Navigant Research Blog

California Wrestles with Emerging Energy Business Models

— June 18, 2014

When it comes to energy policy, California is schizophrenic (or perhaps dyslexic).

On the one hand, recent energy storage mandates in the form of last year’s AB 2514 have created opportunities to test out how advanced batteries can help mitigate the frequency and voltage issues associated with high penetrations of variable renewable energy.  Utilities such as San Diego Gas & Electric (SDG&E) have suggested that these mandates plant the seeds for new microgrids, building upon the utility’s success with the Borrego Springs project, which SDG&E recently announced will be expanded.

On the other hand, this year’s AB 2145, derided by critics as the “Monopoly Protection Act,” would introduce a major kink in efforts for the San Francisco Bay Area to give local governments the authority to purchase bulk renewable energy to reduce carbon emissions.  The target of the legislation is a policy vehicle – known as community choice aggregation (CCA) – that was pioneered in states such as Ohio and Massachusetts but has fanned the flames of the controversy in California.

Come Together

Fueled by the poor track record of early retail deregulation pilot programs, CCA allows local governments to aggregate their constituents into a community bulk power purchase program in order to achieve higher economies of scale.  Residents can opt out, but the experience in Marin County reveals that 80% of the customer base chose the CCA preferred green energy program (resulting in a net reduction of greenhouse gas emissions of 19%).  Adjacent Sonoma County began serving customers under its CCA program in May, and San Francisco has been considering a similar CCA program for several years.

Fast forward to the present.  AB 2145, sponsored by a former utility executive, has cleared the Assembly and is up for its first vote in the Senate on June 23.  Ironically, Republicans are generally opposed to the measure (even though the status quo implies greater government intervention to reduce carbon emissions), while key support to this measure is being provided by Democrats (who are aligning with utility union workers).  Although Pacific Gas & Electric’s efforts to derail Marin County’s CCA via a statewide ballot measure failed in 2010, the utility is a key force behind the latest measure.  The opponents include local governments as well as Silicon Valley.

Interestingly enough, another bill designed to more directly pave the way for microgrids in California by modifying the so-called “over the fence” rule was killed.  A recent California Public Utilities Commission white paper identified this regulatory policy as one of the key impediments frustrating California’s efforts to become the world’s leading market for microgrids.

 

Q&A: Doug Houseman of EnerNex on the Future of Utilities and Power Generation

— June 17, 2014

The release of the U.S. Environmental Protection Agency’s (EPA’s) long-awaited new rule on carbon emissions from U.S. power plants has heightened the debate over the future of power generation in this country.  Environmental organizations and renewable energy industry figures have suggested that wholesale replacement of fossil fuel-based generation with renewables is both achievable and desirable within the next few decades.

I spoke with Doug Houseman, vice president of Innovation and Technology at EnerNex, to get his take on the future of power generation and on utility industry challenges in general.  Houseman has 30 years’ experience in the global power industry and is widely recognized as an energy sector thought leader.  EnerNex specializes in engineering services and consulting to utilities, government, and private institutions.

Navigant Research: In a new report on power generation from renewable sources, Greenpeace suggests that smart grid investments will facilitate integration of extensive distributed generation, but later in the report it shows a “power plant value chain” where generation utilities disappear after 2020 and grid operators become state- or community-controlled.  What’s the logic there?

Doug Houseman: The implication is that the grid can mostly just disappear and that renewable energy will have the same ability to be scheduled as conventional power plants.  A peer-reviewed IEEE [Institute of Electrical and Electronics Engineers] paper I coauthored estimated that, if the U.S. were to use only wind energy, in order to deal with the annual cycle of wind and demand, the U.S. would need large amounts of storage – for example, pumped hydro, which is the most cost-effective storage available today for long-term storage.  We would need to take Lake Michigan twice and put it behind a 200-foot-high dam.  Solar and mixed renewable scenarios all require significant annual storage cycles.  If we move all transportation to electricity, those numbers would grow significantly – say, three to four Lake Michigan equivalents of pumped storage.

NR:  Plans like this rely not only on green generation sources but also reduced electricity and heating demand, thanks to more efficient electronic devices and energy-related renovation of the residential building stock.  Who pays for these innovations?

DH: The consumers will, which means that the people who have money will end up even better off than the people who don’t.  These devices will have a much higher initial cost than less efficient devices – unless the government intervenes in the market in a significant fashion, by either taxing the low efficiency devices heavily or subsidizing the high efficiency devices.  Since many energy-consuming devices have a 20- to 30-year life, even if the manufacture of low efficiency devices are banned, the resale of them through Goodwill and other resale shops will happen, extending use of these devices to the end of their useful life.

Also, to rehab the U.S. housing stock is not a simple process, but probably a 30- to 40-year process – 100 million dwellings will take time to completely rehab to the kinds of standards necessary.  Some of those rehabs will take tens of thousands of dollars to do, and in many cases the buildings will have to be vacant to do the rehab because of remediation issues (like mold) that will be found in the buildings.

NR:  Policy changes are also needed to dramatically change the industry.  Many observers suggest abolishing subsidies for fossil fuels and nuclear energy and transferring the socialized cost of pollution back to the energy sector via carbon fees.  Do you see any of these policy changes happening in the near term?

DH: Honestly, no.  The House of Representatives has proposed a major overhaul of the tax code, which removes many of the subsidies, but the Senate has indicated it is dead on arrival because of the depth of the change.  I doubt that a comprehensive plan can get through and that is the only way to actually act on all the possible subsidies.  Some say that any investment or R&D credits are subsidies, so the depth of the overhaul on the tax code would have to be extensive.

NR:  In the wake of Fukushima, environmental activists and national governments – including Germany and Japan – are working to eliminate nuclear generation.  Natural gas is often considered a “transitional” or “bridge” fuel source.  Your thoughts?

DH: The Sierra Club, the NRDC [Natural Resources Defense Council], and others have indicated that nuclear has a place.  The administration has indicated that natural gas will either need carbon capture or have to be transitioned out.  So electricity use will rise further (as will storage) as heating and cooling move to electricity, along with transportation.

 

Village Nanogrids Fuel Mobile Networks

— April 1, 2014

There have been numerous efforts to electrify remote parts of the developing world.  Typically, these have come in the form of philanthropic ventures, with little to no expectation of a return on investment, using distributed energy systems that were often out of touch with the consumers’ energy needs, as well as their capacity to maintain the systems.  As a result, these efforts have been largely ineffective.  More recently, some for-profit companies (mostly mobile network operators) have found that a business case exists for investing in distributed energy for rural off-grid communities – by implementing systems that are much more in tune with customer needs and capabilities.  These systems usually take the form of nanogrids, which are described in the recent Navigant Research report, Nanogrids, and in my colleague Peter Asmus’ recent blog.

For mobile network operators (MNOs) in emerging markets, such as MTN, Vodacom, and Safaricom in Africa and Digicel in Latin America, the challenge is that there are millions of mobile customers without access to the electricity grid; approximately 259 million, according to a recent GSMA report.  For these customers, the cost of charging their phones can represent up to 50% of their total mobile expenditures (airtime plus charging costs), so their phones are only turned on when absolutely necessary, in order to conserve battery life.  Since MNOs make money when the phones are in use, it’s in their interest to make charging convenient and inexpensive enough that conserving battery life becomes an afterthought.  MNOs are quickly finding that distributed nanogrids, such as 10 watt solar home systems (SHS), are the cheapest, most effective way to maximize cell phone usage by existing customers, as well as to bring more customers online.  To stimulate the spread of these systems, MNOs are starting to form commercial partnerships with local vendors of portable solar products.

Friendly Local Utilities

In Uganda, MTN has partnered with Fenix International to provide MTN airtime vendors with a Fenix ReadySet solar-powered battery kit that charges phones and provides LED lighting for the vendor station, allowing them to stay open longer.  The ReadySet has turned MTN vendors into micro-utilities in their communities, creating additional revenue from phone charging and increased mobile money transactions, as well as savings for the vendor from using the LED light.  MTN is also repackaging the ReadySet as the ReadyPay Power System, which is now available to all its customers on a pay-as-you-go basis.  Similarly, Digicel Haiti partnered with Solengy in 2011 to install over 400 solar-powered street lamps and phone charging stations across Haiti.  Each station is operated by an airtime vendor that sets up shop below the LED street light and manages the phone charging service.  Other examples include Vodacom and Mobisol in Tanzania and Safaricom and M-KOPA in Kenya.

Forming the backbone of this transition are pay-as-you-go business models and mobile money, which I’ll explore in my next blog.

 

Utilities Enter the Era of Distributed Generation

— March 31, 2014

From the “Internet of energy” to the “utility death spiral,” the causes and effects related to the distributed generation (DG) transformation go by many names.  Faced with what is increasingly recognized as DG’s inevitability, utilities and the companies that supply DG technologies are faced with the difficult challenge of defining viable business models in a multi-dimensional technology landscape.

Former Energy Secretary Steven Chu and outspoken NRG CEO David Crane have loudly pointed out the futility of business-as-usual thinking in the face of DG’s advance.  It’s a mistake to think the power sector is oblivious to the changes enveloping it, though: most utilities do not actually have their heads in the sand, as recent headlines suggest.  According to Utility Dive’s 2014 State of the Electric Utility survey, 67% of U.S. utility professionals believe their company should take a direct role in supplying DG to their customers ‑ either by owning and leasing distributed assets or by partnering with established DG companies.  At the same time, key suppliers like GE, recognizing a dawning opportunity, are positioning themselves for growth.

Tip of the Iceberg

Although solar PV has provided a blueprint of sorts, a suite of technologies – collectively called distributed energy resources (DER) – is primed to usher in a reimagining of DG’s value proposition.  Composed of renewable and fossil-based generation, diverse fuel sources like the sun and biogas, power generation and storage assets, and applications from microgrids to combined heat and power (CHP), DG’s multi-dimensionality suggests that existing business models are just scratching the surface.  An estimated 37 million homes in the United States, for example, now have natural gas lines running directly to them, which opens up the possibility of micro-combined heat and power and fuel switching.

For utilities, the challenge is fairly straightforward.  Demand-side generation is leading to death by a thousand cuts, as the cost of maintaining and operating the grid is spread over a gradually declining revenue base due to eroding customer demand.

In its widely-cited Disruptive Challenges report, published in 2013, Edison Electric Institute lists the financial risks created by DG: declining utility revenues, increasing costs, and lower profitability potential.  Simply charging higher rates – one solution offered by the most entrenched utilities – risks accelerating the revenue ”death spiral,” as rising rates make it increasingly attractive to adopt otherwise expensive DG technologies.  Recent experiences across Europe have demonstrated that utilities must adapt (see RWE) or risk obsolescence, at least in the traditional revenue sense.

Transforming is Grand

On the supplier side, companies like GE are positioning for what is an inevitable expansion of DG globally.  The company announced last month the creation of a new business unit called GE Distributed Power, targeting the global distributed power opportunity.  Merging three existing business lines – Aeroderivative Gas Turbines, Jenbacher Gas Engines, and Waukesha Gas Engines – GE will invest $1.4 billion to combine formerly niche generation products into a cohesive distributed power offering.

The move coincides with the publication of a recent white paper, “The Rise of Distributed Power,” in which GE forecasts that distributed power will grow 40% faster than overall global electricity demand between now and 2020.  The trend, according to GE, is nothing short of a “grand transformation.”  The company estimates that globally, about 142 gigawatts (GW) of distributed power capacity was ordered and installed in 2012, compared to 218 GW of central power capacity.

Four key trends are driving the distributed power transformation, according to GE: the expansion of natural gas networks; the rise of transmission infrastructure constraints; the growth of digital technologies; and the need for grid resiliency in the face of natural disasters.  While these trends are playing out in the U.S., GE’s efforts are focused primarily on the fast-growing Asia Pacific market and the expansion of natural gas.

Big in Bangladesh

The momentum behind DG is especially strong in the developing world, where electricity demand outstrips the pace at which centralized power stations and transmission infrastructure can be financed and built.  The IEA estimates that in 2009, 1.3 billion people lacked access to electricity, representing around 20% of the global population.  A significant proportion of this population lives in Asia Pacific.

While the DG era represents a degree of complexity that has yet to be fully grasped, initiatives from both utilities and their suppliers point to increasing acceptance of its inevitability.

 

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