Navigant Research Blog

Spanish Wind Industry Faces Subsidy Cuts

— March 24, 2015

In early 2014, the Spanish government reformed the electricity market by discontinuing the feed-in tariff (FIT) program entirely for all wind plants going forward. The government has also attempted to lower purchase prices retroactively for production from existing wind plants, which essentially means that wind producers who built wind plants counting on tariff-subsidized prices for the next 20 years now abruptly face major revenue shortfalls. A direct result of Europe’s ongoing fiscal crisis in the wake of the 2008 crash, this move is widely considered the most damaging change to renewable incentives in any country globally, and it could result in a permanent wind market collapse across the European Union (EU).

For Spanish wind plant developers, such as Iberdrola or Acciona (ranked as the No. 1 and No. 5 wind operators globally in 2013, respectively), 2014 was a rough year. In its 2014 annual report, Iberdrola announced that it installed only 157.7 MW during 2014. To put that into perspective, the No. 2 company on the list of top 15 global wind operators, Longyuan Power Group in China, installed 1632.7 MW in 2014, and is now likely to surpass Iberdrola as the leading global wind operator. Acciona added 98 MW in 2014, but was forced to sell off 150 MW—thus ending up with less net wind capacity in 2014 than in 2013.

Cash Crunch

The FIT cancellation affected the cash flow of these Spanish companies, as well. Iberdrola’s 2014 profits took a major hit, falling by almost 10% compared to 2013, to hit €2.33 billion ($2.65 billion). In its 2014 annual report, Acciona asserted that, despite the regulatory setback, the company is profitable again and has managed to reduce its debt by €746 million to a still-heavy €5.2 billion ($5.64 billion).

Even if the companies survive this hit, the prospects for domestic development of wind energy in Spain are dire. Companies like Iberdrola and Acciona have the option to go abroad to markets in the United Kingdom, the United States, and Brazil to install wind energy; but for wind development in Spain, there is nothing attractive to investors about joining a market where regulation is uncertain and government support withering. In 2014, Spain installed just 28 MW of wind power, far below the 175 MW installed in 2013. The tariff cut has imperiled the future of clean energy in Spain, unless the government can bring back wind incentives and restart the market.

For a more detailed analysis of Spain’s wind market, as well as the broader global market for wind power, see Navigant Research’s forthcoming World Market Update.

 

Energy Storage Leaders Stumbled, Then Survived

— March 20, 2015

At a time when the major electric industry players were either unwilling or not nimble enough to develop energy storage systems integration expertise, four growing energy storage players with four distinct technologies took a risk to develop this expertise. Over the last few years, each of these companies failed financially and was subsequently acquired, in some cases more than once. In nearly every case, private equity firms stepped in, seeing an opportunity to invest in a maturing technology company with specialized expertise in the market.

Citing Tesla founder Elon Musk’s determination to build a massive Gigafactory to manufacture batteries for his vehicles, E Source Senior Fellow Jay Stein has argued that company failures like these indicate the shortcomings of the overall market. This is a logical fallacy.

Number of Deployed Systems Market Share by Top 10 System Integrators, Excluding Pumped Storage and CAES, World Markets: 1Q 2015

(Source: Navigant Research)

Detours Behind

The chart above is derived from Navigant Research’s Energy Storage Tracker 1Q 15, a global database of energy storage installations that includes 808 projects. This specific graph charts the top 10 systems integrators of energy storage in terms of number of systems deployed globally. Four of the 10 market leaders for systems integration have gone bankrupt and been acquired in the past several years. NEC Energy Solutions, formerly A123 Energy Solutions, was acquired following a bankruptcy filing, and the grid business was subsequently spun off and sold to NEC Corporation for approximately $100 million in 2014. Beacon Power was acquired by a private equity firm following a bankruptcy filing in 2012, and Xtreme Power (now Younicos Inc.) was acquired by Younicos AG in 2014, also after filing for bankruptcy.

All three firms were focused on a core grid storage technology (lithium ion batteries, flywheels, and advanced lead-acid batteries, respectively), but all spent a great deal of resources in the earlier days of the market learning how to integrate complete systems. Ultimately, all three firms developed this expertise, and NEC Energy Solutions and Younicos repositioned themselves as systems integration companies, offering software, controls, and integration expertise as opposed to pure-play battery suppliers. Beacon Power is a market leader in flywheels and flywheel systems integration and has developed a modular flywheel product with built-in power electronics for simpler integration and installation.

Managers, Not Markets

Finally, Coda Energy repositioned itself as an energy storage integration firm in 2013 after filing for bankruptcy. The company rebranded and shifted its product offering to target stationary energy storage using a battery management system, battery thermal management, and a sophisticated power source controller.

Together, these four companies account for 21% of the global market share for the top 10 systems integrators (although part of this market share is attributed to Younicos AG). These companies and others like them are challenging incumbents such as ABB and S&C Electric, demonstrating that their earlier stumbles arose out of flawed management and/or strategy, not failed markets or futile technologies.

Equating a management failure with a market failure ignores the value of the technology. Whether the Gigafactory will be Musk’s Waterloo or Austerlitz has less to do with the technology and much more to do with Tesla’s strategy and execution—and Musk has proven he can accomplish both in the automotive and the financial services worlds.

 

ConEd Details Its Smart Meter Plan

— March 11, 2015

Con Edison, also known as ConEd, one of the largest U.S. investor owned utilities, has provided details of its planned rollout of smart meters over the next several years. Contained in ConEd’s recent rate filing with the New York Public Service Commission, the plan reflects a comprehensive strategy to make smart metering the backbone of future customer engagement, as well as improve outage restoration, enhance operational performance, and ease the integration of distributed energy resources such as rooftop solar.

The utility envisions an advanced metering infrastructure (AMI) deployment over 8 years at a cost of about $1.5 billion—about $8 million this year, $69 million in 2016, $174 million in 2017, $317 million in 2018, and $306 million in 2019. Projected spending details beyond that have not been made available. The approximate number of meters involved is 3.4 million.

Aligned With the Vision

Con Edison’s AMI deployment plan also aligns with the state of New York’s wide-ranging Reforming the Energy Vision (REV) initiative, which was announced last year by Governor Andrew Cuomo. The REV initiative is aimed at transforming the state’s electric grid into a more customer-oriented industry, featuring “market-based, sustainable products and services,” with an emphasis on enabling clean distributed power generation. Smart metering, with its two-way communications functionality, is a key technology for facilitating this type of flexible, modern grid.

Even though smart meters have been around for a number of years, no deployment lacks naysayers, nor controversy. Con Edison is likely to face opposition from consumers who have concerns over health risks, privacy, and the accuracy of the data smart meters provide—concerns the industry says are unfounded.

Take Your Time

For smart meter manufacturers and infrastructure players like Landis+Gyr, Itron, General Electric, Elster, and Sensus among others, the ConEd deployment represents a significant potential opportunity. The utility is expected to announce the bidding process in the coming weeks. Given the large scale of this project, it is possible the utility will choose several vendors or a primary contractor and various partners.

At 8 years, the anticipated timeline for ConEd’s smart meter deployment appears prolonged. Other large U.S. utilities—such as Pacific Gas & Electric, San Diego Gas & Electric, Oncor, and CenterPoint Energy—have rolled out smart meters in 4–6 years. But ConEd may be playing it safe, giving itself enough of a time cushion to overcome the inevitable hurdles and detours.

ConEd’s smart meter plan hinges on regulatory approval, but regulators are inclined to be in favor, especially since the deployment fits in with the state’s REV initiative. And despite the considerable costs involved, smart meters provide benefits to both customers and the utility, and tend to outweigh any drawbacks.

 

Investors Search for Returns from Energy Efficiency

— March 9, 2015

The U.S. Federal Reserve is poised to raise interest rates this year, ending an unprecedented period of prolonged low rates. Though the suppression of interest rates has cushioned the effects of a severely damaged economy, it has also forced investors to search for higher yields. With bond yields so low, money has been flowing into different and sometimes new assets. While energy-efficiency improvements can generate a strong return on investment, the investment has generally only been made by building owners (or, in some markets, energy service companies). The unique investment environment created by monetary policy seems to be facilitating a broader financing of energy-efficiency improvements. However, it is unclear if a successful model can be established in time to survive a return to historically normal interest rates.

Financing Energy Efficiency

New models of financing energy-efficiency improvements demonstrate the flow of money into the space. The general model is for investors to finance equipment upgrades, commissioning, and the installation of advanced controls. Then, the savings in operating costs for the building owner are used to compensate the investors. Building owners reap the cost savings without capital investment, while investors get the returns. An interesting new twist on this model is Alodyne, which focuses exclusively on boilers. In the residential market, the expanding opportunity to lease solar panels represents investors trying to capitalize on renewable energy generation in much the same way.

Social Responsibility

Financially, energy-efficiency investments have demonstrated strong returns that, for the most part, are uncorrelated with overall market gyrations. Outside of money, energy-efficiency investment has many benefits. Lower electricity demand can strengthen the electrical grid and reduce carbon emissions. Unfortunately, doing well by doing good may leave investors doing not so well. The Credit Suisse Global Investment Returns Yearbook 2015 examined the performance of sin stocks, based on companies involved in tobacco, alcoholic beverages, gaming, and defense/aerospace industries, and found them to have outperformed socially responsible portfolios over the past 15 years. Indeed, investments in vice, namely alcohol and tobacco, have outperformed all other industries since 1900. If normalized monetary policy does create an environment less conducive for energy-efficiency investors, improving building performance may return to being an area only of interest to building owners.

 

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