Navigant Research Blog

Smart Cities Seek Viable Financing Models

— May 21, 2014

It’s almost a truism to say the biggest barrier to implementing smart city programs is access to finance.  The same can be said of almost any large-scale capital project, particularly those involving public infrastructure.  Smart cities face the additional challenge of assessing the costs and benefits of new technologies and the uncertainties introduced by new operating models.  Fortunately, a growing range of financing options is available to cities as the financial sector comes to understand the benefits and risks of these new projects better.

A useful resource for cities perplexed by funding options is the Smart Cities Financing Guide, released by the Smart Cities Council (SCC) in association with Arizona State University.  The report assesses 28 different financial tools that are potentially available to city leaders, from the well-established use of municipal bonds to advanced financial models, such as securitization (now notorious for its role in the global recession of 2009).   Several different forms of performance contracting and green deals that have become available in recent years are also covered.

Not Available in All Areas

The report mainly focuses on financial tools available in North America, but similar options are usually available in Europe (if sometimes under different terminology).   Financing Models for Smart Cities, a guide produced by the European Smart Cities Stakeholder Platform, provides more detail on European options.  European cities also have access to additional support from the European Union.

However, not all of the potential financial tools are available in all regions, countries, or even in all states.  As Navigant Research’s report, Smart Cities: Asia Pacific, shows, even in China, with its huge infrastructure investment, financing for smart city projects can be difficult.  Cities in Asia often have fewer options for raising funds than their European or North American counterparts.

Finance and the Cloud

Smart city projects also vary widely in investment requirements and the length of time over which benefits are accrued: from a short-scale focus on the outcomes of social programs to 100-year-plus expectations for a railway infrastructure.  As the SCC guide stresses, cities should consider a range of financing options.   They should also look at consolidating requirements to achieve greater scale where this fits the preferred financial option.  On the other hand, in some cases, it makes sense to go in the opposite direction and look at disaggregating projects in order to find the right financial tool for each component.

Funding innovation can take other forms, of course.   One area not pursued explicitly in the SCC report is the change in operational models enabled by new technologies.  The most important of these is the emergence of cloud-based services.  For smart cities, cloud computing offers a cost-effective and scalable infrastructure for the delivery of new services, as well as important financial advantages – notably, shifting investment costs from capital expenditures to operating expenditures.  Cloud computing, therefore, makes it easier to establish a scalable and adaptable commercial model for the infrastructure services being provided.  Another opportunity for cities to maximize the value of their assets is to open up data resources to third-party developers.  However, crowdsourcing and open data can’t provide the resources for large-scale infrastructure, such as new transit systems or smart water networks – which is where the approaches examined in the Smart Cities Financing Guide become essential.

 

Incentives Are Driving PEV Sales – Right?

— May 21, 2014

New data from the International Council on Clean Transportation (ICCT) shows that incentives are, for the most part, driving sales of plug-in electric vehicles (PEVs) globally (with the United Kingdom, China, and a few others aside).  For example, while consumer uptake of PEVs has been limited to less than 1% in nearly every major auto market, Norway’s fiscal incentives (equivalent to 55% of the vehicle base price) have resulted in a 6% market share for 2013.  Similarly, large incentives in the Netherlands (5.6% market share) and California (4% market share) have led to strong PEV growth in those markets.

Exceptions to the Rule

However, not all jurisdictions with strong incentives have led to higher market share.  Despite a robust €5,000 ($6,850) incentive per PEV purchased, exemption from the vehicle taxation system, and exemption from London’s CO2-based congestion charge, just 0.2% of vehicle sales can be attributed to PEVs in the United Kingdom.  One possible explanation could be the large influx of French-manufactured PEVs in the country, such as those made by Renault and Citroën, which have traditionally not been highly sought after brands in the United Kingdom.  China’s PEV incentives have similarly not made a significant impact because the middle and upper class who can afford PEVs are looking to buy non-Chinese brands, such as Teslas, which have historically been largely unavailable.

The following graph shows the correlation between fiscal incentives and the market share for plug-in hybrid electric vehicles (PHEVs) and battery electric vehicles (BEVs).

(Source: ICCT)

While the ICCT data leaves some questions unanswered, it does demonstrate that fiscal incentives can be powerful mechanisms for reducing the effective total cost of ownership and are largely successful at encouraging consumers to buy PEVs.  For example, California’s PEV penetration growth forecast numbers (7.61% market share by 2023) are partially calculated by using a combination of financial and other incentives, such as HOV lane access and exemption from emissions inspections and state sales and use taxes.  For an in-depth analysis of how quantifying U.S. state incentives can identify the best market opportunities in the country, see Navigant Research’s report, Electric Vehicle Geographic Forecasts.

 

Inaction on Energy, Climate Change Risks Global Chaos

— May 16, 2014

The crisis in Ukraine has provided the West with a stark reminder of an inconvenient fact: Many of Europe’s liberal democracies are heavily dependent on Russia for their energy supplies.  The latest move by Vladimir Putin in his campaign to destabilize the fragile elected government of Ukraine came this week, as he announced that supplies of natural gas to the country would be cut off at the end of May unless Ukraine pays for them in advance.

Ukraine owes Russian gas giant Gazprom $3.5 billion, Putin said in a May 15 letter to European leaders.  In April, Gazprom responded to the ouster of former Ukrainian president Viktor Yanukovych with a sharp hike in the price of the gas it sells to Ukraine, going from $268 per 1,000 cubic meters to $385.  Russia has throttled its gas pipelines into Ukraine twice before, in 2006 and 2009.

Russia supplies around 27% of Europe’s natural gas, according to Emergingmarkets.org – much more in the case of former Soviet Bloc countries like Bulgaria (85% of its gas comes from Russia) and the Czech Republic (80%).  Nearly half of the gas headed west to European markets flows through Ukraine.

The Law of Possession

Russia’s takeover of the Crimean peninsula has also thrown into turmoil plans for developing offshore oil & gas resources in the Sea of Azov and the northern Black Sea, where Chornomornaftogaz, Ukraine’s state-owned oil & gas producer, controlled rich oil & gas fields and at least a dozen offshore drilling platforms.  Since the annexation of Crimea, Russia has laid claim to those resources.  “If this is a part of Russia,” declared Denis Khramov, Russia’s deputy natural resources and ecology minister, “then it is subject to Russian law.”

Energy chaos on the edge of Eastern Europe has already prompted Fitch Ratings to warn that cutting off Russian gas supplies to Europe could derail the fragile economic recovery on the continent.

All of this points to a further sobering truth, of which Western democracies must be forcefully reminded at least once a decade: There is no national security without energy security.  This fact will be less and less escapable as the effects of climate change accelerate, according to a major new report from CNA Corp., a strategic risk analysis firm in Arlington, Virginia.  Written by the company’s Military Advisory Board, a panel of former high-ranking military officers, the report warns that inaction on climate change is seriously undermining the post-Soviet world order, destabilizing critical regions, fomenting terrorism, and endangering irreplaceable supplies of water and energy.

No Security without Energy Security

“The volatile mixture of population growth, instability due to the growing influence of nonstate actors, and the inevitable competition over scarce resources will be multiplied and exaggerated by climate change,” the report says.

That conclusion was echoed by Helge Lund, CEO of the Norwegian oil & gas major Statoil, in an address at Columbia University’s Center on Global Energy Policy Spring Conference.  “Energy policy is economic policy,” Lund remarked, adding that “Now is the time to support investments that spur carbon reduction.  In that perspective, we at Statoil are strong believers in a high carbon price.”

What a growing chorus of top generals and admirals and senior business executives is saying is this: The proliferation of renewable energy sources, the spread of energy efficiency and conservation measures, and the reduction of reliance on fossil fuel imports from volatile (or hostile) states aren’t just feel-good green policies; they’re critical strategic responses to the harsh realities of climate change and growing resource conflicts.  The world leaders who would resist a price on carbon include Vladimir Putin, whose expansionist tendencies and contempt for the censure of Western democracies is based on his country’s energy might.

If the world fails to act, wrote retired Rear Admiral David Titley, former head of the Navy’s task force on climate change, in the CNA report, “I am afraid we will soon start getting into varsity-level instability.”

 

Luxury EV Sales Outpace Overall Market

— May 13, 2014

The plug-in electric vehicle (PEV) market continued to see strong growth in early 2014, and the high-end segment is likely to expand most quickly during the remaining months.  According to data from HybridCars.com, sales of PEVs in the United States grew by 24% during the first quarter of 2014 compared to the prior year and now make up approximately 0.6% of new light duty vehicle sales.

But if you look at sales from only the luxury vehicle segment, the penetration rate jumps to nearly 3% of new vehicles sold.  Nearly all of those sales (94%) came from just one company – Tesla Motors.  Two models accounted for the rest of the luxury EVs sold: the Cadillac ELR and the Porsche Panamera S E-Hybrid, both plug-in hybrids.

PEV Market Penetration by Vehicle Type, United States: 1Q 2014

(Sources: Navigant Research, HybridCars.com, AutoNews.com, Tesla Motors)

PEVs are doing well in the luxury market not only because the Tesla Model S is a great looking and performing vehicle, but also because its target audience is unfazed by its higher price tag.  Whereas Chevrolet, Nissan, Ford, and others are asking consumers to spend an additional $5,000 to $10,000 for a comparable looking electric compact or sedan (albeit with more features, such as navigation and telematics), Tesla and the other luxury makers are requiring customers to spend about as much as they normally would.  Upselling is always more challenging than asking customers to choose between equally priced options.

Top-Down Approach

Navigant Research projected that the luxury market would be an area of great interest and activity this year as part of our free annual white paper, Electric Vehicle Predictions: 10 Predictions for 2014.  Tesla, which reported sales of 6,457 vehicles during 1Q in its recent quarterly filing, continues to thrive, but competition is coming.  (Tesla does not identify how many of its vehicles were sold outside of the United States separately, so the PEV percentage in the United States is slightly inflated.)

Until recently, the only other luxury options have been the Cadillac ELR and Porsche Panamera S E-Hybrid (the Fisker Karma was also briefly on the market).  However, BMW will soon have two models available, and Mercedes just announced an aggressively priced battery electric vehicle.  And, within a year, Audi and Volvo will also be in the mix with new PEVs for sale in the United States.

While the styling from some of the luxury PEVs may not mirror their internal combustion engine counterparts, the interior creature comforts and vehicle performance will tempt consumers who are interested in avoiding paying more at the pump.  The rapid expansion of luxury PEV models available should enable the segment to stay well ahead of the overall PEV market penetration for the foreseeable future.  We can expect even more luxury PEVs to be announced before the year is over.

The overall PEV penetration rates will only grow if automakers pursue more segments and the high costs of batteries today makes moving from the top down a reasonable strategy.  Tesla and Chrysler are also eying other potential opportunities for PEVs – the SUV and minivan segments.

If you’d like to hear more on the future of electric vehicles, I’ll be speaking at the Electric Drive Transportation Association annual conference on May 20 in Indianapolis.

 

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