Navigant Research Blog

U.S. Energy Mix Shifts toward Renewables, Natural Gas

— April 20, 2015

The U.S. Energy Information Administration (EIA) has released figures for scheduled additions and retirements of generation resources in the United States during 2015. According to the EIA, the United States is expected to add 9.8 GW of wind, 6.3 GW of natural gas power plants, and 2.2 GW of solar—all of which make up 91% of the total 20 GW that is expected to come online this year. No coal plants are scheduled to come online this year, and 12.9 GW of coal and 1.98 GW of natural gas will be retired. Not only does this signal a shift in the U.S. energy mix, but it also indicates that there is a great deal of investment in wind, gas, solar, and even nuclear in the U.S. market. That said, 12 GW of this capacity is variable and will require some type of firming or integration. Often, this balancing is executed by gas power plants, which are more flexible than nuclear plants, for example.

Sources: U.S. Energy Information Administration, Electric Power Monthly
Note: Other renewables include hydroelectric, biomass/wood, and geothermal.

Overall, a healthy amount of capacity is slated to come online in the United States, thanks to market signals such as the Production and Investment Tax Credits. That said, what can we expect to happen in response to the difference between generation and load if the market is not encouraging investment in generation assets?

Shrinking in Texas

I learned at the ERCOT Market Summit that Texas is in a tenuous position with a current reserve margin of 15.7% in 2015 that is expected to shrink to 7.3% by 2024. The reserve margin is a reflection of a grid’s ability to cope with unpredictable but foreseeable events—such as a generator tripping offline or a sudden spike in load. These are not uncommon occurrences, but forecasting them is impossible; hence, the margin.

In Texas, the shrinking reserve margin is a function of power plant retirements and an increase in overall load. In addition, Texas is one of the most deregulated energy markets in the world. This means that it is very unlikely that the state would employ any type of market intervention, such as a mandate or a subsidy, to encourage investment. Instead, it is up the market to adapt in order to embolden the right participant behavior. So far, as evidenced by the shrinking margin, the market is not sending the right signals to encourage investment in power plants.

Markets designers in deregulated markets already looking ahead. Texas has decided against a capacity market and is instead developing reserve products for short-, medium-, and long-term reserves. These products are unlikely to offer the lucrative and consistent returns natural gas power plant developers are looking for, but they should open the door for alternative technologies, including storage.


Surprises in U.K. Renewables Bidding Round

— April 15, 2015

The U.K. Department of Energy & Climate Change (DECC) has announced the results of the first competitive Contracts for Difference (CfD) allocation round. CfDs are designed to give investors the confidence and certainty they need to invest in low-carbon electricity generation. The government does this by paying the generator the difference between the cost of investing in a particular low-carbon technology, known as the strike price, and the reference price, or the average market price for electricity. Generators participate in the electricity market, including selling their power, as usual. This means that if the reference price is higher than the strike price, generators must refund the difference.

The DECC assigned 27 contracts, totaling 2.1 GW of capacity, in round one; the government estimates its total spend will be £315 billion ($470 billion in 2012 prices). Wind projects will supply 1,910 MW of capacity, of which 750 MW will be onshore and 1,160 MW will be offshore. These projects, along with the five offshore projects (3,184 MW) that were allocated CfDs in the so-called round zero, underpin Navigant Research’s forecast in our World Wind Energy Market Update 2015 report that the United Kingdom will install 10.6 GW of wind capacity in the next 5 years.


In addition to the wind capacity, round one winners include two energy-from-waste projects, with associated combined heat and power systems, that total almost 95 MW of capacity. Three additional projects that use biomass gasification technologies have a combined capacity of 62 MW. Finally—and perhaps surprisingly, given the well-known cloudy and windy British weather—five solar plants, with a total capacity of 71 MW, are also included.

The winning strike prices also brought some surprises. On the one hand, low-bidding solar projects outbid onshore wind projects—which are usually considered the cheapest source of renewable energy. The solar projects offered £50 per MWh, or roughly $0.075 per kWh—very close to the current U.K. wholesale electricity price.

On the other hand, the offshore wind winning bids offered £114.39 ($0.169/kWh) and £119.89 ($0.178/kWh). Interestingly, the Danish Energy Agency announced the winner of its 400 MW Horns Rev. 3 offshore wind farm on the same day. The winning bid was 52% lower than those in the United Kingdom were and will run for 3 fewer years.

Storm Clouds 

If these solar projects actually get built, they will put solar costs in the United Kingdom at a similar level to winning bids in regions with excellent solar resources, such as Dubai and Texas. But there are some clouds on the horizon. James Rowe, director with Hadstone Energy (the developer of one of the lowest bidding projects), put this construction in doubt in a pair of LinkedIn posts (“We Got Our CfD … Oh Dear” and “What Went Wrong with the CfD Auction for Solar?”) in which he explored the reasons why the players (including Hadstone) bid so low.

At this point, it’s difficult to measure the level of success or failure of this allocation round. The solar bids at £50 per MWh are unlikely to ever be built. If others, which bid £79.23/MWh, do come online before the end of 2017, it will be the first time that solar in a resource-poor country has outbid onshore wind in a country with good wind resources.


Alaska Builds a Microgrid Future

— April 15, 2015

Alaska was in the midst of a heat wave when I arrived there in early March, with temperatures hovering around the freezing mark, and reaching 40 °F  the day I left. The lack of snow forced the annual Iditarod dog sled race to a new route farther north, a sign many locals attributed to global climate change.

I went to Alaska because the state is ground zero for microgrids, with more deployed here than any other state in the United States, with some nearly 100% supplied with renewable energy. Alaska’s often harsh environment means that microgrid performance can literally be a life-or-death situation. When one such system failed more than a decade ago in Kotzebue, a city with a population of 3,700 and located 30 miles above the Arctic Circle, the entire water and wastewater system froze, and it took months to bring water back online.

Call to Arms

Held in Anchorage, the Islanded Grid Wind Power Conference demonstrated that Alaska can show the rest of the world how to create more resilient and sustainable power systems in the face of immense logistical challenges. While the rest of the world seems to be turning to solar power, wind is still king in Alaska, where towns like Kotzebue only have 35 days during summer where the sun rises above the horizon.

Most microgrids in Alaska are run by utilities—rural cooperatives, municipal utilities, or Native Alaska village corporations. Some of these entities, especially tiny villages on remote islands, have limited operational capacity, so technology choices must be wise and easily reparable. That’s why some companies, such as Intelligent Energy Systems, often rely upon older turbines that can be fixed the old fashioned way: with a wrench.

Beyond Diesel

Other companies, such as TDX Power, an Alaskan Native corporation created by individuals whose ancestors were the slaves of Russian fur trappers, are building innovative wind heating systems that validate the thermal energy benefits microgrids bring to the table. They’re also investigating new business models, given that Alaska is now about $4 billion in the red due to declining oil prices. Ironically enough, this shortfall is limiting future financial support for renewable energy development, forcing developers to find creative microgrid financing solutions.

Perhaps the most interesting company I saw was Innovus Power of Fremont, California. Innovus offers variable-speed diesel generators that come embedded with what is, in essence, a microgrid controller capable of supporting renewable penetration levels of up to 100%. Leveraging power converter innovation from Northern Power, the company says its gensets can eliminate the need for curtailment or expensive energy storage, and can serve as backbones for microgrids that combine dispatchable power and renewable integration capabilities.

Governor Bill Walker pointed out that while Alaska has more energy resources than any other U.S. state, its power prices are the highest. Microgrids integrating renewable energy are a key part of the future strategy to change that situation.


The Impacts of the Evolving Energy Cloud

— April 9, 2015

In my July 2014 blog, I discussed how utilities should play both offense and defense as the energy cloud evolves and transforms the energy sector. Navigant Research’s new white paper, authored by Mackinnon Lawrence and Eric Woods, provides an update on the evolution of the energy cloud. To summarize, we foresee the strategic, business model, and operational impacts on incumbent utilities increasing, more so as new entrants play important roles in states like Hawaii, California, Arizona, Colorado, New York, New Jersey, and the Carolinas.

Distributed energy resources (as detailed in Navigant Research’s report, Global Distributed Generation Deployment Forecast) and renewables will continue to grow exponentially over the next 5–10 years globally, driven by expanding customer choices and a rapidly changing technology landscape. This will dramatically affect utilities’ customer relationships and increase the complexity of their operations as distributed, intermittent, renewable energy resources spread and the grid becomes more and more digitized. Below is an overview of the highlights of the themes we see evolving rapidly.

Customer Relationships: The further evolution of distributed generation, energy efficiency, demand-side management, demand response, smart metering, behind-the-meter energy management systems, and social media will drastically change the way utilities interact with their customers—many of whom will generate their own power, sell power back into the grid, and plug in their electric vehicles at night. These increasingly sophisticated energy customers expect increased self-service and new products and services, which in turn will require innovative front- and back-office customer operations. This is likely to lead, in many cases, to a strategic pivot in how utilities proactively engage with customers.

Operations: Increasing the return on capital investments and reducing operating expenditures has historically been a priority for utilities. As the energy cloud revolution spreads, the importance of managing assets and capital will only increase. Utilities must give special consideration to managing assets, particularly procurement and the decommissioning of stranded assets. Additionally, utilities will look to build or acquire distributed energy resources and other disruptive technologies that transform day-to-day grid operations while maintaining security and reliability through climate change and other major shifts.

Regulation: All of this will also have a profound impact on regulatory policy, raising the question: will current deregulated market structures be forced to change? The utility industry is vital for the global economy, and is regulated as such. As the energy cloud matures, the regulatory environment can and must change. For a more detailed examination of likely regulatory shifts, please see this blog by Mackinnon Lawrence.

Ultimately, the objective is to provide a safe, reliable, and affordable service to customers. But a fragmented landscape of players (developers, producers and operators, wholesale and retail) will drive the need for organizational, infrastructural, process and data integration, and coordination across the power value chain and could create significant cost in a highly distributed energy infrastructure environment. It will be very interesting to see how markets will evolve as the energy cloud transformation takes hold. More to come…

Mackinnon Lawrence contributed to this blog.


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