Navigant Research Blog

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.


Solar Subsidies Attract Financial Schemes

— October 20, 2014

Arizona Public Service (APS) and Tuscon Power have recently come under a lot of scrutiny for their proposed rate-based solar programs.   The complaint from private sector companies is that rate-basing (i.e., the utility practice of raising funds for capital investments by increasing electricity rates) would create an uneven playing field in the solar industry, because rate-basing a capital expenditure gives utilities a guaranteed rate of return.  As SolarCity’s VP Jonathan Bass put it, “If there were ever a reason for a regulatory body to exist, it would be to stop a state-sponsored monopoly from unfairly competing against the free market in an entirely new industry.”

That’s hard to argue with.  However, I would add that another reason for a regulatory body to exist is to stop the free market from abusing the subsidies that are so crucial to an entirely new industry.  In the spirit of fair-minded analysis, let’s take a closer look at the solar industry and at how level the playing field actually is.

Pump and Dump

First, let’s examine the solar developers (SolarCity, Vivint, SunRun, Clean Power Finance, etc.) whose solar lease and solar loan programs are responsible for catapulting the industry into the period of rapid growth we’re seeing today.  Critics argue that solar developers base their business models around building solar arrays on the cheap and claiming an inflated fair market value (FMV) of the systems.  The FMV is supposed to reflect the fair price of a system, and it’s ultimately used by the government to determine the monetary value of the 30% income tax credit (ITC) that goes back to the owner of the system.  Ironically, the FMV is becoming increasingly difficult to determine as more solar companies are vertically integrating, which has made the true system costs less transparent.

For systems that are being leased (which are most systems), the owners and thus recipients of the ITC are actually third parties.  These third-party owners tend to be financial institutions, such as Morgan Stanley, Goldman Sachs, Credit Suisse, Google, and Blackstone, that are constantly looking for tax credits, and they have found a slam dunk as financiers of residential and commercial solar arrays.  Typically, the developers bundle a group of solar customers together into a tranche (essentially a bucket of leases), which is then backed by the third-party ownership groups.  The financial firms own the leased systems for 5 years and then dump them, but not before taking advantage of the Modified Accelerated Cost Recovery System (MACRS), which is a method of depreciation that allows third-party owners to recoup part of their investment in the solar equipment over a specified time period (5 years) through annual deductions.  Basically, MACRS represents an additional subsidy, with a net present value of 25% of the initial investment.

The Treasury Steps In

So between the 30% ITC and the 25% MACRS, the owners should be getting a 55% subsidized investment; but with the inflation of the FMV, it turns into a much larger subsidy, on the order of 80%.  Then consider the high rate of return (up to 15%) that investing in solar offers on top of all these subsidies, and it starts to sound pretty good to be a solar financier.  Solar developers readily admit that their business models are dependent on government subsidies, but this sounds like manipulation of those subsidies.  Indeed, this practice is currently under investigation by the Department of the Treasury.  While the developers claim they haven’t done anything wrong, if the government tightens the rules around the ITC or tries to recoup the inflated subsidies, it could be a major blow to the solar industry.

What’s more, the developers themselves don’t seem to be reaping the rewards of their innovative business models that have brought solar to the masses.  If anything, they seem to be bearing all the risk while the third-party owners reap most of the profits.  Is there some merit to rate basing solar?  In my next blog, I’ll examine this question.


Truck Fuel Economy on the Rise

— October 20, 2014

The U.S. Environmental Protection Agency (EPA) has just published its 2014 fuel economy trends report, and though the news is generally positive, some potential storm clouds remain on the horizon for manufacturers.  While the overall average fleet fuel economy hit a record 24.1 mpg for the 2013 model year, the monthly update from the University of Michigan Transportation Research Institute (UMTRI) showed a 0.5 mpg drop in September 2014, equal to the 2012 to 2013 annual increase.

The long-term trend has definitely been upward.  Last year represented the eighth increase in the past 9 years for the American new vehicle fleet.  Automakers will have to maintain this momentum if they expect to hit the 2025 corporate average fuel economy target of 54.5 mpg.  Fortunately, attendees at a fuel economy technology showcase at the EPA emissions testing lab in Ann Arbor were all publicly confident that the targets were achievable.

As for the sudden drop in September, that can be explained by what are likely temporary market conditions that led to a significant uptick in full-size truck sales at General Motors (GM) and Chrysler.  As the 2014 model year drew to a close, combined sales of the Chevy Silverado and GMC Sierra jumped 46%, aided by incentives of up to $4,500.  Ram sales were also helped along by retail incentives of up to $3,000, as well as the popularity of the new Ram 1500 EcoDiesel.

From Steel to Aluminum

Sales of Ford’s F-series trucks were essentially flat, as the automaker began the transition to its all-new, aluminum-bodied 2015 F-150.  It appears that GM and Chrysler are hoping to grab some market share in the financially lucrative big truck segment in hopes that Ford would stumble in the complicated transition from steel to aluminum trucks.

At this point next year, even if truck sales continue to climb, we’re unlikely to see a similar drop-off in fuel economy, thanks to new technology in the segment.  The weight savings and new power plants for the Ford trucks are projected to deliver up to 20% better fuel efficiency than the steel-bodied versions.

Chrysler and GM also have to meet the new fuel economy standards.  Ram pickups are already available with ZF 8-speed transmissions, and GM is adding its first 8-speed automatic transmission to 2015 pickups with a 6.2-liter V8.  As GM ramps up production of the new 8L90 transmission, it will probably get paired with other engines as well.  GM and Ford also have a joint development program to produce 9- and 10-speed transmissions for trucks and other vehicles in the next few years.

Diesel Debuts

Chrysler is also building on the success of the 28 mpg Ram 1500 EcoDiesel by doubling production to 20% of its total production volume of trucks in 2015.  Ford is still awaiting final EPA certification on the 2015 F-150, but the 2.7-liter EcoBoost V6 is also expected to get a highway rating in the upper 20s.  GM’s new midsize Colorado and Canyon pickups are already rated at up to 27 mpg with a gasoline V6, and a diesel version is coming some time in 2015.  Ford is also offering a diesel engine option in the new Transit full-size vans that replace the E-series this year.  Ford will likely be closely following the sales trajectory for diesel engines in the Chrysler and GM trucks, as well as the next-generation Nissan Titan and Toyota Tundra, which will both be available with a Cummins-sourced 5.0-liter diesel V8.

With the huge sales volumes of pickup trucks in North America, lightweighting, advanced powertrains, and automatic stop-start, trucks will make a big contribution to reducing fossil fuel use in the next decade.


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