Navigant Research Blog

As Race Tightens, Renewable Energy Costs Fall Quickly

— March 20, 2014

The most common metric used to compare the costs of different power generation technologies is levelized cost of energy (LCOE).  LCOE is defined as the average cost per unit of electricity over the life of a project, which is driven primarily by capital costs, operating costs, financing, and capacity factor (power output relative to the installed capacity).  All of these factors vary by technology and are continually changing.  The chart below shows a snapshot of LCOE for various technologies estimated by Navigant Consulting as of late 2013.  Note that each estimate provided represents an average of a wide range of values, given the many variables such as plant size, age, and location that exist within each technology.

U.S. Levelized Cost of Energy

(Source: Navigant Consulting)

PV Solar Cost Continues Its Precipitous Decline

This chart looked much different 5 years ago, and it will likely be very different in another 5 years.  Photovoltaic (PV) solar and wind in particular have seen dramatic cost reductions in recent years.  For example, average selling prices for PV solar modules have dropped from $3.50 per watt in 2007 to a current price of below $1.00 per watt for large customers.  In addition to declining costs, PV solar has been experiencing improved performance.  Different technologies will also have varying impacts on overall system output.  In warmer climates, for example, thin-film modules will generally produce higher capacity factors compared to crystalline silicon.  Similarly, tracking devices – which allow solar panels to follow the sun – improve the capacity factor of a PV system.  Over the past couple of years, single-axis tracking systems have seen an increase in market share due to lower prices and increased reliability.  While most of the adoption is currently in western states, where the performance benefit of tracking is the greatest, we expect to see more tracking systems across the entire market as prices continue to decline and reliability increases.  For example, Public Service Company of New Mexico recently filed for approval of 23 MW to be built in 2014 at a contracted price of just $2.03 per installed watt.

Wind Cost Resumes Its Downward Trend

The LCOE of wind power has experienced a similar decline since its modern day peak in 2009.  Average power purchase agreement prices for wind plants in the interior (windy) part of the United States were around $50 per MWh (in 2013 dollars) that year, compared to an average of $23 per MWh in 2013.  The newest generation of wind turbines have capacity factors that are approximately 10 percentage points higher (i.e., 45% instead of 35%) compared to just 5 years ago.  With the new large rotor turbines yet to be integrated into the U.S. fleet, we can expect continued improvements in the years ahead, with many projects achieving capacity of factors above 50%.

Mature technologies are also able to secure more favorable financing.  This is due to the lower perceived risk by financial providers, which improves the price competitiveness of these projects.  Both wind and solar are now becoming mainstream technologies and will ultimately become cost-competitive without the need for incentives.  As the newer renewable technologies mature, we expect them to benefit from more attractive financing terms, as well.

Readers should be cautioned that LCOE is only part of the story.  The short-term variability of renewables imposes some cost, especially at higher penetrations.  Resources and projects may require new or expanded transmission investment, which is typically not included in general LCOE estimates.

For those interested in hearing a lively discussion on this subject, representatives from Navigant Consulting, the Lawrence Berkeley National Laboratory, and the National Renewable Energy Laboratory will participate in a panel session covering LCOE forecasts for renewable energy and grid parity projections as part of a renewable energy workshop on May 5, 2014 at the AWEA WINDPOWER 2014 conference in Las Vegas.  For more information, click here.

Notes:  The chart assumes federal incentives only (e.g., 30% investment tax credit [ITC] for solar and accelerated depreciation).  PV is fixed axis.  Concentrated solar power (CSP) assumes trough technology.  Natural gas price of $3.00 per MMBtu.  Geothermal assumes installed cost of $5 per watt, capacity factor of 80%, and ITC of 10%.  Wind assumes 35% net capacity factor with no production tax credit (PTC)/ITC.

Bruce Hamilton is a director in the Energy Practice of Navigant Consulting.

 

Is Warren Buffet Betting Wrong on Utilities?

— March 18, 2014

In Warren Buffet’s famed letter to shareholders of March 1, 2014, the Oracle of Omaha made it clear that following Berkshire Hathaway’s $10 billion buy of NV Energy last year, he is still shopping for utilities.  Analysts are throwing around names like Wisconsin Energy, Westar Energy, and Alliant Energy because they each provide the returns on equity (historically) that Buffet demands and operate in states with favorable regulatory climes.

Now, Warren Buffet has more investing savvy in his little finger than I’ll ever have.  But is he right on this one?

The Berkshire Hathaway website offers a succinct list of Buffet’s investment requirements.  He’s looking for big (but simple) businesses with consistent earnings, low debt, and good management.  In the latest letter to shareholders, he notes that utilities have “recession-resistant earnings, which result from these companies exclusively offering an essential service.”

The Figures Don’t Lie

There may be a few cracks in the foundation of Buffet’s premise, especially because his broader investment theme has always been an unshakeable belief in America’s ability to innovate and grow over the longer term.  We’re talking 20 to 100 years, not 5.

I examined recent financial reports for MidAmerican Energy Holdings, the subsidiary that includes Berkshire Hathaway’s utilities, and also those of NV Energy.  The buy of NV closed in mid-December.  Here are the MidAmerican figures as shown in Buffet’s letter:

 

Overall, healthy growth for Warren’s shareholders, but look what happened with the utilities (HomeServices is a real estate company).  U.K. utilities (i.e., Northern Powergrid) have experienced a 12% average annual decline in earnings since 2011.  Earnings at the Iowa utility (MidAmerican Energy) have fallen 9%, on average.  Western utilities (PacifiCorp) enjoyed a nice bump in earnings last year, but at NV Energy, revenue was down 2%, cost of fuel rose 38%, and operating income fell 7.5%through September 30, 2013.

In the discussion of results for the various utilities, there are other worrisome comments.  From the discussion of PacifiCorp:  “Certain large industrial customers with generation capabilities began to self-generate in 2012 resulting in lower industrial customer usage across PacifiCorp’s service territories,” and “Net income increased $55 million primarily due to higher retail prices approved by regulators and higher retail customer load, partially offset by higher energy costs, lower renewable energy credit (REC) revenue and higher depreciation and amortization.”

Still Coal-Dependent

Growth is largely predicated on regulators raising rates.  Large commercial and industrial (C&I) customers are beginning to self-generate, and fuel costs are rising.  Buffet also likes to tout his companies’ diversification and investment in renewables.  But at PacifiCorp, it was coal (as a percentage of overall energy sources) that rose from 59% in 2011 to 62% in 2013.

In his letter, Buffet also said, “Our confidence is justified both by our past experience and by the knowledge that society will forever need massive investments in both transportation and energy.  It is in the self-interest of governments to treat capital providers in a manner that will ensure the continued flow of funds to essential projects.”

That may be true, but that American entrepreneurial spirit that Buffet so believes in is exactly why he should be worried.  Cheaper and better solar and wind options for residential – and C&I – customers will affect utilities’ bottom lines whether regulators like it or not.  And they won’t just keep raising everyone else’s rates in response.

 

China’s ‘Solar Bubble’ a Coal Bubble in Disguise

— March 14, 2014

Tremors rippled through global financial markets this week after Shanghai Chairo Solar Energy Science and Technology defaulted on its corporate debt.  The first Chinese company to default on domestically issued bonds, Shanghai Chairo is seen as a signal of the over-inflation of China’s red-hot solar market – and, worse, as an indication that the whole edifice of “shadow banking,” shaky corporate debt, excessive property lending, and unsustainable economic growth in China could come crashing down, leading to another global financial meltdown.

That seems overly alarmist.  China’s leaders have for some time been forecasting a modest slowdown in economic growth for 2014, to the 7%-8% range, which would still be the envy of any Western economy.  And Chinese premier Li Keqiang warned on Thursday that future corporate debt failures are “unavoidable” as the country deregulates its financial markets and the government stops propping up unprofitable enterprises.  China’s economy is maturing beyond export-led growth based on cheap commodities, and some regrettable bankruptcies aside, that’s good not only for the Chinese people, but also, ultimately for the stability of the global financial system.

At least that’s the official, reassuring line.  In the energy sector things are slightly more complicated.

King Dethroned

There’s no question that the Chinese solar industry finds itself in a situation of overinvestment and overcapacity.  The spectacular bankruptcy of Suntech, previously headed by China’s “Solar King,” Zhengrong Shi, signaled clearly that the dot-com phase of China’s solar power boom is officially over and a period of sober reassessment – and disinvestment – must inevitably follow.

Still, overseas solar markets, particularly the United States, are enjoying sustained growth, largely thanks to innovative leasing models.  And last month the Chinese government upped its target for new solar installations for 2014 to 14 gigawatts (GW) – a mark that would surpass last year’s total of 12 GW, which itself was the most any nation had added in a single year.  China’s solar industry must adjust to market realities going forward; but the market is growing.

That’s not necessarily true of the coal sector, which could be the real bubble now threatening China’s sustained economic growth.  Nearly 40GW of new coal-fired power generation capacity was added last year, and it’s no longer obvious that demand will continue to grow to soak up all that power.  China has actually closed down more than 80 GW of coal capacity in the last dozen years, and the government reportedly plans to shutter another 20 GW in the coming years.

Wobbly Steel

Indeed, within 5 years there may well be a nationwide cap on coal consumption in China – an extraordinary development in a country whose economic miracle of the last 20 years has been powered almost completely by coal. The less-noticed default of Haixin Steel, a steelmaker based in the coal-producing region of Shanxi Province, China’s Appalachia, could be a more troubling episode than Shanghai Chaori.  Haixin was involved in “triangular debt” arrangements with coal producers and other investors, and its failure could forebode turbulence in China’s heavy industry – and its commodities markets, including coal.

“The truth is Chinese coal consumption is peaking,” writes Justin Guay, of the Sierra Club, “and its plans to build the world’s largest coal pipeline is a bubble that may have already burst.”

If the coal/steel nexus that has fueled China’s growth turns into a bubble, concerns over solar companies going belly up will look minor by comparison.

 

China Builds Bridges to U.S. EV Market

— March 10, 2014

Chinese automotive companies have long aspired to build vehicles for the U.S. electric vehicle (EV) market, without much progress.  However, recent developments indicate that Made in China could be stamped on cars stateside before long.

Chinese automakers Geely, BYD, and Wanxiang have all made investments in establishing or partnering with U.S. entities with the goal of opening China’s formidable manufacturing resources to America.  Geely, which has been the slowest among the three to approach the U.S. market, purchased Emerald Technologies in February.  The company, a startup developing electric vans and taxis, has offices in the United Kingdom and Missouri.  It will receive up to $200 million during the next 5 years from Geely to grow its business.

Geely is no stranger to EVs, having launched a successful EV carsharing joint venture in China with Kandi Technologies Group.  The Emerald acquisition gives the company access to new technology outside of the consumer passenger vehicle market, which is a common strategy for Chinese companies that do not want to take on Detroit, Japan, and South Korea head on in the United States – yet.  If Chinese-built taxis, vans, and trucks can pass all of the required safety tests and prove their reliability in the coming years, then American consumers might become more comfortable in considering them.  Geely purchased Volvo in 2010 and has been expanding globally during the past few years, including setting up shop in several countries in Eastern Europe and Latin America.

California Dreaming

BYD was the first Chinese automaker to target the U.S. market and had announced its intention to sell EVs when it established a presence in California back in 2010, but the company has yet to deliver passenger vehicles.  The latest target date for EVs in the United States from Warren Buffett-backed BYD is late 2015.  Until then, the company is focused on selling electric buses using its battery packs in China, California, Canada, and Spain.

Wanxiang has been the biggest spender from China on U.S. EV assets: the company picked up the bankrupt pieces of battery maker A123 Systems and of Fisker Automotive for pennies on the dollar.  Wanxiang recently said it would resume production of the aborted Fisker Karma (perhaps both as a gas car and plug-in electric vehicle) by the end of 2015, as well as complete the development of the Atlantic, the second EV promised by defunct Fisker.  It would not be surprising to see more acquisitions of EV-related technology firms from Wanxiang in the United States in the future.

The U.S. EV market has taken 3 years to grow to just under 100,000 vehicles, but according to Navigant Research’s Electric Vehicle Market Forecast report, over the next 3 years it will more than double –  reaching volumes that merit Chinese firms establishing North American assembly and manufacturing plants.  Chinese companies will continue to learn more about optimizing EV production at home once a domestic market begins to mature in China, and this will lead to greater efforts to tighten the bond between the two countries’ EV industries.

 

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