Navigant Research Blog

Incentives Are Driving PEV Sales – Right?

— May 21, 2014

New data from the International Council on Clean Transportation (ICCT) shows that incentives are, for the most part, driving sales of plug-in electric vehicles (PEVs) globally (with the United Kingdom, China, and a few others aside).  For example, while consumer uptake of PEVs has been limited to less than 1% in nearly every major auto market, Norway’s fiscal incentives (equivalent to 55% of the vehicle base price) have resulted in a 6% market share for 2013.  Similarly, large incentives in the Netherlands (5.6% market share) and California (4% market share) have led to strong PEV growth in those markets.

Exceptions to the Rule

However, not all jurisdictions with strong incentives have led to higher market share.  Despite a robust €5,000 ($6,850) incentive per PEV purchased, exemption from the vehicle taxation system, and exemption from London’s CO2-based congestion charge, just 0.2% of vehicle sales can be attributed to PEVs in the United Kingdom.  One possible explanation could be the large influx of French-manufactured PEVs in the country, such as those made by Renault and Citroën, which have traditionally not been highly sought after brands in the United Kingdom.  China’s PEV incentives have similarly not made a significant impact because the middle and upper class who can afford PEVs are looking to buy non-Chinese brands, such as Teslas, which have historically been largely unavailable.

The following graph shows the correlation between fiscal incentives and the market share for plug-in hybrid electric vehicles (PHEVs) and battery electric vehicles (BEVs).

(Source: ICCT)

While the ICCT data leaves some questions unanswered, it does demonstrate that fiscal incentives can be powerful mechanisms for reducing the effective total cost of ownership and are largely successful at encouraging consumers to buy PEVs.  For example, California’s PEV penetration growth forecast numbers (7.61% market share by 2023) are partially calculated by using a combination of financial and other incentives, such as HOV lane access and exemption from emissions inspections and state sales and use taxes.  For an in-depth analysis of how quantifying U.S. state incentives can identify the best market opportunities in the country, see Navigant Research’s report, Electric Vehicle Geographic Forecasts.

 

Inaction on Energy, Climate Change Risks Global Chaos

— May 16, 2014

The crisis in Ukraine has provided the West with a stark reminder of an inconvenient fact: Many of Europe’s liberal democracies are heavily dependent on Russia for their energy supplies.  The latest move by Vladimir Putin in his campaign to destabilize the fragile elected government of Ukraine came this week, as he announced that supplies of natural gas to the country would be cut off at the end of May unless Ukraine pays for them in advance.

Ukraine owes Russian gas giant Gazprom $3.5 billion, Putin said in a May 15 letter to European leaders.  In April, Gazprom responded to the ouster of former Ukrainian president Viktor Yanukovych with a sharp hike in the price of the gas it sells to Ukraine, going from $268 per 1,000 cubic meters to $385.  Russia has throttled its gas pipelines into Ukraine twice before, in 2006 and 2009.

Russia supplies around 27% of Europe’s natural gas, according to Emergingmarkets.org – much more in the case of former Soviet Bloc countries like Bulgaria (85% of its gas comes from Russia) and the Czech Republic (80%).  Nearly half of the gas headed west to European markets flows through Ukraine.

The Law of Possession

Russia’s takeover of the Crimean peninsula has also thrown into turmoil plans for developing offshore oil & gas resources in the Sea of Azov and the northern Black Sea, where Chornomornaftogaz, Ukraine’s state-owned oil & gas producer, controlled rich oil & gas fields and at least a dozen offshore drilling platforms.  Since the annexation of Crimea, Russia has laid claim to those resources.  “If this is a part of Russia,” declared Denis Khramov, Russia’s deputy natural resources and ecology minister, “then it is subject to Russian law.”

Energy chaos on the edge of Eastern Europe has already prompted Fitch Ratings to warn that cutting off Russian gas supplies to Europe could derail the fragile economic recovery on the continent.

All of this points to a further sobering truth, of which Western democracies must be forcefully reminded at least once a decade: There is no national security without energy security.  This fact will be less and less escapable as the effects of climate change accelerate, according to a major new report from CNA Corp., a strategic risk analysis firm in Arlington, Virginia.  Written by the company’s Military Advisory Board, a panel of former high-ranking military officers, the report warns that inaction on climate change is seriously undermining the post-Soviet world order, destabilizing critical regions, fomenting terrorism, and endangering irreplaceable supplies of water and energy.

No Security without Energy Security

“The volatile mixture of population growth, instability due to the growing influence of nonstate actors, and the inevitable competition over scarce resources will be multiplied and exaggerated by climate change,” the report says.

That conclusion was echoed by Helge Lund, CEO of the Norwegian oil & gas major Statoil, in an address at Columbia University’s Center on Global Energy Policy Spring Conference.  “Energy policy is economic policy,” Lund remarked, adding that “Now is the time to support investments that spur carbon reduction.  In that perspective, we at Statoil are strong believers in a high carbon price.”

What a growing chorus of top generals and admirals and senior business executives is saying is this: The proliferation of renewable energy sources, the spread of energy efficiency and conservation measures, and the reduction of reliance on fossil fuel imports from volatile (or hostile) states aren’t just feel-good green policies; they’re critical strategic responses to the harsh realities of climate change and growing resource conflicts.  The world leaders who would resist a price on carbon include Vladimir Putin, whose expansionist tendencies and contempt for the censure of Western democracies is based on his country’s energy might.

If the world fails to act, wrote retired Rear Admiral David Titley, former head of the Navy’s task force on climate change, in the CNA report, “I am afraid we will soon start getting into varsity-level instability.”

 

In Reinvention, TVA Wrestles with Uncertainty

— May 9, 2014

This week’s release of the Third National Climate Assessment – which demonstrates that the effects of climate change today are much more widespread, pervasive, and destructive than previously understood – and the decision by Stanford University to cleanse its endowment of $18 billion in investments in the coal industry have increased the pressure on U.S. utilities to reform their business models, restructure their fuel mixes toward cleaner fuels and away from coal, and embrace the distributed energy model that is gradually replacing the centralized grid.  Nowhere are those pressures more apparent than at the TVA Towers, the Knoxville, Tennessee headquarters of the Tennessee Valley Authority (TVA).

TVA is being forced to remake itself at a more rapid pace than other utilities, thanks to the settlement of a historic lawsuit filed by the state of North Carolina and the U.S. Environmental Protection Agency in 2011.  The agreement called for a drastic reduction in TVA’s coal-fired power generation capacity and a variety of clean-up measures at the remaining plants.  In essence, TVA – which is one of the nation’s largest operators of both coal and nuclear plants and is attempting to complete and fire up the second nuclear power reactor at its Watts Bar Plant in central Tennessee – is being shoved out of the business of burning coal.

Time to Go

In fact it is time, according to a new report from the conservative Heritage Foundation, for TVA to go the way of the Works Progress Administration and the Rural Electrification Administration – other New Deal federal agencies created to create jobs, spur economic development, and bring light and power to America in the depths of the Depression – and shut its doors.

Unique among U.S. utilities, TVA is a quasi-federal agency that was created with an explicit socioeconomic mission beyond the business of supplying electricity to its customers: to develop the Tennessee River into a navigable waterway, to bring prosperity to some of America’s least developed regions, and to be a steward of the region’s resources.

“The navigation waterway is built, though lightly used,” writes Ken Glozer, author of the Heritage report.  “Electricity is widely available, though rates are among the highest in the Southeast; and the people of Tennessee enjoy a good standard of living.  The most effective way to restore efficiency to the TVA system and to relieve federal taxpayers of a significant liability is to sell the Authority’s assets in a competitive auction.”

End of the Coal Era

Going fully private is hardly what TVA CEO Bill Johnson had in mind when he told shareholders and audience members at the Authority’s May 8 board meeting in Memphis that the 81-year-old organization is cutting expenses and refashioning its power generation business in order to meet the region’s power demands with rates below the U.S. average, while replacing coal with more renewable sources of power generation and instituting far-reaching conservation and efficiency measures.  TVA has already shut down its John Sevier coal plant near Rogersville, replacing it with a state-of-the-art combined cycle natural gas plant, and plans to shut down several more, including the massive Johnsonville plant, the largest coal plant in its fleet.

Johnson also said that TVA’s debt, which in recent years has edged closer to the $30 billion limit imposed by Congress, is coming down.  Debt reduction, he argues, will help the authority in its plans to open new co-generation plants that would use biomass in combination with coal to produce both heat and steam.  The co-generation project “is a perfect example of how our improved financial condition has put us in a condition to take the steps to do this,” said finance chairman Peter Mahurin at the board meeting.

The steps TVA is taking to remake itself for the 21st century are ambitious and could provide a model for other large utilities – unencumbered by TVA’s ties to the federal government, its complicated history, and its high debt load – to follow.  Whether they’ll be enough to enable the Authority to survive and prosper remains to be seen.

 

Hungry Solar Developers Look to Booming South Africa

— May 8, 2014

South Africa leads the renewable energy market in Africa.  The country has established a target of nearly 3.7 GW of renewables installed by 2030; in November 2013, it completed its third round of bids under the Renewable Energy Independent Power Producer Program, bringing the country to 86 MW of solar operating and nearly 1.5 GW in development.  The program provides power purchase agreements (PPAs) over 20 years with the country’s primary utility, Eskom, for projects up to 75 MW.  In the third round of bidding alone, the country procured 787 MW for wind projects, 450 MW for solar PV, and 200 MW of concentrating solar power (CSP).  There were also bids for 16.5 MW of biomass and 18 MW of landfill gas power.  Not bad for one of the top coal-producing countries in the world.

As is common practice with bidding processes for any large infrastructure projects, the government included a local content requirement (LCR).  In the third round of bidding, the LCR was increased to 45% and, in a unique twist, the local company had to have a black South African shareholder majority.  Together, these requirements were expected to reduce the attractiveness to foreign companies and increase bid prices – both of which proved untrue.  The average price for solar PV projects dropped from around $3.50/W in the first round to less than $2.50/W in the second and third rounds.  This is competitive with solar being installed anywhere in the world today.

Open and Fair, Mostly

This is largely because the companies bidding include leading international project developers, such as Spain’s Abengoa, Italy’s Enel, China’s Longyuan Power, Norway’s Scatec, and SunPower Corporation (where France’s Total is now the majority shareholder).  China’s Trina Solar and U.S.-based First Solar are also active in South Africa.  While the market has either slowed down or become saturated in their home countries, international players are looking to emerging markets to grow sales.  This is a strong indicator of the hunger level of international power producers and the mature state of the solar PV industry in South Africa.

Bidders reported that they were generally pleased with the transparency of the process, typically a gripe when operating in emerging markets, including much of Africa.  There were construction delays for the first two rounds of projects and delays in announcing the third round of preferred bidders due to the overwhelming number of applicants – but these are to be expected as the country gets its first gigawatt under its belt.

The question is whether this apparent success can be replicated in other African countries.  Large-scale solar PV projects are operational in Reunion (15.6 MW), Mauritania (15 MW), and Cape Verde (5 MW), with a number of projects on the continent in development – notably Rwanda, with 8.5 MW.  Kenya, Tanzania, Nigeria, and Ghana are other countries with strong prospects and abundant activity in both on-grid and off-grid solutions.

 

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