Navigant Research Blog

Old McDonald Had a Grid, EIA AEO

— February 15, 2018

The US Energy Information Administration (EIA) released its 2018 Annual Energy Outlook (AEO) on February 6. Several short- and long-term trends warrant highlighting as follows:

  • US net energy exports occur over the projection period to 2050 in most scenarios that are modeled.
  • The US becomes a net energy exporter by 2022 in reference case, due to strong domestic production and relatively flat demand.
  • The fuel mix of energy consumption changes significantly over time, with natural gas and renewables growing while coal, nuclear, and oil decrease.

Energy Consumption by Source (Reference Case) – Quadrillion British Thermal Units

(Source: US Energy Information Administration, Annual Energy Outlook)

GDP Outpaces Energy Consumption

Residential and commercial sectors will likely have increased energy efficiency offsets growth in energy demand in residential and commercial sectors. Energy consumption grows about 0.4% per year on average, while GDP is expected to average 2.0% annual growth to 2050 in the reference case, showing a decoupling between economic expansion and energy use. Lighting displays the largest drop in both sectors due to the increasing penetration of LEDs.

On the residential side, all types of appliances are expected to become more efficient, water heating shows a sizable decrease due to heat pumps, among other reasons, while cooling actually has an increase resulting from a continued population shift to warmer parts of the US, lower heating demand, and increase cooling demand. However, increased adoption of electronic devices contributes to growth in residential use of electricity.

Electricity used for commercial HVAC equipment is likely to drop by more than one-third from 2017 to 2050 in the reference case because of increases in energy efficiency and a continued population shift toward warmer parts of the country in the South and West. Although the US has no federally-mandated commercial building energy code, state and local-level building codes reduce energy used for heating and cooling.

Use of Purchased Electricity per Household (Reference Case) – Thousand Kilowatt-Hour per Household

(Source: US Energy Information Administration, Annual Energy Outlook)

Use of Purchased Electricity per Square Foot of Commercial Floor Space (Reference Case) – Thousand Kilowatt-Hour per Square Foot

(Source: US Energy Information Administration, Annual Energy Outlook)

Natural Gas or Renewables Take the Lead

Most new electricity generation capacity will likely be natural gas or renewables after 2022 (per the reference case), as a result of low natural gas prices, declining renewables technology costs, and supportive policies, mostly at the state level. These findings lineup with Navigant Research’s recent forecasts in its Global DER Deployment Forecast Database report, which expects distributed energy resources capacity additions to outpace centralized generation going forward.

Annual Electricity Generating Capacity Additions and Retirements (Reference Case) – Gigawatts

(Source: US Energy Information Administration, Annual Energy Outlook)

Light duty vehicle fuel economy will likely improve as sales of more fuel-efficient cars grow and as electrified powertrains gain market share, but gasoline vehicles remain the dominant vehicle type through 2050 in the reference case. Combined sales of new EVs, plug-in hybrid EVs, and hybrid vehicles are likely grow in market share from 4% in 2017 to 19% in 2050.

Light Duty Vehicle Sales by Fuel Type – Millions

(Source: US Energy Information Administration, Annual Energy Outlook)

During the press conference where these results were reported, there were audience questions that challenged some of the AEO’s assumptions about renewable energy and energy efficiency growth. Such concerns have also been raised after reading the report as well. The AEO does include a number of high and low cases to try to represent the range of potential outcomes. It is important to consider the AEO as a point of reference, but not take it as gospel. As a professional market research analyst, my goal is for my analysis and forecasts to reflect the general trends in the industry and spark intelligent debate.


A Sign That Large-Scale, Offsite Renewable Energy Procurement Is Becoming Mainstream

— February 1, 2018

In an August 2017 blog, I highlighted how corporate commercial and industrial (C&I) energy facilities and sustainability managers have new options to address their energy management and procurement needs. These managers now hold the keys driving the growth of energy as a service (EaaS) solutions. The move by large C&I energy users to procure renewable energy from large, offsite renewable energy project sits within Navigant Research’s EaaS framework as part of the Offsite Energy Supply solution.

EaaS Delivery Models

The delivery models for this new EaaS solution in the US have been developing over the last few years, due in part to the market capacity development efforts of the Rocky Mountain Institute’s Business Renewable Center (BRC). While not all US projects are direct procurements, as of the end of 2017, a total of 8 GW of corporate renewable energy deals have been signed in the US and Mexico alone per the BRC.

The early stages of the market for this EaaS solution in the US was driven by pioneers like Google and Microsoft. These companies were primarily interested in putting their money where their mouth is in terms of their innovation and sustainability commitments. But these companies were also focused on how these deals could help mitigate their long-term energy price risk. Given the impact of shale gas on natural gas pricing and low wholesale electricity prices in the US, using this type of procurement solution as a legitimate energy price risk hedging tool has been met with mixed results.

Rocky Mountain Institute Corporate Renewables Data

(Source: Rocky Mountain Institute)

Ready for Risk Mitigation Challenges

However, a recent announcement on a European procurement deal may signal otherwise. In late 2017, Norsk Hydro, a leading European aluminum manufacturer, announced an agreement to purchase wind power from a 650 MW wind farm for 19 years in Sweden starting in 2021. While Norsk Hydro has been previously recognized for its sustainability performance, this announcement indicates that the purchase of large-scale offsite renewable energy is now posed to meet the complex energy price risk mitigation needs of energy-intensive manufacturers that have spent years trying to lower the cost of the energy they use.

Stay Tuned for Research

Later this year, Navigant Research will prepare a comprehensive global research report on the drivers, barriers, transaction models, and market forecasts for these new large-scale, offsite renewable energy procurements as part of the new Utility Customers Solutions research service. Meanwhile, Navigant Research will be closely watching for deals that show this type of energy procurement strategy is moving past a nice-to-have sustainability commitment toward a legitimate component of an enterprisewide energy price hedge strategy.


When It Comes to New US Solar Tariffs, the Sky Is Not Falling

— January 25, 2018

On January 22, 2018, President Trump announced the rates applied to solar modules and cells that resulted from the Section 201 trade case. Modules and cells have a tariff rate of 30% in 2018, to decline 5% in each of the 3 subsequent years, then stay at 15% from 2021. These are just below what the US International Trade Commission (ITC) recommended in October 2017. As I explained at that time, tariffs at this level favor the status quo, keeping the solar industry intact but slowing its growth.

No Need to Panic

At current international prices of around $0.30/W-$0.35/W, the impact of this tariff would be around $0.10/W in 2018. For utility-scale projects, costs could increase by 10%-15% compared to a tariff-free scenario. This would add $0.02/kWh-$0.04/kWh to the record solar bids, like Xcel’s disclosed earlier in January or TEP-NextEra’s announcement on May 2017. This increase would hardly make these utilities reconsider their investments.

The impact of the new tariff on the C&I and residential markets will be limited. For a commercial project, the tariff could increase the cost by about 5%; for a residential installation, only 2%-3%.

Winner and Losers

Currently, this ruling seems to have only one company as its beneficiary: First Solar. First Solar is in the middle of a technology transition as it tries to catch up with the prices offered by manufacturers of Crystalline modules. It is the only PV manufacturer with significant capacity in the US. On November 16, 2016, it made the decision to scrap its Module 5 product, which had been expected to debut next year. The new plan is to instead accelerate the production schedule of its Module 6 and introduce it in 2018, a year earlier than previously planned. The tariff bought First Solar some time to implement its new technology without risking losing significant market share in its home market.

The other two backers of the tariff, Suniva and SolarWorld, are unlikely to capitalize from its introduction. Even with the introduction of the tariff, local US prices of important modules will be below the costs that pushed both Suniva and SolarWorld into administration as the global prices of solar have dropped by more than 30% in the last 2 years. SunPower and Tesla, the other two US PV manufacturers, rely on the global value chain for their module operations and therefore will be affected by the tariffs.

If Nothing Else, Clarity for the Next Few Years

All in all, most of the players in the US solar sector should be glad that the uncertainty that plagued the sector in 2017 is now gone. They will need some time to absorb the fiscal changes and to find ways to mitigate the impact of the tariffs, but at least they will have a stable policy outlook for the next few years.


Major Businesses, Beware Myopia

— December 21, 2017

Develop Peripheral Vision to Manage Industry Disruption

The past 50 years have witnessed the collapse of many corporate giants, often caused by the systemic myopia of business leaders. The likes of Blockbuster, Kodak, and Polaroid demonstrated a failure to recognize where the value lay in the digitization of their industries, for example. As we move into 2018, energy industry disruption is accelerating. Huge opportunities stem from increasing complexity and disruption, but the risks of utilities becoming the next Kodak are also increasing. To combat competitive threats, the industry must develop peripheral vision—the use of competitive early warning signals and scenario planning—to exploit opportunities and manage threats.

Identify and Monitor Early Warning Signals

A competitive early warning system delivers this peripheral vision. By maintaining a broad perspective, utility executives can focus on where changes are happening the fastest and identify where future value lies. However, it is imperative for executives to filter signals from noise and focus attention on the developments that have the highest potential to hurt a business in the coming decade. Scenario planning is a useful filtering tool: a signal such as the development of a new technology, product, or service is extrapolated into the future in several scenarios that gauge the likelihood of adoption and potential impact.

For example, there is a growing trend for residential customers in Europe to purchase solar PV bundled with storage. German battery vendor sonnen has developed a solar plus storage product—sonnenFlat—which requires customers to only pay a flat fee every month. As part of the deal, customers provide sonnen with access to their distributed energy resources (DER) to provide grid services. In return, sonnen guarantees customers free grid-sourced power when their DER is unavailable. sonnenFlat is a new, niche product. Nonetheless, utilities globally should be assessing the risk this poses, particularly when combined with community solar programs. A self-sufficient solar plus storage customer is lost to an incumbent supplier for 20 years.

Measure the Likely Impact on Business for Each Signal

No one can claim to know the future, but with careful planning, a company can prepare for the most likely scenarios. The potential scenarios for residential solar plus storage installations span from little or no growth through near ubiquity. The industry should be asking whether solar plus storage could kill the traditional grid supply model. Careful analysis of the market—for instance, using SWOT or PESTLE approaches—will help gauge the likelihood of different scenarios.

In many countries, the cost of financing solar plus storage is less than a household’s annual electricity bill; falling technology costs and rising power prices will make the solar plus storage option more compelling. While the economic argument is increasingly convincing, there are many reasons why adoption is relatively low, including apathy and ignorance.

Expect (and Plan for) the Unexpected

Customer preference is the biggest driver of solar plus storage, and therefore beyond the industry’s sphere of influence. There is little an incumbent energy provider can do to protect existing revenue from power supply by deterring customers from making solar plus storage investments. This strategy also fails to capture the value of solar plus storage. The industry should be planning strategies to respond to the growth of solar plus storage. These include the development of solar plus storage products, aggregation services, providing the infrastructure on which third parties can offer services, or partnering with or acquiring existing providers. It is possible to be as well-prepared as possible by recognizing the biggest threats and creating risk mitigation strategies in advance.

To mitigate risk, utilities must plan scenarios for a large number of signals in a well-defined early warning system.


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