Navigant Research Blog

Cautiously, Private Utilities Dip Toes into Microgrid Pool

— December 16, 2014

Lawrence Berkeley National Laboratory statistics show that 80% to 90% of all grid failures begin at the distribution level of electricity service.  While utilities can resolve these issues through a variety of technologies, their historic bias against the concept of intentional islanding – or cutting off certain systems from the wider grid – has precluded them from considering microgrids in the past.

That has changed over the last 3 years.  The extreme storms that pounded the East Coast beginning in 2011 have led the states of Connecticut, Maryland, Massachusetts, New York, and New Jersey to all initiate resiliency programs that promote microgrids as a key element of their strategy.

Unfortunately, the concept of community resiliency or public purpose microgrids often violates utility franchise rules, since power would have to be sent over public rights of ways.  Connecting, for example, a gas station to a high school serving as an emergency shelter and a hospital could get the operator of this impromptu microgrid in trouble.

So, by way of necessity, utilities clearly have to play a role in these kinds of microgrids.  Furthermore, the hype about the utility death spiral is prompting many utilities to examine new regulatory structures and business models to accommodate the growth in third-party distributed energy resources (DER).

The Revolution Will Be Distributed

As a result, Navigant Research has issued a new report, Utility Distribution Microgrids (or UDMs).  While public power UDMs – both grid-tied and remote – are a larger market today and are expected to be in the future than systems deployed by investor-owned utilities (IOUs), the most interesting segment are these latter private systems, due to the regulatory issues they raise and because these large companies tend to move markets.

In conversations with utilities, the messages I’ve heard have changed dramatically.  When I initially researched this topic more than 2 years ago, the biggest concern about microgrids revolved around technology and intentional islanding, a concept that was anathema to utilities whose grid codes were designed to prevent customers from sealing themselves off from the larger distribution grids.  Worker safety, loss of customer load, and stranded investments in centralized generation also came up.

Today, many utilities cite these same issues, but growing numbers realize the DER revolution is picking up momentum and that microgrids that are owned or controlled by utilities could help them fulfill their mission to provide low-cost, reliable power.

Convincing the Regulators

The IOUs exploring microgrids include Arizona Public Service, Consolidated Edison, Duke Energy, NRG Energy, and San Diego Gas & Electric.  The primary challenge for an IOU today in implementing a UDM is justifying a microgrid under traditional rate-based regulation.  How can the utility convince state regulators that investing ratepayer funds into a project that directly benefits a small subset of customers will also benefit the wider customer base?  Even if a valid business case can be made, the typical 3-year rate case state regulatory proceeding business model may retard near-term innovation.

This IOU UDM segment offers the largest potential growth of any UDM segment, since it helps address the need for new technology solutions to address explosive growth in DER.  But it also faces the largest regulatory question marks.

 

The Global Biofuels Industry: A Future in Doubt

— December 11, 2014

In its recent report, The State of the Biofuels Market: Regulatory, Trade, and Development Perspectives, the United Nations (UN) notes that although the emerging biofuels industry has made great strides in the past decade – with ethanol and biodiesel becoming established commodities traded on all continents – significant barriers to commercialization persist across the developing world.  Global biofuels forecasts published in Navigant Research’s report, Market Data: Biofuels, support the view that future capacity deployment is heavily contingent on accessing a shrinking pool of capital investment targeting the industry.

As the UN report notes, conditions in the 2000s that drove annual investment in biofuels in the range of $10 billion per year – including uncertainties related to the price of petroleum products and peak oil speculation – have largely dissipated.  With shale oil & gas production on the rise in key biofuels markets like the United States and the price of crude sliding well under $100 per barrel, market realities have shifted.

Poor Timing

For the emerging advanced biofuels industry, the timing of this macroeconomic shift could not have come at a worse time.  While growth aspirations for the global biofuels industry shifted away from conventional pathways, such as corn starch, to ethanol, palm oil, and biodiesel during the financial crisis of 2008, greenfield biorefinery projects producing advanced biofuels have only just come online in the past year.

The development of these facilities involves capital costs in the hundreds of millions.  Since many of these projects were initiated and financed during a time when macroeconomic realities were quite favorable, a primary concern going forward is whether these first-of-kind facilities can spark additional investment to drive sustained capacity expansion.

This is unlikely given current realities.  To put this into perspective, according to our market data report mentioned above, global biofuels capacity – including conventional and advanced pathways – was just shy of 40 billion gallons per year at the end of 2013.  This represents 4.2% of the global liquid fuel market, or just under 1% of global final energy consumption.

Another $25 Billion Off

Advanced biofuels installed capacity – the focus of current commercialization efforts – accounts for just 1.2 billion gallons, or less than 2% of global biofuels production.  While that’s by no means insignificant, there’s still a long way to go in terms of reducing dependence on liquid fossil fuels, which account for 35% of global final energy consumption, according to data published by the Energy Information Administration (EIA).

In order for advanced biofuels to meet projected production capacity requirements by 2020 under expected biofuels supply mandates in key markets like the United States, European Union, China, and India (Brazil relies mostly on blending quotas), $25 billion to $35 billion in annual investment will be needed over the next 6 years, according to Navigant Research estimates.  This is a tall order for a suite of technology platforms that are not yet at price parity with petroleum-based fuels.

 

Distributed Solar PV Poised to Reach Its Potential in Africa

— December 9, 2014

According to the International Monetary Fund, 7 of the world’s 10 fastest-growing economies are located in Africa.  While Cairo, Egypt, was the only city in Africa to have a population exceeding 10 million in 2010, seven cities across Africa are expected to achieve this level by 2040.  Rapid urbanization means that more than 100 African cities are projected to exceed 1 million inhabitants by 2040.  Such levels of urbanization and economic growth have forced local utilities to acquire new, primarily large-scale power projects.  Utilities are primarily calling for large scale natural gas power plants and renewable energy projects (led by solar PV and wind),  as evidenced by the booming South African renewables market.

Over time, however, there will be growing opportunity for smaller-scale distributed renewable energy projects in the 1 kW to 1 MW range.  Growth in this power class is led by government agencies that are electrifying health clinics and schools, often with international donor support. This is likely going to continue to be the case for at least the next 5 years. According to Navigant Research’s report, Global Distributed Generation Deployment Forecast, annual capacity additions of distributed solar PV in Africa are expected to grow from 10.9 MW in 2014 to 56.5 MW in 2023.  Agriculture, hotels, extraction industries, water pumping, telecom applications, and growing consumer markets in Africa will result in distributed solar PV growth across the region.  Cumulative distributed solar installed capacity during this time will reach 332.2 MW, representing less than 5% of the total installed solar PV capacity in Africa in 2023.

Immense Opportunity

Urban residential will be the last segment to catch on in urban African communities, primarily due to the combination of a small middle class, a lack of awareness among potential customers, and a lack of financing options.  Several experienced engineering firms, particularly in Kenya, are targeting distributed solar customer segments.  And while there is significant buzz about microgrids in the region, in particular, these projects have not yet developed at the anticipated rate.  That will change if innovative companies, such as PowerHive, Access Energy, and PowerGen, are able to successfully scale up current microgrid efforts and attract further investment.  In Kenya, there are a number of creative mid-sized projects, including solar-wind hybrid systems, ranging from 10 kW to 300kW.  In general, the opportunity for distributed renewables is immense, and the field is wide open – provided companies (and investors) are patient enough to deal with potentially problematic African bureaucracies.

Patient Yet Determined

The engineering firms and developers offering these solutions are working with utilities and regulators to create a more conducive environment for this small-to-mid-scale market segment in urban and off-grid settings.  Compared to utility-scale installations by larger international companies that hire workers for a short period and do not have a continued presence, the distributed market segment will have the most impact from a job creation and sustainable development perspective.

These companies tend to be staffed with very determined people who have made progress in very uncertain and often frustrating circumstances.  They’re becoming more organized and lobbying for a more favorable regulatory environment – including more robust net metering policies, feed-in tariffs, and, in general, more freedom to operate.

Equally critical, however, is education among financiers (and customers) on how to finance small-to-mid-sized solar PV systems.  Similar to the diversity among U.S. state policy and public utility commissions, pathways for growth will differ for each country in Africa.  Those that are willing to stay the course and weather the frustrations of operating in uncertain political and regulatory environments stand to profit  and, in the process, contribute to the establishment of the local industry over the long term.

 

Renewable Energy Grows, Large and Small, in Africa

— December 8, 2014

More than two-thirds of the population of Sub-Saharan Africa has no access to electricity – a figure that rises to more than 85% of those living in rural areas.  Those that do enjoy electricity pay some of the highest rates in the world.  Now, though, the opportunity for renewable energy investment in Africa is finally being realized.  Renewable energy growth in Africa has typically been due to investment in large hydropower plants.  The new wave of investment is now happening across the spectrum – including in utility-scale solar PV, wind, geothermal projects (greater than 10 MW in size), and pico solar systems (under 100W) that encompass solar lanterns, task lights, and solar home systems for people who typically earn less than a few dollars per day.

Beyond Johannesburg

At the utility scale, the leading country in Africa for renewable energy deployment is South Africa, where the government’s integrated resource plan may result in nearly 10 GW of solar PV installed by 2030.  With nearly 1.5 GW of solar PV and 2 GW of wind currently installed or in development, following four well-administered auctions, the country is making strong progress.

Kenya, arguably the next leading market, has 750 MW of solar PV and 290 MW of wind approved and in development.  South Africa and Kenya have both seen strong economic growth over the past decade and are typically the landing points for new companies looking to expand in the region.  The opportunity for large-scale renewable energy investment is now expanding to other African countries through similar mandates for integrating large amounts of renewable energy as part of their overall strategies for increasing electrification rates and meeting demand for power that’s crucial for economic development:

  • Rwanda: An 8.5 MW solar PV installation was built by GigaWatt Global Rwanda in Agahozo Shalom Youth Village for $23 million ($2.70/W); in addition, the government has set a 567 MW target for new renewable energy installed capacity by 2017.
  • Tanzania: The government of Tanzania has a renewable energy target of 14% by 2015.
  • Mauritania: 15 MW of solar PV have been installed, and 15 MW are in development.  The government has targeted 40% rural electrification by 2020.
  • Ethiopia: A 20 MW module assembly line was completed in partnership with Sky Energy.
  • Ghana: The government is targeting 10% renewable energy by 2020.

At the Pico Scale

Of course, there will be challenges along the way in executing these targets and ensuring a fair and transparent process for bidding on projects in these countries.  But if the majority of major announcements are realized in the next 6 years, the African solar PV market could see more than 8 GW installed and $23 billion in revenue by 2020.

On the pico solar side, Navigant Research’s report, Solar Photovoltaic Consumer Products, forecasts that the pico solar and solar home system market could surpass 130 MW in annual installations in Africa by 2018, resulting in revenue in the neighborhood of $500 million.  Kenya is the leader here, as well, expected to account for approximately 20% of the African market followed by Tanzania.  Venture investment is now flowing to so-called social enterprises that use for-profit business models to reach reduce poverty and spread electrification.  Pay-as-you-go and mobile phone-based payment systems are expected to be the key to enabling pico solar to scale effectively.

The success of several leading companies – such as D.Light, Barefoot Power, Green Light Planet, M-KOPA, and others – has led to a crowded market in Kenya, in particular, and the need to expand to new markets, including Malawi, Zambia, Rwanda, Uganda, Nigeria, and Zimbabwe, is increasingly on the radar.

Taken together, impressive growth in utility-scale renewables and of pico solar systems in Africa shows that developing countries can forge their own paths, achieving the benefits of electricity without becoming dependent on large, polluting thermal power plants.

 

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