Navigant Research Blog

As Future of US Energy Becomes Uncertain, China Moves Forward with Clean Energy Plans

— February 2, 2017

Cyber Security MonitoringChina is moving forward on its commitments to cutting back on coal generation. It recently announced that it was canceling the development of 103 coal-fired power plants. The announcement, made by China’s National Energy Administration on January 16, cites the goal of these cancellations as meeting a target in the country’s 13th Five-Year Plan to limit coal-fired power generation capacity to 1,100 GW by 2020. The plan includes canceling projects across 13 provinces, some of which are already under construction.

The cancellation of these plants comes in conjunction with another announcement made by the National Energy Administration stating that it intends to spend more than $360 billion on renewable energy resources, including solar and wind, through 2020. The plan includes creating more than 13 million jobs in the renewable energy sector, curbing the growth of greenhouse gas emissions contributing to global warming, and reducing the air pollution that hangs over cities like Beijing.

US Shifts Direction

These announcements come at a time when US President Donald Trump’s stated plans to revive the coal industry, scrap the Clean Power Plan, and focus on oil & gas have raised questions about the future direction of the US energy industry. Some experts claim that the Trump administration will only have so much power to change the fate of the coal industry; the economics behind the industry still point to a decline due to renewable resources becoming cheaper and natural gas proving to be a cost-competitive option in the United States’ current energy portfolio.

Based on statements in the first week of the Trump presidency, it seems unlikely that the United States will assume a leadership role in mitigating climate change. In fact, this shift in focus means that the United States risks losing ground to China in a race to lead the world forward in decreasing carbon emissions. This differs from the status quo just over a year ago at the Paris Climate Summit, where the United States and China both committed to fighting climate change.

Today, President Trump’s past claims that climate change is a Chinese hoax and suggestions of the United States’ withdrawal from the Paris Agreement could create a space for China to take on a leadership role in clean power. While the country still has a long way to go to prove its commitments to the environment, in the past few years it has made significant progress in terms of reducing its emissions, curbing coal generation, and ramping up investments in renewable energy resources. China has shown potential in its ability to lead the world toward a low carbon future.

 

As Natural Gas Electricity Generation Grows, Risks and Opportunities Emerge for Energy Consumers

— October 26, 2016

Natural gas is becoming increasingly vital to US electricity generation. With vast new resources made available by hydraulic fracturing, use of the fuel is growing across various sectors, especially in the area of electricity. Although coal has led electricity generation since before 1950, natural gas finally took the highest share for most of 2015 and almost all of 2016 (as seen in the chart below).

While many welcome the growth of this cheap, low-emissions fuel, some risks are arising for energy consumers. Put simply: a system that depends heavily on natural gas is more susceptible to supply shocks. With slumping production and demand from the electricity sector, prices are already trending up. The monthly Henry Hub price reached $2.99/MMBtu in September, the highest in 20 months. This may be exacerbated by a colder winter that is driving predictions of higher gas and electricity prices and volatility compared to last year. And this week marks 1 year since the largest natural gas leak in US history hit southern California, the fallout of which still reminds us how unforeseen disasters can shock supplies.

This type of volatility can affect everything from household budgeting to the balance sheets of multi billion-dollar utilities. Notably, commercial and industrial electricity consumers can be heavily affected to the tune of millions of dollars by volatility in gas prices, electricity prices, or both. Thankfully, advances in alternative generation options exist to mitigate these risks.

Monthly Net Electricity Generation, All Sectors (Jan 2011 – Dec 2016)

AForni Blog

(Source: US Energy Information Administration)

Alternative Generation Advances

Renewables include technology solutions like wind and solar, and (in this context) other zero-emissions complements like battery storage and demand response. These technologies are being broadly embraced thanks to government support, cost declines, and emissions reductions initiatives. The dramatic growth in corporate renewable power purchase agreements is one of the most powerful examples of the Energy Cloud in action.

Onsite gas-fueled generation may seem subject to the same market vicissitudes affecting natural gas, but it has some key advantages, even over renewables. First, customers installing fuel cells, gensets, or microturbines can purchase long-term gas contracts that will guarantee a certain rate for gas (and therefore electricity)—a key risk mitigation tool. Compared to centralized generation, onsite gas generation is installed faster and with less regulatory risk, while also eliminating the transmission and distribution energy losses (and risks) of the electric grid. Compared to renewables, these technologies can be installed in a far smaller footprint and, crucially, generate electricity without relying on the wind or sun.

Onsite dual-fuel generation consists of gensets, turbines, or microturbines that can operate on diesel and natural gas (and often, other fuels). Such equipment has many of the same advantages of onsite gas-fueled generation, with the added bonus of accepting multiple fuel types. While natural gas is often the preferred fuel (due to emissions requirements and lower cost), shocks to natural gas supply and/or price can make an alternate fuel like diesel favorable, if only for a short period. Diesel can also be stored onsite, ensuring access in a major catastrophe. This technology has been most embraced in the US oil & gas sector, but has growing applications both stateside and abroad. Watch for the coming revolution in liquefied natural gas to open new opportunities in flexible generation, too.

Natural gas will be an important electricity fuel for a long time to come. But in an era with baseload in decline and renewables on the rise, these tools should not only mitigate natural gas risk, but also build flexibility into an electric grid that sorely needs it.

 

Can Hybrid Projects Usher in the Next Generation of Renewable Energy?

— September 16, 2016

Wind and SolarIndia’s ambitious plans for renewable energy development are faced with a number of challenges. Chief among these challenges is the limited availability of land for wind and solar plants in the densely populated country, as well as the cost and technical challenges of interconnecting projects to the grid. These challenges have driven some developers and equipment manufacturers to explore hybrid renewable energy facilities, combining both wind and solar generation at a single site. This hybrid concept has been explored in other areas with limited land available for new development, most notably in Japan, where a 56 MW hybrid wind and solar project was commissioned in 2014.

Wind and solar development is often limited by the relatively high upfront costs for land acquisition, grid interconnection, and project development. The availability of grid interconnections can prohibit the development of many potential wind and solar sites, and the cost for interconnection often requires developers to build larger-than-ideal facilities. As a result, many of the optimal locations for wind and solar generation have already been developed, particularly in densely populated regions.

Hybrid Wind and Solar

The concept of a hybrid wind and solar project aims to eliminate many of the barriers to development by maximizing the value of a facility to overcome the costs for acquiring land and interconnecting to the grid compared to individual technologies. In the United States and other countries, select areas have already been set aside for renewables development. A hybrid system can allow developers to maximize the megawatts of capacity installed per each acre of available land. In addition to overcoming upfront costs, a hybrid project can take advantage of the complementary generation profiles of wind and solar. Wind is often most productive at night while solar power is naturally only generated during the day. By co-locating these generation sources at a single site, a project can more closely represent a baseload resource on the grid, facilitating easier integration and making the resource more valuable for grid operators. The improved predictability of generation output is further enhanced if an energy storage system is also combined at a single facility. This is exactly the aim of developer Windlab Ltd. for the Kennedy Energy Park it is developing in Queensland Australia. The project, scheduled to come online in 2018, will feature 30 MW of wind, 20 MW of solar PV, and 2 MW of battery energy storage capacity.

This hybrid power plant concept doesn’t stop on land, the Danish company Floating Power Plant is currently testing its hybrid wind and wave power generation platform known as Poseidon in the waters off of Northern Europe. While the concept of hybrid renewable plants holds significant potential, it will have to overcome the existing approach of both developers and utilities to typically work with only a single technology per project. However, as the industry matures and ideal sites become scarcer, the benefits of hybrid projects are likely to increase and these projects may eventually become the norm.

 

Europe’s Energy Transition Megatrends and Tipping Points, Part VI: New Entrants and Converging Industries

— September 6, 2016

SmartCityJan Vrins coauthored this post.

In our initial blog on Europe’s energy transition, we discussed seven megatrends that are fundamentally changing how we produce and use power. This blog discusses how converging industries and new entrants are changing our industry, specifically focusing on smart cities as a key area where this convergence and disruption is occurring at an accelerated pace. Finally, we will discuss what this means for the many market players that want to participate and survive in the Energy Cloud.

Our latest white paper describes how changing customer needs, evolving policy and regulation, and accelerating technology innovation and integration drives a more sophisticated two-way grid platform and a rapidly evolving ecosystem. Smart cities—dynamic, localised platforms that recombine technologies and services around energy, transportation, and data communication—provide fertile testing grounds for the industry incumbents and disruptors going after the nearly $1.3 trillion of forecasted new annual industry revenue by 2030 globally.

What’s Happening?

Europe’s focus on the interdependent goals of creating a low-carbon economy, ensuring energy security, and enabling competitive energy markets make it a test bed for many of the developments associated with the energy transition. This is reflected in the European market’s attraction for players across the energy value chain, including many new entrants who see an opportunity to disrupt the traditional utility industry and take market share away from incumbent utilities.

The role of energy companies, including utilities, network operators, and oil & gas companies, is being transformed by a series of fundamental shifts, including the following:

  • Energy consumption and GDP growth: Although population and GDP growth (at a slower pace) drive growing energy demand, the trend line between GDP and energy consumption growth has been broken in absolute terms in EU countries. Primary energy consumption in the EU countries was almost the same in 2013 as in 1990 according to the European Environment Agency (albeit partly as a result of economic recession). This dynamic puts pressure on all players in the energy sector. Utilities with no or limited customer growth see their overall revenue declining. Utilities that still see customer growth are reporting that demand (and revenue) is not growing at the same pace. This is creating an unsustainable situation: utilities with flat or declining revenue yet growing costs to serve their customers and maintain the grid.
  • Impacts of climate change: In an earlier blog, we discussed the impacts of the growing number of policies and regulations to reduce carbon emissions. It is clear that this impact is being felt, as Europe is on target to meet its 2020 goals for renewable energy and carbon emissions reductions. However, member states now face the challenge of meeting more challenging new targets if they are to make progress towards the grand goal of making Europe a low-carbon economy by 2050. In the meantime, cities and large corporations are not waiting—they are setting their own sustainability targets and investing in programs that reduce their carbon footprint. Power generators, network operators, and energy retailers are all active in this transformation but also face significant, and in many cases unknown, challenges as they try to understand the new demands placed on their businesses and operations.
  • Big power to small energy and the rise of the prosumer: Commercial, industrial, public sector, and residential energy consumers are all becoming more actively engaged in energy management and energy generation. More and more customers are choosing to install distributed energy resources (DER) on their premises. DER solutions include distributed generation, demand response, energy efficiency, distributed storage, microgrids, and EVs. Europe is expected to have the greatest percentage of new DER capacity deployed compared to centralised generation throughout the next decade. New energy retailers are also taking advantage of these changes and the development of smart energy applications and online service models to provide more innovative and lower-cost solutions for customers. These new entrants are further challenging the established position and profitability of the incumbent players.

How Industry Giants Are Responding

As a consequence of these changes, electricity utilities are under pressure. As revenue declines, costs are increasing due to needed investments to provide safe, reliable, and affordable power while also supporting an emerging, cleaner, and more distributed and intelligent grid that is required to provide needed flexibility. Therefore, utilities are looking for new revenue streams and thinking through new business models that will create shareholder value going forward. Oil & gas companies, under additional pressure because of the continued low oil price, are looking for ways to survive by taking out costs, reducing their upstream capital investments, and shutting down unprofitable assets. However, their long-term future also requires them to find new opportunities to grow revenue and shareholder value in new energy businesses.

Both utilities and oil & gas companies are looking to turn the challenges of the energy transition into their advantage through entry into new markets and the delivery of new energy platforms and services. Total’s Chairman and CEO Patrick Pouyanné has stated that the company’s goal “is to be in the top three global solar power companies, expand electricity trading and energy storage and be a leader in biofuels.” Meanwhile, French energy giant, Engie (formerly GDF Suez) has been investing heavily in renewables and storage technologies, developing its energy services business, and establishing its Cities of Tomorrow programme to target the growing smart cities market.

European utilities have also been embracing DER and developing alternative business models to capitalise on new technologies and the changing resource mix. This is especially true in Germany, where there are high levels of DER, and utilities like RWE and E.ON have begun transforming their business into a more capital-light, DER-based model by shedding centralised generation assets and positioning themselves as enablers and integrators of new DER resources. For example, RWE has invested in and formed a rooftop solar partnership with German solar developer Conergy and is white labelling Sonnenbatterie’s behind-the-meter battery systems for solar-equipped German homes. As DER penetration in Europe accelerates, we see more value in moving from generation to distribution and beyond the meter.

Energy market incumbents are developing strategies to position themselves as the leading force in creating the new order. At the same time, other players—from giants in the transport, IT, telecommunications, and engineering sectors to energy service and technology startups—are looking to increase their share of these emerging opportunities. For example, Europe is seeing the emergence of a new class of DER aggregators aiming to take advantage of these new technologies and the utilities’ evolving business models. LichtBlick, Caterva, Next Kraftwerke, and Ampard are just a few of the companies establishing virtual power plant business models to provide additional value from the integration of DER into the European grid. Many other, much larger players also see the potential in brokering the new relationships emerging between energy companies and their end customers.

Cities at the Heart of the Energy Transition

The continuing interest in developing smart cities is closely aligned to the transformation in the energy market and provides an important example of how the energy landscape is evolving. More than any other region, Europe has recognised the importance of smart city developments to its energy transition programme. Cities are examining the sources and efficiency of their energy to reduce their greenhouse gas emissions and energy costs. In the process, cities are becoming more ambitious and proactive in setting energy strategy. They are seizing opportunities to work with utilities and other stakeholders to create new urban energy systems. The emerging vision is of a smart city with integrated large- and small-scale energy initiatives, including major infrastructure investments, citywide improvements in energy efficiency, and distributed energy generation.

Across the continent, city leaders have been signing up for ambitious carbon emissions targets and are taking an active role in encouraging utilities and other players to support their strategies. Stockholm and Copenhagen have led the way with plans to become carbon-free cities, and many more cities are now following their path. Frustrated at the slowness of the change they are seeing, some cities are even taking matters into their own hands and looking at re-municipalisation of utilities or the creation of new city energy companies. Hamburg, for example, took back control of the city’s energy in 2014. In the United Kingdom, Bristol and Nottingham have established new city-owned energy companies, and the new Mayor of London has made a strong commitment to a new energy policy for the capital.

Utilities are responding to these challenges by working closely with cities and communities to develop new energy models. Alliander, for example, has been a long-standing supporter and investor in the ambitious Amsterdam Smart City programme. E.ON has been working with smart cities in order to test integration of its smart grid solutions that enable more effective energy management and integration of DER. In Malmo, Sweden, the utility and the city signed an agreement to adapt the entire Hyllie district of Malmo to a climate-friendly energy supply. By 2020, the entire district’s electricity, heating, and cooling will be powered exclusively by renewable resources and energy recovery.

Another aspect of Europe’s urban agenda that is having a strong influence on the energy sector is the focus on sustainable transportation. The European Union has put the triple play of energy, transport, and information and communications technology (ICT) at the heart of its innovation programme for cities. Reducing emissions from transportation is the next critical frontier in the decarbonisation of the European economy—electrification of heat and transport pose the most obvious options for sustainable demand growth in the present market. Europe has arguably the strongest level of utility engagement in developing EV charging services. Utilities and energy companies such as Germany’s RWE, Italy’s Distribuzione, Ireland’s ESB, and the Danish utilities SEAS-NVE, SE, NRGi, EnergiMidt, and Energi Fyn have all funded charging deployments or invested in companies that deploy chargers. For example, Danish company CLEVER is owned by the five largest utilities in Denmark and operates a network of several hundred EV supply equipment (EVSE) stations throughout Denmark; the company is now branching out into other geographic markets. Enel has developed an interoperability platform and is aggressively deploying charging stations, with more than 2,000 deployed across Italy.

So What Does This Mean?

The next decade will see a reshaping of the European energy sector to meet the needs and challenges of a low-carbon economy. We have already seen some of the industry’s largest players moving quickly to expand their capabilities and services to meet these new requirements.  As discussed in Part IV of this series, further diversification and mergers and acquisitions are inevitable as players look to gain a footprint in emerging services and exploit new energy technologies.

Energy companies also need to broaden their partnership network, working with those in the public services, transportation, infrastructure, and ICT sectors to deliver the integrated capabilities needed to make the energy transition a reality. They also need to create new relationships with their customers, as they too become partners as much as end consumers. The industry giants of today are using their resources as some of the biggest companies in the world to engineer this energy transformation and to meet future shareholder interests. They will need to continually reinvent themselves and become broader and more adaptable energy companies able to protect existing revenue streams and seize new opportunities. However, not all bets will pay off. We will inevitably see some wrong turns in this process of adaptation and the eventual winners may well be those who learn quickest from their mistakes.

This blog is the sixth in a series discussing how industry megatrends will play out across Europe as well as at the regional and country levels. Stay tuned for our next blog in this series focusing on customer choice and changing customer demands.

Learn more about our clients, projects, solution offerings, and team in our Navigant Energy Practice Overview.

 

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