Navigant Research Blog

A Sign That Large-Scale, Offsite Renewable Energy Procurement Is Becoming Mainstream

— February 1, 2018

In an August 2017 blog, I highlighted how corporate commercial and industrial (C&I) energy facilities and sustainability managers have new options to address their energy management and procurement needs. These managers now hold the keys driving the growth of energy as a service (EaaS) solutions. The move by large C&I energy users to procure renewable energy from large, offsite renewable energy project sits within Navigant Research’s EaaS framework as part of the Offsite Energy Supply solution.

EaaS Delivery Models

The delivery models for this new EaaS solution in the US have been developing over the last few years, due in part to the market capacity development efforts of the Rocky Mountain Institute’s Business Renewable Center (BRC). While not all US projects are direct procurements, as of the end of 2017, a total of 8 GW of corporate renewable energy deals have been signed in the US and Mexico alone per the BRC.

The early stages of the market for this EaaS solution in the US was driven by pioneers like Google and Microsoft. These companies were primarily interested in putting their money where their mouth is in terms of their innovation and sustainability commitments. But these companies were also focused on how these deals could help mitigate their long-term energy price risk. Given the impact of shale gas on natural gas pricing and low wholesale electricity prices in the US, using this type of procurement solution as a legitimate energy price risk hedging tool has been met with mixed results.

Rocky Mountain Institute Corporate Renewables Data

(Source: Rocky Mountain Institute)

Ready for Risk Mitigation Challenges

However, a recent announcement on a European procurement deal may signal otherwise. In late 2017, Norsk Hydro, a leading European aluminum manufacturer, announced an agreement to purchase wind power from a 650 MW wind farm for 19 years in Sweden starting in 2021. While Norsk Hydro has been previously recognized for its sustainability performance, this announcement indicates that the purchase of large-scale offsite renewable energy is now posed to meet the complex energy price risk mitigation needs of energy-intensive manufacturers that have spent years trying to lower the cost of the energy they use.

Stay Tuned for Research

Later this year, Navigant Research will prepare a comprehensive global research report on the drivers, barriers, transaction models, and market forecasts for these new large-scale, offsite renewable energy procurements as part of the new Utility Customers Solutions research service. Meanwhile, Navigant Research will be closely watching for deals that show this type of energy procurement strategy is moving past a nice-to-have sustainability commitment toward a legitimate component of an enterprisewide energy price hedge strategy.

 

Electricity Landscape: Expanding Demand

— January 30, 2018

On January 16, 2018, I attended the US launch of the International Energy Agency (IEA)’s World Energy Outlook (WEO) 2017 at the Center for Strategic and International Studies. Dr. Fatih Birol, Executive Director of the IEA, presented findings from the WEO and highlighted four megatrends in the global energy system:

  • Rapid deployment and falling costs of clean energy technologies
  • Growth in electrification of energy
  • China’s shift to a more services-based economy and a clean energy mix
  • The US’s position as the biggest oil & gas producer globally

Taking these megatrends into account, as well as projections on where existing policies and announced intentions may lead the energy systems, WEO’s New Policies Scenario expects global energy needs to increase by 30% between 2018 and 2040. This growth is mainly driven by India, whose share of global energy use is expected to rise to 11% by 2040. Southeast Asia also contributes immensely to overall growing demand. Developing countries in Asia Pacific are expected to account for two-thirds of global energy growth.

Growing Demand for Electricity

With a rising standard of living in many developing countries, more people will want to buy appliances and electronic devices powered by electricity. Innovative transportation technologies are gaining momentum and are projected to increase electricity demand as well. For example, China will need to add the equivalent of today’s US power system to its infrastructure by 2040 to meet rising electricity demand; India needs to add a power system the size of the current European Union. In fact, global investment in electricity overtook that of oil & gas for the first time in 2016. Dr. Birol emphasized the importance of China and India’s future energy decisions. Their decisions will play a huge role in determining global trends due to the scale of investment and deployment.

WEO Electricity Demand Projections to 2040

(Source: International Energy Agency)

Heating and Cooling Demand Ramping Up

The growing demand for heating and cooling is among various drivers for electrification of energy. In particular, consumers in warmer regions will increasingly install cooling systems. There is great potential for energy savings with energy efficient HVAC products, but that market remains largely untapped at present. According to the recent Navigant Research report, Market Data: Energy Efficient Buildings – Asia Pacific, the energy efficient HVAC market in Asia Pacific is expected to reach $25.6 billion in 2026. Specifically, China’s market is expected to grow at a 10.5% CAGR between 2017 and 2026; and 11.4% in India. Today, heating and cooling in buildings account for approximately 40% of energy consumption.

In addition to demand for heating and cooling, the EV market is expected to grow rapidly. EVs can lead to a major low-carbon pathway for the transportation sector. Notably, Europe and China are aggressively promoting EV deployments. Navigant Research projects global plug-in EV sales to reach 8.3 million by 2026.

Increasing Electricity Demands

Overall, end-use electrification is expanding. The IEA expects the share of electricity in final energy demand to increase from 18% today to 26% in by 2060. So, what does the growing electrification of energy mean? Electrification creates environmental benefits by shifting many end uses of electricity away from fossil fuel sources. It also creates opportunities for boosting energy efficiency.

While there are still many challenges to overcome, such as enforcing energy efficiency regulations and developing EV infrastructure, the electrification of large sectors of the economy holds great growth potential. This growth will be driven by rapidly evolving technologies, emerging innovative business models, and shifting regulatory environment. Together, these are referred to as the Energy Cloud, disrupting the traditional electricity landscape. To learn more about how industry stakeholders can prepare and manage their organization to maneuver through the Energy Cloud disruption and position themselves for long-term success, see Navigant Research’s white paper, Navigating the Energy Transformation.

 

How Long Can Companies Afford to Neglect Setting Science-Based Climate Targets?

— December 21, 2017

This blog post was prepared with contributions from Vincent Hoen, Jeroen Scheepmaker, and Frank Stern.

During the last 3 years, more than 300 companies have signed up to participate in the Science Based Targets initiative. The combined revenue of these companies runs into the billions of US dollars and includes high ranking Fortune 500 companies like Walmart, HP, CVS Health, and Procter & Gamble. Why are these companies committing to science-based targets? Are they willing to publicly disclose their emissions and commit to reducing their environmental impact?

Increased awareness of environmental responsibility, especially following the Paris Agreement, has increased overall consumer, city, and business willingness to act. The corporate sector is embracing science-based targets as an instrument to provide objective guidance on how to react to increasing pressure to have a credible climate strategy. Science-based targets show the fair contribution of any company to limit global warming to 2° or even 1.5° Celsius.

In addition, science-based targets help companies do the following:

  1. Mitigate climate risks and ensure investor acceptance.
  2. Meet climate disclosure recommendations (e.g., from the Financial Stability Board).
  3. Improve business relationships.
  4. Become a more attractive employer.

Let’s look at these points in a greater detail.

Science-Based Targets Become Part of Overall Credit Rating

Globally, well-accepted rating instruments such as the Dow Jones Sustainability Indices and CDP Climate Leadership Index are integrating science-based targets into their ratings and awarding credits for companies having an approved science-based target. Not committing to science-based targets can lead to lower credit ratings and less client and investor attractiveness.

Science-Based Targets Will Be Part of Recommended Climate Risk Disclosure

The Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (FSB-TCFD) recommends companies perform scenario analysis on their portfolios to assess climate-related risks and opportunities. Setting science-based targets is the tool for meeting these recommendations, as science-based targets are based on the leading climate scenarios of the International Energy Agency. They provide key insights into the required transformations for a company and a direct link to climate risks and opportunities. By setting science-based targets, companies are also well-prepared for upcoming policies that make a climate impact disclosure mandatory.

Science-Based Targets Result in Improved Business Relationships

An important trend is companies not only focusing on their own operations but also on value chain impacts. For instance, Walmart’s Project Gigaton implemented a suppliers program to achieve its climate objective and science-based target. A solid climate strategy with a science-based target ensures that companies act in line with the demands of the purchasing departments of supply chain partners. Companies can develop more intimate client relationships and secure longer-term contracts when a science-based target is in place.

Sustainability Increases Employer Attractiveness

Last but not least, it is known that companies with a strong climate strategy will be more attractive not only for clients and investors, but also for (new) employees. Young professionals have a strong preference for companies with a green image. A science-based target is a great instrument to drive an ambitious sustainability program.

Benefits of Science-Based Targets

Science-based targets are being embraced on a large scale by corporate leaders because they provide the perfect framework for a credible climate and energy strategy. These targets are at the heart of climate-related risk disclosures and will continue to have an increasing effect on companies’ credit ratings. In addition, science-based targets ensure soft benefits, including communicative value, improved supplier relations, and a more attractive working environment. Acting now allows companies to join the ranks of sustainability leaders and show shareholders, investors, clients, suppliers, and employees that the company has a credible response to prevent climate change.

 

Thinking Outside the Box about Microgrid Technology

— November 28, 2017

When one hears the word technology, most think of a hardware gadget, something tangible that can be touched and is a literal tool. However, some prominent thought leaders take a much broader view.

Jayant Kumar, global digital grids director for GE Grid Solutions, points to better microgrid master planning tools as a technology vital to bringing the microgrid platform into full commercial viability. In a recent interview, he asked “What we are trying to do is to create a utility in a box. But how do you do that at the right economic scale? What is the right business case?” He explained that with sophisticated planning tools, the assets can be matched up with the right market landscape to reach necessary internal rate of returns to make projects pencil out.

Investments in Microgrid Tech to Rise

Navigant Research will soon be publishing a report on the topic of microgrid enabling technologies (MET). The focus will be on the distributed energy resources—hardware assets—that get wrapped into microgrids. Preliminary findings show combined heat and power (CHP) capturing the largest market share today, but by 2026, the leader is solar PV (with energy storage coming in second place). All told, the hardware assets (biomass, CHP, diesel, energy storage, fuel cells, hydro, solar PV, and wind) will represent approximately $90 billion in cumulative investment over the next decade.

While these numbers are staggering and may make certain investors drool, the key to unlocking the value sometimes hidden in these hardware assets is more nebulous since they delve into the realms of telecommunications, finance, and software technologies—the value of which is more difficult to count and quantify.

Mobile Phones as a Microgrid Enabling Technology

In the developing world, there is an acute need for financial products to pave the way for microgrids linked to energy access initiatives. In these markets, it is the proliferation of mobile phones—and the infrastructure required to enable communications (i.e., cell phone towers)—that could also be considered MET. Mobile phones create the infrastructure to enable payment for energy services on an as used incremental basis that is driving growth in smaller scale microgrid systems.

For example, Simpa Networks is one of many innovators bringing energy access through microgrids to developing world markets via the pay-as-you-go model. It installs solar PV systems in households or small businesses and customers pay for the electricity consumed, like prepaid mobile phone plans. The payments count toward the purchase price of the solar PV system so customers will eventually own the system.

Controllers: The Magic Sauce

The other MET to be sized in my forthcoming report is microgrid controls spending. This is the linchpin software enabling technology that remains the bottleneck to full-scale commercial viability (just ask Duke Energy). The US Department of Energy (DOE) and the Institute of Electrical Energy Engineers (IEEE) are playing critical roles in taking a bit of the mystery out of what is now the magic sauce that makes a microgrid work (or not.)

Perhaps the most interesting initiative was launched by the National Renewable Energy Laboratory (NREL) in what is being described as a shootout under a controller-in-the-loop test pitting controller against controller. Stage 1 involved five vendors in a Microgrid Innovation Challenge where all five vendors competed in managing a simulated highly complex microgrid. The companies competed for 100 minutes on seven performance parameters. Next, NREL will pit two finalists in a real-world hardware environment in December 2017. The winner will be selected as the controller to be used at NREL’s microgrid testing facility.

 

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