Author Archives: Brian Warshay

Production Tax Credit Extension in the U.S. a Win For Wind, But of Little Help For Storage

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Amidst fiscal cliffs and financial ruin, the U.S. Congress found the time to extend the production tax credit (PTC) for new wind power installations that begin or are “under construction” by December 31, 2013. The PTC provides wind developers with a $0.22 per kWh credit, significantly spurring new wind development for the remainder of 2013 until Congress is faced with the same decision again. Under this legislation, wind developers can opt for an investment tax credit (ITC) instead of the PTC, which offsets the upfront costs of construction rather than providing a long-term subsidy for every kilowatt-hour of electricity produced. This historically tenuous legislation has been the backbone of blossoming wind industry in the U.S.

Although it is not explicitly stated in the PTC and ITC verbiage, an Internal Revenue Service (IRS) ruling from 2011 indicates that a storage unit charged by wind behind the meter can be considered generation and the clean electricity discharged from the storage unit can receive the PTC as if it came from wind farm itself. Although this ruling sounds like a boon for storage, it is misleading because any electricity generated by a PTC-qualifying wind farm and stored before discharge to the grid will be reduced in quantity by the storage unit’s efficiency, resulting in fewer kilowatt-hours of electricity discharge and therefore fewer PTC-bloated electrons to sell for the wind farm owner. The storage unit, may, however, if it is considered a ‘generating asset,’ be eligible for the ITC under this ruling to defray capital costs, although the full lifetime economics of the wind-storage system using either the PTC or ITC must be evaluated to determine overall cost-effectiveness. Wind developers, without storage, are often better off selling electricity to the grid, even at a loss, so long as the loss is not more than the PTC itself. However, revenues from energy arbitrage and ancillary services that can only be captured with a storage unit in the unregulated U.S. electricity markets may be enough to offset the efficiency losses from storing the electricity.

In the long-term, the PTC is valuable for building up the renewables industry in the U.S. which will inevitably support grid storage, but storage developers will have to develop clear and creative business models for proving value before wind developers will risk losing high-value electrons to inefficiencies. One example is for grid storage developers to follow the solar model and lease their systems, sharing the capital cost risk (client registration required) with customers and sharing revenue over the lifetime of the system.

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Like watching grass grow? The slow evolution of the hydrogen economy’s $3 billion fuel cell market

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Politicians, economists, and environmentalists have dreamt of a hydrogen economy for decades, where hydrogen fuel cells provide a significant portion of our power demand for stationary and transport applications. While such utopian technology visions will always persist, rigorous analysis leads to a different reality. Factoring in all the technology options and competitive solutions, proton exchange membrane (PEM) fuel cells for telecom power and backup will need until 2030 to reach $1 billion, while fuel cells for residential, commercial, and utility generation will not prove cost effective or appealing, even if the hydrogen is free. The automotive fuel cell visionaries may point to their own game-changing potential where a PEM fuel cell market of $2 billion can be projected by 2030, but on the backs of forklifts and light-duty vehicles. Unfortunately, fuel cell buses will remain miniscule. The fate of PEM fuel cell passenger vehicles is even more dire. While the need for infrastructure is a perceived bottleneck, such hydrogen vehicle fueling infrastructure is certainly necessary but ultimately insufficient to overhaul the passenger vehicle market hamstrung by the cost of the fuel cell itself and storage of hydrogen. Corporations looking to benefit off of a potential hydrogen economy will need to win in the handful of countries with very favorable policies towards fuel cells, or tightly defined regions with existing chlor-alkali capacity and islanded grids will offer niche markets for some hydrogen technologies. Fuel cell utopia, as it turns out, is a grand vision that will turn out to be a modest hyper-local reality.

Source: Lux Research report “The Great Compression: The Future of the Hydrogen Economy (client registration required).”

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Uncertainty around high wind and solar penetration has been weighed, measured, and found wanting…autoDR and storage

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Uncertainty surrounding fossil fuel prices, increased regulations on fossil fuel emissions, and a growing desire for energy independence and cleaner power are pushing governments to look to renewables to appease the masses. Although the emergence of modern wind and solar technologies promise to satiate government-mandated need for large-scale renewables, resources depending directly on the wind and sun for their fuel bring with them the same uncertainty as the evening news weatherman. With wind and solar electricity mandated to jump from 1.5% to 11% of electricity generation capacity globally before 2050, grid operators are faced with the unique challenge of being required to guarantee 100% reliability (client registration required) while being compelled to incorporate an increasing proportion of inherently unreliable renewable electricity generation resources. This task may seem straightforward because at first glance the daily and seasonal profiles of wind and solar generation appear to complement one another to meet demand. Upon closer inspection, however, power output from wind and solar resources fluctuates in its frequency, magnitude, duration, and speed, and varies further over timescales of seconds, minutes, hours, days, and months. Grid operators that have turned to natural gas peaker plants in the past will need to incorporate emerging technologies such as automated demand response (autoDR) (client registration required) and grid storage to fill in the generation gaps, but have yet to fully quantify how much of the intermittency these new resources can manage and at what cost.

We have evaluated and quantified the impact of various levels of wind and solar penetration to determine the amount, if any, of autoDR and energy storage that can and should be used to mitigate the impacts of these inherently unpredictable energy supplies in ways that existing and new natural gas capacity cannot. We have determined that at 30% renewable energy penetration, 2% of the highest peak daytime demand can be shifted to the night by autoDR and 0.5% of the annual electricity generated must be stored and shifted to minimize the curtailment of wind resources (see the full analysis in the report “Cloudy with a Chance of Energy: Evaluating Technologies to Manage Grid Intermittency” — client registration required).

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$2.3 Billion Acquisition of Elster Unlikely to Pay Off

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The Elster Group (Client registration required), a provider of products and services for
advanced metering infrastructure, was acquired late last month to the tune of $2.3 billion by Melrose PLC, a British buyout group. This price, $20.50 per share, is a substantial premium on Elster’s stock price, which has hovered around $15 per share over the previous six months, and is 49% more than the June 11, 2012 Elster stock price.

This move is one of the largest since Toshiba acquired Landis + Gyr (Client registration required) in May of 2011, coincidentally enough, also for $2.3 billion. Melrose, however, is putting itself at risk by paying such a hefty price for Elster, a smaller and less successful
smart grid company compared to Landis + Gyr (Client registration required). Additionally, much of the hype around smart meters has died down, with their global deployment slated to slow down over the next few years as the market becomes saturated by 2018 (see the report “The Data Revolution.” (Client registration required).

While Elster is a strong company that will continue to grow within the advanced metering infrastructure (AMI) market, it will hardly grow enough to make up for the 49% premium that Melrose paid for it. That said, rather than face up against these two well-funded players slated to dominate that space, investors should shy away from further smart meter or AMI investments that lack clear differentiators.

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Forecasting Global Demand for Grid Storage: 2012 through 2017

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The nascent grid storage market is plagued by regulatory uncertainty, unproven technologies, high costs, and a risk-averse client base. Yet opportunities exist. Utilities must manage an increasingly variable load of intermittent renewable energy sources as well as high costs associated with upgrading aging infrastructure. Commercial customers are dealing with demand charges and outages that cost the United States alone between $80 billion and $188 billion annually. Plus, residential customers in markets with time-of-use pricing have an opportunity to arbitrage their energy consumption to reduce their electricity bills.

This week’s graphic appears in the latest report (Client registration required) from Lux Research’s Smart Grid and Grid Storage Intelligence service. The report builds on the service’s dynamic Grid Storage Demand Forecaster to evaluate the internal rate of return (IRR) and levelized cost of electricity (LCOE) of eight grid storage technologies in six applications throughout 44 countries and all 50 US states.

The report’s “Base Case” scenario models the potential demand for emerging grid storage technologies from 2012 through 2017 using current market conditions. Overall, it finds that the global potential for grid storage by 2017 is $113.5 billion, accounting for 185.4 GWh (or 51.89 GW) of capacity.

However, while demand remains strong through 2017, growth will not occur evenly throughout the sector. Renewable energy shifting shows greatest potential among applications, snatching up to $61 billion, or 54% of the demand, in 2017. Meanwhile, in terms of geography, the Asia-Pacific region and EMEA (Europe, the Middle East and Africa) currently hold 88% of the market; but the Americas’ share will more than double from 12% to 25% by 2017, bringing the three global markets closer to parity. Lastly, growth will vary among grid storage technologies as the market shifts from one dominated by molten salt batteries to one with a more diversified mix that also includes Li-ion, advanced lead, and flow batteries.

Source: Lux Research report “Grid Storage under the Microscope: Using Local Knowledge to Forecast Global Demand.”

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Energy storage economics unveiled at Columbia University Energy Storage Symposium

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We caught some of the latest updates from energy storage academics and technology developers during the Energy Storage Symposium at the Columbia University Lenfest Center for Sustainable Energy in New York City. Among the presenters was Dr. Jay Apt, an economist and the Director of Carnegie Mellon’s Electricity Industry Center, who shed light on the intricacies of energy storage economics. One of the key findings of his team was that capital cost of the chosen energy storage technology was the single most important metric for determining the economic viability of a project, and that marginal improvements in efficiency have an almost insignificant impact on project economics.

This conclusion lends further support to expectations that lithium-ion batteries for grid storage will lose market share in the mid- to long term to cheaper technologies such as molten salt and flow batteries as lower-priced technologies become commercially available (see the Lux Research Report “Grid Storage Under the Microscope.” Client registration required).

Cost continues to be the most important barrier to widespread grid storage market penetration, providing opportunities for financial institutions and technology developers to develop creative mechanisms for financing distributed commercial and residential projects (Client registration required). One example of such a mechanism is illustrated by Prudent Energy’s (Client registration required) recently commissioned 600 kilowatt, 3.6 megawatt-hour vanadium redox battery at the Gills’ Onions food processing facility. For this project, Prudent Energy retains ownership over the battery and equipment, while sharing with Gills the cost saving benefits that result from peak shaving and demand charge reduction.

Peak shaving and demand charge applications are among the most cost-effective in several of the unregulated markets in the U.S., despite the highly anticipated impact of the pay-for-performance ruling on ancillary service rates (Client registration required). Demand management is, and will remain, the low-cost option for ancillary services in the near- to mid-term, especially compared to storage. Dr. Apt was keen to point out that demand management shows increased potential in unregulated markets in the U.S. and at cooperative utilities, but that privately owned vertically integrated utilities have little taste or patience for demand response projects because the economics do not benefit them. We took a deeper dive into the economics of demand response around the world last week when we moderated a panel, “DR Around the Globe,” with representatives from Japan, Korea, and China at Connectivity Week in Santa Clara, California.

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Crowded Lithium-ion Battery Market Sends Ener1 (and Others) Out to Sea, Yielding Bargains in its Wake

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Lithium-ion (Li-ion) car and grid storage battery manufacturer Ener1 declared bankruptcy in January after massive debt and limited revenues became too much of a burden for the fledgling company (client registration required) to shoulder. This event should come as no surprise to investors or the industry. Ener1 has been in the headlines several times over the last six months due to its failed investment in Think and its December 2011 delisting from the Nasdaq exchange (client registration required). This bankruptcy adds to the woes (client registration required) of the U.S. Department of Energy, which had provided Ener1 with a $118.5 million matching grant in August 2009. This recent news reiterates the fact that companies touting government support as a major feather in their cap may be enticing investors with false wares. In these cases, government funding provides just enough capital for a company to prove its technical viability despite failing commercially, teeing it up at a bargain price to larger players and investors in the market, much like Beacon Power’s recent fire sale to private equity firm Rockland Capital.

 Ener1 is not the only company struggling within the crowded Li-ion battery space. On January 11, 2012, Altairnano Nanotechnologies (client registration required) was again warned by Nasdaq to get its share price above $1 or it will also be delisted from the exchange. Li-ion batteries must compete not only with each other, but also with the negative press that pounces on the slightest safety slipup (client registration required), including the Chevy Volt that caught fire (client registration required), and the evacuation at the new Saft battery manufacturing plant in Florida. As with many maturing industries, there will be many failures before a few winners emerge. Amidst a pending oversupply of Li-ion batteries and intense competition from low cost manufacturers in China, readers should be wary of Li-ion battery suppliers without a clear competitive advantage or a proven foothold in the market. Also, watch for Chinese companies blessed with deep pockets, government support, and no aversion to low margins. Many are eager to acquire valuable IP and assets from recently broke or struggling companies in order to rid themselves of the low-quality stigma attached to Chinese Li-ion batteries. Case in point: Boston Power’s recent move to China (client registration required).

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