Navigant Research Blog

Major Businesses, Beware Myopia

— December 21, 2017

Develop Peripheral Vision to Manage Industry Disruption

The past 50 years have witnessed the collapse of many corporate giants, often caused by the systemic myopia of business leaders. The likes of Blockbuster, Kodak, and Polaroid demonstrated a failure to recognize where the value lay in the digitization of their industries, for example. As we move into 2018, energy industry disruption is accelerating. Huge opportunities stem from increasing complexity and disruption, but the risks of utilities becoming the next Kodak are also increasing. To combat competitive threats, the industry must develop peripheral vision—the use of competitive early warning signals and scenario planning—to exploit opportunities and manage threats.

Identify and Monitor Early Warning Signals

A competitive early warning system delivers this peripheral vision. By maintaining a broad perspective, utility executives can focus on where changes are happening the fastest and identify where future value lies. However, it is imperative for executives to filter signals from noise and focus attention on the developments that have the highest potential to hurt a business in the coming decade. Scenario planning is a useful filtering tool: a signal such as the development of a new technology, product, or service is extrapolated into the future in several scenarios that gauge the likelihood of adoption and potential impact.

For example, there is a growing trend for residential customers in Europe to purchase solar PV bundled with storage. German battery vendor sonnen has developed a solar plus storage product—sonnenFlat—which requires customers to only pay a flat fee every month. As part of the deal, customers provide sonnen with access to their distributed energy resources (DER) to provide grid services. In return, sonnen guarantees customers free grid-sourced power when their DER is unavailable. sonnenFlat is a new, niche product. Nonetheless, utilities globally should be assessing the risk this poses, particularly when combined with community solar programs. A self-sufficient solar plus storage customer is lost to an incumbent supplier for 20 years.

Measure the Likely Impact on Business for Each Signal

No one can claim to know the future, but with careful planning, a company can prepare for the most likely scenarios. The potential scenarios for residential solar plus storage installations span from little or no growth through near ubiquity. The industry should be asking whether solar plus storage could kill the traditional grid supply model. Careful analysis of the market—for instance, using SWOT or PESTLE approaches—will help gauge the likelihood of different scenarios.

In many countries, the cost of financing solar plus storage is less than a household’s annual electricity bill; falling technology costs and rising power prices will make the solar plus storage option more compelling. While the economic argument is increasingly convincing, there are many reasons why adoption is relatively low, including apathy and ignorance.

Expect (and Plan for) the Unexpected

Customer preference is the biggest driver of solar plus storage, and therefore beyond the industry’s sphere of influence. There is little an incumbent energy provider can do to protect existing revenue from power supply by deterring customers from making solar plus storage investments. This strategy also fails to capture the value of solar plus storage. The industry should be planning strategies to respond to the growth of solar plus storage. These include the development of solar plus storage products, aggregation services, providing the infrastructure on which third parties can offer services, or partnering with or acquiring existing providers. It is possible to be as well-prepared as possible by recognizing the biggest threats and creating risk mitigation strategies in advance.

To mitigate risk, utilities must plan scenarios for a large number of signals in a well-defined early warning system.


Could New Trade Deals Create a Cloudy Forecast for the US Solar Market?

— November 1, 2017

After a lengthy investigation, the US International Trade Commission (ITC) unanimously voted in favor of pursuing protectionist policies on imported solar equipment. The panel found that imports of crystalline silicon PV cells and modules have caused serious injury to the US solar industry, rendering some firms incapable of competing in the global market. To insulate US solar companies from the practices of foreign producers, the ITC agreed to grant President Trump the authority to implement trade protection policies.

Renewable Energy Often Needs Government Support

As cost structures do not always reflect the environmental benefits of green technology, the integration of renewable energy (RE) often requires some form of government aid such as tax incentives, customs duties, or import tariffs to support nascent industries. For instance, Germany’s feed-in tariff scheme under the German Renewable Energy Act created financial security for investors, allowing for healthy market competition within the region to thrive.

Subsidies and tax breaks can also assist solar producers and manufacturers in their efforts to vertically integrate themselves along the value chain, especially when market prices become volatile. For example, a company producing solar cells may want to vertically integrate upstream by manufacturing polysilicon, or integrate downstream by installing PV equipment.

Government support can help alleviate cost impediments associated with integration along the value chain. The spillover effects from German policies, along with other market forces, have created an economic environment suitable for solar technology innovation and deployment. This has allowed Europe to represent 80% of global demand for solar panels for much of the 2000s.

A Global Trade

However, the efficacy of protectionism for the US solar market is up for debate, as the preferential treatment of domestic manufacturers may end up doing more harm than good. Comparative advantages and market imbalances within the RE industry have led to an increasingly globalized supply chain and a growing reliance on international trade. In fact, 87% of all US solar installations use foreign-assembled panels, which means that restrictions on solar imports would increase costs for US consumers. This could severely limit the integration of solar energy and US adoption of clean energy practices as a whole.

US Solar Market

The size of the US solar market at stake within the broader RE industry is grounds for concern. A substantial tariff could lead to the loss of 88,000 US solar energy jobs out of an estimated 250,000. US-based manufacturers have even spoken out against the use of trade sanctions due to the detrimental impact it would have on the entire solar industry.

In fact, researchers at the University of Chicago found that the primary driver of solar industry growth in the United States has not been manufacturing, but rather the increase of installations caused by decreasing costs of solar products. This study highlights the fact that solar employment in the United States is not dependent on manufacturing but on several other subsectors within the market such as installation, sales and distribution, and project development. The US decision to invoke protectionist policies may end up protecting cell and module manufacturing at a great expense to these subsectors.

Policy Ripple Effects

The ripple effects from these new tariffs would be far reaching. Many US businesses depend on competitive pricing along the entire value chain, not just in manufacturing. The solar industry represents one of the fastest growing industries in the country. Consequently, the decision to implement such policies could darken what was once a bright future for a critical industry.


UK Offshore Wind Costs Plummet to Record Lows

— October 5, 2017

Offshore wind power costs are plummeting as wind turbines get bigger and European countries implement a variety of market-oriented competitive pricing schemes. The general pattern is to let wind project developers bid and compete for the lowest power purchase agreement (PPA) price at which they are still confidently willing to finance and build a wind project. The latest results of the United Kingdom’s Contracts for Difference (CfD) auction for 15-year contracts are being hailed as a breakthrough on price.

Contracts for Difference Awards

3,196 MW was awarded mid-September, divided to go to three projects. Project and price highlights are as follows:

  • Dong Energy will construct its 1,386 MW Hornsea Project Two with a winning bid at £57.50/MWh ($75.75/MWh). Staged commissioning is planned for years 2022 and 2023.
  • EDP Renovaveis (EDPR) also won its CfD bid at the same £57.50/MWh ($75.75/MWh) price for its 950 MW Moray Offshore Wind Farm East with a similar 2022-2023 completion timeframe.
  • Innogy (formerly RWE Innogy) won its CfD bid at £74.75/MWh ($98.48/MWh) for its 860 MW Triton Knoll offshore project.

Other Offshore Wind Wins

Technically, the lowest prices awarded recently for offshore wind are for the Borssele III and IV wind farms off the Netherlands, amounting to 700 MW at a new record low PPA price of €54.5/MWh ($65.2/MWh). This was awarded in December 2016 to a consortium made up of Shell, Van Oord, Eneco, and Mitsubishi/DGE. The next lowest price seen yet was awarded in September 2016 as part of Denmark’s nearshore tender to Vattenfall for its 350 MW Vesterhav Syd and Vesterhav Nord wind farms at €60/MWh ($71.79/MWh).

However, while both of those projects are nominally the lowest PPA contract price, the Borssele projects in the Netherlands and the Danish nearshore tender do not include the cost of transmission and grid connection. This cost is estimated to add another approximately $15/MWh-$20/MWh, which pushes their real price up to around the price level of the recent UK CfD projects.

Changes in the Past Few Years

These recent prices reflect a rapid drop from offshore PPA prices only a few years ago. Dong’s 1,200 MW Hornsea 1, which will go online in 2020, was guaranteed £140/MWh ($184.2/MWh) in 2014. Three years later, the recently awarded 1,386 MW Hornsea 2 will proceed at less than half the previous Hornsea 1 project’s cost. By comparison, the new low prices are coming in cheaper than the United Kingdom’s nuclear power.

In addition, in the previous CfD auction in 2015, two offshore wind farm projects won subsidies between £114/MWh and £120/MWh ($150/MWh and $157.8/MWh)—Neart na Gaoithe and East Anglia 1, respectively.

Other Auctions and Numbers

Recent April 2017 offshore wind auctions in Germany should also be mentioned. Dong and EnBW won power contracts for offshore wind plants totaling 1,490 MW with zero subsidies.

Large projects and ever growing turbine sizes are major reasons for the price drop. The latest generation Vestas 9.5 MW turbine can provide enough power for over 8,000 average UK homes. Siemens likewise has rapidly uprated its offshore platform to 8 MW, and the company is hinting at a 10 MW plus turbine for coming years. Dong and EDPR did not disclose the turbine nameplate rating expected for their latest wind projects, but size is likely to be between 10 MW and 15 MW per turbine. Larger turbine units generate more power and reduce the total number of offshore foundations needed for a given project size, thereby reducing construction, foundations, and inter-array cable cost.


Can Solar Make an Impact on the Transportation Market? Part 2

— September 5, 2017

After a few conversations with Scott Shepard about PV systems in EVs, I began to come around to his view that solar is too expensive and the roof space too limited to make a solar-equipped EV work at the mass market scale. But then I read about another PV in transport project that made economic sense: Indian Railways’ newly launched solar diesel multiple unit (DEMU) trains. A total of 16 300W solar modules are installed on each coach on the train for ₹9 lakh ($13,950 or $2.9/W). The Indian Institute of Science estimates that the annual energy yield in a solar rail coach will be between 6,820 kWh and 7,452 kWh. This could displace 1,862 liters of diesel, saving around $1,650 per year at $0.88/liter diesel.

Lessons Learned

I see two key elements that make the project work. The first lesson from India is that solar in transport makes more sense when it is displacing liquid fuels rather than electrons. Going back to the Prius example from the first blog in this series, if the solar roof was available in Toyota’s non-plug-in version of the car, its economic effect would be significantly better. If a non-plug-in version of the Prius could run for 2,190 km per year on only solar, it could save about 150 liters per year, which would have a value of around $180 per year (using Japan’s gasoline price in July 2017). The investment in a solar roof could break even within the lifetime of the car, so the current cost of the add-on could be justified.

The second lesson is the use of off-the-shelf modules. In this way, the project benefits from the economies of scale that PV systems are famous for. It would be difficult to use off-the-shelf modules in cars, but if Toyota introduced the solar roof in all its Prius cars (for example), it could increase the production rate of solar roofs for the Prius from a couple of thousand per year to about 350,000 per year (global Prius sales in 2016). Modules with similar high efficiency cells in the wholesale market sell for about $0.50/W (i.e., $90 for the 180W used in the Prius).

Most of the costs arise from integrating the PV cells into the roof of the car. These costs could decline significantly due to economies of scale as well. If Toyota could cut costs to those of the train company ($540 for 180W already installed in the car, including inverters and other costs), the breakeven period would be about 2.5 years. Slashing costs would make a solar roof a no-brainer (especially for consumers like me who would be able to drive the car without ever using a charging point or stopping at a gas station).

Interesting Niche

This would open an interesting niche for solar companies. If all the EV and hybrid EV cars sold globally in 2017 (expected to be between 3 million and 4 million) had a 180W roof, an additional 840 MW (an extra 1%) could be added to global solar PV demand. But solar roofs need a champion to push them into the mass market in the same way Tesla pushed EVs away from the margins. My last blog discussed two startups that are exploring this niche. However, traditional manufacturers could do the same to differentiate their brand and cars from the competition. Toyota is an obvious choice given its brand association with hybrid cars, but other manufacturers could step in. For example, Volvo could be a great candidate since it is hybridizing all its models.


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