Navigant Research Blog

Solar Lessons from the North of Chile

— October 30, 2015

Northern Chile is dominated by the Atacama Desert, and other than its large mining industry, the location is otherwise isolated. To supply this area with electricity, Chile established a local grid called Sistema Interconectado del Norte Grande (SING) that is segregated from the main grid, known as Sistema Interconectado Central (SIC).

Traditionally, electricity generation in the SING network relied on relatively expensive imports of coal, natural gas (NG), and diesel. Of the 4.97 GW of installed capacity in 2014, coal represented 42.2% and NG 47.5%. As solar energy prices dropped, the region became a hot spot for solar developers because it offered a perfect combination of high electricity prices in an area with the world’s leading insulation levels. A significant number of developers pulled the trigger and began the construction of their plants, planning to sign power purchase agreements once the project was commissioned.

The problem is that every company had the same idea at the same time. Solar projects have mushroomed in the past year. By October 2015, SING had 157 MW of installed solar capacity, 80% of which was commissioned in 2015. Solar now makes up 3% of the total generation capacity, and that was before the commissioning of First Solar’s 141 MW Luz del Norte plant, which will be the largest in Latin America. This plant is in the late stages of the construction process and it is expected to begin operations before the end of 2015.

Impact on Electricity Prices

The impact of new solar capacity on daytime wholesale electricity prices has been staggering. The average hourly wholesale electricity price in October 2015 dropped 42% between 8 a.m. and 9 a.m., whereas it fell only 10% in 2014 and 16% in 2013. In October 2014, prices averaged $54/MWh between 9 a.m. and 7 p.m. versus $67/MWh throughout the rest of the day. By October 2015, the average day-to-night differential widened to $48/MWh between 9 a.m. and 7 p.m. versus $78/MWh in the rest of the day.

Solar developers now find themselves in a predicament. Daytime electricity prices are expected to fall even further as the projects currently under construction come online, creating a death spiral that would threaten the economics of all plants and the sustainability of the whole industry. But no company wants to throw in the towel and write off all of its investment to date. The question is, who will move first?


Ecova’s Retroficiency Acquisition Spurs DSM Momentum

— October 30, 2015

Data analytics for energy efficiency and demand-side management (DSM) programs is a relatively new trend in the energy industry. Data analytics can be used in residential DSM programs to teach consumers how their home is using energy (by appliance level in some cases) and in commercial and industrial (C&I) DSM programs to help find opportunities for energy savings in large buildings. Data analytics can even be used in retail, restaurant chains, or in other small and medium businesses in order to make operations more efficient, as has been seen in the work done by PlotWatt.

Many of the companies that have been advocating data analytics for energy efficiency are either startups (working on a handful of small deployments) or pilots or large companies with the resources to dabble in energy management, such as Apple with HomeKit. Because of this, data analytics as a solution for DSM programs is still in the early stages of market adoption

Acquisition Makes for New Player

That is, until October 14, 2015 when Ecova announced its acquisition of Retroficiency. A building efficiency analytics startup founded 6 years ago, Retroficiency initially worked at streamlining onsite audits, which quickly evolved into its current Building Efficiency Intelligence software platform to enable utility-scale customer targeting and engagement. Ecova, a large provider of energy and sustainability management services, has a behind-the-scenes style platform that helps utilities manage DSM programs. In addition to developing joint solutions for utility customers, Ecova will be able to use Retroficiency’s data analytics capabilities to provide its C&I clients—which collectively have more than 700,000 sites in North America—with better information on where they can save energy, where to prioritize efficiency investments, and how to manage energy costs.

Ecova’s acquisition of Retroficiency sends an important message to other players in the energy industry that there is value in data analytics for energy efficiency, which means even more when considering that Ecova has the backing of a larger energy efficiency company. In 2014, Ecova itself was acquired by Cofely USA, a subsidiary of French utility company Engie (GDF Suez). The depth of experience, geographic reach, and expanse of resources that a company like Engie can bring to the data analytics market through subsidiaries like Ecova can mean real growth and development in a very similar way to what the home energy management market saw when Google acquired Nest.

Furthermore, Engie also happens to be an investor in Tendril, a Boulder, Colorado-based startup offering a cloud-based energy services management platform for helping energy providers better engage residential customers. With Ecova’s acquisition of Retroficiency, the company now has the resources to offer a combined residential and C&I platform to utilities that can counter Opower and Firstfuel’s new platform. The newly joined forces of Ecova and Retroficiency not only signal to others the value of data analytics, but also bring to the market a big name in energy and increased competition, which could give the data analytics market the momentum it needs to take off and become a vital part of energy efficiency.


California Incentive Program: Remaining Challenges for Energy Storage

— October 23, 2015

California’s Self-Generation Incentive Program (SGIP) has significantly advanced the state’s distributed energy storage market and has also highlighted the remaining challenges facing the industry. The program provides incentives for customers to install qualifying technologies including: small wind, waste-to-energy, generator sets and microturbines, fuel cells, and energy storage systems. SGIP has made California’s burgeoning energy storage industry one of the most advanced in the world. Storage systems currently receive incentives of up to $1.46 per watt, the second highest rate in the program. As a result, 224 storage systems have been deployed through the program, representing just over 11 MW of capacity. Despite this success, the industry still faces many challenges that are evident when analyzing the program’s project data.

Program Backlog

While an impressive number of systems have been deployed through SGIP, many projects have been cancelled, and many others currently sit idly by with little chance of being developed. There are currently 301 systems in the SGIP pipeline that were initiated before the start of 2014. These systems account for $25.1 million of held-up incentives that could otherwise go to more active projects. Given the program’s annual statewide budget of $77.1 million, these languishing projects account for 32% of the available incentives.

One reason for this backlog is the relative ease with which customers can begin working with vendors and reserve incentives through the program. Several companies active in California have employed a strategy of taking as many reservations as possible from prospective customers, regardless of the odds of the companies following through with an installation. While this strategy may improve a company’s market share for pipeline alone, it is detrimental to the overall program goals because it works against the other companies that focus efforts on the appropriate and more reliable customers. A potential fix for the program could include stricter milestones and required reservation timelines. Currently, a proof-of-project milestone is due 90 days after the start of most projects, meaning many systems have been in the pipeline for well over a year since that milestone was passed.

Remaining Challenges

The program’s large pipeline and rate of cancelled storage projects highlight challenges for both the program and the overall storage industry. The average ratio of systems deployed to systems that are eventually cancelled is only around 18% for leading vendors in the program. This results in a significant amount of capital resources for emerging companies that are lost on identifying and working with customers that never install systems. Furthermore, this dynamic highlights challenges with systems integration and installation that are faced by the relatively new industry. Changes in interconnection and installation requirements in different parts of the state—often not discovered until well into the development process—can add substantial costs to a project and significantly alter the overall economics, resulting in cancellations.

The large number of cancelled and delayed projects undoubtedly illustrates that the distributed storage industry as a whole must mature to improve the efficiency of operations and lower costs. Improvements should come naturally to the rapidly growing industry as customers become more educated and as increasing sales volumes lead to more standardization and streamlined processes, perhaps similar to California’s recent experiences with solar PV.


M&A Activity in the Wind Market Picks Up

— October 23, 2015

2015 has seen a notable uptick in merger and acquisition (M&A) activity in the wind energy industry, which mirrors activity in broader global markets in general. Thomson Reuters reported a 36% increase in M&A activity and values reaching $3.5 trillion for 2015 (both globally and across all industries), the biggest yearly total since records of this data were kept in the 1980s. The largest news in the wind energy industry is General Electric’s (GE’s) takeover of Alstom’s power generation business. Additionally, Germany’s wind turbine vendor Nordex will take over Spanish turbine vendor Acciona’s wind assets for €785 million ($880 million).

To say this is fully a trend, however, may be an overstatement for the wind energy industry. The merger of the GE and Alstom wind businesses was a happy byproduct of the much larger acquisition by GE of Alstom’s power generation business. The GE-Alstom joint venture should ultimately be good for the offshore market by introducing another major conglomerate-backed offshore vendor to counterbalance Siemens’ approximately 60% market share of operational offshore wind capacity, followed by MHI-Vestas with around 14%.

The Nordex-Acciona deal is more strategic. According to Navigant Research’s report World Wind Energy Market Update 2015, Nordex installed 1,489 MW globally in 2014 and Acciona installed 345 MW. Nordex will improve its access to large markets like Brazil and the broader Latin American market, as well as its footing in the United States and Canada, where both companies have maintained a small footprint. Acciona will get a share and partnership with a company known for good technology and forward-looking R&D efforts that will allow Acciona to reduce its costs. The changing pace of  technology in the wind business has been relentless, and the associated R&D commitments—while significant—are not likely a major priority for Acciona, as its core business is focused on construction activities.

Signs of the Future?

Does this suggest that other M&A are on the way? Perhaps. There could be more deals, but the wind industry (excluding China) is mature, so there are few M&A opportunities, and other acquisitions would have to be large. The ownership structures of other players are also somewhat protected. Germany’s Enercon is protected from takeover since a controlling interest in its shares were transferred to the Alloys Wobben Foundation, a trust formed specifically by its founder to protect Enercon from acquisition. Suzlon has a large controlling interest by its founding family. Gamesa has a major shareholder position by Iberdrola, which has a strategic interest in maintaining turbine supply agreements with the company. Germany’s Senvion, on the other hand, is likely to be sold by Centerbridge Partners (a hedge fund) at some point in the next 5 years. Private equity is not likely to have an appetite for the risk and expenditure required to stay competitive in the offshore market.

Consolidation among the Chinese vendors is likely given the slowing growth of the Chinese economy and the losses and lack of confidence in its stock market. A slowing of China’s annual wind market build cycle is inevitable. Wind projects built in China before adequate grid connection is ensured may be similar to the country’s overbuilding of ghost cities—unoccupied housing complexes built before enough consumer demand was in place. Last year, 23.3 GW of wind was installed in China with almost all of that capacity coming from 22 Chinese wind turbine vendors. M&A activity and one or more outright exits are inevitable among Chinese vendors, as there are too many occupying the market—even if build rates do continue to grow.


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