Navigant Research Blog

Enterprisewide Financing Innovation Needed to Drive Energy as a Service Delivery

— July 5, 2017

In my most recent blog post, I examined how corporate commercial and industrial (C&I) energy and sustainability managers, after years of having no say in how they procure energy, are choosing to apply new technology and business model innovations to meet sustainability needs. Navigant Research anticipates these needs will contribute to the emergence of new energy as a service (EaaS) solution offerings and deployment models underpinned by financing innovation and a desire by customers to avoid spending capital on energy projects. I will highlight how these EaaS solutions and deployment models are brought to the market in an upcoming Navigant Research report titled Energy as a Service.

Currently, C&I customers attempting to implement energy efficiency and/or distributed generation projects are already using EaaS solutions, typically from pure-play solutions providers. For example, solar PV developers use project finance instruments such as solar power purchasing agreements, while energy efficiency implementers can deploy shared cost savings-based energy services performance contracts. Both EaaS financing instruments allow customer to implement projects without deploying their own capital. But until recently, there were fewer options for customers to deploy EaaS using financing innovation on an enterprisewide basis.

Enterprisewide Financing Innovation

One deployment model that is poised to drive the growth of EaaS solutions is called the outsourced managed energy services agreement (MESA). In a MESA, customers with large portfolios of small and medium-sized C&I buildings will look to outsource their entire management operations for a fixed annual payment over an extended period. The MESA concept shown below highlights how this type of EaaS deployment model might work.

Basic MESA Structure

(Source: Wilson Sonsini Goodrich & Rosati)

At the heart of a MESA is a turnkey EaaS provider with deep project development and technology expertise across multiple EaaS disciplines. These vendors will also have the capability to deploy financing innovation to overcome customer simple payback capital deployment hurdles. The MESA concept allows the EaaS provider to assume turnkey responsibility for enterprisewide energy management, including utility bill payment, in exchange for a series of annual creditworthy payments over 10, 15, or more years based on the customer’s historic energy management costs. This approach allows the MESA provider the flexibility to pursue energy retrofits or solar PV deployments under long-term financing arrangements should the customer lack the expertise, risk appetite, time, or capital to do so themselves.

As several of my recent blogs have highlighted, the need for interested EaaS stakeholders to create and apply financing innovation is critical to the deployment of new distributed energy resources. The MESA is a prime example of an innovative financing approach that can be applied on an enterprisewide basis to meet the customer needs to reduce energy spend and lower greenhouse gas emissions while overcoming the capital deployment and technical expertise barriers they face.

 

A Roadmap to the Coming Hydrogen Economy in One Chart

— July 5, 2017

Hydrogen has been discussed as a future energy carrier for decades, though infrastructure challenges and high cost seem to always keep broad adoption in the hypothetical realm. However, as the cost of electrolyzers and renewable energy continue to tumble and climate policies tighten, hydrogen is again experiencing renewed global interest.

Versatility and Disruptive Potential

Hydrogen’s versatility boosts its appeal as an energy carrier. It is the only energy carrier that has significant disruptive potential across the world’s energy-consuming segments: power, transport, industry, and heating. Electrolytic hydrogen—which comes from splitting water molecules by electrolysis, often with renewable electricity—is broadly seen as the key to clean hydrogen.

As seen in in the following chart, electrolysis remains expensive today. This is because electrolyzer capital costs have not fallen much below $1,000/kW. Renewable electricity costs, while falling dramatically, remain relatively high compared to a very high penetration future. But as those two costs fall, as is projected through 2025 and beyond, the cost of clean hydrogen falls substantially.

Hydrogen Cost Comparison with Other Energy Carriers, World Markets: 2017, 2025, and Beyond

Notes: Commodity costs include representative data from California, Germany, and Japan. Electrolytic hydrogen (2017) based on DOE data and actual filling station costs, while future prices presume large-scale (100 MW) systems with continued declines in both cost of renewable electricity and electrolyzer capital costs. SMR is steam methane reformation.

(Sources: Navigant Research, US Department of Energy, International Monetary Fund, International Energy Agency, California Energy Commission)

Hydrogen Use in Transportation

Transportation, which favors expensive energy-dense fuels, is among the more attractive uses for hydrogen. Indeed, electrolysis is providing a growing share of hydrogen to rollouts of both passenger vehicles and heavy duty vehicles like buses—in places such as China, California, Germany, and the United Kingdom. The success of battery EVs (BEVs) represents a major hurdle for hydrogen, though there is growing reason to believe that both energy carriers will be embraced. For example, the range-extending capabilities of hydrogen on battery vehicles are continuing to improve.

Other Hydrogen Uses

Hydrogen is also highly valued by industry as an important process input to production of ammonia, glass, and metals. Industrial uses represent an existing hydrogen economy that can be decarbonized and made more efficient by renewable hydrogen. Finally, hydrogen could revolutionize power generation and heating through fuel cells or other thermal generators, though it is expensive compared to natural gas, especially in the United States with its ongoing shale gas boom. Still, if the aggressive cost decline targets are met, even these two heavily polluting segments could be disrupted by hydrogen energy.

Hydrogen detractors correctly point to the infrastructure challenges of hydrogen storage, compression, and transport and the steep cost declines needed. If those hurdles can be cleared, this chart may hold two additional reasons for optimism: carbon pricing and hydrogen’s efficiency bonus. Carbon pricing, which is on the rise, makes hydrogen more attractive, as it displaces fossil fuels. Finally, comparing by units of energy hides a key efficiency bonus of hydrogen: it is often twice as efficient as the fossil fuels it replaces. This is because both stationary and vehicular fuel cells can be around 60% efficient, which is roughly twice the efficiency of combustion-based technologies after losses.

A Roadmap to Future Energy

This chart can be considered a roadmap to an eventual hydrogen economy. Electrolytic hydrogen is already competing with fossil fuels in the transport and industrial segments, and will continue to grow its market share. Provided the favorable carbon policies and cost declines continue, hydrogen has the potential to be the best and most versatile energy carrier of the future.

 

Online to Brick-and-Mortar and Back Again

— July 5, 2017

As I strolled down Pearl Street, the center of local commerce, it was hard not to notice the shifting face of a small city undergoing an economic boom. Storefront overhauls and new construction flank the street from the east to west end. One newcomer caught my eye this week and made me think again about the debate of the potential death of brick-and-mortar retail. Warby Parker, the online eyeglass retailer, is setting up to open its doors on Pearl Street, bringing its cult following from cell phones to the door. This store is part of the company’s seemingly aggressive 2017 expansion to 70 storefronts nationwide.

So, what is happening? Amazon, the online retail giant, bought Whole Foods for $13.7 billion. Walmart is set to buy Bonobos Menswear for a reported $310 million. Do the big companies see online or in-person shopping as the future? I’d argue that the future is choice and technology-enabled convenience.

Smart Technologies to Redefine the Shopping Experience

Seamless access to products from our cell phones to the store counter plus technology-enabled in-store experience: this is the future of retail. The mobile/online access to goods has been the threat to the storefront for a few years at this point. What the recent moves by the retail giants tell us is that choice is critical. Taking a deeper look into the future of in-store shopping, the winners will offer a tech-enabled experience for convenience and fun.

Intelligent building technologies were long touted as solutions for cost savings via energy efficiency. While this foundational benefit remains important, the framing of solutions around the Internet of Things (IoT) changes the value proposition. Once a facility—in this context, a storefront—has been equipped with a backbone of sensors, gateways, and controllers to feed analytics and services, the IoT applications can offer wide business insight. Store managers can suddenly track shopper movements to optimize product placement and speed up checkout times, yet ultimately make the experience more enjoyable for their customers to keep them in the store as long as possible.

Evolving IoT Retail

This IoT approach to facility optimization has many energy and operational benefits, but the change in the experience for the customer is key for retailers. A few recent examples of IoT for retail showcase a new tech-enabled experience and provide a spotlight on what the future of shopping may look like for the stores that survive.

There has been a lot of speculation on the integration of Amazon Go and Whole Foods. As one article explained, “Amazon Go is clearly a new benchmark for IoT retail. With its system, a store can at once know the real-time status of every item, attribute these items to individuals, and then instantly bill them for it. The behavioral analytics potential of linking all stages of the supply and purchasing funnel is immense, allowing Amazon to pursue a more agile and responsive brick and mortar retail strategy. Customers might even be able to get real-time suggestions based on their shopping lists, or even get coupons for items they’re mulling over—all because of identity.”

What we know is major investments are shaking up retail. Any major retailer that fails to embrace technology faces real threats to its long-term viability.

 

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