Navigant Research Blog

ConEd Details Its Smart Meter Plan

— March 11, 2015

Con Edison, also known as ConEd, one of the largest U.S. investor owned utilities, has provided details of its planned rollout of smart meters over the next several years. Contained in ConEd’s recent rate filing with the New York Public Service Commission, the plan reflects a comprehensive strategy to make smart metering the backbone of future customer engagement, as well as improve outage restoration, enhance operational performance, and ease the integration of distributed energy resources such as rooftop solar.

The utility envisions an advanced metering infrastructure (AMI) deployment over 8 years at a cost of about $1.5 billion—about $8 million this year, $69 million in 2016, $174 million in 2017, $317 million in 2018, and $306 million in 2019. Projected spending details beyond that have not been made available. The approximate number of meters involved is 3.4 million.

Aligned With the Vision

Con Edison’s AMI deployment plan also aligns with the state of New York’s wide-ranging Reforming the Energy Vision (REV) initiative, which was announced last year by Governor Andrew Cuomo. The REV initiative is aimed at transforming the state’s electric grid into a more customer-oriented industry, featuring “market-based, sustainable products and services,” with an emphasis on enabling clean distributed power generation. Smart metering, with its two-way communications functionality, is a key technology for facilitating this type of flexible, modern grid.

Even though smart meters have been around for a number of years, no deployment lacks naysayers, nor controversy. Con Edison is likely to face opposition from consumers who have concerns over health risks, privacy, and the accuracy of the data smart meters provide—concerns the industry says are unfounded.

Take Your Time

For smart meter manufacturers and infrastructure players like Landis+Gyr, Itron, General Electric, Elster, and Sensus among others, the ConEd deployment represents a significant potential opportunity. The utility is expected to announce the bidding process in the coming weeks. Given the large scale of this project, it is possible the utility will choose several vendors or a primary contractor and various partners.

At 8 years, the anticipated timeline for ConEd’s smart meter deployment appears prolonged. Other large U.S. utilities—such as Pacific Gas & Electric, San Diego Gas & Electric, Oncor, and CenterPoint Energy—have rolled out smart meters in 4–6 years. But ConEd may be playing it safe, giving itself enough of a time cushion to overcome the inevitable hurdles and detours.

ConEd’s smart meter plan hinges on regulatory approval, but regulators are inclined to be in favor, especially since the deployment fits in with the state’s REV initiative. And despite the considerable costs involved, smart meters provide benefits to both customers and the utility, and tend to outweigh any drawbacks.

 

Investors Search for Returns from Energy Efficiency

— March 9, 2015

The U.S. Federal Reserve is poised to raise interest rates this year, ending an unprecedented period of prolonged low rates. Though the suppression of interest rates has cushioned the effects of a severely damaged economy, it has also forced investors to search for higher yields. With bond yields so low, money has been flowing into different and sometimes new assets. While energy-efficiency improvements can generate a strong return on investment, the investment has generally only been made by building owners (or, in some markets, energy service companies). The unique investment environment created by monetary policy seems to be facilitating a broader financing of energy-efficiency improvements. However, it is unclear if a successful model can be established in time to survive a return to historically normal interest rates.

Financing Energy Efficiency

New models of financing energy-efficiency improvements demonstrate the flow of money into the space. The general model is for investors to finance equipment upgrades, commissioning, and the installation of advanced controls. Then, the savings in operating costs for the building owner are used to compensate the investors. Building owners reap the cost savings without capital investment, while investors get the returns. An interesting new twist on this model is Alodyne, which focuses exclusively on boilers. In the residential market, the expanding opportunity to lease solar panels represents investors trying to capitalize on renewable energy generation in much the same way.

Social Responsibility

Financially, energy-efficiency investments have demonstrated strong returns that, for the most part, are uncorrelated with overall market gyrations. Outside of money, energy-efficiency investment has many benefits. Lower electricity demand can strengthen the electrical grid and reduce carbon emissions. Unfortunately, doing well by doing good may leave investors doing not so well. The Credit Suisse Global Investment Returns Yearbook 2015 examined the performance of sin stocks, based on companies involved in tobacco, alcoholic beverages, gaming, and defense/aerospace industries, and found them to have outperformed socially responsible portfolios over the past 15 years. Indeed, investments in vice, namely alcohol and tobacco, have outperformed all other industries since 1900. If normalized monetary policy does create an environment less conducive for energy-efficiency investors, improving building performance may return to being an area only of interest to building owners.

 

Yieldcos for Renewable Energy: “Now Is the Time”

— March 8, 2015

Enel Green Power is forming a yieldco with its renewable assets in the United States, joining a trend that started about 2 years ago and accelerated in 2014.

The idea behind yieldcos is not new. It involves the creation of a company to buy and retain operational infrastructure projects and pass the majority of cash flows from those assets to investors in the form of dividends. Structurally, yieldcos are very similar to real estate investment trusts (REITs). They are also almost ideal for renewable energy projects such as wind farms.

A crucial aspect of yieldcos is that they are not exposed to development or construction risk—this is borne by either the parent company or a third-party developer. Yieldcos simply acquire infrastructure projects that are or have recently become operational. They fund the acquisitions by issuing shares (normally debt is only used at the project level), which they can do at a lower cost of capital (the return on the investment that shareholders want to invest in the company) than their parent companies or developers because they’re shielded from development and construction risks.

Squeezing Out Risk

Another key aspect of yieldcos is that their assets produce fairly predictable cash flows that can be paid to shareholders as dividends. That’s why renewable energy projects such as wind farms are perfectly suited for them. Wind farms and solar power projects are not significantly exposed to changes in the market. On the upstream side, they depend on free resources—wind and light—while on the downstream, they are protected by regulations (feed-in tariffs, long-term power purchase agreements, Renewable Portfolio Standards, and so on).

For developers, yieldcos offer a quick way to sell maturing assets and redeploy capital into early-stage developments that offer higher returns. From an investor point of view, yieldcos offer an investment option with very little risk—which is a testament to how far the investment community’s understanding of wind and solar technologies has come.

New Era or Fad?

The emergence of yieldcos has been driven by a strong initial public offering (IPO) market in the United States and Europe over the last few years, as well as the impact of quantitative easing (QE) policies around the world that resulted in lower interest rates and returns from conventional financial products (i.e., bonds and equities). As a result, the 6%–7% dividend yield of listed green infrastructure funds looks attractive to investors, compared to 4% interest rates on 10-year corporate bonds and even less for government paper.

Still, yieldcos might turn out to be a short-lived fad. As the economic recovery accelerates, and talk of interest rate hikes in the United States fills the financial media, investment vehicles like yieldcos could lose some of their appeal. So if you have solar or wind assets lying around, you may want to take some fashion advice from Enel’s CEO Francesco Starace (an Italian, after all): “Now is the time to do this.”

 

Energy Efficiency: Overcoming Financing Hurdles

— March 4, 2015

With little hope for meaningful near-term legislative action to drive national shifts in energy and resource consumption to tackle climate change, energy efficiency offers an impactful avenue for climate mitigation. But the enabling technologies often require capital investment that are hard to justify in constrained corporate budgets. As a result, a growing number of major banking institutions are making new commitments to financing projects with direct climate impacts, including those that deliver results via energy efficiency.

A recent GreenBiz article highlighted Citi’s updated climate and sustainability commitment of $100 billion to “lending, investing and facilitating” conservation and efficiency projects. Expanding on its 2007 $50 billion commitment focused on alternative and clean energy technologies, Citi has recognized the need for transparency and guidelines alongside the funding to ensure that the investments result in the kind of sustainable and climate change benefits intended. Citi, Bank of America Merrill Lynch, Crédit Agricole Corporate and Investment Banking, and JPMorgan Chase made up the drafting committee for the Green Bond Principals, which were released in January 2013.

Quality Control

Anne Paugam, CEO of the French Development Agency (AFD) recently published an article discussing the importance of transparency and accountability in Green Bond issuance as a model for success. “These instruments have all the characteristics of conventional bonds, but they are backed by investments that contribute to sustainable development or the fight against climate change … In September, the AFD issued €1 billion ($1.2 billion) in climate bonds, with one goal being to contribute to the development of concrete quality standards.”

The World Bank is also on board, and looking to shape investments that fuel sustainability, tackle climate change, and generate strong financial returns. According to a recent article in Barrons, the World Bank has sold more than $7 billion green bonds since 2008, and now officials hope to create a market for green growth bonds, starting with clients in Hong Kong and Singapore.  The World Bank says it is aiming for $225 million in bond sales in the next 6 months.

Green bonds, if offered with transparency and accountability, represent an important source of financing to expand energy efficiency investments and generate large-scale improvements that will have direct and quantifiable climate change and sustainability impacts.

 

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