other players to support their strategies. Stockholm and Copenhagen have led the way with plans to become carbon-free cities, and many more cities are now following their path. Frustrated at the slowness of the change they are seeing, some cities are even taking matters into their own hands and looking at re-municipalisation of utilities or the creation of new city energy companies. Hamburg, for example, took back control of the city’s energy in 2014. In the United Kingdom, Bristol and Nottingham have established new city-owned energy companies, and the new Mayor of London has made a strong commitment to a new energy policy for the capital.

Utilities are responding to these challenges by working closely with cities and communities to develop new energy models. Alliander, for example, has been a long-standing supporter and investor in the ambitious Amsterdam Smart City programme. E.ON has been working with smart cities in order to test integration of its smart grid solutions that enable more effective energy management and integration of DER. In Malmo, Sweden, the utility and the city signed an agreement to adapt the entire Hyllie district of Malmo to a climate-friendly energy supply. By 2020, the entire district’s electricity, heating, and cooling will be powered exclusively by renewable resources and energy recovery.

Another aspect of Europe’s urban agenda that is having a strong influence on the energy sector is the focus on sustainable transportation. The European Union has put the triple play of energy, transport, and information and communications technology (ICT) at the heart of its innovation programme for cities. Reducing emissions from transportation is the next critical frontier in the decarbonisation of the European economy—electrification of heat and transport pose the most obvious options for sustainable demand growth in the present market. Europe has arguably the strongest level of utility engagement in developing EV charging services. Utilities and energy companies such as Germany’s RWE, Italy’s Distribuzione, Ireland’s ESB, and the Danish utilities SEAS-NVE, SE, NRGi, EnergiMidt, and Energi Fyn have all funded charging deployments or invested in companies that deploy chargers. For example, Danish company CLEVER is owned by the five largest utilities in Denmark and operates a network of several hundred EV supply equipment (EVSE) stations throughout Denmark; the company is now branching out into other geographic markets. Enel has developed an interoperability platform and is aggressively deploying charging stations, with more than 2,000 deployed across Italy.

So What Does This Mean?

The next decade will see a reshaping of the European energy sector to meet the needs and challenges of a low-carbon economy. We have already seen some of the industry’s largest players moving quickly to expand their capabilities and services to meet these new requirements.  As discussed in Part IV of this series, further diversification and mergers and acquisitions are inevitable as players look to gain a footprint in emerging services and exploit new energy technologies.

Energy companies also need to broaden their partnership network, working with those in the public services, transportation, infrastructure, and ICT sectors to deliver the integrated capabilities needed to make the energy transition a reality. They also need to create new relationships with their customers, as they too become partners as much as end consumers. The industry giants of today are using their resources as some of the biggest companies in the world to engineer this energy transformation and to meet future shareholder interests. They will need to continually reinvent themselves and become broader and more adaptable energy companies able to protect existing revenue streams and seize new opportunities. However, not all bets will pay off. We will inevitably see some wrong turns in this process of adaptation and the eventual winners may well be those who learn quickest from their mistakes.

This blog is the sixth in a series discussing how industry megatrends will play out across Europe as well as at the regional and country levels. Stay tuned for our next blog in this series focusing on customer choice and changing customer demands.

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

 

Energy Efficiency Is an Imperative for Climate Change Adaptation

— August 1, 2016

HVAC Roof

There are two common ways climate change enters the public discourse in the United States: heated political rhetoric or targeted campaigns for increased investment in renewable energy. The problem is that while shifting away from fossil fuels is critical, energy efficiency—a significant opportunity to combat greenhouse gas (GHG) emissions—is often overlooked. Redefining the relationship between commercial buildings and energy is fundamental for tackling climate change because these facilities are not only contributing about 40% of the GHG emissions in the United States, but also are strikingly inefficient. Here are two reasons energy efficiency can move the needle on the fight against climate change and circumvent the political boondoggle.

Energy Efficiency Makes Economic Sense

The bottom line is that customers adopt technology and behavior changes that reduce costs or generate new revenue. Energy efficiency is straightforward. Take a simple scenario for a commercial building owner—the improvement in equipment performance (say a more efficient air conditioning unit) results in lower utility bills. The benefits are magnified when you start to consider the effects on the climate associated with energy efficient technologies.

In July 2016, a Navigant report was published for the U.S. Department of Energy. It provides a deep dive into the specifics of how the economic benefits of energy efficiency could be a revenue stream for deeper climate mitigation strategies. The report states that, “Given that energy costs account for the majority of lifecycle air conditioning costs, energy efficiency improvements can more than offset increases in upfront purchase costs to consumers that could result from switching to hydrofluorocarbon alternatives (refrigerants with lower global warming potential).” 

Energy Efficiency Provides a Robust Sustainability Strategy

Corporations are facing significant demand from shareholders and customers to address climate change. In fact, in late July, major corporate shareholders sent a collective letter to the U.S. Securities and Exchange Committee (SEC) demanding clarity on the material risks of climate change: “Based on our experience with these issues, we (45 investors representing $1.1 trillion in assets under management) believe it is critical for the SEC to improve reporting of material sustainability risks in issuers’ SEC filings, both because such disclosure is mandated by current law and because we need it to make informed investment and proxy voting decisions.”

There are two sides to the relationship between energy and climate change. The transformation of supply with renewables is important and will help shift the economy away from the fossil-fuel based generation people have relied on for hundreds of years. Let’s not forget the demand side of the equation. Changes in the way people operate equipment, utilize innovative technologies (such as automation and software), and direct behavioral modification can reduce carbon emissions while benefiting the economy. Navigant Research captures this dynamic relationship between energy supply and demand with ongoing thought leadership on the concept of the Energy Cloud—this is the transition from one-way power flow to a dynamic network of networks supporting two-way energy flows at the periphery of the grid. Buildings have a huge role to play in this new reality, as commercial buildings represent new business opportunities, tackle climate risk, and see broad business results. Energy efficiency can be the foundation of this new reality.

 

Blog Articles

Most Recent

By Date

Tags

Clean Transportation, Electric Vehicles, Finance & Investing, Policy & Regulation, Renewable Energy, Smart Energy Practice, Smart Energy Program, Smart Transportation Program, Transportation Efficiencies, Utility Innovations

By Author


{"userID":"","pageName":"Climate Change","path":"\/tag\/climate-change","date":"9\/30\/2016"}