Navigant Research Blog

Innovation Is Booming in the Water Industry

— April 9, 2014

As part of the events to mark World Water Day, the United Nations (UN) has launched a new report highlighting the challenges of ensuring an adequate global water supply over the coming decade.  In particular, the World Water Development Report focuses on the growing interdependency of water and energy.  The report looks at the water industry’s energy requirements for production, distribution, and treatment, as well as at the growing demand for water resources from the energy industry.

We have written about the impact of the growing global demand for water before, but the World Water Development Report yet again highlights the challenges ahead.  According to the report, water demand will increase by 55% by 2050, with the biggest impact coming from the growing demand from manufacturing (400%), thermal electricity generation (140%), and domestic use (130%).  More than 40% of the global population is projected to be living in areas of severe water stress through 2050.

Countries, cities, and communities need to improve their ability to assess and plan for future water needs.  However, developing new water supplies, storage facilities, or treatment plants will remain a hugely expensive endeavor, and so the industry must look to technologies that can mitigate the need for capital investment by improving the efficiency of existing systems and maximizing the benefits of new investments.  For this reason, we are seeing a host of innovative technologies and solutions targeted at the water industry.  Entrepreneurs and developers from the IT, telecom, and smart grid sectors are now looking to water as the next industry where they can make a major impact on the way the business operates.  This opportunity is attracting a wide range of technology and service suppliers, including established water metering vendors, water network engineering companies, water service companies, infrastructure providers, IT software and service companies, and a variety of startups and innovators.

The recent World Water-Tech Investment Summit in London gave me a good opportunity to survey a range of companies.  Among a host of other innovators at the show were companies we looked at in our Smart Water Networks report, including TaKaDu, which has been pioneering the use of cloud-based analytics for leak detection.  Also present was i2O, which is providing water utilities with an intelligent pressure management solution that also uses cloud-based advanced analytics, but integrates them directly into the pressure management system.  Other companies new to me included Acoustic Sensing, a U.K. startup that has developed a new acoustic sensing solution to allow the rapid identification of structural defects and blockages in sewerage systems; Syrinix, another U.K. company that provides intelligent pipe monitoring systems for burst detection and pressure monitoring, among other applications; IOSight, an Israeli-based company providing advanced business intelligence and data management for the water industry; and Optiqua, which provides sensor networks for real-time water quality monitoring.

Keeping Afloat

While there is no shortage of innovation in the industry, it is still a challenge to find ways of investing in new technologies in a heavily regulated industry.  With no stimulus funding or mandated smart meter rollouts to boost the market, the industry needs to find other ways to finance innovation.  One option is the use of a software-as-a-service (SaaS) model to defer capital expenditures and reduce resource needs.  For example, both TaKaDu and i20 provide their software as a cloud-based service.  Innovative approaches to regulatory and investment programs will also be important.  In the United Kingdom, OFWAT is currently working with the country’s water utilities on the next regulatory pricing period, to run from 2015 to 2020.  The aim is to increase the ability of utilities to invest in water metering and other networks’ management technologies.

The smart water market is attracting a wide range of new players and presenting established players with the opportunity to expand their business into new areas.  Both sets of players face challenges in an industry that is hungry for change but also conservative in its operations and restricted in its financial options.  As stated in our Smart Water Networks report, while there are strong drivers for growth, the challenges of transforming a conservative industry faced with a physically and technically challenging deployment environment mean that the growth in this market will always be steady rather than explosive.  However, the direction of travel is clear.

 

Cyber Security Community Finally Faces Reality

— April 8, 2014

It’s springtime, so the Navigant Research team is on the road again, speaking at conferences.  This spring’s cyber security conferences have confirmed what I’ve said in this blog for some time now:  the hype is over; the hard work is here to stay.

At SMi’s European Smart Grid Cyber and SCADA Security conference in London, traditionally a showplace for vendors to hawk their wares, there was a decidedly more technical focus this year.  Enel of Italy gave a detailed description on the various projects running in its lab in Pisa, describing how cyber security is integral to each.  It was inspiring to see cyber security integrated at the outset of a project, rather than after a bad audit.  Equally instructive was the description of Enel’s experimental area in Livorno, where many of the company’s new technologies first see public adoption.  Other speakers at this conference continued the technical thread, with topics such as descriptions of self-learning network anomaly detection, and traditional devices such as firewalls and intrusion detection that have been specifically reengineered for control networks.  The unmistakable message that I brought back from London: cyber security vendors have finally accepted that the utility industry is like no other.

Future at Risk

The SANS ICS Cyber Security Summit in Orlando, Florida offered similar but more technical fare.  Adam Crain and Chris Sistrunk described their eponymous vulnerabilities.  They have demonstrated how to disable a utility substation or control console via the serial protocol DNP3.  This is critical because DNP3, which is non-routable, had been previously considered immune to attack.  Another safe assumption bites the dust.  Eric Byres of Tofino Security gave a surprisingly accessible description of deep packet inspection in control networks – a topic normally best saved for researchers and PhDs.  There was also a fascinating Trend Micro report on a control network honeypot deployment, which will be the subject of my next blog.

The unifying theme at both conferences was that protecting control networks is hard work that is never really finished.  Our reports, including Industrial Control Systems Security, have been saying this for 4 years now.  Utility cyber security vendors are finally getting the message.  And to be fair, a few vendors have always understood.

Nonplussed

But challenges remain.  At both conferences, my remarks described the existential threat facing many utilities.  One U.S. utility CEO declares that the grid’s days are numberedThe Economist reports that European utilities have lost half a trillion euros of market cap since 2008.  Reactions to that news were often blank stares or utter confusion – as if the financial health of utilities has nothing to do with their deployment of cyber security.

This too must change.  Security vendors are not competing with each other, so much as they are wrestling with the future of the industry.  Just as understanding settles upon the community, the odds become daunting.

 

Cellulosic Biofuels Not Dead

— April 4, 2014

Risk_webCellulosic biofuels have multiple advantages over conventional biofuels like ethanol and biodiesel.  Primary among the advantages is that the fuel’s feedstock is agriculture waste, which means it avoids controversial topics like the food versus fuel debate and direct or indirect land use change concerns.  Despite these advantages, hope for cellulosic biofuels has eroded because multiple companies have failed to produce the fuel at scale and a competitive price point.

The many failures forced the U.S. Environmental Protection Agency (EPA) to cut the annual volumetric blending requirement for cellulosic biofuels mandated by the Renewable Fuel Standard (RFS) to levels ranging from 6 million gallons to 9 million gallons between 2010 and 2013.  For 2014, the EPA has proposed cutting the original volume requirement for cellulosic from 1.75 billion gallons to 17 million gallons.  Additionally, KiOR, the company closest to producing cellulosic biofuels at scale, has run into financial stumbling blocks.  This situation is leading some to question whether cellulosic biofuels will ever take off.  But while the industry has certainly appeared to be on the brink, investors do still have hope, as demonstrated by Cool Planet’s successful closing of $100 million Series D financing at the end of last month.

Saving Cellulosic Biofuels One Plant at a Time

Cool Planet has often been described as similar to KiOR, as the two companies take cellulosic biomass and convert it to hydrocarbons chemically identical to petroleum-based fuels.  The two companies are, however, also “dramatically different,” as described in interview with Cool Planet’s CFO Barry Rowan.  The most significant differences are related to Cool Planet’s novel approach to production plant development, the production process, and the development of the company’s propriety biochar, CoolTerra.

Rather than focusing on one or more major production facilities, Cool Planet will develop numerous small-scale (10 million gallons per year) plants.  This approach has multiple advantages.  First, it reduces risk to investors, as each small capacity plant is significantly less costly than one giant facility.  Second, the development costs of each new plant are reduced and production margins improved since Cool Planet is able to innovate on lessons learned from past plant developments.  Third, it allows Cool Planet to bring the plant to the biomass rather than the biomass to the plant.  This reduces the transport costs for the cellulosic biomass and insulates Cool Planet against feedstock shortages.  Rowan notes that the capacity of each plant is limited to a fraction of a region’s cellulosic resources.

Cool Planet can use a variety of cellulosic feedstocks, which the company exposes to high temperature and pressure to create a biovapor.  The biovapor is then converted to a high octane gasoline blend stock.  In contrast, KiOR’s process produces a biocrude oil, which is then refined into gasoline and diesel products.  When put through a proprietary catalytic column, the biovapor created by Cool Planet’s process produces the biofuels and a residual biochar – both of which have markets.

The biochar produced from the biofuels development is then treated by Cool Planet to create the company’s proprietary product, CoolTerra.  According to the company, which has five PhDs working on this product, trial results show improved crop yields and growth rates, as well as reduced water and fertilizer input requirements.  The resulting impact is a fuel that is carbon-negative; any carbon produced is sequestered in the CoolTerra, which will be used to produce carbon-absorbing plants and thus reduce atmospheric carbon concentrations.

Development of Cool Planet’s first 10 million gallon facility located in the Port of Alexandria, Louisiana is underway; the plant should be operating by 2015.  The development of two other plants in Louisiana is scheduled to follow in 2015 and 2016.  Rowan estimates Cool Planet can be profitable at oil prices of $50 per barrel, well below today’s rate.  Real world tests of Cool Planet’s business model will demonstrate its viability.  If anything can be gleaned from the recent struggles and successes of KiOR and Cool Planet, it’s that the industry is not dead; rather, it is simply taking longer to adapt to technological and logistical problems than expected.  And it’s clear investors believe Cool Planet may have a winning approach.

 

Policy Headwinds for the Wind Industry

— April 4, 2014

Weatherman_webFor the first time in 8 years, the global wind industry installed less wind capacity in an annual cycle than the year before.  A total of 36.1 GW was brought online in 2013, representing a full 20% drop from the 44.9 GW installed the year before, according to the latest figures from Navigant Research’s World Market Update – International Wind Energy Development Forecast 2014-2018.  Policy fluctuations and uncertainty are key factors for the drop and continue to frustrate those in the wind industry.  The countries where policy put the brakes on wind power development globally in 2013 or is dampening its future outlook include:

United States: The biggest dent to global wind growth came from one of the sector’s largest markets, the United States, where new installations fell 92% from a record 13.1 GW in 2012 to just under 1.1 GW in 2013.  This was the result of a dysfunctional federal government, which delayed renewing the wind industry’s key tax incentives.  Strong growth is expected this year and the next, but the broader boom and bust policy cycle is likely to continue in coming years.

Spain: For the beleaguered Spanish wind market, 2013 was the first full year in which installation data clearly reflected the downturn caused by the near total removal of incentives for wind energy.  With just 175 MW of new capacity added in 2013, Spain’s wind industry recorded its lowest growth rate in 16 years. The sector’s collapse is the result of the national government’s decision to withdraw virtually all subsidies for renewable energy projects. The latest electricity market reforms scrap production incentive payments for all new wind plants and attempt to reduce revenue for wind plants already operating.

Italy: Newly installed wind capacity in Italy was down 65% from 1,272 MW in 2012 to just 450 MW in 2013. The decline in new installations was widely expected, with Italy switching policy from a system of tradable green certificates to a structure based on competitive bidding for a capped volume of fixed-price 20-year contracts. The contract prices are significantly lower than prices for wind under the certificate program. The change in market structure set off a rush among developers to connect wind projects to the grid before January 1, 2013 and the drop-off for the full year 2013.

Canada: Wind plant construction hit a record 1,599 MW in Canada last year, but medium- and longer-term forecasts are lower due to policy changes at the provincial level.  Ontario scrapped its feed-in tariff (FIT) program of premium fixed power purchase prices for wind power after the World Trade Organization found the local content rules to be in violation of international law.

Australia: 2013 was a strong year for wind plant construction in Australia, with 655 MW connected, but the future of Australia’s wind power industry is in serious doubt following the late 2013 election that resulted in a conservative coalition government that is openly hostile to wind power.  The new government is planning a number of policy reversals in 2014 that will dilute or collapse price support for wind power generation and strengthen the fossil fuel industry.

European Union: The EU is making progress toward meeting its 2020 climate and energy target, but the view beyond has grown less positive for renewables.  The European Commission proposed a new framework for a climate and energy policy for the 2020-2030 timeframe that includes a proposed renewable energy target of 27% by 2030, lower than the previously discussed 30%.  In addition, under the proposal, the target would not be formally translated into national, binding, country-level commitments, as it is currently structured through 2020 for all EU member states.

For further details on policy headwinds, how they contributed to changing market shares of the top wind turbine OEMs globally and within country specific markets, and a range of other current topics, check out the recently released World Market Update – International Wind Energy Development Forecast 2014-2018.

 

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