Navigant Research Blog

Why VPP Software Vendors Are Vital to the Success of the Emerging Energy Cloud

— November 30, 2016

Ethernet CablesThe concept of a virtual power plant (VPP) means different things to different people. It’s really just a creative way to imagine the variety of grid services that can be harvested from the plethora of distributed energy resources (DER) that are rapidly populating power grids worldwide.

A VPP is the epitome of the changes transforming relationships between utilities, customers, and a host of other market participants that are building real solutions to the pressing energy and environmental challenges facing the world today. Navigant has coined the term the Energy Cloud to describe the evolution of our collective energy future. VPPs are just one aspect of this shift toward smarter, cleaner, and smaller power sources being aggregated into real-time solutions that benefit individual asset owners while contributing to the sustainability of existing infrastructure.

The Value of Software

Now that hardware assets such as solar PV panels, batteries, and other DER are becoming commoditized due to increased market penetrations and creative business models, the key to unlocking greater value from both new and existing DER is software—the fundamental technology driver underlying the VPP market.

Software is a broad category. It includes systems that connect DER in order to optimize synergies between like and unlike resources, in addition to the interface mechanics of interacting with utilities and wholesale markets for ancillary services. IT and related software is where the money is being made in the VPP market; according to Navigant Research’s Virtual Power Plant Enabling Technologies report, software spending is expected to represent nearly 90% of total VPP implementation spending by 2025. The same report also provides an analysis of the energy storage systems being wrapped into VPPs.

A sudden surge in energy storage deployments being aggregated into VPPs is tilting the market in dramatically new directions. How utilities and wholesale transmission grid operators treat energy storage as an asset may be the most important technology-related development affecting near-term commercial VPP deployments.

Ranking Vendors

Navigant also recently published a Leaderboard Report ranking VPP software vendors. There is always an apples-to-apples comparison challenge with the Leaderboard format, but by stepping back and focusing on the overall trends in the market, insights bubble up to the surface.

Ranking software vendors active in the mixed asset VPP market is even more problematic than microgrid controls vendors given the lack of available transparent data on performance of software products. The lack of a universal definition for a VPP only adds another layer of issues in developing a ranking. These caveats aside, the rankings do reveal some market insights.

Some vendors claim vertically integrated utilities are the best near-term market for VPPs, since all ancillary services required to keep the grid physically in balance are purchased by one single entity. Others argue that deregulated markets open doors to new ways of monetizing value and harness the value of diversity and competition. I believe both opportunities will help build the VPPs of the future. It will be mix of pure-play software vendors, energy storage innovators, and large global technology companies that show the way.

 

Europe’s Energy Transition Megatrends and Tipping Points, Part II: Rising Number of Carbon Emissions Reduction Policies and Regulations

— August 10, 2016

AnalyticsJan Vrins coauthored this post.

In our initial blog in this series, we discussed seven megatrends that are fundamentally changing how we produce and use power. In this blog, we will discuss the rising number of carbon emissions reduction policies and regulations, and how this is fundamentally changing the European utilities industry.

Europe has always been a leader in climate change and carbon reduction initiatives. Policies and regulations to reduce greenhouse gas (GHG) emissions continue to evolve at the European level, as well across the unique markets at the individual country and local levels (provinces and cities). Europe has established a long-term goal of reducing emissions to 80%-95% below 1990 levels by 2050. This overarching goal is supported by a range of polices, regulations, and binding targets (currently set for 2020 and 2030) targeting GHG reductions for specific sectors, energy efficiency, building performance, and renewables.

Although there is no question that there have been threats to its ability to achieve these targets—including various austerity and financial measures, Brexit, and, more recently, Clexit—the European Union (EU) remains committed and has recently put into place new regulations to provide the needed incentives for individual member states to dig even deeper. Several countries are leading the way, and when combined with initiatives at the local level (often in partnership with the private sector and local energy companies), we are seeing the sustainability objectives of governments, policymakers, utilities, businesses, and local communities more closely aligned than ever before.

The long-term impact of the Paris Climate Agreement will be significant. This agreement will focus on limiting global warming to well below 2°C (3.6°F) by the year 2100. Each nation sets its own target for reducing emissions each year. While a record number of countries (174 and the EU) signed the agreement in April 2016, the agreement will only go into effect when at least 55 countries representing at least 55% of global emissions formally become parties to it. To date, 24 countries have formally joined the agreement. If the countries that have publicly committed to join this year (including China, United States, Mexico, Canada, and Australia) formally enter into the agreement, the world would still be 1.05% short of the 55% threshold. More work to be done, but the EU and many European countries and local governments are not waiting.

EU Carbon Regulation

The EU has long had some of the most aggressive carbon policies and regulations in place, along with complementary policies establishing binding targets for energy efficiency, building performance, and renewables. Its most recent strategy is set out in the Energy Roadmap 2050. Policies and measures have also been put in place to achieve interim goals and targets for 2020 and 2030. While it is expected that the EU will achieve its 2020 targets for GHG, emissions, energy efficiency, and renewables, current predictions indicate that it will fall short of the 2030 targets by a considerable amount. Based on that, a proposal for new regulation was announced on 20 July 2016. Referred to as Effort Sharing Regulation, this regulation establishes binding national targets ranging from 35%-40% for some EU member states with higher than average GDP per capita and significant cost-effective GHG reduction potential (e.g., Luxembourg, Germany, and the UK). It also sets targets of 0%-10% for member states on the other end of the spectrum (e.g., Bulgaria, Romania, and Latvia).

Europe’s Energy Roadmap 2050 explores pathways for the transition to a new energy system that meets these GHG emissions goals while simultaneously promoting competitiveness and security of supply. In its analysis, the EU concludes that decarbonisation is technically and economically feasible. A European approach is expected to result in lower energy costs and more secure energy supplies compared to individual national schemes. Further, the EU’s move to establish a fully integrated internal energy market aims to remove technical and regulatory barriers to improved competition and expanded consumer choice, while at the same time create interconnections needed to improve energy security, reduce imports, and prepare networks for carbon-free energy resources.

With or without the UK, Europe is moving forward on its path to achieve its ambitious carbon emissions reductions targets, which will continue to be facilitated by its long-established and well-supported climate and energy policies. Many of Europe’s leading countries have already begun to realise the “triple bottom line benefits” (sustainability, affordability, and security) from these policies. Other countries will follow along, and over time, Europe—as a major international trading partner—could advance its position as global leader in establishing climate and energy compliance standards worldwide.

What Are Individual Countries Doing?

Many European countries have made significant contributions toward the EU’s climate and energy targets; a few examples are offered below.

Despite Brexit, the UK stands out as the first country to establish legally binding carbon policies and regulations. The UK’s Climate Change Act of 2008 establishes the framework for its transition to a low-carbon economy and requires that UK GHG emissions in 2050 are reduced to at least 80% below 1990 levels. In fact, the UK’s most recent Fifth Carbon Budget, which legislates the UK’s GHG emissions reductions targets, limits GHG emissions during 2028-2032 to 57% below 1990 levels. In addition, the UK government has announced plans to close all coal-fired power plants by 2025 and restrict their use by 2023.

Germany has led the market for solar renewable energy development, with other countries like the UK, France, Italy, and Spain having made substantial investments over time, and some countries continuing to accelerate investments, especially for distributed solar PV. Despite some short-term challenges in certain countries, Europe as a whole is highly committed to advancing its renewable energy agenda. For example, distributed solar PV will be a major contributor to the EU’s renewable targets; over 150 GW of solar capacity representing €250 billion ($279 billion) in revenue is forecast for 2016-2024, of which three quarters will be distributed solar PV.

Germany also appears to be leading in the area of energy efficiency, having recently announced a €17 billion ($19.4 billion) campaign titled Effizienzoffensive, the ultimate goal of which is to cut the country’s energy consumption in half by 2050. The German government has launched the scheme because expansion in renewable energy sources alone will not be enough to meet the country’s carbon emissions reduction targets. The campaign will include a competitive tender to acquire cost-effective energy savings, a pilot smart metering programme, a waste heat recovery initiative, and other activities promoting cross-cutting technologies.

In the transport sector, Norway is leading the charge toward decarbonisation with its support for electric vehicles (EVs). Today, nearly one-quarter of all new cars sold in Norway are EVs, which is a key outcome of the government’s efforts to raise awareness and support EV market development for the past 30 years. Norway’s (dis)incentive programmes (taxes, fees, tolls, access lanes, etc.) have also contributed to this outcome, as has its investment in EV charging infrastructure. Today, Norway has more than 1,000 public charging stations covering 55,000 miles of roadway, as compared to the 13,000 stations covering 4 million miles of roadway in the United States.

Norway and other European countries (e.g., Sweden, Germany, France, and The Netherlands) have also recently announced plans to phase out fuel-powered transportation. While there is considerable opposition to these plans from a diverse set of political and commercial perspectives, it is expected that if multiple EU member states succeed in establishing these types of bans, the EU will attempt to enforce similar rules throughout its territory.

Local Initiatives

While policy and regulation at the EU and country level will continue to evolve, we also see significant movement at the local level. Numerous cities have committed to clean energy, with some establishing 100% clean energy targets, including Copenhagen, Denmark; Munich, Germany; and the Isle of Wight, England. Cities and businesses have been showing tremendous leadership in reducing the emissions responsible for climate change and building resilience to climate impacts. That’s why the Center for Climate and Energy Solutions (C2ES) and the U.S. Conference of Mayors are teaming up to create the new Alliance for a Sustainable Future. This alliance will help mayors and business leaders develop concrete approaches to reduce carbon emissions, speed deployment of new technology, and implement sustainable development strategies. We see public-private partnerships between local governments, utility incumbents, new entrants, and large corporations taking shape and driving the sustainability agenda forward.

Key Roles for Stakeholders

Meanwhile, many utilities are decommissioning or converting their existing coal plants and investing in utility-scale renewables, as well as distributed energy resources (DER). We have seen Centrica, Engie, and others make significant investments in new energy businesses focused on new distributed, greener, and smarter energy products and services. The biggest challenge in this energy transition will be balancing ongoing investments in the grid while the total volume (and with that, total revenue) that flows through core centralized components decreases overtime. This includes mitigating the risk of stranded assets that may become obsolete or financially unsustainable, as well as their cost to their business, their customers, and society.

Governments and regulators at all levels have a key role to play, as well. They will have to balance a wider set of imperatives supporting a safe, reliable, and affordable power grid while at the same time incorporating clean, distributed, and more intelligent energy. In doing so, they must ensure that this shifting landscape accommodates innovation while also adapting rules and procedures to keep up with the pace of change underway.

What Does This All Mean?

The sustainability objectives of government, policymakers, utilities, and their customers are more closely aligned than ever before. Countries and local governments will continue to discuss how sustainable targets can be met without affecting jobs and the access to safe, reliable, and affordable power. And utilities will continue to evolve to support cleaner, more distributed, and more intelligent energy generation, distribution, and consumption.

Recommended action items for countries, local governments, and utilities include:

  • Understand the possibilities, costs, and full impacts of low-carbon generation and DER (energy efficiency, demand response, and others).
  • Implement a workable framework and develop an integrated plan to move toward lower emissions goals, since it’s certain that decreased emissions requirements will be in place in the near future.
  • Leverage neighbouring country and local government designs and efforts (as described above) at the European level to develop joint plans, policies, and goals.
  • Implement (pilot) initiatives that include renewable energy and other low-carbon generation into a reduced emissions framework while also incorporating energy efficiency and distributed generation as resources into the decreased emissions planning process.

This blog is the second in a series discussing how industry megatrends will play out across Europe as well as at the regional and country level. Stay tuned for our next blog in this series.

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

 

Take Control of Your Future, Part V: Delivering Shareholder Value through M&A

— May 27, 2016

Energy CloudIn my first blog in this series, I discussed seven megatrends that are fundamentally changing how we produce and use power. As discussed widely across the industry, the pace of transformational change in the utilities industry is accelerating. Low demand growth, increased carbon reduction policies and regulations, changing customer demands, the growth of distributed energy resources (DER), and other developments are shifting the value proposition for incumbent and new players alike.

It is no surprise that with so much change, mergers and acquisitions (M&A) are on the rise, with fascinating implications for the broader industry. We hear mostly about large acquisitions—Exelon’s acquisition of Pepco, Emera’s acquisition of TECO, Southern Company acquiring AGL Resources, and Duke Energy acquiring Piedmont Natural Gas Co, Inc.—but there is much more happening under the surface and on the periphery, underscoring the tectonic shifts reshaping the energy industry.

With the emergence of the Energy Cloud, which is driving broad and pervasive digitalization of the industry, utilities, manufacturers, technology companies, and other stakeholders are pursuing proactive initiatives such as M&A deals to retain customers, increase revenue, and improve market position. Recent activity points to three different flavors of M&A deals occurring with more frequency than others:

  1. Utilities acquiring other utility companies or assets
  2. Utilities acquiring energy technology companies
  3. Manufacturers or energy technology companies acquiring other manufacturers and energy technology companies

 Utilities Acquiring Other Utility Companies or Assets

The table below shows that the value of utility deals has more than quadrupled in 2014 and 2015 compared to 2012. In the first quarter of 2016 alone, 22 deals valued at more than $40 billion have already closed.

Utility M&A Deals (>USD $5M): 2012-2016 (Q1)

Jan Blog table

(Sources: S&P Capital IQ, Thomas Reuters)

The main driver for this increased level of M&A activity is a renewed search for growth, shareholder value, and diversification to offset some of the challenges facing the industry. Additionally, utilities are increasingly hedging against uncertainty and risk, as seen with Duke Energy and Southern Company acquiring natural gas companies as they pivot away from coal. As Southern Company stated after the acquisition was announced, “The addition of AGL Resources’ network of natural gas assets and businesses will provide a broader, more robust platform for long-term success and increase opportunities to invest in future infrastructure and energy solutions.”

Some utility analysts see these high-cost, high-debt acquisitions as unsustainable. Although the acquisitions are in regulated, low-risk businesses, utilities have had to pay a premium for these acquisitions and utilize debt financing, which could potentially put pressure on their credit ratings.

Utilities Buying Energy Technology Companies

We have seen an even greater uptick in the acquisition of technology companies by utilities. In particular, acquisitions targeting renewables, storage, and DER are on the rise.

A couple noteworthy transactions include Engie (formerly GDF Suez) taking a majority stake in Green Charge Networks, a provider of C&I energy storage solutions, and Southern Company acquiring PowerSecure. According to a press release, PowerSecure, a provider of distributed energy, utility infrastructure, and efficiency solutions, gives Southern Company the capability to help meet commercial & industrial (C&I) customers’ energy needs in the areas of individual reliability, energy efficiency, and green objectives.

Additionally, many utilities are acquiring and investing in companies offering IT/OT and data analytics solutions. The latest example is a $20 million investment in AutoGrid Systems from Energy Impact Partners (EIP), a utility group that includes Southern Company, Xcel Energy, Oncor, and National Grid, and Envision Ventures. According to Michael Donnelly of EIP, “Big data analytics and automated control of grid operations will allow utilities to adapt to the increasingly complex distributed energy environment.”

The rationale behind this wave of energy technology acquisitions by utilities reflects their willingness to play both offense and defense as the Energy Cloud takes shape. It also shows a willingness to protect their core business against new entrants looking to provide new products and services to their customers. At the same time, it suggests a willingness to look beyond their current customer base and target customers with a full suite of energy management solutions within the country and internationally.

In a recent announcement, Ted Craver, chairman and CEO of Edison International stated that, “[within] the New Energy Future … large energy users increasingly need a strategic partner to help them navigate through the diverse energy marketplace. Edison Energy will provide the expertise that will enable large commercial and industrial energy users to explore the many options available to them and to select the best portfolio of alternatives to power their operations.”

Duke Energy’s recent acquisition of Phoenix, a provider of energy management systems and services for commercial customers, offers a similar view. In the announcement press release, Greg Wolf, president of Duke Energy’s Commercial Portfolio, stated: “Duke Energy will continue to expand its offering of on-site, advanced energy solutions for commercial customers as the company finds opportunities in this rapidly growing market.”

These are just a couple of examples, and we expect similar acquisitions to accelerate going forward.

Manufacturers or Energy Technology Companies Acquiring Other Manufacturers and Energy Technology Companies

Of the three categories described in this post, this is perhaps the most active. We have seen solar companies buying other solar companies, solar companies buying storage companies, and technology companies buying other technology companies—the list goes on. From Google buying Nest to Oracle buying Opower and many more, everybody wants to get into the game and is looking for unique, differentiating technologies and capabilities to stay ahead of the competition with a focus on technology synergies and customers.

Additionally, there’s a significant rise in the number of new companies entering the energy space, selling new and innovative energy technology products and services. We don’t expect this trend to slow anytime soon. On the contrary, with the scale of investment pouring into newer, greener ways of producing, managing, and using power, we are at the beginning of a greentech tsunami.

So What Does This All Mean?

My advice to all these players: Be alert and think out of the box. Your clients today can become your competitors tomorrow—consider IKEA as one example. Technology companies have the potential to become network orchestrators and provide utility products and services. The risk for utilities is they end up with stranded, worthless assets.

Balancing today’s business with tomorrow’s opportunities is key. Thinking through strategy and future-case scenarios will help you understand the opportunities and threats as technology and customer choice drive new products, services, and business models. Stay close to your customers and innovate; partner where it makes sense and stay in the game. This is Energy Strategy 2.0 for the Energy Cloud 2.0.

This is the fifth in a series of posts in which I discuss each of the power industry megatrends and the impacts (“so what?”) in more detail. My next blog will cover the regionalization of energy. Stay tuned.

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

 

Agile Innovation in the Energy Cloud

— May 2, 2016

Energy CloudOne year ago, Navigant’s Energy Cloud: Emerging Opportunities on the Decentralized Grid white paper described a power industry evolving into a dynamic network of networks far more sophisticated than the traditional hub-and-spoke model of yesterday. Propelled forward by the convergence of multiple megatrends transforming how energy is produced and consumed globally, tomorrow’s grid will be more clean, distributed, and intelligent.

Marking a shift in industry sentiment, there is now nearly unanimous consensus among utility executives and stakeholders that the industry is facing profound change. Utility Dive’s State of the Electric Utility 2016 survey shows that 97% of the 515 U.S. electric utility executives who responded to the survey believe their own utility’s business model needs to change.

But while some aspirational endpoints may be clearly defined (e.g., “Grid to Cloud“), the pathways to position for success in this emerging environment remain elusive.

Stakeholders continue to run up against the same issue: yesterday’s playbook to capture and grow revenue no longer applies. Whereas yesterday’s coal plants could be rate-based over a 30-year timeframe, for example, today’s distributed energy resources (DER) technologies are likely to be obsolete in a matter of years, replaced by ever cheaper and more efficient solutions. Navigant Research analysis shows that new global DER capacity deployments, for example, are expected to outpace centralized generation deployments by a factor of five by 2025—both a reflection of a rapidly evolving energy landscape and the emergence of a more modular, plug-and-play grid.

As the scale and velocity of DER adoption accelerate, utilities will become more exposed to technology innovation than ever before. With many hemmed in by a regulatory model better tuned to centralized generation, utilities must maneuver to allow sufficient flexibility to continuously swap out obsolete assets and programs.

Holistic Planning

Today, nearly all major utilities in North America and Europe are heavily invested in demand-side management, utility-scale renewables, and DER, according to Utility Dive’s survey. However, many utility investments remain siloed, focused on new business models targeting single technology solutions. Meanwhile, the emerging Energy Cloud is a multi-variable landscape where agility and flexibility are fast becoming a strategic necessity. The threats transforming the industry are both nuanced (e.g., value of clean, intermittent power versus reliable, baseload power) and multifaceted.

Take the aforementioned trends—clean, distributed, and intelligent. While each are profoundly disruptive in their own right, they are also interrelated and cut across multiple dimensions: customers, regulation, business models, technology, and operations. Strategic planning requires a view toward the multitude of disruptive forces eroding utility revenue.

Perhaps most challenging for utilities, strategic planning must embrace the ability to fail fast, early, and often to keep pace with the rate of technology change. If innovation tells us anything, it is that most initiatives are bound to fail, or worse yet, return just enough to sustain interest and occupy resources for several years before finally flaming out.

While the pursuit of new business models remains vitally important in this shifting landscape whether regulated or not, the utility opportunity lies more in the ability to continuously shape and prune DER portfolios, shedding laggard components and embracing emerging solutions rich in grid services.

Agile innovation, an extension of an approach to product development that gained fame in the highly competitive software industry, provides a useful blueprint. Focused on two objectives—accelerating the time to market readiness and reliably producing high-quality results—agile innovation is designed to be highly iterative, enabling rapid adaptation to unfamiliar and turbulent environment. Sitting on the precipice of profound industry change, utilities that embrace holistic planning while remaining flexible are likely to be prove most successful at preserving and growing revenue.

 

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