Author Archives: Steven Minnihan

The hydrogen economy – necessary and sufficient for fuel cell adoption?

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The U.S. Department of Energy (DOE) has already stated its skepticism* towards hydrogen fuel cells. So it isn’t surprising that a recent DOE funding round for hydrogen storage technologies totaled a meager $7 million.

It is no secret that fuel cells have failed to make a large impact in the transportation and stationary power generation markets. Despite a long list of subsidies and incentives, they are gaining little traction beyond the uninterruptable power supply (UPS) and telecommunication markets (see the June 2011 Lux Research report Off-grid: A Modest Meal for Starving Storage Developers*).

Even within these markets, pure hydrogen fuel cells are passed-over in favor of fuel cells powered by natural gas, methane or other fuels that are more readily available than H2. The “hydrogen economy,” or the ubiquitous infrastructure for generation, transport, storage and distribution of hydrogen for transport and stationary power, seeks to overcome the issue of fuel scarcity and obscurity. This has many technology developers wondering whether addressing the availability of hydrogen, would prompt fuel cell growth in all markets?

In order to answer the question, we must look at the single greatest barrier to fuel cell adoption – prohibitive capital costs. Without a hydrogen economy, a hydrogen fuel cell requires ancillary hardware including a fuel reformer or hydrolysis unit, as well as a water pretreatment unit if a region lacks access to clean water. Theoretically, a hydrogen economy would eliminate the need for this ancillary equipment, and thereby bring the capital cost for hydrogen fuel cells down between $4/W to $7/W. These lower price points put hydrogen fuel cells on par with natural gas and methane fuel cells. But these prices still require subsidies and incentives to make fuel cells cost competitive with other generation technologies in transportation and stationary power. Lux analysis indicates that fuel cells need to reach prices below $2/W at the system-level in order to attain stable growth in the stationary power markets.

So, while the hydrogen economy is necessary to enable success of the hydrogen fuel cell in transportation and stationary markets, it is not sufficient on its own to ensure stable market growth. In order for hydrogen power and hydrogen fuel cells to prove themselves in the market, clients must continue fundamental work on all nodes along the hydrogen economy and the fuel cell itself; including hydrogen generation*, hydrogen storage, and fuel cell catalysts*.

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Does China’s battery manufacturing capacity threaten your strategy in grid storage?

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It may seem shocking that China, with large manufacturing capacity for relatively low-cost lead-acid and lithium-ion batteries, comprises only 1% of the global installed megawatts of emerging grid storage capacity according to the recently published Lux Research Grid Storage Tracker.* While the North American market has seen tremendous movement on a regulatory* front* for energy storage in the past months, grid storage remains in the pilot stage in China as the Chinese government focuses on electric vehicles.* Is China snubbing the grid storage market and, if so, what does that mean for clients looking towards the Chinese market?

The European, North American, Korean and Japanese markets offer much stronger bets than the Chinese markets for near-term growth of grid storage. Due to a mixture of domestic storage technology developers, relatively swift regulation and government spending, these markets will continue to overshadow China’s grid storage market in the immediate future. However, the tides can, and will shift with staggering speed when China makes its move. Today’s leading markets rely on regulation, market pricing and consumer demand, resulting in slow, steady market growth. Conversely, the Chinese market will see immediate and explosive growth once government and the State Grid Corporation decide to turn their attention to grid storage.

With a growing pool of domestic battery supply and tremendous government funding, the Chinese market can lead global production and consumption of grid storage technologies, just as the world has seen it do in the automotive and solar sectors. The message is clear: clients need to integrate themselves into China’s domestic battery supply chain in order to capitalize on this growth.

However, these regional dynamics offer a valuable insight for clients looking to sell products outside of China. Specifically, the grid storage market offers strong growth for lithium-ion and other storage technologies outside of China, while other existing markets for storage remain China-focused. Based on market conditions earlier in 2011, Lux forecast that electric bikes and heavy electric vehicles will dominate demand for lithium-ion, with the vast majority of demand and supply coming from China. Conversely, the grid storage market is growing today in North America, Europe, Japan and Korea, making these regions primary focal points for companies looking to generate revenues outside of China.

* Client registration required.

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Saft’s defensive strategy against Johnson Controls paying early dividends

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Last May, Johnson Controls filed a petition to dissolve its joint venture with French battery-maker Saft. But Saft opposed JCI’s pressure to move the JV outside the original scope of automotive battery applications and into the energy-storage market*.Saft’s resistance appeared to be vindicated in late July, with the announcement of two grid-storage projects in France totaling nearly 6 MWh of advanced lithium-ion storage.

In the first, Saft will deploy 500 Li-ion storage units of 4 to 8 kWh for the Millener Project to smooth out energy supply generated from photovoltaic installations being rolled out across several of France’s island territories. In the second, Saft announcedits listing as first-rank partner for 2.7 MWh of energy storage in mainland France’s Nice Grid project, which covers storage applications at origination and distribution substations as well as residential storage. Though energy storage and renewables are typically more cost-effective for island applications such as the Millener Project where a region lacks a robust centralized grid, the Nice Grid project provides evidence that the time is approaching for larger mainland grid storage projects. Both projects not only offer Saft the opportunity to further test and demonstrate the effectiveness of its technology, they also allow it to cultivate relationships with the numerous other project partners, including BPL Global*, Delta Dore, Edelia, Schneider Electric,Tenesol*, the European Regional Development Fund (ERDF), Alstom Grid, and EDF.

Despite its emotionally tarnished relationship with JCI, Saft made the correct tactical move to isolate its strong position in the energy storage market from JCI’s reach into the energy storage arena, which already includes a memorandum of understanding with Hitachi and an endowment for an energy storage program at the University of Wisconsin. It is important to note that, similar to its microgrid project in San Francisco*,Saft’s projects in France are subsidized by government funds,  which indicates indicating that in many applications grid energy storage is not yet market-ready on its own. Nonetheless, if Saft succeeds with its several ongoing energy storage demonstration projects, it should remain a leader in this market over the mid- to long-term.

* Client registration required.

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Market forecast for off-grid generation and storage by technology

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Graphic of the weekAs emerging electrical storage developers struggle for a toehold in transportation and grid-tied markets, many have begun eying off-grid opportunities as a way to attain scale and lower costs. The off-grid market will grow from $9.9 billion in 2011 to $13.5 billion in 2016, a 6% compound annual growth rate (CAGR). Emerging technologies, such as Li-ion batteries and fuel cells, will lead that growth, expanding from $1.5 billion in 2011 in 2011 to about $4 billion in 2016, a 22% CAGR.

As the column on the left indicates, emerging technologies will only comprise 5% of new capacity in 2011, growing to 13% in 2016. Shown on the right: revenues tell a different story. Revenues from emerging technologies will comprise over 30% of the market in 2016, thanks largely to their higher capital costs: Lithium-ion batteries and PEM fuel cells run 6x the cost of lead-acid batteries and diesel generators, respectively.

With steady growth in diversified markets, Li-ion batteries will grow from $795 million in revenue in 2011 to $2.2 billion in 2016, a 23% compound annual growth rate. Improved cycle life and energy density over lead-acid batteries will drive narrow penetration into high-end data center applications, such as unlimited power supply telecom backup.

Fuel cell potential is also strong, growing at a 22% CAGR from $536 million in 2011 to $1.3 billion in 2016. Again, the off-grid telecom power market will drive growth, but not enough to support the expansive list of fuel cell developers, leading to fierce competition and consolidation.

Other emerging technologies, such as flywheels and ultracapacitors will supplement, not lead, the datacenter UPS market. Together, they will capture 10% share by 2016. Flywheels will grow from $49 million in 2011 to $104 million in 2016 (a 16% CAGR), while ultracapacitors will expand from a base of $88 million to $248 million in 2016 (a 23% CAGR). High reliability, superior cycle life, unsurpassed power density, and minimal maintenance costs all help make these technologies strong candidates, but their limited energy capacity raises barriers against broad adoption.

Source: Lux Research report “Off-grid: A Modest Meal for Starving Storage Developers.”

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The surprise winners in the $34 billion smart grid market

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gotw3_6_11As smart grid programs advance in Europe, North America, and Asia, utilities across the globe are implementing intelligent hardware to enable the transition from monthly to hourly meter reads. While this hardware promises to usher in an era of more efficient grid management, it also spells a 900% increase in the quantity of data that utilities will need to communicate, manage, and utilize over the next decade. As a result, utilities will invest heavily in technologies enabling them to capitalize on this flood of data, driving the global smart grid market from $12.8 billion today to $34.2 billion in 2020, a 10% CAGR.

While the overall market will grow 267% over 10 years, the relative market share of the applications comprising it will shift as well. As this week’s illustration shows, the market share of measurement and control hardware will shrink from 28% today to 20% in 2020, due to saturation of smart meters and modest growth of sensors and intelligent distribution hardware. As measurement and control hardware cedes market share, the logistics and the analysis and services segments will win a bigger piece of the pie. Both market segments are comprised primarily of technologies adopted from the telecommunication and information technology industries. As a result, incumbents from these industries – including Cisco, General Electric, and Oracle – face an explosive growth opportunity within the smart grid as their market share grows along with the cumulative market size.

Source: Lux Research report “The Data Revolution: How Intelligent Hardware Will Drive the $34 Billion Smart Grid.“

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Demand response auctioning tightens the belt on pure-play providers

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We recently talked with World Energy Solutions, an energy management services company that assists with auctioning of electricity and gas supplies, carbon and renewable energy credits. Notably, the company also conducts auctions in which demand response (DR) providers submit bids for government, commercial, and industrial contracts.

While DR providers profit by retaining a share of the revenues from these contracts, World Energy Solutions’ auctioning process motivates them to increase the share of revenue passed on to the customer in order to win the contract.

World Energy Solutions began its DR auctioning program in February of 2010, and it currently has a contract with Alban Engine, a PJM-based Caterpillar dealer, to auction off 1,500 MW of capacity to a number of DR providers. While its service remains in an early stage, increased competition like this can threaten the margins of DR providers that have a narrow market focus. More specifically, it gives the upper hand to utilities that would rather offer DR services directly than work with a third-party DR provider.

Providers with a primary focus on DR currently enjoy healthy gross margins, with EnerNOC and Comverge reporting 45% and 32%, respectively, from DR contracts for fiscal year 2009. However, when competing on price, a DR provider would need to forfeit at least 10% of the contract revenues, given that World Energy Solution’s share of the transaction amounts to roughly 5% of the contract value. This could signify moving from an 80:20 revenue share between customer and provider to a 85:5:10 share between the customer, the auction coordinator, and the provider.

Apply that shift to all contracts, and EnerNOC’s gross margins could drop to about -10%, and Comverge’s to approximately -36%. Meanwhile, more diversified competitors such as Honeywell and Silver Spring Networks, as well as utilities including Constellation Energy and Pacific Gas and Electric, are significantly less dependent on the rates of DR contracts and more capable of undercutting their competition – a concern that EnerNOC has expressed previously (see the September 29, 2010 LRPJ – client registration required). If pricing pressure persists, DR providers without a diversified source of revenues will get edged out. This lesson can be applied to the greater smart-grid industry, where innovative companies once enjoyed the benefits of an early-mover advantage. But as larger competitors enter the maturing smart-grid industry, scale and competitive pricing will determine the victor.

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Smart grid and automotive deals dominate recent VC deals in alternative power and energy storage

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Graphic of the WeekThe market for alternative power and energy storage started gaining momentum around the turn of the century thanks largely to venture capital (VC) funding for far-reaching and high-risk technologies. That hasn’t changed: Today, technology developers are leaning even more heavily on VC funding to finance demonstration pilots and manufacturing scale-up. What appears to be changing, however, is VC attitudes toward the space.

As this week’s graphic shows, a sharp increase in funding in H1 2009 was followed by a precipitous decline in H2 2009 and a record-breaking high in H1 2010. Along with this roller-coaster-like funding pattern, there’s been an indisputable shift in the size and stage of financing rounds. At the very least, such behavior indicates that VCs are reconsidering their position and strategy in the alternative power and energy storage field. A closer look shows that VC’s are doubling-down on their bets on maturing smart grid and automotive companies.

During the first half of 2009, alternative power and energy storage companies raised $1.14 billion through venture capital, suggesting that 2009 would be the best funding year the sector has seen since we began tracking it in 1999. However, purse strings tightened in the latter half of 2009, bringing the annual total to $1.43 billion, a relatively disappointing sum despite that fact that it represented a 20.5% gain over 2008. In 2010, the money once again came pouring in. The first half of 2010 goes on record as the strongest six-month period for financing, with a total of $1.14 billion in VC funding. However, there’s been flat growth in the number of deals.

Smart grid and automotive companies were the big winners, accounting for more than 77% of all investments. Further, this percentage was dominated by uncharacteristically large financing deals from a select number of high-profile companies. Fisker Automotive, Better Place, and Silver Spring Networks completed a total of four rounds, each more than $100 million, to account for 50% of all financing in the graph’s final 12-month period. As a result of these large bets, the average deal size grew to $29.6 million – the highest average value since our coverage began in 1999, and a 47.2% increase over the average deal size in 2009.

Source: Lux Research report “Alternative Power and Energy Storage Financing: How to Play a Buyer’s Market.“

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Toyota takes a shortcut into the EV market with Tesla partnership

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Recently, the auto industry has been abuzz over the partnership formed between Toyota and Tesla Motors to develop a passenger all-electric vehicle (EV) for less than $30,000. Additionally, Toyota has committed to purchasing $50 million worth of common stock immediately following the closure of Tesla’s IPO, on the condition that Tesla completes the IPO by December 31, 2010. The unnamed vehicle will consist of Tesla’s powertrain technology, with the rest of the car comprising traditional Toyota hardware and design. This move is a change in course for Toyota, since the automaker has stated in the past that it is unsure of the market potential for EVs, citing that the cost of the battery packs make the vehicles economically unfavorable. It’s possible Toyota feels its title as the greenest car company is being usurped by Nissan Motor with the early sales and hype of its EV, the Leaf. With the Mitsubishi Motors i-MiEV planned for pricing above $30,000, it is likely that the early EV market in the United States, such as it is (see the report “Unplugging the Hype around Electric Vehicles” – client registration required) will be dominated by Nissan and Toyota, as they will have the cheapest EVs on the market for the foreseeable future.

This transaction with Tesla provides a fast, low-cost, low-risk option for Toyota to enter the EV market. For the small price tag of $50 million, Toyota can lean on Tesla’s experience and avoid much of the R&D expense of developing an EV on its own. This is a bargain for Toyota, considering that General Motors advertised that it spent upwards of $1 billion developing the Volt. In exchange, Tesla is receiving validation from the Toyota name, along with the manufacturing and marketing support that Toyota is likely to provide. Perhaps most valuable to Tesla, the jointly developed vehicle will most likely be sold through Toyota dealerships, allowing it significantly greater penetration into the market. Meanwhile, Panasonic, which provides batteries both for Tesla and for Toyota’s Prius (see the October 21, 2009 LRPJ – client registration required), will strengthen its position in the vehicle battery market. The announcement is a clear win for all three parties involved. However, this news by no means implies that the Toyota EV will sell, since like all EVs it still faces many economic and behavioral hurdles to mass adoption (see the February 3, 2010 LRPJ – client registration required).

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GE digs into the mining wastewater market with CONSOL Energy deal

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Earlier in March, GE announced that it will provide the first wastewater treatment system for use in a U.S. coal mine. CONSOL Energy will install the technology later this year at its Buchanan 1 facility in Oakwood, VA – one of the nation’s largest underground coal mines.

GE’s zero liquid discharge (ZLD) system is capable of treating 1,600 gallons of water per minute. Using hollow-fiber ultrafiltration and reverse osmosis, it will remove dispersed and dissolved impurities from the mine’s high-salinity wastewater.

The resulting concentrated brine will then treated through thermal evaporation and crystallization, creating crystallized waste salt and allowing reuse of up to 99% of the treated water within the mine. The system will benefit CONSOL Energy by decreasing the amount of freshwater that it currently sources and transports from external sites.
 
The treatment of wastewater from coal mines represents a tremendous, and largely untapped market. The high level of total dissolved solids and total suspended solids in the wastewater causes frequent membrane fouling, which drives up operation and maintenance costs. GE entered the market in North America by targeting one of the region’s largest underground coal mines. So, if the company’s ZLD system proves cost effective in the long run, GE will have a strong advantage in the mining wastewater market.

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Water Security Carries a High Cost for Israel’s Citizens

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Changes in Israel’s water industry are having a drastic effect on the nation’s water bills. At the start of the year, Israel’s national water company, Mekorot, which provides 80% of the nation’s water, increased water rates by 25%. Additionally, rates will increase by another 16% during this summer, and at least another 2% at the start of 2011. Currently, water rates range between $1.5 and $2 per cubic meter.

The additional money will help fund a rapid integration of desalination plants into Israel’s water infrastructure. Currently, Israel sources 80% of its drinking water from Lake Kinneret. However, recent water usage levels have caused the lake to drop 1.5 meters in the past two years, and created a total deficit of 2 billion cubic meters. In a report, Mekorot stated there is a 38% chance that the lake will drop to a level by the end of 2010 that prohibits further pumping.

Mekorot instituted a program in 2008 to drill relief wells, which reduced water sourcing from Lake Kinneret by nearly 50%. The company’s long-term water solution involves installing a series of desalination plants that draw from the Mediterranean Sea. Currently, three plants are fully operational, providing approximately 150 million cubic meters of water per year. A fourth plant in Hadera became operational in December 2009, and is expected to reach its full capacity of approximately 125 million cubic meters per year within a few months. Mekorot is planning on bringing two additional plants online by 2012, bringing the total production to 600 million cubic meters, or 80% of Israel’s residential demand. The Israel Water Authority predicts that the increased water production will end the country’s water shortage within three years.

Once completed, the company will invest an additional 5 billion ILS ($1.36 billion) to install a new east-to-west pipeline. The company will focus on reducing water loss with the new pipeline, but it has not made an estimate on the increase in yield at this time.

Even with such drastic rate increases, Mekorot’s CEO believes that the company will still endure heavy losses, and the company is already facing an $8 billion gap in the project’s funding. This indicates that the Israeli people can expect further increases over the coming years. The Israeli government has attempted to ease the impact on customers by temporarily suspending the national Drought Tax until April 2010. At this time, there are no additional plans for government funding or support of the project.

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