Navigant Research Blog

Biofuels: A Guide for the Next Couple of Years

— June 16, 2015

Six months after its official deadline to propose the Renewable Fuel Standard for 2014 (yes, 2014), the U.S. Environmental Protection Agency (EPA) has finally released a draft proposal for the annual standards for 2014, 2015, 2016, and for the 2017 biomass-diesel volume.

The EPA played it safe for 2014, matching the standards with the actual consumption of biofuels such as transportation fuel, heating oil, or jet fuel in the contiguous United States and Hawaii. For the upcoming years, the EPA is proposing a slight increase in the total mandate: 9.2% in 2 years. Most of the growth is expected to come from advanced biofuels, which are set to increase by almost 31% by 2016, while conventional biofuels (grain-based ethanol) are expected to grow only grow 5.6% in the same period. The mandate will likely not make too many people happy, and that is probably good.

Fats Are In, Carbs Are Out

For conventional biofuels, the news is not good but perhaps not surprising. In the original mandate, conventional biofuels had a target for 2015 of 15 billion gallons (1.6 billion gallons more than in the new proposal), but the adoption of ethanol has been limited by what the industry calls a blending wall, or a technical/regulatory limit that impedes older gasoline vehicles to consume fuel blends containing more than 10% of ethanol by volume.

The supply-demand balance in the industry seems in favor of buyers. The Renewables Fuel Association reported June 1 that operating capacity of the industry was 14.57 billion gallons per year, which implies that the mandate will cover 92% of its capacity in 2015 and 96% in 2016. They might be able to sell more ethanol if enough gasoline in consumed in the United States (increasing the volumes allowed under the blending wall), but they will have to price it below gasoline to attract buyers. The lower mandate is expected to hit harder the producers with old and inefficient plants. Leading producers like POET, Green Plains Renewable Energy (GPRE), or Abengoa are anticipated to perform well.

The picture for the rest of the industry is rosier. The new standards for biomass-based diesel (produced from vegetable oils or animal fats) is high enough to absorb the current capacity. The National Biodiesel Board plant database aggregate capacity  sums 808 million gallons, although it does not account for the whole biomass-based diesel industry. The new standard will benefit producers like the Renewable Energy Group (REGI) and Neste Oil – both large producers of biomass-based diesel.

The Underdog Story

Finally, the EPA kept a large enough carve-out for cellulosic fuels. The United States used 26 million gallons of ethanol-equivalent cellulosic fuels in the first four months of 2015. If the country continues producing them at the same rate, the annual production would reach 78 million gallons, or 28 million gallons below the 2015 mandate. Although a lot of investment has gone into technologies that promise to produce liquid fuels from cellulosic material, it is the biogas producers that are benefiting the most from this mandate, as they are supplying virtually all the cellulosic-based biofuels. This is surprising given that biogas was only approved as a cellulosic fuel halfway through last year.


Incentives for EVs Continue to Drive the Market

— June 5, 2015

Can cleantech incentives be too successful?

This is a question that Norway is grappling with as the country considers dropping its generous electric vehicle (EV) subsidies. EV drivers in the county receive a number of benefits, including free parking and bus lane access, but the biggest by far are the tax exemptions. Since taxes in Norway can double the price of a conventional car, an EV without sales tax suddenly becomes much more affordable. One study estimated that total subsidies for EVs in Norway equated to around $8,200 per car per year. And they’ve worked. Norway has the highest EV adoption rate in the world. Navigant Research has estimated that battery electric vehicles were around 13% of the country’s annual light duty vehicle sales in 2014.

Evidence suggests these incentives are important drivers in other markets, as well. In the United States, HOV lane access has been strongly correlated to demand for hybrids and EVs in markets like the Washington, D.C. area and California, where traffic delays are legendary. Georgia has seen a significant uptick in EV sales since implementing an EV tax break—one that the state is now considering ending.

One complaint made against these incentives is that they are essentially subsidizing the rich, or at least the well-off. And there is some truth to this. A $100,000 Tesla S is certainly a car out of reach for most households. Even mainstream EVs like the Nissan LEAF, while affordable, represents a significant premium over the price of a comparable car. The same complaint can be made for most clean energy subsidies, whether for solar, wind, or fuel cells: initial adoption is likely in the higher income brackets.

Why Governments Still See Subsidies as Useful

However, subsidies are very often the carrot to the government stick of regulatory mandates. In the United States, automakers are facing increasingly tough fuel economy and greenhouse gas emissions targets. By model year 2025, passenger vehicles in the United States will be required to meet an estimated combined average fuel economy of 54.5 mpg. As Navigant Research found in its Automotive Fuel Efficiency Technologies report, these standards cannot be fully met simply by the downsizing of internal combustion engines and the introduction of stop-start or hybrid capability. EV sales will be a necessary component to meeting these standards. Add to this the zero emissions vehicle mandates set by California and adopted by 9 other states, and the government is in essence requiring the sale of EVs.

EV sales have seen steady growth since 2010, and are poised to see faster growth. However, even with the introduction of more models, they will still be offered a price premium that will keep them at a niche sales level. In its Electric Vehicle Market Forecasts report, Navigant Research projected global PEV sales would rise from under 2% of annual light duty vehicle sales in major markets like North America and Western Europe to around 4-5% in 2023.

Even with cheaper and longer range EVs coming to market, the price premium can keep these cars from reaching the sales level needed to meet these standards without some incentives; these will continue to be necessary for the next decade.


Novel Microgrid Architectures Face Regulatory Hurdles – Even in New York and California

— June 4, 2015

If I had to pick two states that are leading the charge on reinventing electric utilities, they would be New York and California. Yet, even in these state laboratories of regulatory reform, novel forms of distribution networks (often referred to as microgrids) that rely upon the inherent advantages of direct current (DC) are facing obstacles.

The core challenge facing DC distribution networks lies with the need for standards and open grid architectures that can help integrate the increasing diversity of resources being plugged into retail power grids. This, among other issues, is the focus of the first major conference sponsored by the Institute of Electrical and Electronics Engineers (IEEE) on DC distribution networks. The conference will take place in Atlanta, Georgia, from June 7 through June 10.

In New York, Pareto Energy of Washington, D.C. obtained preliminary engineering approval from Consolidated Edison (and a $2 million grant from the New York State Energy Research and Development Authority [NYSERDA]) to install its patented GridLink microgrid controller at the 12.8 MW combined heat and power (CHP) plant that serves Kings Plaza Shopping Center on the Brooklyn waterfront.  GridLink converts power from each generation source (including grid power) from alternating current (AC) to DC, collects all the power on a common DC bus, converts that DC power back to AC, and distributes power to any load (including those on the utility grid).  All the while, each power source is electrically isolated. In short, GridLink creates a non-synchronous plug-and-play microgrid.

Although Kings Plaza has never been connected to Consolidated Edison’s grid, it provides electric and thermal energy to the center at costs less than half of equivalent utility services. Under the plan, 8 MW of low-cost power from Kings Plaza’s CHP unit will be exported to the utility grid, which may be utilized to serve nearby low-income communities during a major power outage. Despite these potential benefits, some regulatory snags have delayed the project. Pareto has also filed a petition with the New York Public Service Commission, claiming discrimination against its lower cost option to traditional power delivery infrastructure to meet contingency requirements for reliability within the Consolidated Edison service territory.

The View from the Other Coast

In California, the issues are different, but they also involve DC. One case involves Bosch, which was awarded a California Energy Commission grant of $2.8 million grant to develop a high-penetration solar PV DC microgrid at an American Honda Motor Co. parts distribution center in Southern California. The project is designed to validate the efficiency performance benefits of a patented system allowing it to directly connect DC power flowing from solar PV to LED lighting and DC ventilation systems located within the building, as well as a DC energy storage device. The benefits of DC attached to this project include lower installation and operating costs. In addition, this project is pioneering the application of a DC distribution network within existing building codes in order to boost reliability.

While Bosch observes it has not run into any problems with building codes or other such potential obstacles to its DC building grid business model, it has identified an interesting dilemma. Since state subsidies for both solar PV and energy storage are linked to the size of the inverter interconnecting with the AC grid, it appears DC technologies are being discriminated against, despite the fact they are more efficient and reliable.

In both cases, the status quo is being challenged by new technology revolving around a nonsynchronous microgrid incorporating the advantages of DC.  This is the subject of my next report, Direct Current Distribution Networks, expected to publish later this month.


Dispatches from the National Town Meeting on Demand Response

— June 4, 2015

One year after the U.S. Court of Appeals’ decision to strike down Federal Energy Regulatory Commission (FERC) Order 745 and question FERC’s jurisdiction over demand response (DR), the DR community appeared alive and well at the 12th annual National Town Meeting on DR in Washington, D.C. There was a plethora of enthusiasts, including utilities, regulators, and vendors, talking about drivers for DR and how the industry could progress in a post-745 world should the Supreme Court uphold the lower court’s decision.

The event kicked off with a roundtable of state regulators discussing DR and, more broadly, electricity industry transformation based on distributed energy resources (DER). Michael Picker, president of the California Public Utilities Commission, compared the DR industry to the telecommunications industry by talking about how incumbent communication providers lost 40% of their landline base and the world transitioned to a mobile model. The dialog was past the utility death spiral concept, but it indicated that the reality of stagnant or decreasing load and customer-side energy solutions will have to be addressed. The big chicken-and-egg question was whether regulatory change or business model change needs to come first, and little consensus was reached.

Changes Ahead

Following the regulators, a panel of utility executives outlined their opportunities and pain points from the changing landscape. Interestingly, when given a list of disruptive technologies to rank, energy storage and solar came out on top, while DR was on the bottom. DR is seen more as a positive force and tool for the utility to manage the grid and engage customers. One theme that arose is that utilities will need to add new skills to their workforce as the business shifts from strictly a wires and hardware model to more software, information technology, and customer outreach.

One other major area of focus was New York’s Reforming the Energy Vision (REV) proceeding. REV has gotten a lot of attention since it was launched a year ago, but now people want to know where the rubber will hit the road. It appeared that speakers who are involved in REV had a bit of trouble really explaining the market transformation that is espoused. That doesn’t mean that important changes won’t occur, but as the rest of the country watches REV proceed, it will learn what to emulate and what to avoid.

These issues and other drivers and barriers to DR are discussed in Navigant Research’s new Demand Response Enabling Technologies report. By the time the National Town Meeting comes around next year, the Supreme Court will have decided DR’s fate one way or another … and hopefully it won’t make for an unlucky 13th gathering.


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