Navigant Research Blog

Big Retailers Boost Home Energy Management

— October 28, 2014

Home energy management solutions have struggled to gain much traction beyond early adopters and consumers enrolled in a sprinkling of utility programs for demand response.  That could be changing as more retailers push connected home devices that have advanced energy controls as a component.

Best Buy, for example, has been selling a handful of smart home products for several years, and for a time it tested dedicated home energy management sections in three of its locations.  But now the electronics retailer plans to set up new connected home departments within about 400 of its 1,400 stores.  These new sections are expected to show up around Thanksgiving, and will be staffed with blue-shirted experts who will be trained to offer smart home solutions for homeowners.  Products on the energy side will include smart thermostats from Nest and Honeywell and smart lighting controls from Philips and Belkin, ranging in price from about $50 to $350.

Out on the Floor

Beyond hardware products, Best Buy will also highlight services for the connected home from a variety of providers, including Comcast, DirecTV, Time Warner, ADT, and others that can tie the hardware to services geared toward automation, security, and energy management.  This could be a key to wider adoption of home energy management, since many people have not heard much about energy management services.

Other retailers, such as Walmart, Lowe’s, and Home Depot, offer similar products and services for increased home automation, security, and energy management.  Office supply giant Staples now offers Connect, which combines a hub with a single mobile app to connect door locks, thermostats, and lighting for homeowners or small business owners.

One of the main inhibitors to growth for home energy management products and services has been a lack of awareness among consumers, as noted in Navigant Research’s Home Energy Management report.  This current wave of retailers promoting a variety of solutions to create a more intelligent home should help increase customer knowledge and drive adoption.  It will likely take a couple of more years to reach widespread consumer adoption, but this current retail push is a start.

 

As Rail Congestion Crimps Coal Supplies, Calls for Expansion Grow Louder

— October 27, 2014

Even as power plant operators are warning of coal supply shortages come winter, the U.S. government has predicted that congestion on the nation’s railways is likely to get much worse in coming years.

Increased freight traffic traveling by rail – particularly crude oil from the Great Plains and grain from a bumper crop this year – has led to significant bottlenecks across the railway network, the Government Accountability Office (GAO) said in a report issued in September.  Rail traffic has reached the levels last seen in 2007, before the global recession, and “recent trends in freight flows, if they continue as expected, may exacerbate congestion issues in communities, particularly along certain corridors,” the GAO concluded.

Sounding a more dire warning, Hunter Harrison, the CEO of Canadian Pacific, said during a recent analyst briefing that the entire North American railway system is headed toward a cliff.  “We’re quickly approaching a time where none of this works,” Harrison said, according to The Financial Times.  “We cannot continue to go down the road that we’re going down and be successful and not have gridlock beyond anything we’ve experienced before.”

On to Chicago, Slowly

Like a slow train spotted in the distance, this fall’s tie-up of train traffic has been anticipated for years.  The domestic oil & gas boom, centered in the Bakken formation in North Dakota, has had ripple effects across the upper Midwest, the Rocky Mountains, and the Pacific Northwest.  Chicago, where all seven of the Class I railroad companies have major yards, is one of the biggest bottlenecks.  Rail transport is relatively low-cost and emits less CO2 than shipping by plane or truck, but investment in rail infrastructure has been slow.  Producers and consumers of coal, in particular, have traditionally been trapped in exclusive contracts that give them little leverage in negotiations with rail providers.  In September, Democratic Senator Jay Rockefeller of West Virginia introduced the Surface Transportation Board Reauthorization Act, which would increase the authority of the Surface Transportation Board, which regulates railroads, to force them to remedy service delays and justify rate hikes.  Lawmakers chided rail executives at a September 10 hearing in Washington for their failure to anticipate and keep up with increased demands on the railway system.

The problem is especially acute for mines in Wyoming’s Powder River Basin trying to ship coal to customers.  Big coal-burning utilities have already begun running coal plants at below capacity in order to conserve coal stocks.

Ship Gas, Not Coal

Some of this alarm is likely overstated; no one has suggested that coal plants are actually in danger of running out of fuel this winter.  And despite the transport constriction, the price of Powder River Basin coal remains stubbornly low; the price of a ton has dropped 8%, to $10.80, according to Bloomberg.  As a matter of national policy, it makes sense to reduce shipments of dirty coal by diesel-burning trains to supply aging power plants that are quickly becoming uneconomical anyway.  Meanwhile, tight coal supplies will inevitably lead to louder calls for other types of energy transport infrastructure: namely, natural gas pipelines.

There are good reasons to invest in expanding the nation’s railway infrastructure; shipping more coal is probably not one of them.

 

Solar Subsidies Attract Financial Schemes

— October 20, 2014

Arizona Public Service (APS) and Tucson Power have recently come under a lot of scrutiny for their proposed rate-based solar programs.   The complaint from private sector companies is that rate-basing (i.e., the utility practice of raising funds for capital investments by increasing electricity rates) would create an uneven playing field in the solar industry, because rate-basing a capital expenditure gives utilities a guaranteed rate of return.  As SolarCity’s VP Jonathan Bass put it, “If there were ever a reason for a regulatory body to exist, it would be to stop a state-sponsored monopoly from unfairly competing against the free market in an entirely new industry.”

That’s hard to argue with.  However, I would add that another reason for a regulatory body to exist is to stop the free market from abusing the subsidies that are so crucial to an entirely new industry.  In the spirit of fair-minded analysis, let’s take a closer look at the solar industry and at how level the playing field actually is.

Pump and Dump

First, let’s examine the solar developers (SolarCity, Vivint, SunRun, Clean Power Finance, etc.) whose solar lease and solar loan programs are responsible for catapulting the industry into the period of rapid growth we’re seeing today.  Critics argue that solar developers base their business models around building solar arrays on the cheap and claiming an inflated fair market value (FMV) of the systems.  The FMV is supposed to reflect the fair price of a system, and it’s ultimately used by the government to determine the monetary value of the 30% income tax credit (ITC) that goes back to the owner of the system.  Ironically, the FMV is becoming increasingly difficult to determine as more solar companies are vertically integrating, which has made the true system costs less transparent.

For systems that are being leased (which are most systems), the owners and thus recipients of the ITC are actually third parties.  These third-party owners tend to be financial institutions, such as Morgan Stanley, Goldman Sachs, Credit Suisse, Google, and Blackstone, that are constantly looking for tax credits, and they have found a slam dunk as financiers of residential and commercial solar arrays.  Typically, the developers bundle a group of solar customers together into a tranche (essentially a bucket of leases), which is then backed by the third-party ownership groups.  The financial firms own the leased systems for 5 years and then dump them, but not before taking advantage of the Modified Accelerated Cost Recovery System (MACRS), which is a method of depreciation that allows third-party owners to recoup part of their investment in the solar equipment over a specified time period (5 years) through annual deductions.  Basically, MACRS represents an additional subsidy, with a net present value of 25% of the initial investment.

The Treasury Steps In

So between the 30% ITC and the 25% MACRS, the owners should be getting a 55% subsidized investment; but with the inflation of the FMV, it turns into a much larger subsidy, on the order of 80%.  Then consider the high rate of return (up to 15%) that investing in solar offers on top of all these subsidies, and it starts to sound pretty good to be a solar financier.  Solar developers readily admit that their business models are dependent on government subsidies, but this sounds like manipulation of those subsidies.  Indeed, this practice is currently under investigation by the Department of the Treasury.  While the developers claim they haven’t done anything wrong, if the government tightens the rules around the ITC or tries to recoup the inflated subsidies, it could be a major blow to the solar industry.

What’s more, the developers themselves don’t seem to be reaping the rewards of their innovative business models that have brought solar to the masses.  If anything, they seem to be bearing all the risk while the third-party owners reap most of the profits.  Is there some merit to rate basing solar?  In my next blog, I’ll examine this question.

 

Innovative Energy Storage Technologies Gain Ground

— October 18, 2014

According to the Navigant Research Energy Storage Tracker 3Q14, the 2007 to 2013 period has seen the commercialization of a number of key technologies in energy storage, including several advanced battery chemistries, flywheels, and power-to-gas.

The Energy Storage Tracker is a database of energy storage projects that tracks announcements and deployments of energy storage across a range of technologies in an effort to identify industry trends.  The chart below shows the deployed power capacity for six advanced storage technologies in utility-scale applications.  There was a peak in installed capacity across most of these technologies in 2011 and 2012 in response to stimulus funding under the American Recovery and Reinvestment Act.  The purpose of this funding was to jumpstart the energy storage market, and while 2013 was a slow year for most battery technologies, preliminary 2014 data (not shown) indicates improved numbers over 2013 levels.  In contrast to advanced batteries, flywheels and power-to-gas saw an uptick in deployed capacity from 2012 to 2013.

Utility-Scale Energy Storage Power Capacity by Technology, World Markets: 2007-2013

(Source: Navigant Research)

Playing Catch-Up

Although no single technology is a clear winner in the global stationary energy storage market, lithium ion (Li-ion) has arguably established itself as a key frontrunner going forward.  Over the past 13 years, sodium sulfur (NaS) batteries, manufactured solely by Japanese power infrastructure giant NGK, have established themselves as the clear leader in terms of installed power capacity in the stationary energy storage space, with 243.7 MW from 2007 to 2013.  However, publicly announced deployments are typically large orders in the tens of MWs, which results in peaks and troughs in NGK’s market activity.

Li-ion sits in second during the same time period, with 231.9 MW aggregated over all its subchemistries.  In 2013, Li-ion had the highest number of MW installed and managed to keep output steady with 2012.  Of this 231.9 MW, lithium iron phosphate (manufactured by A123 Systems, now NEC Energy Solutions and BYD) accounts for at least 114.8 MW, lithium titanate (manufactured by Altairnano and Toshiba) accounts for at least 10.6 MW, and lithium manganese spinel (manufactured by Samsung SDI and LG Chem) accounts for at least 16 MW.

Peaks and Valleys

Other technologies that have seen significant deployments from 2007 to 2013 include advanced lead-acid batteries (71.4 MW), the vast majority provided by Xtreme Power (now a part of Younicos).   More than 58 MW worth of advanced flow batteries were deployed, primarily by ZBB and Premium Power, during the same time period.  In addition, 50.9 MW worth of flywheels were deployed, with 45 MW of that capacity coming from Beacon Power (though 4 MW of Beacon’s installations have since been decommissioned).   Lastly, 11.1 MW of power-to-gas storage capacity was deployed between 2007 and 2013, primarily by ETOGAS and Hydrogenics.

In the early period of commercialization, it’s not unexpected to see strong years and weak years for technology deployment.  Li-ion is maturing and is showing signs of being a fully commercial technology, similar to NaS batteries.  Advanced lead-acid, flywheels, and flow batteries will continue to grow, but in some cases will be limited due to the small number of suppliers in the market.  Power-to-gas is in the very early stages of commercialization, and will likely see growth and decline in deployed capacity in the demonstration stages before commercializing, similar to Li-ion.

 

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