Navigant Research Blog

The Global Biofuels Industry: A Future in Doubt

— December 11, 2014

In its recent report, The State of the Biofuels Market: Regulatory, Trade, and Development Perspectives, the United Nations (UN) notes that although the emerging biofuels industry has made great strides in the past decade – with ethanol and biodiesel becoming established commodities traded on all continents – significant barriers to commercialization persist across the developing world.  Global biofuels forecasts published in Navigant Research’s report, Market Data: Biofuels, support the view that future capacity deployment is heavily contingent on accessing a shrinking pool of capital investment targeting the industry.

As the UN report notes, conditions in the 2000s that drove annual investment in biofuels in the range of $10 billion per year – including uncertainties related to the price of petroleum products and peak oil speculation – have largely dissipated.  With shale oil & gas production on the rise in key biofuels markets like the United States and the price of crude sliding well under $100 per barrel, market realities have shifted.

Poor Timing

For the emerging advanced biofuels industry, the timing of this macroeconomic shift could not have come at a worse time.  While growth aspirations for the global biofuels industry shifted away from conventional pathways, such as corn starch, to ethanol, palm oil, and biodiesel during the financial crisis of 2008, greenfield biorefinery projects producing advanced biofuels have only just come online in the past year.

The development of these facilities involves capital costs in the hundreds of millions.  Since many of these projects were initiated and financed during a time when macroeconomic realities were quite favorable, a primary concern going forward is whether these first-of-kind facilities can spark additional investment to drive sustained capacity expansion.

This is unlikely given current realities.  To put this into perspective, according to our market data report mentioned above, global biofuels capacity – including conventional and advanced pathways – was just shy of 40 billion gallons per year at the end of 2013.  This represents 4.2% of the global liquid fuel market, or just under 1% of global final energy consumption.

Another $25 Billion Off

Advanced biofuels installed capacity – the focus of current commercialization efforts – accounts for just 1.2 billion gallons, or less than 2% of global biofuels production.  While that’s by no means insignificant, there’s still a long way to go in terms of reducing dependence on liquid fossil fuels, which account for 35% of global final energy consumption, according to data published by the Energy Information Administration (EIA).

In order for advanced biofuels to meet projected production capacity requirements by 2020 under expected biofuels supply mandates in key markets like the United States, European Union, China, and India (Brazil relies mostly on blending quotas), $25 billion to $35 billion in annual investment will be needed over the next 6 years, according to Navigant Research estimates.  This is a tall order for a suite of technology platforms that are not yet at price parity with petroleum-based fuels.

 

Are Corporate Clean Energy Initiatives Real?

— December 10, 2014

In November, Amazon made a commitment to power its infrastructure with 100% renewable energy over the long term.  Among tech companies, Amazon is late to the game in announcing its sustainability goal; Apple, Google, and Facebook had already released similar pledges over the past few years.  Although cloud computing is more environmentally friendly than previous computing technologies, according to Amazon, a “significant amount of unused server capacity and wasted energy consumption” still occurs when powering data center infrastructure.

Since 2008, businesses and corporations around the world have begun to more actively pursue sustainability initiatives.  Between 1992 and 2012, the number of corporations worldwide issuing corporate social responsibility (CSR) reports jumped from 26 to around 7,500.

Fortune 500 Leads the Way

Many of the leaders in corporate sustainability are part of the Fortune 500.  In 2013, 43% of Fortune 500 companies had established goals for greenhouse gas (GHG) reductions, energy efficiency, renewable energy, or some combination of the three, and 60% of Fortune 100 companies had set sustainability targets.  Although large corporations have made progress in establishing sustainability initiatives, only 75 of the Fortune 500 had specific energy efficiency targets in place by 2013.  GHG reduction targets made up the greatest share of climate and energy initiatives.

Companies with long-standing commitments to reducing energy use have already seen energy and dollar savings from these initiatives.  Walmart, for example, laid out plans in 2013 to save $1 billion globally per year through energy efficiency and renewable energy programs.  The company has a long-term aspirational goal to achieve 100% renewable energy.  In the shorter term, by the end of 2020, Walmart aims to reduce emissions intensity by 30% from 2010 levels and produce or procure 7 billion kWh of renewable energy worldwide.

The Trouble with Long Term

Kohl’s is another leader in corporate sustainability efforts.  It has been implementing green building methods since 2005, and it had 432 LEED-certified stores as of June 2014, representing a full 37% of the company’s 1,160 stores across the United States.  The 432 stores represent a total floor space of 35,616,240 square feet.  Kohl’s plans to reduce absolute emissions and emissions intensity on a per-square-foot basis by 20%, both by 2020, compared to 2010 levels.

Although the growing prevalence of CSR and sustainability goals is encouraging, broad long-term goals have raised concern from some environmental groups.  Setting goals without defined milestones makes it more difficult to hold companies accountable for the clean energy initiatives they have in place.  Many companies, Amazon included, have not specified a roadmap to achieve their energy goals – an obvious next step to ensure those goals are achieved.  Publicly committing to a clean energy future is only a first step.

 

Distributed Solar PV Poised to Reach Its Potential in Africa

— December 9, 2014

According to the International Monetary Fund, 7 of the world’s 10 fastest-growing economies are located in Africa.  While Cairo, Egypt, was the only city in Africa to have a population exceeding 10 million in 2010, seven cities across Africa are expected to achieve this level by 2040.  Rapid urbanization means that more than 100 African cities are projected to exceed 1 million inhabitants by 2040.  Such levels of urbanization and economic growth have forced local utilities to acquire new, primarily large-scale power projects.  Utilities are primarily calling for large scale natural gas power plants and renewable energy projects (led by solar PV and wind),  as evidenced by the booming South African renewables market.

Over time, however, there will be growing opportunity for smaller-scale distributed renewable energy projects in the 1 kW to 1 MW range.  Growth in this power class is led by government agencies that are electrifying health clinics and schools, often with international donor support. This is likely going to continue to be the case for at least the next 5 years. According to Navigant Research’s report, Global Distributed Generation Deployment Forecast, annual capacity additions of distributed solar PV in Africa are expected to grow from 10.9 MW in 2014 to 56.5 MW in 2023.  Agriculture, hotels, extraction industries, water pumping, telecom applications, and growing consumer markets in Africa will result in distributed solar PV growth across the region.  Cumulative distributed solar installed capacity during this time will reach 332.2 MW, representing less than 5% of the total installed solar PV capacity in Africa in 2023.

Immense Opportunity

Urban residential will be the last segment to catch on in urban African communities, primarily due to the combination of a small middle class, a lack of awareness among potential customers, and a lack of financing options.  Several experienced engineering firms, particularly in Kenya, are targeting distributed solar customer segments.  And while there is significant buzz about microgrids in the region, in particular, these projects have not yet developed at the anticipated rate.  That will change if innovative companies, such as PowerHive, Access Energy, and PowerGen, are able to successfully scale up current microgrid efforts and attract further investment.  In Kenya, there are a number of creative mid-sized projects, including solar-wind hybrid systems, ranging from 10 kW to 300kW.  In general, the opportunity for distributed renewables is immense, and the field is wide open – provided companies (and investors) are patient enough to deal with potentially problematic African bureaucracies.

Patient Yet Determined

The engineering firms and developers offering these solutions are working with utilities and regulators to create a more conducive environment for this small-to-mid-scale market segment in urban and off-grid settings.  Compared to utility-scale installations by larger international companies that hire workers for a short period and do not have a continued presence, the distributed market segment will have the most impact from a job creation and sustainable development perspective.

These companies tend to be staffed with very determined people who have made progress in very uncertain and often frustrating circumstances.  They’re becoming more organized and lobbying for a more favorable regulatory environment – including more robust net metering policies, feed-in tariffs, and, in general, more freedom to operate.

Equally critical, however, is education among financiers (and customers) on how to finance small-to-mid-sized solar PV systems.  Similar to the diversity among U.S. state policy and public utility commissions, pathways for growth will differ for each country in Africa.  Those that are willing to stay the course and weather the frustrations of operating in uncertain political and regulatory environments stand to profit  and, in the process, contribute to the establishment of the local industry over the long term.

 

In Germany, a Small Town Becomes an Energy Dynamo

— December 8, 2014

A small town in Germany has become a symbol of what is possible for renewable energy and of the challenges it presents to the traditional utility model.  Wildpoldsried, in southern Bavaria, produces 500% more energy than it needs.  The town of approximately 2,600 people does this through solar, wind, biogas, and hydro systems and a healthy dose of government subsidies.

The transformation of the town’s energy use enabled it to produce all of its electricity well before the target date of 2020.  The excess energy, however, presented the regional utility, Allgäuer Überlandwerke GmbH (AÜW), with a problem: How to integrate the surplus renewable energy into the wider grid? So the utility partnered with Siemens on a project called the Integration of Regenerative Energy and Electrical Mobility (IRENE).  Using sensors throughout the town’s energy systems, operators are able to measure various levels of current, voltage, and frequency, and then a self-organizing automation system balances supply and demand to stabilize the grid.  In addition, local homeowners who have energy-producing systems (e.g., solar PV) are now prosumers, and each has a small device that controls how much power is sold back to the grid and at what minimum price, creating, in effect, a small-scale distributed energy resource market that feeds into the larger grid.

Cars, Solar PV, & the Grid

Wildpoldsried is not alone in attempts to modernize and create a more efficient grid.  In the wake of the March 2011 Fukushima disaster, officials in Japan have been wrestling with how to create more sustainable cities.  The Japan Smart City initiative includes projects in Yokohama, Toyota City, Keihanna (Kyoto), and Kitakyushu.  In Yokohama, for instance, one of the trials involves a home energy management system provided by Panasonic that integrates solar PV systems with battery storage.  In another trial, automaker Nissan has been testing a vehicle-to-home system, in which electrical power is furnished to homes from the batteries mounted in electric vehicles. (For more on these types of vehicle-grid integration projects, please attend Navigant Research’s free webinar, Electric Vehicles and the Grid, on February 10, 2015, at 2 p.m. ET.  Click here to register.)

Net Zero

Similarly, in the United States, California continues to be a bellwether for renewable energy and sustainability.  The state’s Zero Net Energy (ZNE) policy requires all new residential construction to be ZNE by 2020; a ZNE home is one that produces as much renewable, grid-tied energy onsite, such as from a solar PV system, as it uses during a calendar year.  Homebuilder KB Homes has constructed such a zero-net home in the Sacramento area that features a rooftop solar PV system with battery storage, an advanced greywater recycling system, triple-pane windows, and heavy duty insulation.  In the city of Lancaster, builders are offering similar types of ZNE homes as that city attempts to become a leader in alternative energy.

What Wildpoldsried and these other cities demonstrate is that through technology, regulations, and cooperation with utilities, a smarter and eco-friendly grid is possible.  For skeptics, these are real world examples of what is possible.  Yes, this can mean disruption of current business models.  But it does not have to mean destruction.  As noted in Navigant Research’s free white paper, Smart Grid: 10 Trends to Watch in 2015 and Beyond, these and other smart grid trends are expected to unfold in the coming years, and stakeholders must adapt to this transforming energy landscape.

 

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