The stationary storage landscape is a complex and fragmented one, with battery manufacturers, power electronics providers, software developers, and system integrators all working together to complete projects. In this complex landscape, some partnerships have allowed battery manufacturers better access to the stationary market, while also giving system integrators a more reliable and affordable source of cells. Given this importance, we analyze partnerships in the stationary storage landscape and assess which technology providers have positioned themselves for success – and those that haven’t.
French oil major Total has made a billion-dollar bet on energy storage with its purchase of Saft – complementing its existing stake in solar major Sunpower and other investments in distributed generation. This move is just an opening salvo in a Darwinian competition emerging among energy supermajors to get ahead of the future of the power sector. The remaining energy storage landscape offers oil firms few appealing opportunities to respond – but they should aim to make deals nonetheless, and changes in the energy landscape mean that doing nothing is an even worse option.
By: Cosmin Laslau
On Monday, U.S. Environmental Protection Agency (EPA) administrator Gina McCarthy revealed a “Clean Power Plan” to implement Obama administration’s proposal for reducing CO2 emissions from existing power plants down 30% from 2005 levels by 2030. The President had laid out the broad brushstrokes of the proposed regulations in his weekly address on Sunday. EPA’s announcement yesterday underscored that the rules are enforceable with specific targets for each state ranging from lower targets for coal-dominant states, like Kentucky at 23%, and for states with a cleaner energy mix, such as New York at 44%. The EPA rules are not prescriptive for specific technologies, but allow for flexibility by individual states in how they choose to achieve their targets. They can institute Renewable Portfolio Standards (RPS) like much of the Northeast, or set up carbon trading markets, including broad regional ones. Any such plan will include more renewables, both utility-scale and distributed. For some states, the targets may not be a heavy lift: For instance, analysis from the World Resources Institute indicates Minnesota can achieve a 31% reduction by continuing its existing RPS, increasing the use of combined cycle natural gas (currently operating at 11% capacity), and enforcing existing energy efficiency standards.
The EPA will enforce the new rules under section 111-d of the Clean Air Act, but is bound to face many legal challenges prior to that. However, if the U.S. Supreme Court acts on its own precedents set in Massachusetts vs EPA in 2007, the new rules will withstand the legal challenges. More serious challenges may be in the offing on the political front, particularly if a Republican takes the White House in the 2016 presidential election.
The new rules represent the most significant action taken by the U.S. government to address climate change to date, given that existing power plants account for 38% of the country’s carbon emissions, and complement the expected reductions in the transportation sector generated by the EPA’s increased fuel economy standards for automobiles, released in July 2011. This action has raised the hopes of international agencies like the United Nations Framework Convention on Climate Change (UNFCC) regarding a global climate deal in 2015.
We predict four major technology sectors to get a boost:
- Combined cycle gas turbines (CCGT) will gain greater ground
States will continue to look for decarbonizing fossil fuel power plants first, to ensure supply security and to use infrastructure the utilities have already invested in. The administrations’ earlier announced rules regulating CO2 from new power plants have already had some impact, contributing to the coal-to-gas switch for electricity generation. Firms like Platt are already predicting a significant rise in gas prices as a result of the new EPA rules. In this environment, expect that combined cycle gas turbines, which use energy from natural gas burning as well as steam generated from the hot exhaust gas, will rise in demand, given their higher efficiency at 50%, relative to 40% for regular thermal power plants. We anticipate CCGT giants like General Electric to benefit from this rise in demand.
- Commercial- and utility-scale solar demand will rise in unexpected places
Subsidized internal rates of return (IRRs) are already high for commercial and utility solar installations in states like California and Massachusetts, ranging from 10% to 15% (see Lux Solar Demand Tracker — client registration required). However, the new carbon emissions rules will likely open up hitherto unattractive markets due to the lack of significant subsidies, such as Georgia and South Carolina, where we project IRRs between 2% and 5%. As the IRRs rise in the Southeast, expect a greater flow of debt capital and competing business models, such as leasing from SolarCity and solar loans from Sungage, to make their presence felt. Provided the states comply, the new rules will also make it more difficult for utilities to raise legal objections to increasing use of renewables in the energy mix (client registration required).
- Negawatts will prove to be the cheapest compliance option for states and utilities
Saving electricity is considerably cheaper for a utility than producing it. A recent study (client registration required) from the American Council for Energy Efficient Economy (ACEEE) shows that the average cost of saving electricity across all the utility energy efficiency programs in the 20 U.S. states is 2.8 cents/kwh, two times cheaper than even coal power generation. The new rules will make the trade-off even more attractive by raising the cost of generation in coal-dominated states like Kentucky, Ohio, and Wyoming. Expect the utilities dominant in these regions, such as American Electric Power (AEP), to expand their residential energy efficiency programs, leading to the adoption of air barrier materials, light-emitting diode (LED) lights, and double-pane, low-e coated windows.
- Carbon capture and sequestration (CCS) will get a new lease on life
Current costs of CCS using the incumbent integrated gasification combined cycle (IGCC) technology are an astounding $60/ton, according to the U.S. Department of Energy. Therefore, demonstration projects have been few and far between – and even when they do get commissioned, the capital costs are out of control: A case in point being the 582 MW Kemper CCS plant in Mississippi, where the capital costs now stand at an estimated $5.5 billion, compared to $2.4 billion originally budgeted. The new rules will likely accelerate the development of game-changer second- and third-generation CCS, such as use of metal organic frameworks (MOF), which have the potential to get the costs down to $20/ton.
The increased deployment of the above technologies will have an impact beyond the U.S. As CCGT and CCS technologies scale, expect developers like GE, Toshiba, Siemens, and Alstom to expand their footprint in India, China, South Africa, and Vietnam. Leading CCS research institutes in China, such as Huazhong University of Science and Technology, will partner with companies like the Sinopec group to commercialize the second- and third-generation technologies. A greater diversity of financing models will migrate to countries with attractive rates of return for solar projects, such as India. Utilities plagued with energy security issues (client registration required), such as Korea Electric Corporation (KEPCO), are already engaged in smart grid pilot projects and will likely start launching building energy conservation programs.
In short, the impact of the new EPA rules will neither come via a global binding climate deal nor from an absolute reduction in U.S. emissions, but from catalyzing technology development and deployment. Clients engaged in developing CCGT, CCS, solar, wind, and building energy efficiency solutions should take note and use the opportunity to deploy their technologies aggressively.
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.