Wednesday, April 10, 2013

Can utilities survive the energy transition?

The utility industry is being disrupted on every side, prompting worries about its stability.
A new policy paper from the Edison Electric Institute (EEI), an association of shareholder-owned U.S. electric companies, details the "disruptive challenges" the sector faces. These private, for-profit companies, also known as investor-owned utilities or IOUs, serve about 70 percent of the U.S. population. They are usually subject to different regulations than publicly owned utilities or co-ops, and must turn enough profit to retain their investors in a difficult, constrained, low-margin business.
Here are just a few of the challenges the industry is facing.
Falling costs of distributed generation
The cost of power generation from solar PV, wind, geothermal, micro-hydro, and fuel cells running on natural gas has been dropping dramatically. Residential and commercial utility customers can now generate some or all of their own power economically instead of drawing it from the grid. The cost of such distributed generation is set to continue falling as more of it is deployed around the world, and "could directly threaten the centralized utility model," the report acknowledges.
Distributed generation costs are falling too rapidly for lumbering utilities to adapt to these new business realities. In Germany, which has deployed renewable power aggressively for the past decade, solar power has nearly reached grid parity and may now be "unstoppable" even without subsidies, according to Macquarie Group, a global investment bank. Germany's coal-fired and nuclear power generators are now struggling to remain profitable as their share of the market shrinks as higher-priced peak hours of the day are increasingly met by solar.
Worse, being able to generate your own power means that you might eventually decide you don't need the grid at all. The EEI raises concerns that "the longer-term threat of fully exiting from the grid (or customers solely using the electric grid for backup purposes) raises the potential for irreparable damages to revenues and growth prospects," observing that it may become difficult to recover investment costs over a 30-year period, as it has done in the past.
Increasing use of demand-side management technologies
The cheapest watt is the one you don't have to generate, and the most expensive watt (for fossil-fueled power) is the one that has to be generated at peak times. As such, improving efficiency and shifting loads away from peak times has made good sense for consumers and the economy as a whole. But those aren't necessarily good things from a utility's standpoint.
Efficiency gains have gradually reduced the amount of power customers use, and "spending on energy-efficiency programs will increase by as much as 300 percent from 2010 to 2025, within a projected range of $6 billion to $16 billion per year," according to research by Bloomberg New Energy Finance. This investment will have "a meaningful impact on utility load and, thus, will create significant additional lost revenue exposure," the EEI report says.
And now there's a new threat: demand-response technologies and "curtailment service providers" (CSPs), which offer voluntary programs that let customers reduce their power consumption at peak times in return for lower, off-peak electricity rates. Some demand response customers will cut their power consumption when the utility requests it -- for emergency response, or to reduce peak load -- while others will voluntarily reduce their demand when advised by CSPs, in order to reduce their overall power costs.
Demand response is one of the reasons why power consumption is decreasing overall, which means that utilities aren't able to make as much money on peak power generation or increase their revenue by building new power generation capacity.
Government programs to incentivize selected technologies
The utility industry complains about "selected technologies," but only when those technologies -- like renewables, efficiency upgrades, and demand response -- cut into their fossil-fueled power generation business. They don't complain about the government picking winners when it sells coal mining leases on public lands at well below fair market value, or when it continues the 100-year-old percentage depletion allowance which lets oil and natural gas companies write off a certain percentage of the oil and gas they extract.
The declining price of natural gas
The boom in U.S. shale gas helped to drive the price of natural gas down from $13/MMBtu in 2008 to $2/MMBtu in 2012, which reduced the price of wholesale power and hurt utility profits. As the ratings agency Fitch noted in February, low gas prices put pressure on "power producers that depend heavily on the sale of excess power to subsidize their retail revenue," and over the long term, it can accelerate the retirement of coal-fired power plants whose capital costs were recovered long ago. Ultimately, it may force utilities to spend significant capital on newer, cleaner natural-gas fired plants in an environment of relatively low wholesale power revenues.
Capital expenditures required to upgrade the grid
The U.S. power grid is old, creaky, largely analog, and suffering badly from decades of deferred maintenance. This is precisely what one would expect when it is operated by for-profit companies, which have every incentive to "maximize shareholder value" by squeezing every last month of service they can out of their capital assets. They are required by law to maintain certain service levels, but they have not been required to proactively upgrade their equipment in order to, for example, adapt to a more robust, security-oriented digital age. Indeed, as a recent New York Times article noted, "some utilities don't know if a customer has lost power unless that person calls to complain," adding that "[m]any utilities still rely on paper maps of their systems that become outdated quickly."
Market forces, the spread of technologies like distributed generation and smart meters, and growing regulatory pressure are now forcing the utility sector to face its deferred maintenance backlog, and those costs are going up. This has the utilities worried, because it is coming at a time of industry contraction.
Slowing economic growth trends
Thanks to the recession, improved efficiency, and distributed generation, electricity demand in recent years has been "anemic." The power industry is no longer growing as it did in the past, but now it must " deploy capital investment at almost twice the rate of depreciation to enhance the grid and address various regulatory mandates."
IOUs are now facing a "vicious cycle," EEI says, wherein the industry's decline will make it harder to pass on the costs of providing service, because customer rates are tied to usage. As usage declines, the costs of new investment must be passed on to a shrinking pool of customer demand, which in turn forces per-unit prices higher still. As those prices rise, investment in efficiency and renewables becomes even more cost-effective, which shrinks usage further. Ultimately, these dynamics could leave a small number of customers supporting the costs of a large chunk of grid infrastructure, leaving utilities with "stranded investments."
It could become very difficult for IOUs to remain profitable, which will test the loyalty of investors. Brokerage firms are forecasting earnings per share of 4 percent to 7 percent for IOUs, EEI notes, but if the utilities aren't able to meet these investor expectations, "a wholesale reevaluation of the sector is likely to occur."
While all of these challenges to the traditional private-sector utility model are indeed disruptive, it's instructive that they're also for the good of the environment, and for our communities. Nobody ever said that energy transition was going to be easy, or that there wouldn't be losers as well as winners. Some utilities will navigate the transformation successfully, while others will fight it tooth and nail until they die. It may make sense for some of them to convert to public entities. Stay tuned to this space for more on that. 

Wednesday, April 3, 2013

Australian Solar Market

Germany is often cited as the king in solar, but its reign may soon be over. Driven by public and government support in the form of healthy feed-in tariffs, Germany is the proud owner of nearly one out of every three installed solar panels in the world. Germany has sustained this leadership for over a decade, and does it with balance of system costs a whopping 75 percent lower than for equivalent systems in the U.S. Now, however, German leadership in the solar industry is being challenged on multiple fronts.
Not surprisingly, with China’s voracious appetite for energy—fueled by that nation’s rapid industrialization and urbanization, and buoyed by China’s status as the world seat of solar module manufacturing—German solar adoption may pass the torch to China for new installed PV capacity. Solarbuzz NPD projects that China will install more than 22 gigawatts of solar in 2013, definitively becoming the world’s leader in PV adoption. But China isn’t the only one challenging German dominance.
Australia, seldom talked about in the solar industry, is currently going toe to toe with Germany on another solar metric that’s equally important to installed capacity: PV system pricing. And remarkably, Australia achieves this distinction with a scant 2.5 gigawatts of installed PV capacity nationwide (by comparison, Germany had installed nearly 10 times that by the end of 2011). Australia’s low-cost rooftop solar environment underscores the solar leadership role that Australia may have in the years to come.

Dropping system prices

Just how low are Australian PV system prices? Solar Choice, a company that operates out of Sydney, has the answer to that question. And how do they know? Because PV installers tell them.
Acting as an intermediary between PV installers and customers (much like energysage and SolarList in the United States), Solar Choice has detailed knowledge of system prices throughout Australia. With Solar Choice’s price information from its network of 115 qualified installers, PV customers can log on to the SolarChoice website and get near-instant quotes from multiple installers in their area.
Based on data and insight from SolarChoice analyst James Martin, the cost of a 3 kW PV system in Australia hovers around $2.20 USD/W. Backing out federal-level Australian subsidies, unsubsidized prices are in the ballpark of $2.85 USD/W.
This is worth repeating. Australian PV system prices for medium-sized residential projects are currently at $2.85 per Watt. Based on the latest price estimates from GTM Research, average residential prices in the U.S. are $5.00 USD/W. Last year, Lawrence Berkeley Lab reported German PV system prices at $3 USD/W. More recently, Germany’s Solar Energy Association claimed that German PV systems prices have declined to $2.28 USD/W. This highlights the fierce cost competition between Germany and Australia.
Australia’s low prices, however, are even more impressive when we look at the makeup of its PV installations. Driven by its incentive structure, the majority of Australian solar systems are sized at 1.5 kW or below. Industry common sense dictates that larger systems are cheaper because fixed costs can be spread across more Watts. Australia is clearly bucking this trend.

How do they get these prices so low?

There are several possible reasons for the rock-bottom prices in Australia.
First, Australian installers are more aggressively taking advantage of module oversupply, especially the abundance of lower-tiered (based on perceived quality) modules. By using some of the cheapest Chinese modules and inverters on the market, some Australian installers have priced PV systems as low as $1.56 USD/Watt. Yet, this use of lower quality components is not the full explanation, particularly since recent downward installation price trends have continued despite a strengthening shift towards high-quality, higher cost, tier-one modules.
Second, the Australian market might have seen the smaller 1.5 kW residential systems as an advantage rather than an obstacle to overcome. The small system sizes allow for more standardized approaches, enabling installers to complete jobs more quickly and efficiently, resulting in a learning curve that Germany and other countries were only able to attain at much higher installed PV capacities.
Other potential contributing factors in this advantage could be lower wage rates and reduced permitting requirements. These and other cost lessons are nuggets of insight that need to be mined from the land down under.

What are the implications of Australia becoming a world leader in solar?

These costs will set Australia up as a solar market that is poised for continued growth and leadership. Even with the disappearance of generous state-level feed-in tariffs, the market fundamentals of solar energy are very strong in most areas of the country. Australia has great sunshine, attractive market conditions (low capital costs and a long-term carbon pricing market), and the country has a very high cost of electricity, which currently stands at an average rate of more than 27 cents/kWh (AUD).
In fact, a Bloomberg New Energy Finance press release from earlier this year noted that unsubsidized renewable energy in Australia is already cheaper than electricity from both new-build coal- and gas-fired generation. The levelized cost of energy for a new wind farm came in at $80/MWh (AUD), compared to $143/MWh and $116/MWh for coal and gas, respectively. Even without a carbon price, wind energy is 14% cheaper than new coal and 18% cheaper than new gas. Further, utility-scale solar PV is expected to follow suit, forecast to beat coal and natural gas by 2020 with carbon prices factored in.
Australia added around 2 GW of solar PV in the last two years—and more than 90% of this solar is in the residential market. This is impressive on multiple levels, and there are signs that this is only the beginning. One recent report projects that the solar PV market in Australia will likely grow two to three times by 2017, reaching 10 GW of installed capacity. In some communities, 90% of single-family residential rooftops are already covered with PV systems, and regional penetration rates between 50 and 75% are entirely possible.
Such aggressive growth in Australia’s solar PV market is strengthened by strong support from the nation’s citizens. A recent AMR Research survey found that 87% of Australians want “more action by all sectors, including government, to make Australia a top-10 global producer of renewable energy.” In response, the Australian government has soundly set the stage for further clean energy innovation by establishing a carbon pricing system as well as a nationwide target to get at least 20% of the country’s electricity from renewable sources by 2020. This renewable energy target is especially noteworthy given its emphasis on solar and wind; worldwide non-hydro renewables only comprised about 5% of electricity generation in 2011, according to REN21’s “Renewables 2012 Global Status Report.

Together We Stand

With Australia’s drive toward high solar penetrations, there’s an opportunity to spread best practices on cost reductions, utility operations (Australia is seeing how its solar PV generation has dramatically softened peak demands during the day), and business model choices (Australia has its own debate about the pros and cons of a feed-in-tariff vs. net energy metering).
The U.S. government, for one, recognizes Australia’s solar strides, and has already begun cementing our two countries’ common goals around solar energy by funding R&D collaboration between leading labs in both countries. However, we at RMI believe we can and should grow this partnership beyond the lab setting. Through our SIMPLE BoS project, we are comparing cost insights in key solar areas around the world, such as in Australia. If you are interested in what we find, engage with us directly at
In a world where cost is king, Australia is proving that it can be a unique model for continued solar adoption. If it is successful, Australia will be a powerful leader and partner in ushering in a cleaner and more distributed electricity system all around the world.

Read more at 

Tuesday, April 2, 2013

NY Solar off to a good start

With his NY-Sun Initiative, Governor Cuomo is aiming to quadruple the amount of solar installed in the state between 2011 and 2013.
The New York State Energy Research and Development Authority’s (NYSERDA) Competitive PV Program is one way that New York’s energy customers and solar developers will meet those goals. 
Today, Governor Cuomo announced the award of $46 million for 76 large-scale solar projects across the state, totaling 52 megawatts of new solar capacity. That will leverage an additional $100 million of private investment in solar infrastructure.
NYSERDA will offer two additional rounds this year to keep adding new megawatts of customer-sited solar up and down the state. As is evident in its name, the Competitive PV Program was designed to harness competition and private investment and drive down the cost of solar. In this successful first round of the Competitive PV Program, NYSERDA awarded $46 million, which successfully leveraged $100 million in private investment.
The average weighted incentive of the awards was $0.88 per watt, a reduction from $1.30 per watt in 2011. 
The program also has a smart design feature that aims to deploy solar energy where it is needed most on New York’s grid. New York’s utilities have identified regions within their service territories where the installation of new customer-sited solar generation will provide tangible benefits to the electric distribution system. Projects located in these regions receive an added bonus on top of their incentive bid. In other words, deliver greater benefits -- receive more money.
In the wake of Superstorm Sandy, the need for New York to combat climate change and build a more resilient power grid became more apparent than ever. There is real opportunity for rooftop solar to help tackle these challenges head on. And Governor Cuomo has made it clear that solar is part of his vision for a stronger, safer New York. The NY-Sun Initiative was conceived of as a shorter-term program to boost solar power today, but -- now the Governor is aiming for more. In his State of the State address this year, Cuomo announced his intention to extend the NY-Sun program an additional ten years to the tune of $150 million per year through 2023, saying, “The extended solar jobs program will provide longer program certainty...and is expected to attract significant private investment in solar photovoltaic systems, enable the sustainable development of a robust solar power industry in New York, create well-paying skilled jobs, improve the reliability of the electric grid, and reduce air pollution.” 
Ten more years of committed solar development will unleash the many economic, environmental and grid benefits of a solar-powered New York.
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