Navigant Research Blog

Winners and Losers in EPA Fuel Economy Scores

— April 28, 2014

The U.S. Environmental Protection Agency (EPA) last week issued its first report detailing the performance of automakers in meeting fuel economy standards enacted in 2010.  The report shows the 11 companies that met the fuel economy standards and the 9 that didn’t, based on the performance of their own vehicles and on the net result after companies purchased credits from each other or transferred them from other years.

As seen in the table below, Toyota generated the most credits for reducing greenhouse gas emissions, which is unsurprising since it sold the second most vehicles after General Motors (GM) and sells by far the most hybrids.  Honda, Ford, and GM also earned more than 1 million credits, which can be pushed forward to future years or sold to competing automakers.

Chrysler led the list of losers, with a deficit of nearly 1.9 million credits, which is not shocking considering the company’s lack of fuel efficient models and total void of plug-in or hybrid models offered.  Also with a substantial credit deficit were Mercedes-Benz, Nissan, and Volkswagen.  Nissan had a negative tally despite offering the all-electric LEAF and several high-mpg hybrids.

(Source: U.S. Environmental Protection Agency)

A Market Emerges

The EPA designed the credit system to encourage the private sector to trade credits or make up for deficits in subsequent years to minimize the likelihood that automakers would actually pay penalties to the EPA.  Three companies – Honda, Nissan, and Tesla Motors – sold credits between 2010 and 2012, while Chrysler, Ferrari, and Mercedes-Benz purchased them.

For low-volume automaker Tesla Motors, the credits represented a substantial contribution to the company’s bottom line.  Between 2011 and 2013, Tesla pocketed more than $237 million in credits from sales through this EPA program, as well as through California’s Zero Emissions Vehicle program and the National Highway Traffic Safety Administration’s Corporate Average Fuel Economy (CAFE) standards.  That’s a significant boost for Tesla, which had total revenue just shy of $2 billion in 2013.

Overall, automakers surpassed the EPA’s requirement for reducing carbon dioxide emissions, which indicates that the companies are taking the rules seriously in their vehicle design plans and will make significant efforts to continue to meet or surpass the increasingly stringent requirements in future years.

The EPA program, which allows automakers to trade credits and shift them between years, provides flexibility and creates revenue for companies that are leaders in fuel economy.  At the same time, it penalizes those that continue to operate with indifference toward the environmental impact of their products.  With the recent report from the United Nation’s Intergovernmental Panel on Climate Change (IPCC) providing greater clarity on humans’ contribution to climate change, it’s encouraging to see that the U.S. government and the automotive industry are doing something to mitigate the environmental impact.


Why Electric Utilities Have an Image Problem

— April 23, 2014

Those of us involved in the cleantech industry have a tendency to roll our eyes and smirk when we hear about the backlash against smart meters or see an inflammatory, anti-utility meme on social media.  Health concerns?  What about that cell phone attached to your ear?  Profits?  Well, yes, that’s why the utilities are in business.  We’re smug in our superior understanding — and that could very well bite us in the long run.

The public is uninformed when it comes to electric utilities and how they function, and therein lies the problem.  How are utilities regulated and how does a rate of return model work?  How do different generation fuels affect the price customers pay to keep the lights on?  These are not things the average consumer thinks about.  But they understand the concept of a monopoly, and they don’t like it.  Unlike 100 years ago, when people stood in awe of their new electric lights, customers today grouse at the fact that they can’t just cut the cord when they’re unhappy with their electric utility.

Lawsuits are filed over service interruption — even when it’s caused by an event like Tropical Cyclone Sandy.  Social media campaigns espouse reliance upon solar and other renewables:  “Germany now gets 26% of its energy from solar!”   The implication is, “Why don’t we?”  But what consumers don’t realize is that Germany has some of the most expensive electric rates in all of Europe due in part to its high solar penetration.

According to an annual poll conducted by Gallup, the electric and gas utility industry had a net -1 public opinion score in August 2013.  38% of respondents had a favorable view of the industry, but 39% had a negative view (23% had a neutral view).

Electric and Gas Utility Industry Public Opinion: 2001-2013

(Source: Gallup Annual Poll on Work and Education, August 2013)

That was up 3 points from 2012, but electric and gas utilities ranked just 18th out of 25 industries, beating only such public villains as oil & gas, the federal government, banking, and healthcare.

The electric utility industry is facing some of the greatest challenges in its history, but poor public perception doesn’t have to be one of them.  As the industry evolves, effective consumer education and engagement is critical to keeping those customers as deregulation spreads and alternative energy sources become increasingly affordable.  In my next blog, I’ll discuss some of the tools available for effective consumer engagement and also point out ways that utilities can avoid shooting themselves in the foot.


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.


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.


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