Navigant Research Blog

Ubiquitous Broadband vs. States’ Rights—and What It Means for Utilities

— September 26, 2016

Ethernet CablesThe Federal Communications Commission’s (FCC’s) net neutrality rules were upheld earlier this year, though challenges are likely to take that fight all the way to the Supreme Court. However, the Commission recently suffered a setback on another broadband-related front. In February 2015, the FCC issued an Order preempting state laws that restrict the growth of municipal broadband networks beyond their borders. But in August, the US Court of Appeals for the Sixth Circuit reversed that Order, giving states the right to block muni broadband expansion.

The original Order came after two municipal electric utilities—EPB Chattanooga in Tennessee and the City of Wilson in North Carolina—petitioned the FCC to remove restrictive state laws that prevented them from extending their broadband network to areas outside of their utility territory. Such rules exist in some 19 US states, thanks largely to lobbying efforts on the part of incumbent telecommunications and cable providers. Given the relatively high percentage of rural areas across the country where broadband service has limited availability (or is so slow as to hardly qualify as broadband), this reversal flies in the face of the government’s ubiquitous broadband goals.

Energy Superhighway

I’ve been urging utilities to consider the provision of broadband services (via fiber-to-the-meter, 4G LTE, private licensed spectrum options, and/or, eventually, 5G) as the way to financially justify a territory-wide, high bandwidth, low latency network. Said network, dubbed the Energy Superhighway in my recent white paper, can support not only smart grid applications like smart metering and substation and distribution automation, but also smart city applications (lighting, waste, parking, etc.) as well as EV charging station networks and smart solar management. It’s future-proof, unlike the networks utilities tend to build in an ad hoc, application-centric, silo-based manner.

Many of the emerging technologies mentioned above are a long way from being widespread in most geographies. A utility’s ability to offer Triple Play (video, voice, and broadband) services—much like EPB has so successfully done in Chattanooga—supports the economic equation in the near-term while allowing the utility to aggressively plan for the more dynamic, two-way energy economy of the future.

The utilities in the suit (or the FCC) may well appeal this recent reversal, but the conflict between federal goals for broadband connectivity and states’ rights proponents is sure to drag on, to the detriment of both utilities (and other Internet of Things-centric verticals) and consumers.

 

Has Hitachi Zeroed In On the Most Viable Microgrid Business Model Today?

— September 22, 2016

Energy CloudI had the pleasure of participating in an afternoon workshop at the VERGE conference in Santa Clara, California this week. The workshop covered a lot of ground, including offering two different perspectives on microgrids from two leading players: Spirae, a controls and software innovator, and Hitachi, the only company in the world that has declared it has a 100-year-plan for  “social innovation businesses,” a broad category of solutions that includes microgrids in North America and Asia.

While the workshop covered a lot of ground, perhaps the most noteworthy portion of the program was a presentation by Urs Gisiger, director of project finance for Hitachi Energy Solutions. Gisiger directly addressed questions that seem to be a hot topic of conversation at nearly every event focusing on the hype and promise surrounding microgrids and a distributed energy future: How do we finance such projects at a time of great market uncertainty? In other words, what is the best microgrid business model?

Gisiger set the stage by referring to some recent research performed by Navigant Research, looking at which business models have been deployed in systems in North America in 2015 and 2016. Note from the chart below that if we exclude both remote microgrids and military microgrids—systems with unique investment needs—the overall favorite in terms of business model structure is the power purchase agreement (PPA), representing 45% of total capacity.

Grid-Tied Non-Military Microgrids by Business Model Capacity, North America: 2015-2016

Microgrids Blog

 (Source: Navigant Research)

Of course, a PPA can be financed in several different ways, and this is where Hitachi has really done its homework. In the process, it is shedding light on the part of the microgrid finance supply chain that up until this point in time has largely been in the shadows.

Project Financing

For example, Gisiger revealed 20 banks that will do project finance for energy infrastructure today, including microgrids. In addition, he provided a much longer list of 60 banks, the majority of which are selective in their power project financing, that conceivably also loan money for microgrid projects in North America. “In addition, debt funds and insurance companies are also entering the microgrid market,” he said. He also noted that unregulated arms of utilities are also entering the microgrid financing space in North America, a small group creeping up toward 10 at present.

Despite this good news, Gisiger also offered a sobering portrait of financing options, with the majority—including individual project finance and corporate loans—not leading to satisfactory results for either project developer or project owner (or both) today due to high transaction costs. A revolving line of credit for a fleet of projects looks much more promising, since it allows for greater scale.

As an intermediate step to move forward as financiers become more comfortable with the risk profile of microgrids, Gisiger singled out a lease facility arrangement based on full recourse financing on a corporate balance sheet; a line of credit is taken out so no upfront equity is required. The bundling of projects into a portfolio is key to achieve critical mass. This approach results in better overall project economics since portfolio sale proceeds stay with the developer, while significantly trimming overall bank, legal, and advisor fees.

Needless to say, microgrids will never be a one-size-fits-all solution. While utility deployments of microgrids are increasing, it is still third-party microgrids that are plowing new ground, especially in terms of financial innovation, with Hitachi among the leaders.

 

Impacts of the Clean Power Plan, Revisited

— September 22, 2016

AnalyticsOral arguments in the litigation of the US Environmental Protection Agency’s (EPA’s) Clean Power Plan (CPP) are upon us. Let’s revisit what the CPP could mean for power generation in the United States.

Navigant’s Energy Market Outlook (NEMO) includes a regional CPP policy with the mass targets and compliance deadlines laid out by the EPA in the final rule. NEMO shows that impacts of the CPP are regional in nature, and in many regions are not as drastic in the early years of compliance as one might expect. In fact, most states do not see additional costs driven by the policy in the first few years of implementation. This is partly due to the fact that the EPA’s final rule includes a glidepath where targets are not as steep in the early years, partly due to expected changes that lower CO2 emissions before CPP compliance begins.

Coal Retirements

Navigant continues to forecast the retirement of significant coal capacity over the next few decades. Our current modeling shows approximately 73 MW going offline between 2017 and 2035. About 40% of these retirements have already been announced, and just over 20% are forecast based on plant age. These two categories can be ruled out as being “driven” by the CPP. The remaining 40% is shown to be uneconomic and is therefore shown to retire in our modeling.

Retiring Coal Capacity by Region, United States: 2017-2035

CPP Retirements

(Source: Navigant)

A decision to retire a plant before the end of its useful life is very complicated, and it is very rare that a single driver can be identified as causing such a decision. The more influential factors we have seen include competition with cheap natural gas and increases in costs caused by environmental regulations (including the CPP). NEMO shows that the largest shares of announced coal retirements are located in MISO and WECC, while the largest share of modeled coal retirements are located in SERC territory.

Renewable Growth

On the other side of the equation, NEMO also includes continued low natural gas prices due to shale abundance, as well as continued growth in large-scale renewables, distributed energy resources, and energy efficiency. Large-scale solar capacity additions continue to grow due to falling costs, with additions on par with wind in some regions. Early in the forecast, solar becomes the renewable of choice in California, driven by the state’s aggressive renewable and carbon goals, which go above what the CPP requires. Wind continues to be installed in areas with high potential, helping states like Texas meet their CPP targets.

Low-Cost Compliance in Early Years

NEMO includes over 29 GW of coal coming offline in the Eastern Interconnection before the CPP targets begin, making compliance in the first interim compliance period (2022-2024) relatively painless. Our modeling of the CPP uses a cap-and-trade mechanism to approximate a compliance framework. Across most of the country, carbon allowance prices are forecast to be zero for the first 2 years of compliance, meaning no additional costs are needed to meet the targets. As others have found, compliance costs are lower when regional trading is allowed. Our modeling confirms that states that go it alone tend to have higher compliance costs overall.

 

ISO-NE Meeting Attracts Natural Gas Protestors

— September 22, 2016

Oil and Gas ProductionMost regional transmission organization (RTO) stakeholder meetings are about the most dry, boring, and technical sessions you could imagine, usually consisting of a bunch of energy policy wonks debating market rules and cost allocation. But once in a while, something will happen to liven up the scene in an unexpected way. Such was the case at the September 15 Independent System Operator of New England (ISO-NE) Consumer Liaison Group (CLG) meeting in Providence, Rhode Island.

It started out as a typical CLG meeting. Heavy hotel lunch, meeting introduction from the chairperson, ISO-NE update, policy keynote speaker. Then the fun began with a panel on energy infrastructure projects in Rhode Island. First up was the CEO of Deepwater Wind, the developer of the first US offshore wind project to be completed, a 30 MW installation located off of Block Island. Offshore wind used to be controversial in the days of Cape Wind, but now it seems to have become more accepted, and there were no vocal naysayers at this meeting.

Natural Gas Power Plants

Next up was Invenergy, the developer of a new proposed natural gas-fired power plant in Rhode Island. The speaker outlined the basics of the project and made the case for the ISO-NE grid’s need for it. As he got into more of the details of the emissions and gas pipeline needs, a woman stood up on the side of the room and silently held up a sign in opposition to the proposed plant. That action alone was more excitement than is typically seen at one of these meetings, but it was just the appetizer.

Next, a speaker from Spectra Energy (soon to be part of Enbridge) took to the podium. Before he could get too far into his remarks about natural gas pipeline projects in New England, several audience members stood up and walked toward the stage. Two held signs opposing gas pipelines and one acted as the voice for the group, talking loudly to the speaker and the audience about the dangers of fracking.

The speaker from Spectra was obviously used to these types of demonstrations, as he calmly proclaimed that he welcomed the group at the meeting, as long as they didn’t disrupt the event and spoke when the allotted time for questions and answers arrived. The group persisted for a few minutes, but eventually went back to their seats. No need to call in the National Guard.

It was a fresh reminder to me that the discussions undertaken and decisions made in these often esoteric venues have effects on real people in the public and on the land and environment. I honestly don’t think most of the people in the room would disagree with the concern over issues with natural gas extraction and delivery. There is just a difference in opinion over the best path forward for our shared energy future from a cost, reliability, and environmental standpoint. It was a very respectful example of our free society at work.

Now back to those less-than-respectful election campaigns!

 

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