Navigant Research Blog

Stop and Smell the Market Indicators

— May 17, 2018

Last month, Philips Lighting revealed its new Philips GreenPower LED toplighting with a light spectrum optimized for cut rose cultivation. The toplighting technology allows growers to increase light levels year-round without increasing heat, which allows for increased yield production. However, the rose market has advanced in recent years to the point that growers are now more concerned with quality of production. Addressing those concerns along with energy efficiency needs, Philips collaborated with research institutes to provide growers with a toplighting spectrum that improves the quality of the roses and is 40% more energy efficient compared to high pressure sodium lighting. While the technology is important for horticulturalists and agriculture research globally, why would a lighting manufacturing giant like Philips focus on grow solutions for roses? The answer is twofold.

The Wall Street of Flowers

The Netherlands is the trade capital of the global rose market and home to the world’s largest flower market, Royal FloraHolland. Every day, 30 million plants and flowers from all over the world are auctioned at Royal FloraHolland, with operations covering over 14 million square feet—equivalent to 243 football fields. Almost half the world’s flowers and plants pass through one of the 11 cooperatively-run regional flower auctions, with buyers and sellers bidding on trading floors just like a typical stock exchange in financial markets. The sheer scale of this market alone gives reason to why manufacturers would want to specialize in lighting solutions for rose cultivation. Yet bidding wars at Royal FloraHolland are just the beginning.

More Competition, More Opportunities

Developing countries in Africa are starting to take up a larger share of the European market for cut flowers and foliage. The CBI Ministry of Foreign Affairs reports that major suppliers Kenya, Ecuador, Ethiopia, and Colombia have seen a 20%-60% growth in exports of flowers and foliage to Europe. Producers in these regions are strengthening their position in global production and trade, mainly due to favorable growing circumstances, rising demand for competitively priced flowers in Europe, and improved transportation. To remain competitive, European growers are looking to advanced lighting solutions for delivering quality, reliability, and consistency in supply. This is why major lighting manufacturers like Philips and OSRAM have noticed and are taking stock in this burgeoning market. Companies may want to tap into this blossoming market as investment opportunities and demand for unique lighting solutions continue to grow out of this competitive space.

For more details, a recent report from Navigant Research, LED Lighting for Horticultural Applications, examines the global market potential for horticultural lighting.

 

Google Has Reached 100% Renewable Energy, so I’m Issuing a New Challenge

— April 19, 2018

As consumers press companies to be more conscious of their environmental impact and sustainability, corporate procurement of renewable energy has gained momentum around the world. Some 130 companies have signed the RE100 pledge to make their operations run on 100% renewable energy. One of the companies that started this trend was Google.

Google’s First Renewable Steps

In 2010, Google started a journey to replace the electricity it uses with renewable sources by signing its first power purchase agreement (PPA) with a 114 MW wind farm in Iowa.

To ensure that its purchases have a meaningful impact on the environment, Google has followed the concept of additionality, which means that all the electricity it buys is funding new renewable energy projects.

In 2017—2.6 GW over 20 projects and 7 years later—Google announced that it reached its 100% renewables target. This is a massive achievement, especially considering that Google began these plans when grid parity was little more than a dream for wind, and solar energy was a technology that only rich Californians and Germans put on their roofs.

My Challenge to Google

While Google’s achievement should be applauded, I believe it is possible to move that target further afield. It is true that Google is buying all its electricity from renewable sources, but it is unlikely that all the electricity it is using comes from renewable sources. This is because solar and wind, Google’s choices for renewable sources, are both variable, while Google’s electricity demand is not. In other words, there are times and locations when Google must use electricity that comes from traditional sources, while simultaneously the electricity generated from the renewable projects funded via Google’s PPAs is curtailed and lost.

So, here is my challenge to Google (or any company willing to accept it—looking at Apple, Amazon, Microsoft) to move its energy program forward:

  • Work with the 20 projects it has funded to ensure they have onsite storage, which reduces the chance of curtailments and increases impact on the grid. This also means the balancing cost is not passed to other ratepayers.
  • Ensure all energy assets (distributed generation and loads) are part of demand response programs or virtual power plants, which makes the flexibility of these resources open to grid operators.
  • Make sure any new electricity procured is locally generated, and has no impact on the grid (or that the sites at least fulfill bullets 1 and 2 above).
  • Encourage employees to take their own energy consumption choices along the same journey!

Major Companies Should Continue to Set a High Bar

This is not an easy challenge, but it’s also not impossible. It’s probably as difficult as the goal to achieve 100% procurement of renewables seemed in 2010, when Google embarked on this mission. Google addressed these concepts in a white paper released in 2016, but mostly in a future tense. In my opinion, the technologies and regulations to make this possible are already here and are starting to reach scale. Now it is up to Google and other visionary organizations and individuals to make this happen.

 

What’s Up with the Blockchain Trend?

— April 3, 2018

In March 2018, the blockchain-in-energy hype dial turned up a notch with the publication of the total investment attracted by energy-related blockchain startups. While the numbers are impressive, it’s important to remember the majority is investment capital, primarily sourced from initial coin offerings (ICOs), not utilities’ direct investment into blockchain, which remains a tiny percentage. That will only come if these startups last more than a few years, and that ‘if’ is a rather large one.

How Big of a Deal Is Blockchain?

That energy-related blockchain startups raised $324 million in the last year is an eye-catching headline, and cause for excitement. Yes, blockchain is making an impressive charge well beyond its birthplace in cryptocurrencies. Yes, there is promise for blockchain in the utility industry, in several different use cases. Yet, caution, not unfettered enthusiasm, is advised.

Of this $324 million, 75% came from ICOs, a largely unregulated method for startups to raise investment in exchange for cryptocurrencies. ICOs are often backed-up with only a white paper (rather than a prospectus written by lawyers) created by the startups themselves.

Investment Numbers Aren’t Necessarily Stable

Additionally, this $324 million may already have shrunk significantly. In a typical ICO, “investors” buy the tokens or coins on offer with cryptocurrencies like Bitcoin or Ethereum rather than with dollars and cents. The price of Bitcoin has crashed since the end of 2017, so $1 million raised in a Bitcoin-backed ICO in December 2017 will today only be worth 40% of that figure. It’s also not representative of industry interest in blockchain: it’s mostly private investors riding the Bitcoin hype, chasing get-rich-quick cryptocurrency schemes.

Energy Companies Are Hesitant

Despite claims to the contrary, blockchain isn’t taken seriously by energy companies. A few have dabbled. GTM list four in its article: Centrica, RWE, Innogy, and TEPCO. Given that RWE’s blockchain investment is through its erstwhile Innogy subsidiary, three utility investments don’t represent a gold rush. Centrica is often at the forefront of technology innovation: for example, it was the first energy company to acquire a smart home technology business. Yet it placed its blockchain bet on LO3 Energy, one of the most mature and visible blockchain companies. Similarly, TEPCO invested in a company with a unique focus: Electron works on device registration and customer switching, a far cry from the cryptocurrency-based transactive energy (TE) business models of most startups.

Be Wary of Bubbles

But what of the big ‘if’ I mentioned above? I witnessed the internet bubble burst in the late 1990s and see many parallels to blockchain today. In that goldrush, investors poured billions into poorly-regulated businesses that promised the world yet only delivered losses. I believe the same is happening with blockchain. While there will be winners, there will be a lot of losers too. Given that TE is by far the most commonly pursued business case, bear in mind that:

  • Blockchain startups typically cannot demonstrate an ability to code enterprise-grade applications
  • Peer-to-peer energy trading is illegal under most regulatory regimes
  • Even if TE were permitted, to date there is no functional business model
  • If TE were permitted, the world will only ever need a handful of TE platforms from which to choose.

Investors may well be throwing money into an over-populated marketplace that may not be able to deliver a software product, that supports a business model that fails to gain regulatory approval, or may never turn a profit.

Expect Disruption

I am positive about TE. I believe the industry can make it work. TE can benefit all participants in the electricity system, especially because its market-based financial incentives can replace existing subsidies. I also believe that around 90% of the TE-focused startups will no longer be with us by the turn of the decade. Investors and utilities, caveat emptor.

 

Is BlackRock’s Climate Change Announcement a Spark or a Sleeper?

— March 13, 2018

BlackRock, the world’s largest asset manager, has taken on long-term investing, and this will have some cascading impacts throughout the investment community. According to CEO Larry Fink, “To sustain [long-term] performance, however, you must also understand the societal impact of your business as well as the ways that broad, structural trends—from slow wage growth to rising automation to climate change—affect your potential for growth.”

This is a clear statement that climate change is a relevant and crucial factor when examining long-term performance. Climate change can be evaluated with respect to direct impacts on a portfolio or a business (e.g., sea level rise, increased storms, and natural disasters), or climate change impacts can be evaluated indirectly (e.g., how a portfolio or a business can respond [positively or negatively] to regulatory shifts or consumer trends).

But what does BlackRock’s pronouncement mean for the corporate community at large? Certainly corporations pay attention when big players act. For example, Walmart’s sustainability programs are maturing and focusing on its supply chain, and Coca Cola now regularly reports on its sustainability progress. This is leadership in action. But for the long tail of smaller businesses (even in the Fortune 1000), what BlackRock’s announcement will trigger is uncertain. Below are some possibilities.

BlackRock Triggers the Avalanche

It is possible that BlackRock’s approach will influence decision makers in the board room and in the investment houses to take immediate action with respect to their operations and portfolios. Recent announcements by Amazon, JPMorgan, Chase, and Berkshire Hathaway to create their own healthcare system in light of rising costs and government stagnation shows how the big players in corporate America are taking charge of initiatives funded by governments in other countries. We Are Still In is another such effort.

Companies Will Want to Be First to Be Third

Other large financial and investment companies may follow BlackRock’s approach. But the majority of corporates may wait until more Fortune 1000 companies start turning these announcements into action before they act. This could come in the form of seeing who signs up for science-based targets (only 342 as of this witting) or reports their emissions to CDP. The second wave of “light green” companies will follow, triggering the race to be “first to be third”—or to be relevant—before climate impacts become table stakes.

Silence

It is possible that not much will happen in corporate America. While the benefits of long-term planning are becoming clearer in Europe—especially accounting for climate impacts and carbon accounting—that is a different market. The concepts of the circular economy, direct climate change impacts, and carbon accounting are still unknown to most businesses in the US. They may be paying attention more and more, but until climate and sustainability action is clearly a stick or a carrot, they could be slow to act.

So, what does this mean? Which scenario will play out? It is too early to tell, but this is a newly fast-moving environment. Navigant will be watching this space closely.

 

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