Future Megatrends of the Energy Industry Discussed at Harvard

What are the latest megatrends in the energy industry? On Oct. 8, over 300 industrial leaders, private equity investors, utility professionals, academics and students gathered at the 13th HBS Energy Symposium hosted by the Harvard Business School to discuss emerging questions.

What is going on in Germany? Is energy storage technology bankable and scalable? Do green banks provide effective solutions to bridge the ‘valley of death’ that startups face as they grow? What innovative financing structures are available for low-income communities to achieve energy efficiency?

Why Were Customers Paid to Consume Electricity in Germany?

Renewables are taking over the electricity market rapidly in Germany. In 2015, one third of the country’s energy production came from solar and wind power. Now, Germany has the biggest renewable energy market globally. It is on its way to meet a 40-percent greenhouse-gas-emission-reduction target by 2020.

However, some challenges and questions arise.

The law grants priority to renewable-energy producers, so electricity derived from solar and wind will be consumed first.

What would happen if renewables could provide all the power?

On a sunny and windy day in Berlin in May 2016, an energy oversupply in the grid resulted in periodically negative electricity prices. However, after the sun went down, the grid still needed to rely on coal-and-gas-fired power plants for electricity production.

The negative electricity prices resulted from the intermittent nature of renewables and the inflexibility of fossil-fuel power plants to switch their operations on and off. The power producers were willing to pay customers to use the surplus electricity because it would cost them even more to shut down their operations temporarily.

This kind of situation has happened several times in solar-rich places like Texas and California. It is predicted to occur more often in the future.

Another problem arises as more solar and wind energy is added to the grid-shift of peak load. In California, research done by United States Energy Information Administration found that the peak load had been shifted to early evening after the sun went down. Utilities have to manage a much rapid increase in electricity demand around that time.

Will Energy Storage Solve All of these Problems?

What can United States and other countries learn from Germany? Should we focus on developing energy-storage technologies and rely on renewables and storage to opt-out fossil-fuel power plants? Or should we build more natural gas plants to manage the sharp increase once sun or wind power declines?

The future of energy storage is uncertain.

“The value proposition from energy storage spans several possible markets, but at the same time does not perfectly map to existing possible revenue streams from either utilities or wholesale power markets,” said Tanuj Deora, chief strategy officer at Smart Electric Power Alliance.

This creates significant barriers to energy storage entrepreneurs to secure financing and enter the market. 

Energy storage may not be so unique.

“Utility operators have balanced supply and demand without batteries for over 100 years. There are many substitutions for energy storage – such as expanded balancing areas (with investments in software and/or physical transmission assets), reconfiguration of flexible generation like gas turbines and hydro plants, and deployment and operation of demand response,” Deora said.

The market needs a clear track record of risk management and innovative financing structures to demonstrate a stable and satisfactory return to investors.

“We need regulatory support of storage as an alternative to transmission and distribution, put into the regulated utility rate base,” Deora said.

Looking back to Europe, a submarine power cable linking Norway and Germany will start to function in 2020. It will allow Germany to export surplus wind power to Norway and store it there.

Then, when domestic demand is high, Germany can import hydroelectric power from Norway.

Is Community Wind or Solar Farm a Sustainable Financing Structure?

Community wind or solar farm requires no upfront payment from the customers and collects a fixed monthly rate from the users. Russell Tencer, founder and CEO of UnitedWind, said this structure is the “best of both worlds” because it can “match the highest wind sites in a utility load zone with the highest rate classes.”

This shared model provides competitive energy prices and enables customers without the space or wind resource to use distributed wind-derived electricity.

“It also allows the developer to optimize a project’s value,” Tencer said.

UnitedWind has successfully secured up to $4.0 million in revolving construction loans from NY Green Bank and US Bank to install over 160 distributed wind energy projects to serve customers in central and western New York. This transaction helped UnitedWind to break the financing barriers and scale up services rapidly.

Tencer said his strategy to attract investors is to “bootstrap the company to establish a meaningful data set of credible case studies and then use those projects to attract institutional capital to start to scale the concept.”

How Can Energy Decision Makers Reach Low-Income Communities?

In July 2015, Governor Daniel Malloy (D-CT), announced a new public-private financing program. This partnership between PosiGen and Connecticut Green Bank provides affordable solar energy and energy-efficiency upgrades to low-to-moderate-income families across the state.

Similarly, one of the programs known as Pay-As-You-Save (PAYS) also offers energy-saving solutions to low-income communities through an innovative financing structure.

In both programs, there are no credit requirements, no income requirements, and no upfront costs for the customers. The customers choose a tariff and permitted energy-efficient solutions and pay fixed rates that are lower than their regular utility bills.

This breaks the barriers especially for renters and low-income families who are not property owners and do not want to take on additional loans. The program and tariff will be tied to the property instead of the residents. It does not depend on a consumer loan, a long-term lease, or a lien on the value of the property. 

As well as working with PosiGen’s on the low-to-moderate-income (LMI) solar incentive program, Connecticut Green Bank also oversees a variety of products tailored to serve the LMI community. These products include a Smart-E lender for low credit homeowners, a Low Income Multifamily Energy (LIME) Loan for affordable multifamily residents, C-PACE (commercial property-assessed clean energy), and predevelopment loan programs.

In the Connecticut Green Bank’s report Comprehensive Plan – Fiscal Years 2017 and 2018, serving LMI communities is explicitly listed as a fourth goal in the next two years. According to the plan, the bank will “support affordable and healthy buildings in low-to-moderate-income and distressed communities by reducing the energy burden and addressing health and safety issues in their homes, businesses and institutions.”

What Are the Best Approaches in Emerging Markets?

Increasing energy demand, decreasing cost of renewables, uncertainties in prices of fossil fuels and climate change are actively interacting with the others and impacting the development of clean energy in emerging markets.

“The rapidly falling cost of clean-energy technologies is helping to make renewables more competitive when compared to fossil fuels. The most recent Mexico electricity auction resulted in electricity being sold from PV projects at a lower cost than natural gas-fired combined-cycle plants, even at today's low natural gas prices,” said Jed Bailey, managing director at Energy Narrative.

Bailey said, “Due to the recent actions by OPEC and the rise of shale oil and gas production in the United States, we might experience a much wider range of potential future oil prices than historically.”

Three key takeaways Bailey said are important for new entrants to emerging markets are: “Don’t undermine risks, don’t overestimate know-how, and appreciate information.”

“This is especially true if the market has features that are similar to a market that the developer is familiar with,” Bailey said. “For example, United States developers with experience in the PJM market in the east will note that Mexico's new competitive market has many similar features. However, Mexico is also structurally different in many ways. So blindly investing in Mexico's electricity market using assumptions that are based on PJM would be very risky.” 

Note: The CEO of the Connecticut Green Bank, Bryan Garcia, is on the advisory board of Clean Energy Finance Forum. 

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