Navigant Research Blog

Demand Response Prepares for the 2016 Summer Season

— June 24, 2016

??????????????????June has been a much less newsworthy month than May was for the demand-side management industry. But it does represent the traditional start of the summer demand response (DR) season, so we’ll see what Mother Nature has in store for the weather. Will it be a busy DR season or a light one, as the last few years have been?

Drivers of DR Growth

Meanwhile, macro-level factors continue to act as both drivers and barriers for the global growth of DR. California, for example, continues to offer new opportunities for DR participation. The most recent case is the California Public Utilities Commission approving a decision that allows Southern California Edison to spend an additional $8.7 million on DR programs this summer to mitigate potential natural gas shortages stemming from the Aliso Canyon natural gas leak.

Outside of the United States, there are a number of examples of markets becoming more open and attractive for DR resources. From Canada to Europe to Asia, market structures are being reformed to allow DR to compete against generators for revenue. In Ontario, the Independent Electricity System Operator plans to launch a capacity market where DR will be able to compete with generation and other resources. Two of Europe’s largest electricity markets—France and the United Kingdom—plan to open capacity markets by 2017 that would allow DR participation. South Korea now allows DR to compete equally with generators in the electricity market.

And Barriers …

However, specific barriers to DR development still exist due to environmental and reliability concerns. The amount of DR capacity available for this summer was reduced due to the expiration of the U.S. Environmental Protection Agency’s (EPA’s) rules for emergency generators (EGs) for DR purposes. Last year, the U.S. Court of Appeals overturned an EPA rule that allowed 100 hours of EG use for emergency DR programs. It granted the EPA a 1-year stay, which expired on May 1, 2016. The EPA has no plans to make changes to the rule, meaning that the court’s ruling will remain intact, affecting upward of 20% of DR resources in some markets.

The recent PJM capacity auction cleared less DR capacity than the previous year, mostly due to lower prices. But in the longer term, PJM is phasing out its summer DR categories in favor of annual participation requirements. Industrial customers may have fairly flat load profiles throughout the year, but many commercial customers rely on air conditioning (AC) measures to respond to DR events. On a portfolio level, it will come down to a risk/reward calculation. Residential DR that gets bid into the PJM market by utilities running their own DR programs are almost exclusively focused on summer-focused loads like AC and pool pumps. These programs offer virtually no winter DR capability and would not be eligible under the new rules unless they could combine a bid with a winter-type of resource.

All of these dynamics and more are covered in the Navigant Research report, Market Data: Demand Response. I look forward to seeing anyone who will be attending the National Town Meeting on DR in Washington, D.C. in July.

 

Roller Coaster Summer Continues for Fuel Cell Incentives

— June 21, 2016

HydrogenRobust incentives in places like Germany, Japan, and the United States have expanded the market for stationary fuel cells over the past decade. Within the United States, recent changes to major incentive programs hint at the future of the industry.

The California Public Utilities Commission recently proposed changes to the Self-Generation Incentive Program (SGIP). If approved at the Commission’s June 23 business meeting, the wide-ranging changes would substantially restructure the program. Two key changes would specifically affect natural gas generation technologies such as fuel cells, microturbines, and generator sets. First, energy storage projects would be allotted 75% of program funds, with the remaining 25% going to generation projects, including natural gas projects, wind turbines, and others. This would be a strong pivot toward storage over generation since these categories account for 4% and 96%, respectively, of $1.1 billion in historical incentives paid. Second, beginning in 2017, natural gas projects would need to use a minimum of 10% biogas, increasing in steps to 100% in 2020. The changes are intended to strike “the right balance of the program’s goals of reducing [greenhouse gases] GHGs, providing grid support and enabling market transformation.”

The federal Business Energy Investment Tax Credit (ITC) has been another important incentive, offering as much as a 30% rebate on fuel cells and other energy technologies. Wind and solar won big with the December 2015 extension, though fuel cells and other natural gas technologies were passed over and currently expire at the end of 2016. However, recent comments from congressional leadership indicate that an extension for the overlooked technologies is likely this year and may even be approved as part of the Federal Aviation Administration (FAA) authorization bill, which has a deadline of July 15.

So the news for fuel cells is mixed, with California likely offering smaller incentives than in the past but the ITC likely extending beyond 2016. The goals of such programs are ever changing, though in most cases, increasing focus is placed on GHG reductions. California’s biogas requirement cuts emissions and could thus be good for the industry, provided biogas can be viably sourced in the quantities required.

Successful incentives should ultimately render themselves unnecessary by driving down costs. Fuel cell costs have been falling, though not at the rate of some other technologies like PV. The winners will be those that can creatively cut the costs of manufacturing, installation, and financing to make the systems cost-competitive with other electricity sources. Despite the GHG emissions associated with natural gas fuel cells, current developments play a role in a zero-emissions future. Today’s natural gas fuel cell research can be directly applied to the hydrogen fuel cell, a key emissions-free and dispatchable energy resource that can complement the mix of renewables that will power our future.

 

City and Regional Governments Ramp Up Fight Against Climate Change

— June 20, 2016

BiofuelGlobally, climate action and greenhouse gas (GHG) reduction programs are becoming increasingly prevalent as electricity costs and climate change become larger areas of concern for residents. In North America alone, cities such as Boston, Los Angeles, Portland, San Francisco, Minneapolis, Vancouver, and Toronto have defined ambitious targets for improving sustainability and reducing GHG emissions and energy consumption.

While national aspirations were largely aligned during the United Nations Framework Convention on Climate Change COP21 Paris conference, the global partnership lacks meaningful implementation and enforcement mechanisms. In the United States in particular, climate change is heavily politicized, and little action is being taken on a national legislative basis to combat the problem.

Climate Action Plans of Selected Cities

Climate Action PLans of Selected Smart Cities_RC blog

(Source: Navigant Research)

To fill the gap from strong city action and low levels of national alignment, several state and provincial governments have recently taken bold action to combat climate change. The province of Ontario unveiled its new sweeping Climate Change Action Plan in June 2016. The initiative is expected to spend up to $8.3 billion on a range of clean technology programs, largely funded from the provinces’ cap-and-trade program. The Climate Change Action plan aims to quickly transition the province toward more energy efficient heating systems, electric and hybrid cars (via a rebate of up to $14,000), promote the conversion of diesel-powered trucks to natural gas, and help the industrial and agricultural sectors adopt low-carbon technologies.

State and Provincial Collaboration

The state of California, well-known for its clean energy leadership, has a cap-and-trade program that is linked to three Canadian provinces: Quebec, Manitoba, and Ontario. Cap-and-trade programs now cover 61.8 million people across North America—38.8 million in California, 13.6 million in Ontario, 8.2 million in Quebec, and 1.2 million in Manitoba. Each of these programs are designed to drive down emissions and set aggressive GHG reduction targets. Over 17% of the combined North American population (354.1 million people, with 318.9 million from the United States and 35.2 million from Canada) is now participating—knowingly or unknowingly—in a cap-and-trade program without any national or regional framework in place. This figure is anticipated to grow significantly as more states and provinces look to fill the void left by national governments by creating enforceable programs that reduce overall GHG emissions levels.

 

Take Control of Your Future, Part VII: Merging Industries, New Entrants, and Colliding Giants

— June 13, 2016

Modern commercial premisesIn my initial blog in this series, I discussed seven megatrends that are fundamentally changing how we produce and use power. Here, I discuss how merging industries, new entrants, and colliding giants are changing our industry.

What Is Happening?

The power energy industry (the generation, transmission, and distribution of electricity) is not the sole territory of the incumbent utility anymore. Several players from other industries, including oil & gas (O&G), technology, retail, telecom, security, and manufacturing, are trying to get into the game. Navigant sees many cross-industry movements, and one of them is increased crossover investments between the electric utility and O&G industries. Besides pursuing mergers and acquisitions, which I discussed in one of my previous blogs, we see investments in new areas of opportunity like renewables, distributed energy resources (DER, including distributed generation, energy efficiency, demand response, storage, etc.), transportation, smart infrastructure and cities, and energy management.

As an example, in April, the French supermajor Total announced the creation of a Gas, Renewables and Power division, which it said will help drive its ambition to become a top renewables and electricity trading player within 20 years. According to a statement by the supermajor, “Gas, Renewables and Power will spearhead Total’s ambitions in the electricity value chain by expanding in gas midstream and downstream, renewable energies and energy efficiency.” Other companies, like ENGIE and Shell, have made similar announcements.

A Total Gas Station in Paris

TOTAL

(Source: Reuters)

Fighting for Future Energy Positions

The large incumbent players in the energy industry are under pressure. And the way things are unfolding now, it doesn’t seem like this will change anytime soon. Time to make some minor tweaks? Change course more drastically? Or completely reinvent ourselves? These are discussions that are taking place more frequently at the board and executive levels of the incumbent players.

Electric utilities are under pressure because consumption growth is minimal and, in many cases, flat to slightly negative. The average consumption per customer (both residential and commercial) is declining due to self-generation, energy efficiency, demand response, etc. As a result, revenue is declining. Costs are increasing because of needed investments in a safe, reliable, cleaner, and more distributed and intelligent electric power grid. Utilities are identifying new revenue streams and thinking through new business models that will bring shareholder value going forward.

Oil companies are under pressure because of the continued low oil price. Ever since the oil price dropped to historic lows in 2014, the struggles of the industry have been daily news. Short-term hopes for a recovery were tempered significantly by the outcome of the recent OPEC meetings in Doha. Oil companies are looking for ways to survive by taking out costs, reducing their upstream capital investments, and shutting down unprofitable assets. They are also looking for new opportunities to grow revenue and future shareholder value.

Industry Giants Are Responding

In the last couple of months, I’ve attended several meetings with CEOs from large utilities and O&G companies. It is remarkable how their views on what is happening in the energy space are so similar. What is even more interesting is that their strategies to address the challenges and opportunities are almost identical.

Here is what they say is happening:

  • Energy consumption and gross domestic product (GDP) growth: Although population and GDP growth (at a slower pace) drive growing energy demand, the trend line between GDP and energy consumption growth has been broken. This is especially the case in developed countries. Energy consumption in the United States flatlined from 2014 to 2015 even as GDP grew by 2.4%. Since 2007, energy consumption has fallen 2.4% while GDP has grown by 10%, according to the 2016 Sustainable Energy in America Factbook by Bloomberg New Energy Finance. At the level of individual utilities, we see this playing out. Utilities with no or limited customer growth see their overall revenue declining. Utilities that still see customer growth are reporting that demand (and revenue) is not growing at the same pace. This is creating an unsustainable situation, with flat or declining revenue, while the costs to serve their customers and investments in the grid are growing.
  • Impacts of climate change: In an earlier blog, we discussed the impacts of the growing number of policies and regulations to reduce carbon emissions. It is now clear that this impact is being felt. Beyond the COP21, Clean Power Plan, and other global or federal policies and regulations, many initiatives at the regional, country, state, and local levels are being designed and implemented in support of carbon emissions reductions. Sustainability objectives between government, policymakers, utilities, and their customers are more closely aligned than ever before. States and regulators will continue to discuss how sustainable targets can be met without affecting jobs and the access to safe, reliable, and affordable power. And utilities and O&G companies will continue to evolve to support cleaner, more distributed, and more intelligent energy generation/exploration, distribution, and consumption.
  • Big power to small energy and the rise of the prosumer: Customer choice is driving a large move from big to small energy. More and more customers are choosing to install DER on their premises. DER solutions include distributed generation, demand response, energy efficiency, distributed storage, microgrids, and electric vehicles (EVs). This year, DER deployments are projected to reach 30 GW in the United States. According to the U.S. Energy Information Administration, central generation net capacity additions (new generation additions minus retirements) are estimated at 19.7 GW in 2016. This means that DER is already growing significantly faster than central generation. On a 5-year basis (2015-2019), DER in the United States is expected to grow almost 3 times faster than central generation (168 GW vs. 57 GW). This trend varies by region because policy approaches, market dynamics, and structures differ. However, the overall move to small power will persist. In other words, the movement toward customer-centric solutions and DER will ultimately become commonplace worldwide.

And here are the strategies of large utilities and O&G companies going forward:

  • Search for shareholder value: Both utilities and O&G companies are looking across the entire energy value chain for future shareholder value. Right now, that value is not in exploration & production or power generation. Yet, shareholders are still interested in natural gas pipelines and transmission that support the movement of natural gas and electricity.
  • Attempts to develop new solutions and businesses: There has been more than just interest from incumbent players in new energy solutions such as renewables and other alternative fuel sources (hydrogen, biofuels, etc.), DER, behind-the-meter energy management, electric transportation, smart cities, etc. With serious profitability and growth pressure on their core businesses, more serious attempts to build new, potentially transformational businesses in this space are increasingly evident.

For example, Total’s Chairman and CEO Patrick Pouyanné states, “The goal is to be in the top three global solar power companies, expand electricity trading and energy storage and be a leader in biofuels, especially in bio jet fuels.” To this end, Total announced last month that it is acquiring Saft, a designer and manufacturer of high-tech batteries for the manufacturing, transportation, and civilian and military electronics sectors. The company reported sales of €759 million ($856 million) in 2015 and employs more than 4,100 people in 19 countries. “The combination of Saft and Total will enable Saft to become the group’s spearhead in electricity storage,” Chairman and CEO Pouyanné said in a news release, “The acquisition of Saft is part of Total’s ambition to accelerate its development in the fields of renewable energy and electricity.”

Transportation and Smart Cities

Transport electrification, the increased use of biofuels (including bio-jet fuels), and the use of hydrogen to fuel vehicles are all on the rise. These alternative fuel vehicles will slowly but surely replace existing carbon-based transportation fleets, which represent approximately 35% of the global demand for oil. Now there are reports of 500,000 committed purchases of the Tesla Model 3. If Tesla can produce 500,000 cars a year, with models that are in the $30,000-$40,000 price and 200-plus-mile range, this will be another tipping point and game changer for EVs.

Meanwhile, as part of the smart city movement, cities are examining the sources and efficiency of their energy in order to reduce their greenhouse gas emissions and energy costs. In the process, cities are becoming more ambitious and proactive in setting energy strategy. They are seizing opportunities to work with utilities and other stakeholders to create new urban energy systems. The emerging vision is of a smart city with integrated large- and small-scale energy initiatives, including major infrastructure investments, citywide improvements in energy efficiency, and distributed energy generation. As a result, both utilities and O&G companies are increasingly interested in becoming even more engaged with new transportation concepts and innovation (well beyond fuel) and smart cities.

So What Does This Mean?

Do the above examples represent some isolated, small adventures in crossover investments, or do they mark a trend toward two mega-industries (electric utility and O&G) colliding across the entire energy value chain and looking for shareholder value? Time will tell. What is certain is that there will be winners and losers.

There is a clear push for new revenue streams and growth opportunities given the current oil price situation. But we see also new, longer-term threats that will force the incumbent players to reinvent themselves and become broader energy companies. The industry giants seem to be in the best position to be the winners—and ultimately, they have no choice. After all, these are still the biggest companies in the world, and they have a huge shareholder interest that needs to be fed into the future. They simply are not going to declare “game over,” return the equity to the shareholders, and then advise them to go find new companies to invest in.

This post is the seventh in a series in which I discuss each of the power industry megatrends and the impacts (“so what?”) in more detail. My next blog will be about the emerging Energy Cloud. Stay tuned.

Learn more about our clients, projects, solution offerings, and team at Navigant Energy Practice Overview.

 

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