Navigant Research Blog

In Colorado, a New Solar Model Takes Root

— September 26, 2014

A few years ago the Yampa Valley Electric Association, the rural cooperative that serves communities across northwest Colorado, including the Steamboat Springs ski resort, signed an agreement with a company called Clean Energy Collective to build a community solar garden in the valley.

Headquartered in Carbondale, Colorado, Clean Energy Collective (CEC) has helped pioneer the community solar model, in which individuals and businesses can buy shares in solar power generation facilities rather than owning or leasing the solar panels themselves.  Paul Spencer, the founder and CEO of the company, calls it “solar for the masses.”

CEC signs a power purchase agreement (PPA) with the incumbent utility then pre-sells solar generation capacity in the form of subscriptions and finances construction using the PPA and the subscriptions, essentially, as collateral.  Subscribers don’t necessarily get the actual power flowing from the solar array; those electrons go onto the local power grid and appear as renewable energy credits on the customers’ bills. CEC makes money by charging subscribers a slight mark-up over the cost of producing the power.

Under the Smokestacks

As a way of shifting away from the antiquated, centralized, and coal-dependent power grid, community is a powerful model.  Founded in 2010, CEC now has 45 facilities spread across 19 utilities in 9 states. Spencer expects the number of facilities to double by the end of 2015.

In the Yampa Valley, though, CEC had a problem.

Craig, about 40 miles west of Steamboat in the mesa country of far west Colorado, has always been a coal town.  Most of the solar customers would certainly be in Steamboat, at the eastern end of the valley. But land in Steamboat is not cheap, and CECs business model is based, in part, on building solar arrays without paying too much for the land. Proximity to customers was a lesser concern.

As it turned out, there was an ideal site in Craig – literally in the shadows of the Craig power station’s smokestacks. CEC quickly signed up enough people to take 30% of the solar power the garden would produce. That’s when the problem arose.

The land the solar garden was on was owned by the city of Craig, but the mineral rights were held by Tri-State Generation & Transmission, the operator of the Trapper Mine outside town.  Tri-State officials said the rights were unlikely to be exercised — but they declined to formally cede them.  What’s more, some city council members were against the idea in principle, believing that it was harmful to the interests of the coal industry.  Spooked by the mineral rights issue, the title company on the land deal washed its hands of the deal. For a time, it appeared that the solar garden was dead.

Bridging the Divide

Paul Spencer and Terry Carwile, the mayor of Craig, weren’t ready to give up. “We begged, borrowed, and stole,” Spencer told me, chuckling. “We had to find a way to work around the mineral rights issue, and the town helped us do that.”

By the fall of 2014, a new, more amenable title company had been found, the deal was back in place, and CEC had resumed signing up customers.  In coal country, a truce had set in.

“Solar is not the replacement for coal,” said Spencer. “It’s another power solution that helps build a low-carbon future. In some small way, this project is an initial way to bridge the divide between Craig and Steamboat – between the coal-producing world and the renewable energies of the future.”

 

In Slowing Market, Echelon Exits Smart Grids

— September 16, 2014

The market for smart grid technology is still growing — in fact, Navigant Research expects it to grow from $44 billion this year to more than $70 billion in 2023 — but that doesn’t mean it offers easy money for vendors.  In fact, among smart meter vendors in particular, the recent slowdown in demand following the boom years under American Recovery and Reinvestment Act (ARRA) stimulus funding in the United States and several large European deployments is prompting consolidation along with speculation that there is more to come.

San Jose, California-based Echelon announced on August 21 that it is exiting the smart grid market to focus on its Industrial Internet of Things (IIoT) division.  Linz, Austria-based S&T AG will acquire Echelon’s smart grid division for modest consideration — according to SEC filings from Echelon, it will receive in the neighborhood of $5 million before expenses related to the deal; debts associated with the division will also be assumed by S&T.

From S&T’s point of view, the deal is attractive in both financial and strategic terms.  S&T will form a new company, along with unnamed financial investors, and spend approximately $3.3 million (€2.5 million) for 40% of the company, implying an enterprise value of just more than $8 million, or about 0.3 times run-rate revenue for the division.  That low multiple reflects the 52.7% decline in smart grid revenue that Echelon suffered in 2013 versus 2012 and its reliance upon a small number of customers.

In contrast, publicly traded Itron, which has also been the subject of recent deal speculation, is valued by the market at 1 times run-rate revenue.  Considering typical acquisition premiums for technology businesses (typically 25%-50%), one could argue that Itron’s value in a sale would be north of $2.5 billion, or between 1.3 and 1.5 times run-rate revenue.

Head East  

A large IT solutions and services company, S&T has recently expanded its offerings in the smart grid space.  It has a solid presence in Central and Eastern European markets where Echelon’s power line carrier technology is likely to be dominant for smart meter deployments.  Whereas many Western European meter projects are well into the deployment process (or at least in the request for proposal stage), several Central and Eastern European governments have committed to Europe’s 20-20-20 initiative and smart meter deployments, but major utilities have not yet made significant commitments to vendors.

At least one Wall Street analyst expects additional consolidation among smart grid technology vendors.  Louis Basenese of Wall Street Daily reported on August 18 that more than $30 billion in smart grid deals have occurred over the past 2 years.  Of course, GE’s $17 billion buy of Alstom Grid will add substantially to that sum, but Basenese believes both Itron and Silver Spring Networks are presently attractive, largely because of their patent portfolios.

Unfortunately, Echelon appears to have been forced to sell at what may be a nadir in the market for smart meter business — but considering the growth ahead for smart grid technology deployments, I would agree with Basenese that more deals are likely to emerge.

 

Distributed Biogas Gains Footing in Revised Standard

— September 8, 2014

In July, the U.S. Environmental Protection Agency (EPA) finalized an extension of the beleaguered Renewable Fuel Standard (RFS2) to carve out a pathway for renewable biogas to qualify as a cellulosic fuel.  Expanding the scope of the RFS2 beyond liquid transportation markets could have promising implications for the slow-to-emerge cellulosic biofuels market.

Under the RFS2, the EPA requires domestic refiners and importers of transportation fuel to blend increasing volumes of renewable fuels into conventional gasoline and diesel.  The EPA sets the renewable volume obligations for various renewable fuels every year, and regulated entities must demonstrate their compliance by acquiring and retiring renewable identification numbers (RINs), which are publicly traded credits that fluctuate in value.

RINs provide an important financial incentive for the nascent advanced biofuels industry, helping these fuels compete with conventional fuels in the marketplace.  Cellulosic biofuels, a fuel pathway slated to deliver the greatest volume under the rule, have fallen short of expectations every year due to less capacity being built than otherwise predicted.

Expanding Universe

Under the expanded rules, biogas-derived compressed natural gas (CNG), liquefied natural gas (LNG), and electricity used to power electric vehicles would qualify for cellulosic RINs.  The final rule is likely to lead to a substantial increase in the production of cellulosic biofuels and create new markets for materials previously regarded as waste.  Opportunities for upgrading biogas to so-called bioCNG or bioLNG – also referred to as biomethane or renewable biogas and already used in fleet applications like garbage trucks and municipal buses – currently show high promise for biogas-to-transportation fuel.

As outlined in the U.S. government’s Biogas Opportunities Roadmap report released last month, biogas has broad applications across a range of diverse industries.  Livestock farms, industrial wastewater treatment facilities, industrial food processing facilities, commercial buildings and institutions, and landfills all produce biogas – either directly or in the form of waste feedstocks that can be converted into biogas.  According to Navigant Research’s Renewable Biogas report, the biogas capture market across the United States is expected to reach more than $4 billion in annual revenue by 2020.

All in all, biogas remains a vastly underutilized resource across the United States when compared to countries like Germany that have used a range of incentives to drive investment, particularly in agricultural applications.

The Curse of Versatility

The challenge for biogas in the United States is that to some it’s a fuel source, to others a waste mitigation strategy, and to others a distributed generation resource.  That makes it difficult to tailor policies that address all potential opportunities.  Adding to the confusion, distributed biogas is often treated by utilities as a strategic resource alongside solar PV and small wind, when in fact it can be utilized in the form of a traditional generator set, a fuel cell, or sometimes concurrently, in combined heat and power configurations.

With these issues in mind, the EPA’s final rule relating to biogas introduced a relatively novel and subtle feature for renewable energy markets: incentive flexibility.  Under the rule, the EPA not only expands the scope of RFS2, but allows the same amount of renewable electricity derived from biogas to give rise to RINs for transportation applications and renewable energy credits for electricity generation, while also qualifying for incentives under state renewable portfolio standards.

This potential for multiple revenue streams unlocks the versatility of biogas as a resource and is likely to attract new investment in the U.S. biogas market.

 

As Commodity Prices Slide, Big Miners Seek a Sustainable Strategy

— August 22, 2014

Navigant Research’s report, Renewable Energy in the Mining Industry, summed up the state of the global mining business: “In the last decade, increased demand from countries such as China and other emerging economies pushed the price of many metals and minerals upward, which stimulated investment in the mining industry. More recently, the global economic downturn and the collapse in a number of metal and mined commodity prices forced the mining industry to scale back investment into new mine sites, reduce operating mine lives, and scale back their investment into more capital expenditure-heavy renewable energy.”

Since that report was published in the fourth quarter of last year, commodity prices have stumbled further, and the pressures on mining giants like Rio Tinto, BHP Billiton, and Vale Brazil have intensified.

On the surface, so to speak, it’s a great time to be an extractive company with worldwide operations in iron, copper, coal, and other minerals that are essential to the functioning of the modern industrialized economy.  The rise of China and India has created a seemingly bottomless well of demand, particularly for iron ore for steelmaking; technological advancements have cut the costs of large-scale mining operations (while eliminating thousands of well-paying jobs); and governments in places desperate for economic growth, such as Mongolia and Sub-Saharan Africa, have proven pliant to the demands of multinational mining corporations.

The Bottom of the Well

Rio Tinto’s profits in the first half of 2014 doubled from the same period a year before.  BHP Billiton made $13.4 billion in profits in the 12 months leading up to June 2014.  Brazil’s Vale, the world’s largest producer of iron ore, reported second quarter profits of $1.43 billion – slightly below Wall Street estimates but still a healthy increase over the year before.

A closer look, though, shows that big miners are playing a risky and ultimately unsustainable game.  The term of fashion in the mining industry today is “de-diversification” as mining companies sell off low-margin mines that they invested in during the commodities boom of 2002-2008, before the global financial systems crashed and growth in China ground almost to a halt.  To keep profits up, the companies are slashing costs and adding new production – a short-term strategy that could spell long-term disaster.

Rio Tinto’s results “showed that the strategy of carving into costs while ramping up volumes that are being pursued by the major miners has worked to offset commodity price declines,” wrote Stephen Bartholomeusz in the Australian business publication, Business Spectator.  “The key question – worth billions of dollars – is whether it will continue to work.”

Twilight in the Mines

Ultimately, the dilemma facing miners of low-margin commodities like iron and coal is that as economies like China’s and India’s develop, they need less basic stuff.  It takes less iron to make an iPhone than it does to assemble an airliner.  Despite slowing demand, Vale plans to double its exports of iron ore to China over the next 5 years.  Pumping more iron and coal into markets that need less of them is not a winning strategy over the long run.  Goldman Sachs analysts have estimated that the rate of growth in the supply of iron ore is 3 times the rate of growth in demand.  That’s a recipe for a glut and a price crash.  Already, iron prices are on a downward slide.

Asian iron ore spot prices have fallen 31% this year, according to Reuters, and “the consensus is that they will remain below $100 for the foreseeable future as big miners such as BHP, Anglo-Australian rival Rio Tinto and Brazil’s Vale ramp up output even as Chinese demand growth weakens.”

As with coal, iron ore could be entering a downward spiral that could overwhelm the major miners as they narrow their focuses:  “Iron ore risks becoming another coal,” remarked Reuters’ commodities columnist Clyde Russell, “where miners pursue output gains in order to lower costs, but in the end the resulting supply surplus just depresses prices even more, resulting in a no-win situation for producers.”

Like the coal era, the age of iron and steel is nearing its twilight.  That’s not good if you’re a multinational mining outfit.

 

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