Navigant Research Blog

No Clear Path to Highway Funding Solution

— May 4, 2015

The gap between the investment needed for U.S. transportation infrastructure and the available taxpayer funding continues to grow. And neither Congress nor the White House has not gotten significantly closer to solving this problem.  A new report from the University of Michigan’s Transportation Research Institute (UMTRI), released just 2 months before the latest temporary Congressional funding patch for transportation is set to expire, provides further evidence that the federal funding transportation pool will continue to shrink unless Congress takes action.

Navigant Research has been writing about the problem of the Shrinking Gas Tax Fund for many years. Created by Congress in the 1950s, the fund was set up to pay for transportation from direct taxes, rather than from the general Treasury. The current tax rate of 18.4 cents per gallon was set in 1993, 22 years ago. Congress and the White House are loath to propose raising the gas tax, which has long been the third rail in American politics. Today, unfortunately, the drop in gasoline consumption combined with the shrinking purchasing power of 18.4 cents per gallon has made the unthinkable closer to becoming reality.

Tabled

Mainstream business groups have proposed raising the gas tax, and the Republican leader of the Senate Transportation Committee, John Thune, said that raising the gas tax would be on the table for the current Congress. The head of the Senate Environment and Public Works Committee, climate change denier James Inhofe, agreed with that statement.

As of the end of March, though, there was still no clear legislative pathway to raising the gas tax.  The UMTRI report should set off alarm bells in Washington about the future of the Highway Trust Fund. The report points out that U.S. gasoline consumption has been dropping steadily since well before the 2008 recession. From 2004 to 2013, fuel consumption by light duty vehicles in the United States dropped by 11%. The report’s author, Michael Sivak, also noted that the U.S. passenger car population has decreased since 2008, which could be considered an artifact of the economic downturn, or a foretaste of millennials’ mobility habits.

Millennium Shift

This data confirms reports about the shift in attitudes about car ownership among millennials that have been widely reported, albeit mostly anecdotally. A 2013 U.S. PIRG report found that there is a permanent change in expectations about how to get around–with driving seen as just one of many options that millennials regularly use.  And increasingly stringent fuel economy standards are likely to further reduce total gasoline consumption.

Unfortunately, the White House’s proposal for the new transportation bill does not include a gas tax increase, so it will be left to Congress to determine whether the time is finally right to increase the rate–or find a new mechanism to pay for the maintenance and improvement of U.S. transportation infrastructure.

 

China Spurs EV Development

— April 28, 2015

China has aggressively supported the production and purchase of electric vehicles (EVs) since 2010. The government’s goal to deploy 500,000 EVs by 2015 may seem unrealistic. Nonetheless, this target serves as a reflection of the government’s intention to combat pollution and save energy by means of EV deployment. Chinese automakers have struggled to improve the fuel efficiency of conventional vehicles. Between 2010 and 2014, fuel efficiency improved by 5.8% annually in Japan, 3.3% in Europe, and 1.8% in the United States—but only 1.1% in China. As such, the government’s support for EV deployment seems to be the preferred solution for China’s situation.

Incentives Spur the Market

Only around 70,000 EVs were on the road in China during 2014. This is still an almost 250% increase from the 2013 figure, and many experts forecast strong growth in the coming years. To further spur demand for EVs, the government has implemented various incentive programs applicable to approved EV models, which are locally produced. As of 2014, there was a ¥35,000 ($5,600) purchase subsidy for plug-in hybrid electric vehicles (PHEVs) and a ¥60,000 ($9,700) purchase subsidy for battery electric vehicles (BEVs). BYD’s Qin, one of the most popular EVs in China, retails from around ¥210,000, but with government subsidies, customers usually pay between ¥120,000 and ¥160,000 for the PHEV. Qin sold 11,200 units in the first 10 months of 2014.

In addition, the 10% purchase tax is waived for new energy autos, which include EVs, PHEVs, and fuel cell vehicles (FCVs). The government plans to allocate around ¥4 billion for this tax initiative, which is in effect between September 1, 2014 and December 31, 2017. Because the tax break applies to imported EVs as well, foreign car makers have been eager to enter the Chinese market. In 2014, BMW’s i3 and i8 EVs, as well as the Daimler and BYD joint venture EV model Denza, were launched in China. On top of the central government’s efforts, incentive programs and EV targets exist in mega-cities, such as Beijing, Shanghai, and Shenzhen. Beijing plans to deploy 170,000 electric taxis and at least 4,500 electric buses by 2017.

Due to the strong government support, many Chinese automakers, such as SAIC Motor, Dongfeng Motor, FAW, and Changan, as well as automobile components companies, are nowadays interested in manufacturing EVs. In March 2014, Wanxiang, an auto parts manufacturer, acquired American EV maker Fisker. Also, Foxconn, an IT manufacturer, has partnered with Tesla to enter the EV market.

Opportunities and Challenges  

Even though it’s difficult for foreign companies to enter the Chinese EV market, some—including General Motors (GM), Nissan, Hyundai, and Daimler—have jumped on the bandwagon via joint ventures with Chinese companies. However, two major variables are critical to China’s future EV market growth—charging infrastructure and battery technology. While charging equipment and infrastructure investment became open to the private sector recently to speed up development and construction, China lacks a national infrastructure standard. This can lead to operability issues from one city to another.

In addition, Chinese EV battery technology is in a transition from lithium iron phosphate (LFP) batteries to manganese-series batteries. Most EV markets around the world use lithium manganese oxide (LMO) and lithium nickel manganese cobalt oxide (NCM) batteries, which have better performance than LFP batteries. However, Chinese battery manufacturers currently lag behind their competitors in Japan, South Korea, and the United States in this area. Therefore, battery technology, as well as charging infrastructure standards and governance, will significantly influence the future of China’s EV market along with the sustainability of the current incentive programs and subsidies.

 

Surprises in U.K. Renewables Bidding Round

— April 15, 2015

The U.K. Department of Energy & Climate Change (DECC) has announced the results of the first competitive Contracts for Difference (CfD) allocation round. CfDs are designed to give investors the confidence and certainty they need to invest in low-carbon electricity generation. The government does this by paying the generator the difference between the cost of investing in a particular low-carbon technology, known as the strike price, and the reference price, or the average market price for electricity. Generators participate in the electricity market, including selling their power, as usual. This means that if the reference price is higher than the strike price, generators must refund the difference.

The DECC assigned 27 contracts, totaling 2.1 GW of capacity, in round one; the government estimates its total spend will be £315 billion ($470 billion in 2012 prices). Wind projects will supply 1,910 MW of capacity, of which 750 MW will be onshore and 1,160 MW will be offshore. These projects, along with the five offshore projects (3,184 MW) that were allocated CfDs in the so-called round zero, underpin Navigant Research’s forecast in our World Wind Energy Market Update 2015 report that the United Kingdom will install 10.6 GW of wind capacity in the next 5 years.

Low-Balling

In addition to the wind capacity, round one winners include two energy-from-waste projects, with associated combined heat and power systems, that total almost 95 MW of capacity. Three additional projects that use biomass gasification technologies have a combined capacity of 62 MW. Finally—and perhaps surprisingly, given the well-known cloudy and windy British weather—five solar plants, with a total capacity of 71 MW, are also included.

The winning strike prices also brought some surprises. On the one hand, low-bidding solar projects outbid onshore wind projects—which are usually considered the cheapest source of renewable energy. The solar projects offered £50 per MWh, or roughly $0.075 per kWh—very close to the current U.K. wholesale electricity price.

On the other hand, the offshore wind winning bids offered £114.39 ($0.169/kWh) and £119.89 ($0.178/kWh). Interestingly, the Danish Energy Agency announced the winner of its 400 MW Horns Rev. 3 offshore wind farm on the same day. The winning bid was 52% lower than those in the United Kingdom were and will run for 3 fewer years.

Storm Clouds 

If these solar projects actually get built, they will put solar costs in the United Kingdom at a similar level to winning bids in regions with excellent solar resources, such as Dubai and Texas. But there are some clouds on the horizon. James Rowe, director with Hadstone Energy (the developer of one of the lowest bidding projects), put this construction in doubt in a pair of LinkedIn posts (“We Got Our CfD … Oh Dear” and “What Went Wrong with the CfD Auction for Solar?”) in which he explored the reasons why the players (including Hadstone) bid so low.

At this point, it’s difficult to measure the level of success or failure of this allocation round. The solar bids at £50 per MWh are unlikely to ever be built. If others, which bid £79.23/MWh, do come online before the end of 2017, it will be the first time that solar in a resource-poor country has outbid onshore wind in a country with good wind resources.

 

Distributed Energy Storage, Low-Cost Financing a Powerful Combo

— April 14, 2015

Leases and third-party ownership models have helped the global solar PV market grow dramatically in recent years, and now they’re spreading to the energy storage market. ViZn Energy Systems recently announced that it will offer a similar financing program from LFC Capital, Inc. for ViZn’s distributed energy storage systems. While several companies, including CODA Energy, Stem, and Green Charge Networks, offer leases that feature a shared savings model on energy storage systems for commercial and industrial (C&I) customers in the United States, ViZn’s offering will be the first to target larger facilities (system capacities of 80–500 kWh of storage) with a different leasing model that aims to be more beneficial to customers.

ViZn takes responsibility for the system performance and the risks associated with its relatively new zinc/iron flow battery technology. This move demonstrates full trust in the system’s ability to greatly reduce a customer’s energy bills. The leasing program, available for C&I projects combining ViZn’s energy storage with solar PV and/or cogeneration energy systems, is designed to eliminate construction-period financing costs and simplify the installation process. In contrast to complex and lengthy power purchase agreements (PPAs), LFC’s 3-page lease will be familiar to customers accustomed to leasing general business assets and provide them with a predictable low-cost of ownership in 6 or 7 years.

Fees and Incentives

The primary benefit from using ViZn’s system will be ongoing cost savings from reduced demand charges and energy management expenses. Pairing storage with onsite solar PV can improve the economics of both systems by minimizing the consumption of grid power during peak demand periods, as well as hedging against any future net metering restrictions or export limitations. ViZn has also designed its systems to participate in ancillary service markets by aggregating its fleet of distributed storage systems to act as a single, dispatchable resource.

While the leasing program is available nationwide, ViZn anticipates most of the uptake to come from states with high electric rates and strong local incentive programs, such as California, Texas, and several states in the Northeast. The leasing program is not available for use outside the United States at this time. However, with prototype systems already running in the United States and Europe, the company is well-positioned to move into new markets in the coming years.

Innovative financing solutions can be an important component driving an emerging market to further growth. It will be interesting to see if this business model is adopted by other players in the storage industry, and what impact it may have on the market.

 

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