Navigant Research Blog

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.

 

Spanish Wind Industry Faces Subsidy Cuts

— March 24, 2015

In early 2014, the Spanish government reformed the electricity market by discontinuing the feed-in tariff (FIT) program entirely for all wind plants going forward. The government has also attempted to lower purchase prices retroactively for production from existing wind plants, which essentially means that wind producers who built wind plants counting on tariff-subsidized prices for the next 20 years now abruptly face major revenue shortfalls. A direct result of Europe’s ongoing fiscal crisis in the wake of the 2008 crash, this move is widely considered the most damaging change to renewable incentives in any country globally, and it could result in a permanent wind market collapse across the European Union (EU).

For Spanish wind plant developers, such as Iberdrola or Acciona (ranked as the No. 1 and No. 5 wind operators globally in 2013, respectively), 2014 was a rough year. In its 2014 annual report, Iberdrola announced that it installed only 157.7 MW during 2014. To put that into perspective, the No. 2 company on the list of top 15 global wind operators, Longyuan Power Group in China, installed 1632.7 MW in 2014, and is now likely to surpass Iberdrola as the leading global wind operator. Acciona added 98 MW in 2014, but was forced to sell off 150 MW—thus ending up with less net wind capacity in 2014 than in 2013.

Cash Crunch

The FIT cancellation affected the cash flow of these Spanish companies, as well. Iberdrola’s 2014 profits took a major hit, falling by almost 10% compared to 2013, to hit €2.33 billion ($2.65 billion). In its 2014 annual report, Acciona asserted that, despite the regulatory setback, the company is profitable again and has managed to reduce its debt by €746 million to a still-heavy €5.2 billion ($5.64 billion).

Even if the companies survive this hit, the prospects for domestic development of wind energy in Spain are dire. Companies like Iberdrola and Acciona have the option to go abroad to markets in the United Kingdom, the United States, and Brazil to install wind energy; but for wind development in Spain, there is nothing attractive to investors about joining a market where regulation is uncertain and government support withering. In 2014, Spain installed just 28 MW of wind power, far below the 175 MW installed in 2013. The tariff cut has imperiled the future of clean energy in Spain, unless the government can bring back wind incentives and restart the market.

For a more detailed analysis of Spain’s wind market, as well as the broader global market for wind power, see Navigant Research’s forthcoming World Market Update.

 

Energy Storage Leaders Stumbled, Then Survived

— March 20, 2015

At a time when the major electric industry players were either unwilling or not nimble enough to develop energy storage systems integration expertise, four growing energy storage players with four distinct technologies took a risk to develop this expertise. Over the last few years, each of these companies failed financially and was subsequently acquired, in some cases more than once. In nearly every case, private equity firms stepped in, seeing an opportunity to invest in a maturing technology company with specialized expertise in the market.

Citing Tesla founder Elon Musk’s determination to build a massive Gigafactory to manufacture batteries for his vehicles, E Source Senior Fellow Jay Stein has argued that company failures like these indicate the shortcomings of the overall market. This is a logical fallacy.

Number of Deployed Systems Market Share by Top 10 System Integrators, Excluding Pumped Storage and CAES, World Markets: 1Q 2015

(Source: Navigant Research)

Detours Behind

The chart above is derived from Navigant Research’s Energy Storage Tracker 1Q 15, a global database of energy storage installations that includes 808 projects. This specific graph charts the top 10 systems integrators of energy storage in terms of number of systems deployed globally. Four of the 10 market leaders for systems integration have gone bankrupt and been acquired in the past several years. NEC Energy Solutions, formerly A123 Energy Solutions, was acquired following a bankruptcy filing, and the grid business was subsequently spun off and sold to NEC Corporation for approximately $100 million in 2014. Beacon Power was acquired by a private equity firm following a bankruptcy filing in 2012, and Xtreme Power (now Younicos Inc.) was acquired by Younicos AG in 2014, also after filing for bankruptcy.

All three firms were focused on a core grid storage technology (lithium ion batteries, flywheels, and advanced lead-acid batteries, respectively), but all spent a great deal of resources in the earlier days of the market learning how to integrate complete systems. Ultimately, all three firms developed this expertise, and NEC Energy Solutions and Younicos repositioned themselves as systems integration companies, offering software, controls, and integration expertise as opposed to pure-play battery suppliers. Beacon Power is a market leader in flywheels and flywheel systems integration and has developed a modular flywheel product with built-in power electronics for simpler integration and installation.

Managers, Not Markets

Finally, Coda Energy repositioned itself as an energy storage integration firm in 2013 after filing for bankruptcy. The company rebranded and shifted its product offering to target stationary energy storage using a battery management system, battery thermal management, and a sophisticated power source controller.

Together, these four companies account for 21% of the global market share for the top 10 systems integrators (although part of this market share is attributed to Younicos AG). These companies and others like them are challenging incumbents such as ABB and S&C Electric, demonstrating that their earlier stumbles arose out of flawed management and/or strategy, not failed markets or futile technologies.

Equating a management failure with a market failure ignores the value of the technology. Whether the Gigafactory will be Musk’s Waterloo or Austerlitz has less to do with the technology and much more to do with Tesla’s strategy and execution—and Musk has proven he can accomplish both in the automotive and the financial services worlds.

 

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