Navigant Research Blog

Europe’s Energy Transition Megatrends and Tipping Points, Part III: Shifting Power-Generating Sources

— August 17, 2016

Energy CloudJan Vrins coauthored this post.

In our initial blog on Europe’s energy transition, we discussed seven megatrends that are fundamentally changing how we produce and use power. In this third blog in the series, we discuss the shift in power generation fuel mix and how this is transforming the European power industry.

European electricity-generating facilities that use oil, coal, and nuclear are devaluing and at risk of becoming stranded as generation sources shift to less expensive renewable generation and natural gas generation. This shift is playing out in different ways across Europe.

Generation Fuel Mix Shift Is Accelerating

According to the US Energy Information Administration (EIA), net European generation capacity will increase by 7 GW in 2016. Much of Europe’s new capacity TippingPointcomes from renewables, with close to 75% of new capacity coming from wind (44%) and solar (29%). While new coal (16%) and gas (6%) capacity was added, far more coal assets were decommissioned. As a result, net new capacity in Europe is virtually 100% renewables. While recent subsidy cuts have tempered solar’s growth, wind is marching onward. There is still no effective utility-scale solution to the inherent intermittency in renewable generation, as storage solutions and grid interconnection/active management are still lacking penetration at scale. Natural gas is the bridging fuel during the shift to renewables, supported by the abundance of natural gas available globally, lower long-term prices, and increasing import capacity in Europe.

What Are the Drivers Behind This Shift?

We see five main drivers for the shift in generation resources described above:

1. Climate Change Policy: Europe has taken definitive steps to decarbonize its power generation, including relatively generous support for renewables and economic penalties for carbon emitters via the EU Emissions Trading System (EU ETS). See our previous blog on the rising number of carbon emissions reduction policies and regulations.

2. European Market Coupling: A second aspect of Europe’s power sector is the physical and economic integration of markets. Interconnection growth has been strong, and the economic incentives via use of power exchanges for dynamic price signaling has provided further support for low-carbon generation.

3. Generation Economics: While policy and regulatory support for low-carbon generation has taken centre stage, the economics of various forms of generation have also been shifting. Within 7 years, solar power has gone from a heavily subsidized resource to a key component of the generation mix, even with zero or minimal subsidies. Europe continues to lead the world in development of offshore wind, particularly in the North Sea. Thermal generation economics have also changed—despite relatively low gas and coal prices, low marginal cost renewables are increasingly forcing thermal plants to shift from stable baseload operation to less efficient cycling and reliance on ancillary service contracts.

4. Decentralization of Generation: The scale of distributed energy resources (DER) is not yet huge across Europe; however, this trend is already shaking the traditional utility business models. The rise of the prosumer is gathering momentum, be it an industrial customer who invests in combined heat and power, a new commercial building with a biomass boiler, or a housing development with rooftop solar panels.

5. Public Sentiment: This driver cannot be underestimated given the prevalence of democratically elected governments in Europe. Public support for action to curb climate change despite the costs has been most obvious in Germany, where the changes via nuclear shutdowns and solar growth have been massive—and expensive. In the UK, it is more expensive to construct offshore wind than onshore, but the public and political preference is that location trumps economics.

How Does This Play Out Across Europe?

Navigant Research forecasts that 66% of European installed renewable generation capacity in 2016 will be in five countries—Germany, Italy, France, Spain, and the UK. In the struggling economies of Portugal, Italy, and Greece, the rate of renewable growth has slowed to just 0%-2%. Countries that are still dependent on coal as a fuel source face economic and fuel supply obstacles.

Beyond the recognized elements of the shifting power generation trend in Europe, there are a series of potential tipping points that will have pronounced consequences depending how they fall:

  • New Nuclear: This is a topic of much debate in the UK and France. Germany has all but made its mind up, barring a major political reversal. Until recently, the UK Department of Energy and Climate Change (now part of the Department of Business, Energy and Industrial Strategy) was a strong supporter of new nuclear in a portfolio of low-carbon generation. The new Hinkley Point C nuclear facility was planned to begin a renaissance of new nuclear, but with new skepticism rearing its head in the UK media, there is still a chance that the nuclear renaissance will stall and the UK will turn to a mix of more gas and offshore wind. France is another country to watch given its historic strength in nuclear power. Unless the struggling Flamanville facility can turn the corner soon and get commissioned, the growing renewables may get a massive boost that goes beyond current political support. Public sentiment is also an important card to play in the nuclear game. As the power system shifts from the traditional centralized model toward a more dynamic, distributed environment, there are both significant strengths and significant weaknesses in retaining large inflexible baseload generators. Ultimately they are likely to look increasingly out of place in the new world order.
  • Electricity Storage Technology and Economics: Elements of storage in the electricity system are not new, but pumped hydro storage and fuel storage to provide thermal generation are increasingly being surpassed in the perceptual stakes by other new technologies. The recent National Grid Enhanced Frequency Response tender in the UK was massively oversubscribed. Among all the disruptive technologies that affect the electricity system, a breakthrough in electricity storage technology and economics offers perhaps the greatest potential to radically change the power system of the future. The US Department of Energy is so convinced of this that it is funding 75 breakthrough research projects developing electricity storage solutions. These include radical new options such as organic flow batteries, which avoid the need for costly and rare metals such as lithium and vanadium. The race is on to find ways to bring storage costs down below $100/kWh or €90/kWh at present exchange rates.
  • European Shale Gas Developments: Shale gas has proven revolutionary in the United States; however, it remains questionable in Europe. Even though it is highly unlikely to have the same supply and economic characteristics as it does in the United States, it may indeed prove a further tipping point in favour of gas-fired generation if significant quantities of shale gas are produced within Europe. Security of supply is always of paramount importance, so the notion that countries in Europe would produce then export most of their supply would be hard to comprehend. Whereas coal is struggling to find favour other than in countries with little alternative, Europe has a great deal of relatively modern gas-fired generation that is not being well utilized. There may be a trend toward smaller, more flexible plants, but gas-fired generation has a viable future under most scenarios for many decades yet.
  • Carbon Target Commitments for 2030: While COP21 was a major milestone in global climate change, when the microscope is turned on European national commitments to decarbonize power generation, the image is less rosy. Some countries such as Spain and Italy appear to have reached peak renewables, where their appetite to push on and manage the ongoing system impacts are not high. Germany is struggling to digest its huge solar investment and accept the consequences on battling local firms such as RWE, E.ON, and Vattenfall. The UK has repeatedly backed away from committing to 2030 carbon targets, preferring to stick with existing 2020 and 2050 numbers. Until firm 2030 commitments by country are made in early 2017, there is insufficient muscle to power Europe forward.
  • Interconnect and Brexit: No article about Europe is complete without a mention of Brexit. The immediate question and a potential tipping point is how European interconnect developments will fare, especially those proposed in the North Sea to connect Scandinavia, Germany, the Netherlands, France, and the UK. These projects greatly affect the larger renewable generation economics, allowing easy and unrestricted export and import of power between countries as wind, sunshine, and other renewable sources vary between nations. Most commentators assume that the UK will retain its close ties to European energy markets; however, if this changes, it could precipitate an unravelling of arrangements with far-reaching consequences.

What Does This Mean for Generators?

More traditional generation assets, particularly coal and nuclear, face an uncertain future. For coal without carbon capture and storage, every scenario looks at best bad and at worse grim. As evidenced by Navigant’s Generation Knowledge Service (GKS), the average capacity factor of coal plants has declined by 20%-30%, which translates to a 20%-30% drop in gross revenue opportunity. To deal with the combination of lower realized revenue and higher operating costs, companies are evaluating their plants to determine if they can survive in the new world. They are actively seeking new ways to reduce costs through staffing changes, fewer planned outages, and higher operating efficiencies while maintaining high reliability to support the increased use of variable generation. Older coal plants are being phased out and others converted to burn biofuel. Revenue support from capacity contracts and better ancillary service contracts such as black-start capability is also becoming crucial.

Nuclear power today accounts for 25% of all European electricity produced, and any change in nuclear’s role in the generation mix will take time to implement. However, nuclear also highlights the significant differences in national energy policies across the EU and the wider European context. Nuclear was effectively killed in Germany, yet may still enjoy a renaissance in the UK; new plants are under construction in France, Finland, and Slovakia.

As a result, the economics have changed and some of the existing (coal and nuclear) assets are experiencing eroded profit margins. These margins are resulting in challenging economics and, in some cases, significant devaluation. More generation assets are increasingly at risk of becoming stranded investments, as the fuel mix is shifting more quickly than envisioned.

And to Make Things Worse: The Move from Big to Small Power

With the rapid growth of distributed generation (DG), all central generation (coal, gas, hydro, nuclear, and wind) will face more changes in its role on the grid. DG installations are expected to reach 256 GW in 2016; thus, DG is growing faster than central station generation (7 GW additions, minus 8.5 GW retirements, using the EIA forecast). On a 5-year basis (2015-2019), DG in Europe, with some variance by region, will grow almost twice as fast as central generation (47 GW vs. 28 GW), excluding retirements.

Path Forward

As a path forward, generators must clearly define the mission of each generating unit to understand their new role and how to survive economically. To succeed, we believe companies must do the following:

  • Conduct a strategic review of generating assets and determine what, if any, changes need to be made in their generation portfolio and/or how these assets are managed under several regulatory and commodity pricing scenarios.
  • Find innovative ways to reduce O&M costs while maintaining the reliability required by the independent system operators during target operating periods (for plants that will continue to run in the near term).
  • Seek new sources of revenue to replace the capital-intensive position for large generating plants by considering investments in renewables and DER, particularly energy storage, and optimizing commercial contract opportunities with system operators.
  • Have a strategy to manage significant reductions in staffing levels and loss of critical experience across the board, including dealing with the impacts on funding pensions and local economies when plants are retired.
  • Plan for a changing workforce that will include deeper knowledge of digital technology and an understanding of how to optimize operations in a more variable power market.
  • Assess options for global asset diversification given the changes and new opportunities in traditional parts of the value chain such as transmission and distribution.

An understanding of the above disruptive trends and how they affect your company and the rest of industry is crucial to shaping our energy future. Navigant aims to help our clients understand, progress, and protect their business’ future in the context of this massive amount of change.

This blog is the third 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 IV: Power Generation Shift

— May 20, 2016

Oil and Gas ProductionDale Probasco and Rob Patrylak also contributed to this post.

In the initial blog of this series, I discussed seven megatrends that are fundamentally changing how we produce and use power. Here, I discuss how the shift in the power generation fuel mix is changing our industry.

Generation Fuel Mix Shift Is Accelerating

The electric grid in the United States has relied heavily on nuclear and coal-fired plants to serve as baseload generation for the overall system. According to the U.S. Energy Information Administration (EIA), U.S. electric generating facilities expect to add 26.1 GW of utility-scale generating capacity in 2016. Most of these additions come from three resources: natural gas (8 GW), solar (9.5 GW), and wind (6.8 GW), which together make up almost 93% of total planned additions.

The Navigant Energy Market Outlook has projected this level of expansion in natural gas and renewable assets for several years. For 2016, Navigant expects higher natural gas (16.3 GW) and solar (13.2 GW) expansions than EIA is projecting. Navigant forecasts wind expansion will be lower at 6.1 GW, suffering a bit from extremely low natural gas prices and the ongoing decreases in installed costs for solar (decreasing faster than the installed cost of wind).

This shift toward natural gas and renewables will continue as many different factors affect generation fuel strategies, resource plans, and decision-making. Among these factors are sustained low natural gas prices (see Navigant’s natural gas price forecast), state and federal renewable incentives, the implementation of environmental regulations such as the Mercury and Air Toxics Standard, and the threat of new carbon legislation such as the Clean Power Plan (see also my earlier blog in this series on this topic). Today, this shift is accelerating even more because of increased interest from customers in renewable power (customer choice) and the rapidly declining installed costs, which are making renewables more competitive with traditional fuel sources (including coal and nuclear).

What Does This Mean to Generators?

As a result, the economics have changed and some of the existing (coal and nuclear) assets are experiencing eroded profit margins. These margins, in turn, are resulting in challenging economics and, in some cases, significant devaluation. Increasingly more generation assets are at risk of becoming stranded investments, as the fuel mix is shifting more quickly than anybody envisioned. Coal-to-gas switching has caused coal plants to consider retirements and, with low gas prices and the impact of renewables off peak, there is more pressure to decommission nuclear assets. There have been several early shutdowns, confirmed announcements, and threatened early shutdowns in recent years, including the recommendation from Omaha Public Power District (OPPD) management last week to discontinue operations at its Fort Calhoun nuclear station. Generators are reevaluating the role of each of their plants, as well as how and if the plants should fit into their portfolio, leading us to the following observations:

  1. Coal and nuclear plants operate at reduced revenue while still required to maintain system reliability/stability as long as their required economics are met.
  2. Coal plants (designed as baseload) are required to operate more as cycling units. This requirement drives up cost and reduces efficiencies, which may mitigate some of the environmental gains made as a result of more off-design operations.
  3. These economic pressures are driving numerous coal plants out of the market and increasing the possibility of stranded assets.
  4. Nuclear assets have been hurt as well and are requesting market assistance and incentives to keep operating. Savings measures such as Capacity Resource Adequacy payments and even state legislatures have been looking at approaches that can improve the economics for both nuclear and coal in order to maintain fuel diversity and keep these baseload plants running.
  5. Efficient gas plants are operating more in areas of ample gas supply and infrastructure.
  6. All generating plants are seeking ways to reduce operations and maintenance (O&M) costs while maintaining reliability.

As evidenced by Navigant’s Generation Knowledge Service (GKS), the average capacity factor of coal plants has declined by 20%-30%, which translates to a 20%-30% drop in gross revenue opportunity. Very few companies can easily adapt to this type of drop in gross revenue. At the same time, driven largely by increasing amounts of variable renewable generation, these coal plants have been asked to perform more as cycling plants, which drives up overall operating costs and reduces efficiency. To deal with the combination of lower realized revenue and higher operating costs, companies are evaluating their plants to determine if they can survive in the new world or if they should be repowered or retired. They are actively seeking new ways to reduce costs through fewer planned outages and higher operating efficiencies while maintaining high reliability to support the increased use of variable generation.

And to Make Things Worse: The Move from Big to Small Power

Additionally, with the rapid growth of distributed generation (DG), all central generation (coal, gas, nuclear, and wind) will face more changes in their role on the grid. DG installations are expected to reach 19 GW in 2016; thus, DG is growing faster than central station generation (26.1 GW additions, minus 7.9 GW retirements, using the referenced EIA forecast). On a 5-year basis (2015-2019), DG in the United States, with some variance by region, will grow almost twice as fast as central generation (98.4 GW vs. 57 GW).

Path Forward

As a path forward, generators must clearly define the mission of each generating unit to understand their new role and how to survive economically. To succeed, companies must do the following:

  1. Conduct a strategic review of generating assets and determine what, if any, changes need to be made in generation portfolio and/or in how these assets are managed under several regulatory and commodity pricing scenarios.
  2. Find ways to reduce O&M costs while maintaining the reliability required by the independent system operators during target operating periods (for plants that will continue to run in the near term).
  3. Have a strategy to manage significant reductions in staffing levels and loss of critical experience across the board, including dealing with the impacts on funding pensions and local economies when plants are retired.
  4. Plan for a changing workforce that will need to include deeper knowledge of digital technology and an understanding of how to optimize operations in a more variable power market.
  5. Aim to operate fossil assets globally, as companies that do so may find it easier to survive than generators focused solely on North America or Western Europe.
  6. Seek new sources of revenue to replace the capital-intensive position for large generating plants by considering investments in renewables and distributed energy resources.

An understanding of the above data points and how they affect your company and the rest of the industry is crucial to shaping our energy future. Navigant can help you develop and use this information to influence the key decision makers, regional transmission organizations, and state agencies that are shaping the future of the industry. If you’re not sitting at the dinner table shaping a future that works best for your company and your customers, then you just might be the entrée.

This post is the fourth in a series in which I will discuss each of the megatrends and the impacts (“so what?”) in more detail. My next blog will be about delivering shareholder value through mergers and acquisitions. Stay tuned.

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

 

Nuclear Power Tiptoes Back into the Conversation

— October 28, 2015

This may be an uncomfortable notion for cleantech purists, but nuclear power has tiptoed back into the conversation about what sources will supply energy into the future. Recent developments indicate the move toward nuclear power may be closer than many people think. Consider these recent happenings:

  • U.S. nuclear regulators are close to approving the first nuclear power license in 20 years. The Tennessee Valley Authority’s 1,150 MW Watts Bar 2 unit could get the necessary go-ahead in the coming days, and if that happens, the plant could start commercial operations in 2016.
  • The Obama Administration’s Clean Power Plan could give the nuclear industry a shot in the arm; current U.S. Environmental Protection Agency (EPA) administrator Gina McCarthy has said that nuclear plants would be credited under the plan as zero-carbon generation as part of a compliance strategy.
  • Two Massachusetts Institute of Technology-trained scientists are pushing a safer type of nuclear power generation that is designed to eat its own waste. Nuclear physicists Leslie Dewan and Jacob Dewitt have founded separate but comparable startup companies that focus on nuclear generators capable of operating on their own radiated waste, which removes the need for trucking and storing spent radioactive material.
  • China and Bill Gates are said to be making progress in the pursuit of nuclear power. Gates’ nuclear power company, TerraPower, has signed an agreement with the China National Nuclear Corporation (CNNC) that permits the two companies to work together on advanced nuclear technologies that tackle some of nuclear power’s toughest issues: environmental, safety, and cost. China also plans to build 400 new nuclear reactors by about 2050.

Closer to my world, I recently met an attorney who has a background in nuclear power but is no friend of fossil fuels. Attorney Priya Sinha Cloutier has clients that include biofuels companies and various other nuclear power industry players. Her take is that nuclear power needs to be part of the future of energy generation. She is a fan of solar and wind, but those technologies alone are not the only solutions in her mind. It was an interesting conversation, and helped me connect the dots.

Seems pretty clear that a new era is evolving in which nuclear power can be a part of the generation mix, though with better safeguards. Nuclear won’t be the one absolute answer, but could become a very important piece in the future of energy. Thus the nuclear option could take on a new meaning for the rest of the 21st century.

 

Proposed Bill Would Revive U.S. Rare Earths Industry

— February 28, 2014

Attempting to solve two energy security crises at a single stroke, Missouri senator Roy Blunt in early February introduced the National Refining Cooperative Act of 2014 (NRECA), which would create a federally chartered corporation to build and operate a processing facility for rare earth elements.  Used in a variety of cleantech, defense, and telecommunications technologies, rare earths have become increasingly valuable over the last decade even as producers in China have established an effective world monopoly on their production.

Until the early 2000s, the United States was the world’s leading supplier of lanthanides, scandium, yttrium, and other rare earths, and the Mountain Pass mine on the border of Nevada and California was the world’s largest producer of the minerals.  Dogged by environmental issues and flat world prices, the Mountain Pass mine shut down in 2002, and rare earths production in the United States evaporated.  As I reported in Fortune in 2011, a Denver-based company called Molycorp has restarted Mountain Pass and is attempting to carve out a place as a significant producer of rare earths.  However, China still controls 95% of the market and has demonstrated its willingness to curtail exports in order to control the world’s supply.

Critical Elements

“We are here to state the importance of the need to bring back the rare earth industry to the U.S. to protect and grow jobs as well as to control our own sources of rare earths that are so important to green technologies, aerospace, and defense, and energy-efficient motors and generators,” testified Robert Strahs, the VP and general manager of Arnold Magnetic Technologies, before a U.S. House Committee on Foreign Affairs hearing in 2011.

Backing NRECA is a loose coalition of developers, miners, and alternative energy activists, including the Thorium Energy Alliance, which for the last 5 years has been promoting the development of nuclear reactors that use thorium, a radioactive element, rather than uranium.  As I documented in my 2012 book SuperFuel, thorium is cleaner, safer, and more abundant than uranium and is effectively impossible to fashion into explosives.  It’s also nearly always found in association with rare earths.  NRECA would create a private corporation that would store the thorium left over from rare earths production and formulate and market it for commercial uses, including energy generation.

Thorium is almost ubiquitous in the Earth’s surface, and the United States possesses enough readily available thorium to produce ample electricity for hundreds of years.  Scientists at Oak Ridge National Laboratory in Tennessee pioneered thorium reactor research in the 1960s, but the program was abandoned under the Nixon Administration.  Other countries are moving forward.  The Indian Atomic Energy Commission recently debuted the prototype of the advanced heavy water reactor (AHWR), which is designed to run on solid thorium fuel.  The AHWR is being developed at the Bhabha Atomic Research Centre, outside Mumbai, which has become one of the world’s centers of thorium reactor research.

The Refining Cooperative bill is designed to end China’s monopoly on strategically important rare earth elements and to provide a consistent supply of thorium to fuel low-risk, zero-carbon nuclear power for generations.  Nevertheless, NRECA’s backers have faced a multiyear uphill struggle just to get the bill introduced.  The current bill, introduced in the Senate, could be matched in coming weeks with a similar piece of legislation introduced in the House as part of the 2014 National Defense Authorization Act, the annual budget bill for the Department of Defense.

“We have strong bipartisan support in the House and on the Senate Armed Services Committee,” Jim Kennedy, a Missouri developer and one of the bill’s leading proponents, told me.

They’ll need it.

 

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