Navigant Research Blog

The Problem With Pay as You Go

— April 7, 2013

A “pay as you go” strategy for critical infrastructure, such as power supply – wherein infrastructure is financed incrementally, during the construction process – could make sense when applied to small remote microgrids supplying small solar systems in the developing world.   End-users in these countries often earn subsistence wages and need only enough juice for lights, computers, and cell phones.

When applied to nuclear power, though, the pay as you go concept dramatically increases the risks to end-users.   Just ask residents of Florida, where ratepayers are discovering that utilities can actually make more money – and consumers pay more for electricity – the longer it takes to build nuclear power stations.  The culprit is something called “construction work in progress,” or CWIP.

The Nuclear Energy Institute (NEI) has made a convincing argument that CWIP should actually save consumers money.  By collecting funds from ratepayers in advance of actual power production, sudden rate shocks can be avoided.  Financing costs for such large infrastructure projects can be reduced under CWIP, since investors have more certainty that debts will be paid off.  Since the investment ratings of utilities are protected, borrowing costs also shrink.

In the case of a proposed nuclear reactor by Progress Energy in Levy County, Florida, NEI estimated that CWIP program financing would save consumers $13 billion over the life of these nuclear reactors.  When Florida passed a bill in 2009 authorizing CWIP, it sailed through the state legislature with only a single dissenting vote.

After 6 years of CWIP financing, residential customer bills in Florida are projected to increase by $50 a month this year, even before the nuclear reactors generate a single kilowatt-hour of electricity.  Progress Energy originally estimated that building the two unit reactors would cost $5 billion and would be generating carbon-free power by 2016.  Instead, the construction costs have ballooned to $22.4 billion, and the plant – if ever completed – will not be generating power until 2021.

Ironically, this revised price tag and construction schedule mean that Progress Energy will generate more – not less – revenue the longer it takes to build the nuclear reactor.  If the project were cancelled today, the utility would still walk away with $150 million in profit.  So far, ratepayers have committed to over $1 billion dollars for a nuclear plant that won’t produce any power  for almost a decade.

If nuclear power could be financed in a way that makes economic sense, then proceeding down that path might make sense.  “Distributed nukes” – which would be deployed at a much smaller scale, reducing large investment risks – could be a better fit for CWIP and provide the form of financial innovation that might lead to a nuclear renaissance.  (Both water and transmission facilities have deployed CWIP with little controversy).  Unfortunately, the experience in Florida is turning former nuclear advocates and supporters of CWIP into skeptics, though the practice still has its defenders.

All eyes are on Florida to see if and when the plug is pulled on CWIP for large-scale nuclear power plants, with Republican state representative Mike Fasano, who voted for the CWIP state legislation in 2009 and supports nuclear power, leading the charge to shift financial risks away from ratepayers and to utility shareholders with new state legislation.


Brutal Solar Market Benefits Consumers

— March 28, 2013

The imminent bankruptcy of Suntech, based in Wuxi, China and formerly the No. 1 manufacturer of solar PV modules in the world, may please many Western manufacturers that suffered from the company’s below-cost selling strategy.  But schadenfreude offers scant comfort for the dozens of solar PV manufacturers, Chinese and Western, that have been driven into failure in the past few years by China’s 5-year strategic plan to dominate solar PV manufacturing.  Suntech was one of the largest of the army of unprofitable Chinese manufacturers that have topped rankings of annual production for the past 3 years.

Despite ambitious domestic installation targets for solar PV, more failures are yet to come in China as the country becomes a victim of its own success and the Chinese market continues to consolidate.  As with European and American companies, Chinese manufacturers will likely enter into a number of “strategic partnerships” that result in more vertically integrated providers, including some with project development operations.  This is a strategy that has enabled FirstSolar and SunPower to ensure markets for their own modules.

The brutal fact is that no individual solar (or battery, or any other) manufacturer can compete with Chinese state capitalism.   Many policy makers and analysts would love to see an expansion of solar manufacturing in this country.  Yet, we are in this situation today because consumers, as always, have spoken with their dollars.  There is a reason that DVD players, digital cameras, and cell phones are not manufactured in the United States.  Solar PV cells and modules are now also rapidly commoditizing.

Still, even though the below-cost Chinese market flood has contributed to manufacturing job losses in the United States and Europe, the number of solar PV installation jobs has increased considerably.  Ultimately, the result is better value for consumers and a growing overall market.  The Chinese government is effectively subsidizing the cost of solar PV for consumers in the United States and around the world – and that’s not a bad deal, unless you’re a failing solar PV maker.


At Hannover Fair 2013, The Fuel Cells Ingredients Start to Stack Up

— March 26, 2013

The weather is starting to warm up, the days are getting longer, and there might even be lambs gamboling in the fields, but for energy professionals, on April 8 through April 12, there’s only one place to be: inside the hall of the Hannover Fair, Europe’s largest trade show.  Last year 185,000 people descended on the old World Fair site.

Hall 27, now the home of the expanded Hydrogen and Fuel Cell Group Exhibit, will be a mix of the usual buyers, analysts, students, and vendors, as well as people who are, frankly, lost.  As always I have a hit list of the companies I want to meet with and the trends I need to explore further.

In the fuel cell and hydrogen sector I see two key trends emerging this year, and Hannover provides a concentrated opportunity in advance of the production of our Fuel Cell Annual Report for 2013 to track down the data to back up (or not) what I am seeing.  So far the two big trends are:

Hydrogen from electrolysis.  This suddenly ubiquitous technology includes using methanated hydrogen to produce synthetic natural gas.  Companies at the Fair with product in this area include:  Acta (Italy), Ceram (France), CETH2 (France), Giner (USA), H Tec, H2 Nitidor (Italy), iGas (Germany), ITM Power (United Kingdom), McPhy (Germany).  MicrobEnergy (Germany), and Next Hydrogen (Canada).

The stationary sector strengthens.  Stationary applications still don’t attract the type of PR that vehicles do, but an increasing number of companies are on the verge of profitability.  Companies at the Fair that I will be looking for include: Ballard (Canada), Bosch Thermotechnik (Germany), Ceramic Fuel Cells (Australia), ClearEdge Power (United States), Convion (Finland), Elcore (Germany), Foresight Energy (China), and MVV Energie (Germany).

Also interesting is the rise in companies at the Fair with fuel cell-powered portable power products.  This market seemed to drop off a cliff a few years ago, but companies like myFC (Sweden), Lilliputian Systems (United States), and Horizon Fuel Cell (Singapore) could be driving a resurgence of interest in this area.


Why Emerging Economies Are Not Cleantech Cash Machines

— March 26, 2013

In our recent white paper, “Smart Energy: Five Metatrends To Watch in 2013 and Beyond,” Navigant Research forecast that, in terms of economic development, the area in the Southern Africa Power Pool (SAPP) will be the next high economic powerhouse, akin to Brazil, Russia, India, and China (BRIC).  A March article in The Economist seemed to agree with me.  With booming economic growth, an appetite for energy and new technologies, fast liberalizing markets, and encouraging overseas investment, many companies are lining up to export to Africa.

However, Africa is not going to be just a passive adopter of overseas technology.  The governments of South Africa and Kenya, among others, aim to turn their countries into high innovation and IP generating economies, with local value-added manufacturing.

Innovation can be measured by a number of metrics, including IP generation, the amount of government funding allocated to R&D, the number of PhD students, and the number of limited liability companies created.  As each of these grows, in theory, the dependence on imported products decreases.  A prime example of this is the transformation of the South Korean economy from heavy importer to leading exporter in under two decades.

As more and more developing economies seek to follow this path, moving away from being passive importers of new technology (especially in the cleantech space), companies will need to develop long term market entry strategies that involve local partners, local offices, and, increasingly, local manufacturing.

The economics of the United States, Germany, South Korea, and Japan are “old world” examples of this type of market.  The new generation ‑ Brazil, Chile, India, Indonesia, South Africa, Kenya, and of course China – has a high potential for rapid adoption of cleantech, including renewable energy, fuel cells, and advanced batteries.

Together these Tier 2 economies represent billions of dollars in potential revenue for cleantech companies, but they are not pots of gold.  The people of these countries are looking for partners to create local wealth , not multinationals that want to leverage the market and export the wealth.

Shifting from exporting to local production will require extra resources, a deep and realistic understanding of the markets, strong IP protection, and a high degree of flexibility.  Those who succeed will find new partners, rapidly growing markets, and access to highly educated workforces.  Those who fail will have to face the economic reality of limited markets with limited growth potential.


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