Navigant Research Blog

Smart Building Startups Continue to Flourish

— November 17, 2014

Like the “Harvard of the [insert region here],” “the Next Silicon Valley” is a term so trite that it has become meaningless.  You may have heard of the Silicon Hills, the Silicon Strip, Silicon Wadi, or even the Silicon Valley of the East.  It seems that anyone with a pulse is trying to woo tech entrepreneurs into the next Silicon cluster.  Nevertheless, tech activity is not limited to Northern California.  A recent analysis by the Financial Times found that 60% of “unicorns” (tech startups that reach a $1 billion valuation) were created outside of California’s Bay Area.

Indeed, many local governments are trying to establish startup ecosystems to rival Silicon Valley, including the government of Washington, D.C.  Recently, Mayor Vince Gray announced the awarding of grants to tech startups totaling over $800,000.  Several of these companies represent the wave of innovation occurring in smart buildings.  Aquicore, a real-time energy management software for commercial real estate and industrial facilities, received $122,500.  And Azert, the developer of Smart(er) Socket, wall sockets integrated with Apple’s iBeacon technology and Wi-Fi, also received $122,500.

Other People’s Stuff

It might seem strange to think of wall sockets communicating, and even stranger to think of any building infrastructure using an Apple technology.  What’s more, the idea of a software startup that relies entirely on building controls hardware made and installed by other vendors was until recently unthinkable.  In the past, building systems were specifically designed not to work with other vendors’ products in order to ensure a long-term market for replacements and upgrades.  But the convergence of building technology and information technology, the adoption of open protocols, and greater integration between building automation systems have lowered the barriers to entry in the smart building market.

These startups demonstrate that the competitive landscape of smart buildings is changing.  It’s easier than ever to get building data, meaning that a wider pool of competitors are emerging.  What’s striking, and hopefully indicative of future trends, is that these companies are springing up in Washington, D.C., away from the established tech hub of Silicon Valley and away from established global building controls manufacturers.  Future innovation in smart buildings can be driven by anyone, anywhere.

 

With New Plant, Alevo Claims Major Battery Advances

— November 10, 2014

Swiss manufacturer Alevo has launched a new battery and grid storage division in North Carolina that it promises will lead to hundreds of megawatts worth of battery-based grid storage projects.  The U.S. subsidiary hopes to manufacture its formulation of lithium iron phosphate (known in the industry as LFP) batteries in the 3.5-million-square-foot Concord, North Carolina factory.

Alevo’s battery chemistry is not new – there are dozens of LFP manufacturers (most based in China) cranking out hundreds of megawatts of batteries for portable power and grid storage applications.  However, Alevo claims that its formulation of the chemistry (primarily its secret electrolyte additives) will enable its LFP batteries to last as long as 43,000 cycles of full discharge.  If such a cycle life is proven in the field, this chemistry will represent the most durable lithium ion (Li-ion) battery available today.

An Impressive Debut

Alevo also claims that it uses a non-flammable electrolyte, which makes its battery less prone to catching fire than most grid storage batteries.  Although the company won’t discuss manufacturing costs, LFP batteries have relatively cheap material inputs, opening up a potential path toward low-cost cells.

During the unveiling ceremony at the Concord plant (complete with a drawing back of the curtains on stage, swirling searchlights, and wolf whistles from the employees that packed the audience – all for a 20-foot shipping container), the air-cooled battery bank was displayed, along with its Parker Hannifin inverter and fire detection and suppression equipment.  Alevo also highlighted its big data and analytics capabilities, which it says are needed to help deploy and optimize the energy storage system.

While Alevo seems to have plenty of capital behind it (Reuters reported that Swiss investors have put up more than $1 billion), as well as several global partnerships, it has significant challenges ahead.  The most important of these focus on the battery cells themselves: real-life durability and manufacturing cost.

Two Challenges

On the durability front, Alevo’s internal accelerated testing of 43,000 deep discharge cycles is indeed impressive.  But accelerated testing is an imperfect science.  Batteries tend to perform very differently in the real world over the course of decades, as opposed to laboratory benchmark tests that model expected long-term battery durability.

As for manufacturing costs, Alevo has a hard mountain to climb to learn how to become a battery manufacturer, especially with the challenges that LFP technology brings to the factory.  Unlike other Li-ion chemistries, LFP requires very finicky vacuum technologies that make large-scale manufacturing hard to do efficiently.  Many other LFP manufacturers have assumed cheap manufacturing costs only to find that the chemistry left them with much higher costs, lower yields, and more failures than expected.  While other cobalt-based Li-ion chemistries have higher costs for material inputs, the manufacturing processes are much simpler and easier to scale.  Alevo’s claims are impressive; proving them will be another matter.

 

Tailwinds Pick Up for U.S. Wind Market

— November 2, 2014

The U.S. wind market, in the third quarter of 2014, showed clear signs of recovery, with 1,254 MW installed, eclipsing the total of 1,084 MW installed all of last year.  The American Wind Energy Association (AWEA) reports an additional 13,600 MW under construction across 105 projects.  In our March 2014 World Market Update, Navigant Research forecast that by year’s end the 2014 total could reach 6,300 MW.  The last 3 months of the year typically see more capacity installed than in the previous 9 months combined because of the construction cycle peaking at the end of the year.

Some wind projects may to slide into 2015, though, given that there’s not a policy-driven deadline to commission projects by year’s end.  A number of factors have contributed to a slower construction cycle, despite over 12 GW of wind projects with announced construction for next March.  The supply chain in the U.S. wind market exhibits some unavoidable inefficiencies due to the stop-start nature of U.S. wind power policy.  Wind turbine manufacturers, along with their component suppliers for blades, towers, drivetrains, and other equipment, were forced to throttle back manufacturing capacity in 2013 due to the down market.  Re-hiring and training workers and ramping up capacity is not an overnight process in an industry that produces aerospace-grade products at industrial levels.

Delivery Delays

There are also signs of transportation bottlenecks for some of the largest components.  The majority of wind projects under construction use rotors around 100 meters in diameter and towers that are 90 meters or higher.  Transport companies that move this equipment have been reluctant to invest in new trailers designed for larger wind turbines, given that the equipment could sit idle if the U.S. market falls into another slump.  Railways have also been bottlenecked, partly due to the huge volume of crude oil being shipped around North America.

The turbines installed in 2014 so far have come largely from the Big Three vendors: GE, Vestas, and Siemens.  Most of these installations use GE’s 1.6/1.7 MW turbine.  More than 4,500 MW of the capacity under construction uses GE turbines, followed by 2,775 MW for Vestas, 1,792 for Siemens, and around 3,500 MW not yet reporting a turbine.  Notably, however, turbine vendors that have limited manufacturing presence in the United States continue to secure business, with over 800 MW under construction using turbines from Acciona, Gamesa, and Nordex combined.

Flexible Finance

Also notable is the return of the merchant, or hedged, wind plant.  Most wind projects under construction either have signed a long-term power purchase agreement (PPA) or are utility owned.  But a substantial amount of wind capacity is proceeding on a merchant basis, which is operating without a contract. Most of this is occurring in Texas.

A few years ago, following the financial crisis, it was nearly impossible to secure outside project financing for a wind plant that did not have a PPA.  That rigidity has softened as wind developers seeking higher potential returns are finding ways to move forward and secure project financing without a fixed PPA contract.  In many cases, hedge agreements that went out of style during the recession of 2008-2009 are back in use.  These financial tools allow a wind plant to take advantage of fluctuating electricity spot market prices.  Spot prices in Texas generally range from $45 per MWh to just over $60 per MWh.  Special merchant contracts provide a type of insurance that enables wind plants to be paid the fluctuating spot price while also being protected by a price floor and ceiling – thus reducing risk while not limiting wind power providers to a low fixed price, as is typically the case with a PPA.

Moving forward, all eyes will be looking to the end-of-year project commissioning to see how much the U.S. wind market has recovered from its 2013 doldrums.

 

Solar Subsidies Attract Financial Schemes

— October 20, 2014

Arizona Public Service (APS) and Tucson Power have recently come under a lot of scrutiny for their proposed rate-based solar programs.   The complaint from private sector companies is that rate-basing (i.e., the utility practice of raising funds for capital investments by increasing electricity rates) would create an uneven playing field in the solar industry, because rate-basing a capital expenditure gives utilities a guaranteed rate of return.  As SolarCity’s VP Jonathan Bass put it, “If there were ever a reason for a regulatory body to exist, it would be to stop a state-sponsored monopoly from unfairly competing against the free market in an entirely new industry.”

That’s hard to argue with.  However, I would add that another reason for a regulatory body to exist is to stop the free market from abusing the subsidies that are so crucial to an entirely new industry.  In the spirit of fair-minded analysis, let’s take a closer look at the solar industry and at how level the playing field actually is.

Pump and Dump

First, let’s examine the solar developers (SolarCity, Vivint, SunRun, Clean Power Finance, etc.) whose solar lease and solar loan programs are responsible for catapulting the industry into the period of rapid growth we’re seeing today.  Critics argue that solar developers base their business models around building solar arrays on the cheap and claiming an inflated fair market value (FMV) of the systems.  The FMV is supposed to reflect the fair price of a system, and it’s ultimately used by the government to determine the monetary value of the 30% income tax credit (ITC) that goes back to the owner of the system.  Ironically, the FMV is becoming increasingly difficult to determine as more solar companies are vertically integrating, which has made the true system costs less transparent.

For systems that are being leased (which are most systems), the owners and thus recipients of the ITC are actually third parties.  These third-party owners tend to be financial institutions, such as Morgan Stanley, Goldman Sachs, Credit Suisse, Google, and Blackstone, that are constantly looking for tax credits, and they have found a slam dunk as financiers of residential and commercial solar arrays.  Typically, the developers bundle a group of solar customers together into a tranche (essentially a bucket of leases), which is then backed by the third-party ownership groups.  The financial firms own the leased systems for 5 years and then dump them, but not before taking advantage of the Modified Accelerated Cost Recovery System (MACRS), which is a method of depreciation that allows third-party owners to recoup part of their investment in the solar equipment over a specified time period (5 years) through annual deductions.  Basically, MACRS represents an additional subsidy, with a net present value of 25% of the initial investment.

The Treasury Steps In

So between the 30% ITC and the 25% MACRS, the owners should be getting a 55% subsidized investment; but with the inflation of the FMV, it turns into a much larger subsidy, on the order of 80%.  Then consider the high rate of return (up to 15%) that investing in solar offers on top of all these subsidies, and it starts to sound pretty good to be a solar financier.  Solar developers readily admit that their business models are dependent on government subsidies, but this sounds like manipulation of those subsidies.  Indeed, this practice is currently under investigation by the Department of the Treasury.  While the developers claim they haven’t done anything wrong, if the government tightens the rules around the ITC or tries to recoup the inflated subsidies, it could be a major blow to the solar industry.

What’s more, the developers themselves don’t seem to be reaping the rewards of their innovative business models that have brought solar to the masses.  If anything, they seem to be bearing all the risk while the third-party owners reap most of the profits.  Is there some merit to rate basing solar?  In my next blog, I’ll examine this question.

 

Blog Articles

Most Recent

By Date

Tags

Clean Transportation, Electric Vehicles, Policy & Regulation, Renewable Energy, Smart Energy Practice, Smart Energy Program, Smart Grid Practice, Smart Transportation Practice, Smart Transportation Program, Utility Innovations

By Author


{"userID":"","pageName":"Finance & Investing","path":"\/tag\/finance-investing","date":"11\/22\/2014"}