Navigant Research Blog

Tesla Direct Sales Banned in Another State

— October 28, 2014

In mid-October, Michigan governor Rick Snyder signed legislation that effectively bans Tesla’s direct-to-consumer sales business model in the state.  Direct sales of cars are also currently banned in Texas, Maryland, Virginia, and Arizona, and limitations are in place in Georgia and Colorado.  Despite these setbacks, Tesla has overcome battles in Minnesota, Massachusetts, North Carolina, and recently New Jersey.

The reason Tesla’s sales model has been banned has been explained many times, including past Navigant Research blogs, found here and here.  The most critical factor is that Tesla’s direct model leaves established car dealerships out of the business transaction.  This supposedly gives Tesla an advantage over other automakers (like General Motors, which supports the Tesla bans) that must sell their vehicles through dealerships.

As Tesla sales continue to grow, state laws protecting dealerships will come into sharper focus.  Automakers and dealers will have to adapt to legislative reforms accordingly.  Given that, it’s harder to imagine a future where Tesla is forced to sell through dealers than to envision one in which all automakers are able to set up similar direct-to-consumer sales models as they see fit.  Some automakers are already adding more direct pathways for consumers to communicate directly with the automaker on vehicle specifications and deliveries.

Time to Evolve

Under these changing conditions, automotive retail must adapt to the new, information-based, time-efficient market or become structurally obsolete.  Consumers now have more knowledge, power, and control over their vehicle purchases than ever before, and future car buyers will be far more autonomous.  Greater transparency around vehicle costs, automaker inventories, and financing mechanisms enabled by the Internet shifts the bargaining chips heavily in the consumer’s favor.

The disconnect between established dealers and automakers and the new tech-savvy, well-informed consumers will only become more pronounced if state dealer associations focus on campaigning against Tesla rather than pushing industry adaptation.

 

As Rail Congestion Crimps Coal Supplies, Calls for Expansion Grow Louder

— October 27, 2014

Even as power plant operators are warning of coal supply shortages come winter, the U.S. government has predicted that congestion on the nation’s railways is likely to get much worse in coming years.

Increased freight traffic traveling by rail – particularly crude oil from the Great Plains and grain from a bumper crop this year – has led to significant bottlenecks across the railway network, the Government Accountability Office (GAO) said in a report issued in September.  Rail traffic has reached the levels last seen in 2007, before the global recession, and “recent trends in freight flows, if they continue as expected, may exacerbate congestion issues in communities, particularly along certain corridors,” the GAO concluded.

Sounding a more dire warning, Hunter Harrison, the CEO of Canadian Pacific, said during a recent analyst briefing that the entire North American railway system is headed toward a cliff.  “We’re quickly approaching a time where none of this works,” Harrison said, according to The Financial Times.  “We cannot continue to go down the road that we’re going down and be successful and not have gridlock beyond anything we’ve experienced before.”

On to Chicago, Slowly

Like a slow train spotted in the distance, this fall’s tie-up of train traffic has been anticipated for years.  The domestic oil & gas boom, centered in the Bakken formation in North Dakota, has had ripple effects across the upper Midwest, the Rocky Mountains, and the Pacific Northwest.  Chicago, where all seven of the Class I railroad companies have major yards, is one of the biggest bottlenecks.  Rail transport is relatively low-cost and emits less CO2 than shipping by plane or truck, but investment in rail infrastructure has been slow.  Producers and consumers of coal, in particular, have traditionally been trapped in exclusive contracts that give them little leverage in negotiations with rail providers.  In September, Democratic Senator Jay Rockefeller of West Virginia introduced the Surface Transportation Board Reauthorization Act, which would increase the authority of the Surface Transportation Board, which regulates railroads, to force them to remedy service delays and justify rate hikes.  Lawmakers chided rail executives at a September 10 hearing in Washington for their failure to anticipate and keep up with increased demands on the railway system.

The problem is especially acute for mines in Wyoming’s Powder River Basin trying to ship coal to customers.  Big coal-burning utilities have already begun running coal plants at below capacity in order to conserve coal stocks.

Ship Gas, Not Coal

Some of this alarm is likely overstated; no one has suggested that coal plants are actually in danger of running out of fuel this winter.  And despite the transport constriction, the price of Powder River Basin coal remains stubbornly low; the price of a ton has dropped 8%, to $10.80, according to Bloomberg.  As a matter of national policy, it makes sense to reduce shipments of dirty coal by diesel-burning trains to supply aging power plants that are quickly becoming uneconomical anyway.  Meanwhile, tight coal supplies will inevitably lead to louder calls for other types of energy transport infrastructure: namely, natural gas pipelines.

There are good reasons to invest in expanding the nation’s railway infrastructure; shipping more coal is probably not one of them.

 

In Ethanol, Cellulosic Coming To Push out Corn

— October 20, 2014

The last few months have been big for cellulosic biofuels in the United States.  The first of three commercial-scale cellulosic ethanol plants to come on line this year, Project Liberty, opened in Iowa in September.  In July, the U.S. Environmental Protection Agency (EPA) expanded the definition of the cellulosic biofuel pathway to include biogas used for transportation via compressed natural gas (CNG), liquefied natural gas (LNG), or electricity.  At full capacity, Project Liberty will produce 25 million gallons annually; the two other plants scheduled to open this year will run at 25 and 30 million gallons, respectively.  If the plants are successful, this could be the beginning of cellulosic ethanol supplanting corn-based ethanol’s hold in the U.S. biofuel market.

Cellulosic ethanol’s major advantage over corn-based ethanol is that its feedstock is organic material waste rather than food/grain.  This avoids controversial issues regarding food vs. fuel, and minimizes the conversion of arable land to farm land, which experts contend makes cellulosic ethanol far more environmentally sustainable and less politically divisive than corn-based ethanol.  The disadvantage of the fuel is that it’s ethanol.

Flat Gas

Ethanol’s end market is gasoline, primarily used for light duty vehicles in the United States and Brazil.  It can only supply up to 10% of the fuel in a vast majority of the vehicles in use in the United States due to regulatory constraints and reluctance on the part of automakers and fuel retailers to adopt higher ethanol-gasoline blends.  If gasoline consumption in the United States was growing, this aspect wouldn’t be a problem, but it’s not.

In Navigant Research’s reports, Global Fuels Consumption and Light Duty Vehicles, it is estimated that light duty vehicles account for 94% of gasoline consumption in the United States.  Over the next 10 years, the light duty vehicle fleet will become far more energy efficient, thanks to vehicle electrification, vehicle lightweighting, and engine downsizing.  The end result is that the amount of gasoline-ethanol blends consumed in 2023 will likely be 12% less than 2014 levels.

The Cellulosic Edge

Consumption of ethanol is driven by the Renewable Fuel Standard (RFS), which mandates specific volumes of biofuels be blended into the fuel supply.  The standard is adjusted each year to reflect anticipated industry production volumes by biofuel pathway, so that biofuel producers can be assured their product will be purchased by blenders.

Given cellulosic ethanol’s sustainability appeal over conventional ethanol, and the limited market in which these pathways compete, and despite the high cost of cellulosic compared to conventional ethanol, it’s likely that annual adjustments to the RFS will ensure that cellulosic production feeds into the U.S. fuel pool at the expense of conventional ethanol.  That means that the EPA may be inclined to lower conventional ethanol mandates against increases in cellulosic capacity – making cellulosic more valuable to blenders than conventional ethanol.  As a result, conventional U.S. ethanol will likely become an export fuel, going to foreign markets that currently make up a little over 45% of the global market.

 

Transmission Superhighway Takes Shape

— October 20, 2014

In a previous blog I focused on the expansion of high-voltage transmission systems driven by utility-scale wind generation in the multistate arc that stretches across the central United States, from the Texas Panhandle to North Dakota.  Many of us have underestimated the impact and potential of this resource as a contributor to many states’ renewable portfolio standard targets (RPS).  Headlines about new utility-scale solar projects obscure the fact that installed utility-scale wind capacity is at least 5 times that of solar.

Recently, I looked into the long term electric transmission plans for every region in the United States, and found interesting developments in the Southwest Power Pool (SPP) region.  SPP covers much of the Great Plains and the Southwest, including all or part of an eight-state area that includes Arkansas, Kansas, Louisiana, Mississippi, Missouri, New Mexico, Oklahoma, and Texas.  The geographical footprint of SPP overlaps slightly with other independent system operators (ISOs) and regional transmission operators (RTOs) such as Midwest Independent System Operator (MISO).  SPP’s footprint can be seen in the map below.

SPP Regional Footprint

 (Source: Southwest Power Pool)

In 2008, SPP announced that it plans to build the electric equivalent of the United States interstate highway system – an interstate transmission superhighway that would serve as the backbone of a higher capacity, more resilient transmission grid, while providing increased access to low-cost generation, improving electric reliability, and meeting future regional electricity needs.

The SPP transmission plans I saw show that this conceptual idea is beginning to come to fruition, as new 345 kV transmissions systems are being built and older systems are upgraded.  Many of these projects have been completed by the transmission owner/entities in the region to address congestion issues in corridors like the Omaha/Kansas City to the Texas Panhandle route.  The figure below shows recent transmission system builds and upgrades.

SPP Regional Transmission System

(Source: Southwest Power Pool)

On the Horizon  

Meanwhile, ABB has debuted new, 1,110 kV high-voltage direct current systems.  A recent announcement by ABB on new products with 1,110 kV high-voltage direct current capabilities raises the bar again.  Until this announcement, 765 kV lines were the largest capacity lines available, and most transmission lines are currently in the 230 kV to 350 kV sizes.  ABB and other vendors (such as Alstom Grid, General Electric, and Siemens) are focusing on the Asia Pacific markets in China and India, as well Northern Europe, where major utility-scale wind projects now under construction will need to be connected with urban areas.  ABB’s announcement is exciting because it raises the high-voltage capability to a new level, well above what we currently see here in the United States.  I can only imagine that ABB will be talking to SPP about how to take the transmission superhighway to the next level.

 

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