Navigant Research Blog

Transactive Future of 2030

— May 2, 2017

The power industry is just a couple of years into the most disruptive decade in its history. Industry transformation is a topic Navigant Research returns to on a regular basis in blogs. We often discuss the current issues regarding a particular technology, but we also discuss what the industry will look like at the end of this transformation.

The recently published report Defining the Digital Future of Utilities takes a look into the future and discusses how the utility industry might operate under an aggressive Energy Cloud scenario in 2030. In that scenario, there are ubiquitous distributed energy resources (DER)—in particular, solar PV, electricity storage, and EVs. In addition, residential prosumers are able to sell their excess generation on an open platform at market prices.

Transactive Energy Is Customer Centric

A fully transactive energy system could not look more different compared to the utility business model of just a few years ago. The biggest difference is that the balance of power in the energy value chain shifts to the point of consumption. By 2030, customers will sit at the heart of the electricity value chain. The old supply model is likely to be replaced by a combination of services developed to aid self-consumption and maximize returns on DER investments. While grid-sourced electricity supply is still required, customers’ electricity requirements are mostly met via their own PV and storage. Demand for grid-sourced power is significantly reduced (though it still increases dramatically when solar production stops in evenings).

Today’s supply-based business model is significantly disrupted: with every PV installation, the need for grid-sourced power diminishes. And when prosumers can sell their self-generated power onto open markets, they will compete against large-scale generators. Not every customer will want every kind of technology, service, or tariff. Consequently, the 2030 business model will be based on service offerings that meet each customer’s specific needs.

New competitive energy service providers will compete for customers with transactive energy services that optimize a customer’s returns from their DER investments. There will be significant areas for differentiation and a variety of service offerings. Many of these will be offered in regions where incumbent utilities currently enjoy the protection from a monopoly market. Only a small proportion of potential revenue will come from grid-sourced power supply; all the rest is up for grabs.

Adaptation Grows Ever More Crucial for Utilities

Incumbent utilities really are facing an adapt-or-die decision. Whoever owns the customer relationship will lay claim to the majority of value on offer. Some utilities are already investigating new service-based business models and trialing transactive energy platforms, although many are not. Those incumbents that resist the current transformation or complacently believe it will not affect their current business models could be in for a shock. Falling solar and storage prices strengthen the economic case for residential DER; the ability to sell electricity at market prices could replace existing feed-in tariffs. These are compelling arguments for transactive energy. A refusal to react to the requirements of the 21st century energy industry will see at least some utilities vacillate their way into extinction.

 

Self-Consumption Markets Are the Future of Solar

— May 2, 2017

Regulatory changes and the increase in retail electricity prices have made some markets ripe for new business models built around increasing solar self-consumption by adding other energy solutions (like batteries or Internet of Things, or IoT).

In my previous blog, I showed how solar installations can benefit from increasing levels of self-consumption. When this is the main economic driver for solar, we define the market as a self-consumption market. While the blog cited the United Kingdom as an example, that is not the only country in which this strategy works.

European Countries Lead Self-Consumption Markets

Here’s a selection of the most attractive self-consumption markets:

  • Germany: Germany is in a similar situation to the United Kingdom. The feed-in tariff in the country (€0.123/kWh [$0.135/kWh]) is significantly below some retail electricity prices. For example, residential rates cost around €0.30/kWh ($0.33/kWh). To fully benefit from a solar installation, Germans need to displace as much as possible of their own consumption. In addition, Germany offers an incentive to install batteries along solar PV systems. German government incentives cover up to 30% of cost for a PV system battery, making the economics of self-consumption even more attractive.
  • France: Like in Germany, the current French feed-in tariff of €0.1382/kWh ($0.151/kWh) for behind-the-meter installations of up to 36 kWp is below retail electricity prices (€0.20/kWh [$0.22/kWh] for residential customers). So there is also an arbitrage opportunity for installations, although the economics are weaker than in Germany.
  • Spain: Despite Spain’s bad reputation in the renewables sector—well deserved given the retroactive changes to its incentive program and the introduction of the infamous tax on the sun—the country is becoming an attractive self-consumption market for installations under 10 kW. Spain has the best solar resources in Europe. Now the levelized cost of distributed solar is below the retail electricity price, opening an arbitrage opportunity for solar installations with high levels of self-consumption.

Self-Consumption Markets by Attractiveness

(Source: Navigant Research)

US Self-Consumption Markets Are Trying to Catch Up

The economics of self-consumption of solar in the United States are weak given the dominance of net metering as the main tool to incentivize solar. There are some states that are moving away from pure net metering that will increasingly be more attractive to providers of integrated solutions.

One example is Arizona. Per the new settlement reached between Arizona Public Service (APS) and local solar advocacy groups, energy exports of new distributed solar installations in Arizona will not be included in the old net metering program. Instead, it gives all new distributed solar customers the option to take a demand-based rate or a time-of-use rate.

If the new structure is approved by the Arizona Corporation Commission (ACC), it would set the self-consumption offset rate around ¢12/kWh, which includes a grid access fee that APS solar customers must pay. The new export rate, based on the ACC’s newly adopted resource proxy model, would be ¢12.9/kWh. Although these changes will not be enough to attract investment in expensive technology like batteries, it does send a signal to end users to start behavioral changes to increase self-consumption. It might be enough to encourage some level of IoT investment in energy management systems and automation.

Near-Term Growth Is Unlikely

From a purely growth perspective, self-consumption markets are likely to disappoint in the short term. The extra complexity they present needs to be well understood by solar players. In addition, end users and business models will need to be tested before being rolled out cheaply en masse. The strategies that are successful in those markets—and less dependent on incentives and more so on solar economics—are most likely to rule the distributed solar sector in the future.

 

Nanogrids vs. Microgrids: Energy Storage a Winner in Both Cases

— October 21, 2015

The business case for nanogrids echoes many of the same arguments used on behalf of microgrids. These smaller, modular, and flexible distribution networks are the antithesis of the bigger is better, economies of scale thinking that has guided energy resource planning over much of the past century. Nanogrids take the notion of a bottom-up energy paradigm to extreme heights. In some cases, nanogrids help articulate a business case that is even more radical than a microgrid; in other cases; nanogrids can peacefully coexist with the status quo.

Despite the bad news here at home coming from NRG, which has now has spun off its distributed solar PV business due to lagging sales, I believe the linking of batteries to distributed solar PV systems is a game changer. The recently published Solar PV plus Energy Storage Nanogrids report shows that this technology represents a less than $1 billion market worldwide today, but this number is expected to grow to $14 billion by 2024, with residential customers leading the market. When it comes to resilience, states such as Massachusetts have already signaled their preference for building-level solar PV plus energy storage nanogrids, since they face less regulatory hurdles than community resilience microgrids.

Ironically enough, the potential loss of federal investment tax credits for solar PV in the United States as early as 2016 and growing utility opposition globally to traditional solar PV support mechanisms such as net metering and feed-in tariffs only help to build the business case for solar PV plus energy storage nanogrids. Why? In order to extract the greatest value from solar PV in the absence of subsidy—whether that be utility demand charge abatement or greater reliability and resilience—will require linking this variable distributed generation to an energy storage system, either in the context of a microgrid or a nanogrid.

The intermittency of solar PV, which can be more extreme than wind on a second-by-second basis, has long been viewed as a drawback to widespread deployment as a substitute for 24/7 fossil fuel generation. Rooftop solar PV in particular can feature capacity factors as low as 20%. If such small systems—whose primary advantage for residential applications is providing financial benefits (offsetting expensive peak grid power)—are coupled with energy storage systems, the value of solar energy is magnified. In essence, it can be stored and then discharged during time periods most advantageous to asset owner. These same storage systems can also offer resiliency benefits when the larger grid goes down.

While the decline in solar PV pricing has been underway for quite some time, it is only recently that batteries—particularly lithium ion—have begun to match solar PV with a similar downward momentum, thereby increasing the appeal of this technology pairing.

Average Installed ESS Cost by Technology, World Markets: 2015-2025

Peter SNANO Blog

 (Source: Navigant Research)

The most radical interpretation of this solar PV plus energy storage nanogrid vision is at the residential level, the application where the nanogrid model is likely to meet opposition from utilities—that is, unless utilities begin offering nanogrid services. So far, utilities in Ontario, Australia, and New Zealand are doing just this (Powerstream, Vector, and Ergon, respectively).

It is safe to say the size of the microgrid market is larger than that of nanogrid due to sheer scale. But microgrids also incorporate combined heat and power and wind, as well as other resources. If we narrowed the comparison to total capacity of just solar PV plus energy storage microgrids versus nanogrids, it is the smaller nanogrid that would likely come out on top today, and perhaps over the long term.

 

How High Can We Go with Renewable Goals?

— October 19, 2015

California Governor Jerry Brown signed legislation recently that (once again) ups the state’s commitment to renewable energy. This is the third such increase in the state’s Renewable Portfolio Standard (RPS), boosting overall reliance upon renewables such as solar and wind to 50% by 2030.

While other states such as Hawaii and Vermont have approved even higher mandates (100% by 2045 and 75% by 2032, respectively), the sheer size of the California marketand its historical role as a trendsetteris significant.

While these noble goals may raise questions among those worried about aggressive programs to combat global climate change or about impacts on the economy (in terms of higher cost electricity and loss of jobs among traditional resources such as coal), there is really a larger issue. Where will these renewables be located on the grid?

Big goals like these tend to lend themselves to large-scale renewable projects such as wind farms. In the case of California, ambitious goals on renewable procurements have prompted the California Independent System Operator (CAISO) to expand its footprint both north and east, arguing that better coordination among so-called balancing authorities is the best way to increase renewables without requiring expensive fill-in-the-gap resources, such as gas-fired peaking plants. PacifiCorp is among the most noteworthy participants in this expansion of energy imbalance markets.

Into the Wind

This bigger-is-better frame of mind is based on sound thinking on past experience, which verifies that the larger the control area, the less of an issue variability in wind imposes on grid reliability. This makes inherent sense; if the wind suddenly dies down, chances are it is picking up in another location, especially if the balancing authority can mix and match resources over a wide swath of terrain. This is why old-school thinking that dates back to when I first started writing about wind power argued that wind could only supply up to 10% of our power.

Of course, countries such as Denmark have blown these kind of assumptions out of the water (literally). The country currently derives roughly 30% of its total electricity from wind, most now coming from wind turbines placed offshore. At times this year, Denmark produced the equivalent of 140% of its own electricity demand from wind power. Interestingly enough, Denmark has set a goal of 100% renewable energy not only for electricity by 2050, but also for heating and transportation!

Yet, for me, the more interesting trend is not large-scale commitments to wind, but the evolving innovation at the distribution retail-level with, onsite solar PV being increasingly linked to batteries. Let’s call this a bottoms-approach to high renewables reliance (and resilience).

The Frequency and voltage issues are major concerns in Hawaiiwhere the balancing authority is relatively small and isolatedbecome magnified in a microgrid. Distributed energy resources (DER) are on the rise. Solar PV is expected to emerge as the lowest cost resource of all over time. It is not unreasonable to foresee a time when nearly every residence and/or commercial complex will have a default option of onsite solar PV.

These two trends—larger wholesale renewable balancing markets and smaller distributed DER networks such as microgrids—are fueling passionate debates about the best path forward to addressing climate change through increases in renewable energy generation.

We have to harness both simultaneously in order to meet these renewable aggressive goals. Nothing ever goes as planned in this world, especially when it comes to energy (oil pricing being a great example), so we need to hedge our bets.

 

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