Navigant Research Blog

Doubts Surface About U.K. Smart Meter Rollout

— March 26, 2015

Serious doubts have surfaced about the rollout of smart meters in the United Kingdom, with a key government committee raising the issue to a new and alarming level. In its most recent report, the Energy and Climate Change (ECC) parliamentary committee concluded the program “runs the risk of falling far short of expectations. At worst it could prove to be a costly failure.”

The smart meter rollout is large, expensive, and complex. By 2020, a total of 53 million electric and gas meters are to be installed in some 30 million British homes and small businesses. The estimated cost is $16.2 billion, which is to be passed on to consumers. The cost is supposed to be offset by an estimated savings of $25.5 billion, in part from greater energy efficiency. One of the more complex features of the rollout is a communications infrastructure that aims to coordinate meter data among the energy suppliers, network operators, and authorized service providers. A government-appointed company called Smart DCC is charged with setting up this infrastructure.

Shaky Foundation  

The rollout is still in its early stage, called the foundation phase. The committee’s report expresses disappointment with several unresolved issues to this point: meters unable to communicate in multiple occupancy and tall buildings; interoperability issues among different types of meters and in-home displays; a shortage of installation engineers; network rollout delays by Smart DCC; and delays in public engagement around the program. So far, about 550,000 smart meters have been installed and are in use, which is about 1.2% of all domestic meters under management by the country’s largest energy suppliers.

The start of the next phase, called the mass rollout, has been delayed twice, as noted in a previous blog. As of now, the mass rollout is to begin in the fall of 2016. However, with this latest government report and the ongoing technical issues, that start date could slip once again.

Eventually, smart meters will be deployed widely in the United Kingdom. But given the complexities involved, it’s a good bet that the 2020 target will be missed—and perhaps by a wide margin.

 

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.

 

Reforms Drive Renewables, Grid Modernization in Mexico

— March 3, 2015

A recent ranking of the most attractive power markets for investors in Latin America, based on a survey conducted by BNAmericas of power sector stakeholders, places Mexico at the top. The updated rankings cite reforms to the country’s power sector, which are expected to allow for greater levels of private investment and a loosening of Mexico’s state-owned Comisión Federal de Electricidad’s (CFE) monopoly over the national power grid.

Mexico, which ranks 16th globally in installed generation capacity, is among the largest power markets in the world. Currently, CFE controls more than three-quarters of the country’s installed generating capacity and holds a monopoly on electricity transmission and distribution. The status quo has made it difficult for the country to keep up with rising electricity demand, effectively acting as a headwind for broader economic growth across the country.

Reform and Renewables

Although Mexico is heavily dependent on fossil fuels for power generation—representing 86% of delivered electricity—estimates suggest that it has sufficient resources to meet 50% of its generation demand with non-fossil fuels by 2050. Among non-hydro resources, geothermal, biomass, and waste are currently the most utilized. But like Chile, which previously topped BNAmericas’ rankings, Mexico is increasingly being seen as a haven for solar PV and wind development.

Energy sector reforms are designed to enable private firms to sell electricity to commercial and industrial consumers, as well as partner with CFE to finance, build, and operate transmission and distribution infrastructure. Private sector companies can participate through an open permitting process for independent power producers and self-supplied and combined heat and power (CHP) facilities that are typically located at industrial plants. Ultimately, these changes are designed to create a more competitive electricity market, according to Fitch Ratings, and to encourage the use of renewables by awarding clean energy certificates.

As a result of these reforms, private investment inflows could mirror similar trends already underway in Chile. According to some estimates, Mexico will add 66 GW of capacity to its power grid over the next 15 years, with investments in renewables potentially reaching $90 billion.

Wind as Well

U.S.-based solar firms see Mexico as among the countries with the highest growth potential. According to Navigant Research’s report, Global Distributed Generation Deployment Forecast, the country is expected to add more than 800 MW of distributed solar PV over the next decade.

Mexico is rapidly emerging as a substantial wind market as well, second only to Brazil among Latin American markets. Deregulation is expected to accelerate the wind market. The federal energy secretariat (SENER) has targeted 12 GW of new development by 2020. CFE plans to commission eight wind farms, totaling 2.35 GW of capacity, by the end of 2018, and private investors such as Iberdrola, Pattern Energy, and Cemex have announced significant investment targets for the same period. These investments, along with projects under development in Baja California and southern Mexico, are expected to help fuel a 5.5 GW expansion in wind capacity across the country through 2019, according to Navigant Research’s forthcoming report, World Market Update 2014 – Wind Energy.

Mexico’s power generation system is plagued by inefficiency and regulatory rigidity. It currently has the highest distribution losses among Organisation for Economic Co-operation and Development (OECD) countries. While the reforms are designed to liberalize the sector, a likely flood of new intermittent renewable generation capacity and customer-sited distributed generation will likely further strain Mexico’s already inefficient, old, and outdated transmission grid. These challenges are expected to drive an estimated $36 billion in emerging transmission, distribution, and grid modernization technologies over the next decade.

 

New York Details Its Vision for the Future of Energy

— March 2, 2015

On February 26, the New York Public Service Commission (PSC) released its long-awaited Phase 1 Order on its Reforming the Energy Vision (REV) proceeding. The order lays out the PSC’s vision for how the future retail electricity market in the state should operate to maximize efficiency, improve reliability, engage customers, and create clean, affordable energy products and services. I can’t cover the entire 328-page order in one blog, but I’ll hit on the major decisions that affect the current utility world order.

The biggest variable in the REV equation was whether the PSC would require an independent party to perform the function of the distributed system platform (DSP), the central role of REV. According to the order, the DSP’s functions include load and network monitoring, enhanced fault detection/location, and automated voltage and volt-ampere reactive (VAR) control. That list covers a lot of what the utilities currently do, so taking those tasks away from them would have caused a major shift in the market landscape. However, the Phase 1 Order outright supports utilities acting as the DSP as a way to minimize the redundancy of actions. This singular decision vastly limits the potential impacts to the state and the utilities. Utilities must be breathing a sigh of relief.

Metering Alternatives

A second thorny issue was whether utilities should be able to own distributed energy resources (DER) or whether DER should be the sole domain of the competitive marketplace. Many market players wanted to prohibit the utilities from competing with them when they might have a natural advantage in acquiring customers. Under the order, utilities will be able to own DER if they run a solicitation to meet a system need and they are able to show that competitive alternatives are inadequate or more costly than a traditional infrastructure alternative. They will also be able to invest in storage to the extent it functions as part of the transmission and distribution (T&D) system. This seems like a reasonable compromise that should work for most parties.

The last major component is advanced metering infrastructure (AMI). Earlier communications from the PSC hardly mentioned metering at all, so it was unclear how the final rule would play out. In fact, the Phase 1 Order does not mandate AMI deployment by utilities. Rather, the PSC prefers the term “advanced metering functionality” (AMF)—meaning that other technologies, including ones provided by third parties, may be able to achieve the desired functionality cheaper and more efficiently than AMI. It states that “each utility Distributed System Integration Plan (DSIP) will need to include a plan for dealing with advanced metering needs; however, plans that involve third party investment may be preferred over sweeping ratepayer funded investments.” This indicates that utilities should consider AMI alternatives before choosing a path forward.

Ticking Clock

As far as next steps, the utilities’ integration plans must be filed by December 15, 2015, so the clock is ticking. Phase 2 of REV will consider reforming the PSC’s ratemaking process so that utilities do not have disincentives to further developing DER. Utility income is tied to bond funds now, but they should depend more on creating value for customers and achieving policy objectives. A draft proposal is expected by June.

It was interesting trying to guess which way the PSC would fall on these and other major issues. Now the real fun begins: implementing the vision.

 

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