Navigant Research Blog

Severe Drought Hastens Hydropower’s Slow Decline

— November 4, 2014

Coal retirements, the shale gas bonanza, post-Fukushima nuclear curtailments, the rising adoption of distributed generation, and emerging price parity for solar PV and wind – the dynamic changes impacting electricity grids worldwide are many.  Now, with prolonged droughts affecting leading global economies, like Brazil and California (the world’s seventh and eighth largest economies by gross domestic product [GDP], respectively), a slow decline in the prominence of hydropower is in the mix.

Historically, hydropower has been the primary source of clean and renewable energy in both economies.  Its decline has had a more severe impact on Brazil’s grid, but in both places, this development is expected to continue to coincide with a further rise in gas-fired generation and renewables.  Due to the current cost of renewables, the consequences of this shift may be a rise in greenhouse gas emissions in each country’s electric power sector.

California Copes

With a fleet of 300 dams, California is among the nation’s leaders in hydropower generation.  However, hydro in the state has declined from peaks in the 1950s, when it was responsible for more than half of the state’s generation mix, to just 9% in 2013.  Having prepared for hydro’s decline by broadening its generation mix over the last several decades, the California grid remains mostly insulated from the worst effects of nearly a half decade of severe drought.

California generates around 55% to 60% of its power from natural gas and has seen a 30% increase in gas-fired generation since 2002.  Meanwhile, California’s leading investor-owned utilities across the state – Pacific Gas & Electric (PG&E), Southern California Edison (SCE), and San Diego Gas & Electric (SDG&E) – are on track to meet or exceed their 33% renewable procurement obligations by 2020 under the state’s Renewable Portfolio Standard (RPS) policy.

Brazil Gasps

Facing its worst drought in 40 years, meanwhile, Brazil has been more severely affected by reduced hydropower generation than California.  Currently, the second leading producer of hydroelectric power in the world, trailing only China, Brazil relies on hydro for more than three-fourths of its generation.  According to data published by BP earlier this year, hydropower consumption fell 7% in 2013.

This rapid decline has prompted severe rationing in 19 cities, undermined hydropower generation, and resulted in blackouts across the country.  In the run up to the 2014 World Cup, the Brazilian government provided more than $5 billion to subsidize electric utilities, replacing lost hydroelectric generation with fossil fuel-fired generation, including large amounts of liquefied natural gas.  While this helped stabilize the grid during the event, it has nearly doubled greenhouse gas emissions from the power sector.

Brazil’s experience provides a harsh lesson for drought-stricken areas with a high dependence on hydropower.  While natural gas is a low-carbon alternative relative to coal-based generation, it may stall or reverse carbon mitigation efforts when used in place of hydropower.  Renewables can help make up the difference, but even with sharp declines in the price of solar PV and wind, they remain far more expensive than hydropower or natural gas.  While both California and Brazil are in a hole with respect to water supply and hydroelectric generation, persistent drought is unlikely to result in a significant increase in new renewables spending without the introduction of new subsidies.

 

Residential Solar Market Roiled by Proposed Rate-Basing Scheme

— November 3, 2014

There is a growing debate about the financing and subsidies of residential solar PV systems.  How this turns out could have a significant impact on the market’s future.  At the center of the discussion are Arizona Public Service (APS) and Tucson Electric Power (TEP), two regulated utilities that have proposed new rate-based solar programs for residential customers.  Such a move threatens private solar installation-financing companies such as SolarCity and Sunrun, which currently lead the growing market by offering no-money-down leasing schemes that have attracted thousands of new customers.

The private solar companies argue that allowing the utilities to sell rate-based solar systems would create an uneven playing field.  They believe the regulated utilities should set up their own separate, unregulated companies and compete for rooftop solar business with the independent installer-financing companies.  That’s precisely what electricity providers operating in other states have done.  For instance, NRG and Edison International have entered the rooftop solar market by establishing unregulated business units that operate in the Northeast and California, thus avoiding the controversy.

Keeping the Playing Field Level

This is a thorny question for Arizona, and both sides have convincing arguments, as my colleague Taylor Embury pointed in a recent blog post.   The solar installers argue that permitting the Arizona utilities to go ahead with their rate-basing plans would set up unfair competition because of their monopoly status.  The utilities say they just want to expand into solar because of customer demand for distributed generation (DG), and because it helps the utilities meet mandated goals for DG.  But the solar installers and their financiers have advantages they can leverage as well, in the form of the 30% income tax credit and a depreciation method called Modified Accelerated Cost Recovery System (MACRS) that can make the investments quite attractive.  A decision on whether to allow the utilities to move forward with their solar programs is pending before Arizona’s utility regulator, and a ruling is expected before the end of the year.

This topic is certain to be part of the upcoming discussion during Navigant Research’s “The Home as Micro Power Plant” webinar, which takes place on November 11.  Besides the rooftop solar issue, panel members will examine the potential for residential energy storage, how plug-in electric vehicles could be used as grid assets, and whether residential combined heat and power can gain market traction.  To register for the webinar, click here.

 

Finally, Germany Makes Progress on Coal

— November 2, 2014

For critics who scoff that Europe’s carbon emission reduction goals are unachievable, Germany has become Exhibit No. 1.  Since Chancellor Angela Merkel decreed in the wake of the Fukushima Daiichi nuclear accident that Germany would phase out its nuclear power industry, coal use in Germany has been on the rise, and the country’s carbon emissions have remained stubbornly high.

Now it appears that tide may be turning.  According to AG Energiebilanzen (“Working Group on Energy Balances”), an energy research firm, total energy consumption in Germany is projected to fall by 5% in 2014, compared to 2013, to the lowest level since the fall of the Berlin Wall.  Coal consumption for the year is expected to be down more than 9%.

Those declines are due mostly to the mild winter in 2013-2014, but clean energy is expanding as well: Renewable energy use grew by 1.6% over the first 9 months of 2014, compared to the previous year.

The Brown Stuff

Germany’s coal use carries particular importance not only because it is Europe’s biggest economy, but also because Germany burns mostly lignite or “brown coal,” the dirtiest form of coal, and because Germany’s green energy program, known as the Energiewende, is among the most ambitious in the world.  While renewable energy production has expanded rapidly in Germany – accounting, at times, for 100% of the country’s power demand and forcing utilities to pay customers to consume electricity from conventional power plants – the nuclear phase-out has led to a rise in the burning of coal for baseload power supply.

Now, the government is at least considering shutting down coal plants.  German minister Rainer Baake of the Green Party told reporters in late October that the government could come up with a plan as early as December to eliminate coal-fired capacity and boost energy efficiency programs.  Earlier Der Spiegel reported that the government wants to eliminate as much as 10 GW of coal capacity.  A decision will likely not come until next year.

Please Exit

Getting rid of coal is critical if Germany is to reach its target of cutting greenhouse gas emissions 40% compared to 1990 levels by 2020.  The environment ministry has said that if current trends continue, the country will fall short of that goal by 5 to 8 percentage points.

Meanwhile Swedish energy giant Vattenfall, one of Europe’s largest operators of power plants, said it will seek to sell off its coal-fired plants in Germany.  Vattenfall’s coal operations in Germany produce some 60 million tons of carbon dioxide (CO2) a year – more than Sweden’s total CO2 emissions.

Like a drunk uncle at a wedding, Germany’s coal industry is an embarrassing and unwelcome guest that everyone would like to usher to the exit.  Getting it out the door, though, remains a tough task.

 

Tailwinds Pick Up for U.S. Wind Market

— November 2, 2014

The U.S. wind market, in the third quarter of 2014, showed clear signs of recovery, with 1,254 MW installed, eclipsing the total of 1,084 MW installed all of last year.  The American Wind Energy Association (AWEA) reports an additional 13,600 MW under construction across 105 projects.  In our March 2014 World Market Update, Navigant Research forecast that by year’s end the 2014 total could reach 6,300 MW.  The last 3 months of the year typically see more capacity installed than in the previous 9 months combined because of the construction cycle peaking at the end of the year.

Some wind projects may to slide into 2015, though, given that there’s not a policy-driven deadline to commission projects by year’s end.  A number of factors have contributed to a slower construction cycle, despite over 12 GW of wind projects with announced construction for next March.  The supply chain in the U.S. wind market exhibits some unavoidable inefficiencies due to the stop-start nature of U.S. wind power policy.  Wind turbine manufacturers, along with their component suppliers for blades, towers, drivetrains, and other equipment, were forced to throttle back manufacturing capacity in 2013 due to the down market.  Re-hiring and training workers and ramping up capacity is not an overnight process in an industry that produces aerospace-grade products at industrial levels.

Delivery Delays

There are also signs of transportation bottlenecks for some of the largest components.  The majority of wind projects under construction use rotors around 100 meters in diameter and towers that are 90 meters or higher.  Transport companies that move this equipment have been reluctant to invest in new trailers designed for larger wind turbines, given that the equipment could sit idle if the U.S. market falls into another slump.  Railways have also been bottlenecked, partly due to the huge volume of crude oil being shipped around North America.

The turbines installed in 2014 so far have come largely from the Big Three vendors: GE, Vestas, and Siemens.  Most of these installations use GE’s 1.6/1.7 MW turbine.  More than 4,500 MW of the capacity under construction uses GE turbines, followed by 2,775 MW for Vestas, 1,792 for Siemens, and around 3,500 MW not yet reporting a turbine.  Notably, however, turbine vendors that have limited manufacturing presence in the United States continue to secure business, with over 800 MW under construction using turbines from Acciona, Gamesa, and Nordex combined.

Flexible Finance

Also notable is the return of the merchant, or hedged, wind plant.  Most wind projects under construction either have signed a long-term power purchase agreement (PPA) or are utility owned.  But a substantial amount of wind capacity is proceeding on a merchant basis, which is operating without a contract. Most of this is occurring in Texas.

A few years ago, following the financial crisis, it was nearly impossible to secure outside project financing for a wind plant that did not have a PPA.  That rigidity has softened as wind developers seeking higher potential returns are finding ways to move forward and secure project financing without a fixed PPA contract.  In many cases, hedge agreements that went out of style during the recession of 2008-2009 are back in use.  These financial tools allow a wind plant to take advantage of fluctuating electricity spot market prices.  Spot prices in Texas generally range from $45 per MWh to just over $60 per MWh.  Special merchant contracts provide a type of insurance that enables wind plants to be paid the fluctuating spot price while also being protected by a price floor and ceiling – thus reducing risk while not limiting wind power providers to a low fixed price, as is typically the case with a PPA.

Moving forward, all eyes will be looking to the end-of-year project commissioning to see how much the U.S. wind market has recovered from its 2013 doldrums.

 

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