Navigant Research Blog

Vestas, Mitsubishi Settle on Offshore Turbine Design

— February 24, 2015

In 2014, Mitsubishi Heavy Industries (MHI) formed a joint venture with Vestas called MHI Vestas Offshore Wind. The strategy behind that joint venture is now substantially clearer. MHI’s decision to stop the commercialization of its 7 MW SeaAngel offshore wind turbine, to focus instead on the Vestas V164-8.0 MW turbine under MHI Vestas Offshore Wind, makes sense given Vestas’ expertise in the offshore market and the need to move forward without confusion or conflict between the two turbine platforms.

Technology-wise, the SeaAngel’s novel Digital Displacement Transmission Technology (DDT) looked like the more advanced drivetrain system. It employs a sophisticated series of hydraulic pumps, values, and motors to transfer the energy from the constantly varying rotor speed to a fixed speed generator, without the use of a gearbox. No other wind turbine employs a hydraulic drivetrain like this.

That novel technology, however, adds uncertainty to the construction and operation of offshore wind farms.

Risk Avoidance

The increased construction and turbine servicing costs and associated risks for offshore wind increase the rate of return that investors expect to up to 12% compared to an onshore wind farm’s 7% to 9% in developed markets. Once you add the risk of employing a completely new transmission technology system, you likely outweigh the benefits offered by the new drivetrain design. The joint venture with Vestas provides access to a similarly sized turbine based on a proven and more conventional, medium speed geared technology, eliminating the added risk.

Although Vestas’ turbine is also new in the market, the company’s offshore turbine reliability has dramatically improved since 2004, when it had to replace the transformers and generators in all 81 of its then new V80 machines at Horns Rev offshore wind farm. Much refinement and advancement specific to offshore has been achieved by Vestas and its peers.

No Confusion

It’s also important to send a clear signal to the market that the Vestas V164-8.0 turbine is the primary turbine offering of the joint venture, without a separate Mitsubishi-branded product offered outside or within the joint venture. Although the SeaAngel turbine will disappear as a stand-alone brand, testing of the hydraulic technology will continue.

Onshore testing of the full-size 7 MW turbine officially began on February at a test center in the United Kingdom for validation of the drivetrain design. A similar hydraulic-powered turbine may be installed later in 2015 in Japan on a floating platform,  depending on the results from the U.K. tests.

Ultimately, the aim of the effort is to focus on refinement and validation of the hydraulic drivetrain for possible future use under the MHI Vestas joint venture. The floating platform may, in coming years, become part of the joint venture’s offerings as well. For now, though, the V164-8.0 turbine using proven Vestas technology is marching out to sea, having recently landed its first order of 32 units for the 258 MW Burbo Bank Extension project on the west coast of the United Kingdom in the Irish Sea. Hiring has just begun to build the 80 meter turbine blades.

Roberto Labastida contributed to this post.


Oil-Gas Price Swings Slow New Energy Investment

— February 18, 2015

As I wrote in this blog in 2012 and in 2013, rising volatility in the oil-to-gas ratio points to a substantial shift in market dynamics for clean energy. Even if short-lived, this shift will have substantial implications for investment in new energy technologies.

In recent years, as the price of oil climbed to over $100 a barrel, the oil-to-gas ratio—which compares the price of a barrel of crude oil to that of a million Btu (mmBtu) of natural gas—spiked to as high as 52:1 in a single month from a relative constant of around 10:1. While this apparent equilibrium had held steady since the mid-1980s, the widening gap between the price of oil and that of gas seemed to represent a new reality, with natural gas prices holding below $3 per mmBtu (Henry Hub).

In the last several months, as oil prices have slid to less than $50 per barrel, that ratio has come crashing back down to Earth. At a current 13:1, the oil-to-gas ratio is once again nearing historic levels—and again reshuffling the deck for a cleantech industry yearning for macroeconomic certainty.

Ratio of Crude Oil to Natural Gas: 1990-2015


(Source: Navigant Research)

While the boom in shale oil and gas recovery (among other factors) has ushered in an apparent return to historical equilibrium, experts are divided on what the future holds. Some argue that the recent spike in the oil-to-gas ratio was a short-term anomaly and that forces will continue to act to bring prices back into their long run equilibrium. Others question whether a stable long-term relationship between crude oil prices and natural gas prices even existed in the first place.

While the jury is still out on the putative correlation between oil and gas prices, we can expect continued volatility in the oil-to-gas ratio. This creates a challenging environment for new energy technologies going head-to-head with existing infrastructure.

The Incumbent Edge

Volatility dampens growth in new energy technologies in several ways. First, it cools investors’ appetite for clean energy ventures, due to the potential risk that seemingly profitable investments one day may turn out to be unprofitable due to changing fuel costs. Building natural gas infrastructure may look attractive in 2012 if you’re in the United States, for example, but not so wise when the price of a barrel of crude oil drops by more than 50% in 2014. This is an issue of asset stranding.

Second, it lowers customers’ tolerance for risk. As noted in our recently published report, Combined Heat and Power for Commercial Buildings, the impact of price swings are most acutely felt by consumers looking to hedge with one fuel against the other. When oil prices accelerated past $100, consumers of heating oil and gasoline, for example, began looking to natural gas alternatives. These decisions can be straightforward when price signals are stable, but actual (or even perceived) volatility favors a wait-and-see approach.

The Underminer

Third, it undermines the role of incentives and other mechanisms for stimulating the deployment of new energy technologies. Still more expensive than incumbent technology in most cases, clean energy has enjoyed incentives that put emerging energy technologies on an even playing field with fossil fuels. Fuel price volatility can make it especially challenging to establish reasonable incentive levels for the long term.

While Navigant Research’s forecasts for distributed generation technologies like solar PV (see our Global Distributed Generation Deployment Forecast report) and energy storage (see our Community, Residential, and Commercial Energy Storage report) in the United States remain strong despite lower energy prices, volatility is likely to mostly benefit the status quo.


Despite Rival Efforts, China’s Rare Earths Monopoly Persists

— February 11, 2015

Last month, the Chinese Ministry of Commerce announced that it would remove export quotas and other restrictions on rare earth minerals as a result of a 2013 World Trade Organization (WTO) ruling. The case, brought by the United States and other trade partners, asserted that China’s export quotas violated trade rules. China has limited rare earths exports since 2010, when the Chinese government imposed a strict export quota on rare earth elements. At that time, China held approximately 95% of the world’s supply of rare earth elements. The predicted shortage caused prices to skyrocket, and in just 12 months, the cost of some materials used in lighting saw increases of 500% up to more than 2,000%.

Rare earths are a group of 17 metallic elements that are used in a variety of energy technologies, including electric vehicles and lighting. Although they are found in many countries, mining is not economically viable except in concentrated deposits. As a result, industry entrants such as U.S.-based Molycorp, Inc. have been largely unsuccessful at gaining a significant market share. Some experts claim that there is actually a worldwide surplus in rare earths—but that China’s control over market prices and supply is where the real threat lies.

Role in Lighting

In 2013, my colleague Richard Martin blogged about a new research lab called the Critical Materials Institute (CMI). This lab, created by the U.S. Department of Energy, is dedicated to averting supply crunches of rare earth elements. In its first year, CMI produced 11 inventions, all of which aim to improve extraction processes and recycling techniques to assure the availability of rare earths and other energy technology materials.

Phosphors are used in LEDs to convert the blue light produced by high-intensity LED chips into the white light demanded by lighting applications. To accomplish this conversion, the phosphors are mixed with various rare earth elements.

Another effort to ease the supply crunch is the European Union (EU)-funded NEWLED project, launched in early 2013, that seeks to develop LEDs with reduced or eliminated amounts of phosphor.  A number of techniques exist to create white LEDs without phosphors, though none have yet matched phosphor-based LEDs in cost. The use of rare earths in lighting applications has actually declined as part of the shift to LEDs, which use less rare earth materials than fluorescent lamps.

Easing Restrictions

In an attempt to counteract China’s market position, rare earth startups have been popping up across the United States, as well as in Australia, Sweden, and Brazil. These startups hope to break China’s monopoly rare earth materials, but this effort will likely take several decades, at least, due to the economic viability and technological challenges of extraction. Additionally, in both 2011 and 2013, Japan announced the discovery of massive deposits of rare earths on the ocean floor, but has indicated no movement to develop or extract these resources.

Another option that is gaining traction is recycling rare earth materials from used products. At this time, recycling materials is just as expensive as mining the elements, but researchers across the globe are working to improve the recycling process. In particular, fluorescent bulbs are a promising candidate for recycling, and some companies have begun to recover the rare earth materials from these bulbs.

Unfortunately, some experts believe the end of China’s quota will have little practical effect on the market and that Chinese suppliers will retain control over the supply chain of rare earth materials. This concern is compounded by the fact that no other countries currently have well-established rare earths mining operations.


Sunny Outlook for Multifamily Housing Energy Advances

— February 10, 2015

In January, the Obama administration announced a new partnership with the state of California to promote energy efficiency and renewable energy in the multifamily housing market. As part of this new agenda, President Obama established a target of 100 MW of renewable energy across federally subsidized housing by 2020. The program aims to deliver both climate change and economic benefits, estimating that improving energy efficiency in the country’s subsidized multifamily homes by 20% would deliver a $7 billion annual savings and a reduction of 350 million tons of carbon in 10 years.

Accelerating PACE

Property Assessed Clean Energy (PACE) financing will have a big role to play in achieving the goals of the White House and the state of California. PACE programs enable customers to finance up to 100% of an energy efficiency or renewable project and repay the debt as a property tax assessment over a period of up to 20 years. These programs are locally defined by city or state legislation.

The off-balance sheet financing model hit a major roadblock in 2010 when the Federal Housing Finance Agency (FHFA) put residential PACE programs on hold over a battle initiated by Freddie Mac and Fannie Mae over the first lien status of the energy efficiency debts of a PACE-funded project. The FHFA argued the PACE debts put a heightened risk of default on home mortgages and that Freddie Mac and Fannie Mae should not back mortgages on properties with PACE debt.

Four years later, FHFA has not formally changed its stance, but PACE programs are once again funding residential projects. The government of California was so certain the program did not add default risk that the state legislature passed SB 96 in 2013. SB 96 established the PACE Loss Reserve Program and ultimately rejuvenated programs throughout the state. California is not alone in the local drive for PACE financing. In fact, according to PACENow, the non-profit advocate for PACE financing, there are over 25,000 PACE projects underway across the United States, and 18% are supporting improvements in the multifamily housing segment.


(Source: PACENow)

Going West

The opportunity for energy management in the multifamily market is opening the door to growing business in the private sector, as well. For example, Bright Power, a company specializing in comprehensive energy management solutions for multifamily housing, including energy audits and benchmarking, energy efficiency upgrades, and solar, announced a $5 million round of financing that will help support the company’s entry into the California market. The overall buildings market is ripe for the adoption of renewable energy and investment in energy efficiency, and innovative financing models are helping customers overcome the upfront capital challenge. An upcoming Navigant Research report will examine the evolving market for energy efficiency financing as a part of Navigant Research’s Building Innovations syndicated research service.


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