EEnergy Informer - Energy Economics · 3 July 2016 EEnergy Informer Page 3 Sonnen makes residential...

July 2016 EEnergy Informer

19

In this issue Do Oil And Renewables Mix? 1

Humanity Can Survive Without Exxon; Not The Other Way Around 5

Why Saudi’s Vision 2030 Is A Mirage 8

California’s Duck Curve Has Arrived Earlier Than Expected 10

ERCOT Market Makeover 15

EIA’s Latest Outlook: Missing The Mark? 16

Regulation Biggest Barrier To Technological Innovation 18

New York Regulators Take Next Step 20

BP: Coal’s Annus Horribilis Has No End 23

The Future Is In Services, Not Commodity Sales 27

Asset Light, Information Heavy? How Would That Work? 29

IEA: Firing On All Cylinders 32

Future of Utilities: Utilities of the Future 34

Do Oil And Renewables Mix? What should oil majors do if fossil fuels are eventually doomed?

veryone knows that oil and water don’t mix. The question is whether oil and renewables do. And

on this point, like many others, opinions vary. Oil companies, while not threatened to distinction

any time soon, nevertheless must decide if they need to adjust their longer-term investment plans

and business strategies in a future where carbon emissions will increasingly be constrained and/or

costly. And if they conclude that demand for their main products are likely to dwindle as global

economies gradually shift towards lower carbon alternatives, then should they join the booming

renewable bandwagon or stick to their knitting and watch their fortunes fade over time?

As the following 2 articles explain, while the overall trend – a gradual shift away from fossil fuels –

appears likely, the pace of change and the exact form of the substitutes are not. And this partly explains

how different fossil fuel companies are charting their future paths.

In May 2016, French oil giant

Total acquired Saft for €950

million ($1.1 billion),

signaling its entry into energy

storage business. Saft makes

nickel and lithium batteries for

transportation, military and

storage of renewable

generation. It is the latest in a

string of investments starting

with the acquisition of

SunPower Corp, a

manufacturer, assembler and

installer of solar PV panels

with a growing footprint in the

US in 2011.

E

US on top US has been the world's top producer of petroleum and natural gas since 2012

Source: U.S. Energy Information Administration

EEnergy Informer The International Energy Newsletter

July 2016

EEnergy Informer July 2016 Vol. 26, No. 7

ISSN: 1084-0419 http://www.eenergyinformer.com

Subscription options/prices on last page

Copyright © 2016. The content of this newsletter is protected under US copyright laws. No part of this publication may be copied, reproduced or disseminated in any form without prior permission of the publisher.

http://www.eenergyinformer.com/

2 July 2016 EEnergy Informer

According to Total’s CEO, Patrick Pouyanne, Saft will be the company’s spearhead in electricity

storage. Why would an oil major be interested in electricity storage? Because the market for energy

storage is poised for rapid growth as everyone grapples with better ways to integrate variable generation

from solar and wind into the grid – which must ultimately provide reliable service to customers. Total,

which has said it plans to invest $500 million a year in renewables, sees storage as the next big

opportunity. And storage is a good fit for anyone in transportation – which Total totally understands.

Earlier this year, Total announced the formation of a new business unit entirely devoted to renewables

and has said it wants to be among the major players in the growing field within 20 years. Total has

already combined its business units for renewables, gas, power and energy efficiency as the growth of

those markets prompted a “value chain approach to electricity.”

Analysts were broadly

supportive of the

company’s latest move.

Logan Goldie-Scot from Bloomberg New

Energy Finance (BNEF) was quoted in

PV Magazine saying

that the acquisition

gives Total an instant

entry in a market that

will double in size in

2016 in deployed

capacity – and that is

only the beginning of

what is likely to be

exponential growth for

years to come.

“Saft manufactures batteries for a number of applications, but the grid-scale storage division is

likely to be most attractive for Total,” adding, “For Saft, financing is the major rationale behind

the deal (agreeing to be acquired). Total’s €21 billion ($23 billion) balance sheet would

strengthen Saft’s hand when bidding for larger grid-storage contracts.”

Total, of course, is not alone. Many inside and outside the fossil fuel sector are beginning to think outside

the box – although few have spelled out their strategy as clearly as Total has. Its new marketing slogan is

better energy – cute and sufficiently vague. One is reminded of BP’s reference to beyond petroleum –

something that never went beyond a slogan following the sudden departure of its CEO, Lord Browne and

the Deepwater Horizon platform disaster in Gulf of Mexico in 2010.

The diversification towards renewables – while miniscule compared to the overall scale of fossil fuel

industry – is nevertheless significant and appears to be gathering momentum in some circles.

Recently, France's Engie bought an 80% stake in California storage company Green Charge Networks

in early June 2016 following the acquisition of solar developer Solairedirect SA last year. Also in early

June, GE Ventures, an offshoot of GE, bought a minority stake in German battery storage developer

Sonnen GmbH, for an undisclosed amount – showing that money flows in both directions across the

Atlantic in search of potential stars. Utility-scale energy storage appears to be the next big thing in

energy.

Energy history: How fast do you reckon renewables will grow? World energy consumption, 1990-2015

Source: BP’s Statistical Review of Energy, 2016 edition, June 2016


Sonnen makes residential lithium storage system and operates an online energy sharing platform. In a

press release, GE Ventures managing director Jonathan Pulitzer described the joint venture as a

blueprint for the “utility of the future,” adding, that Sonnen is “helping to reshape the energy industry”

and the two companies would collaborate to “provide clean and affordable energy to all.”

Sonnen claims over 10,000 installations world-

wide, making it a serious competitor with the

likes of Tesla, Panasonic, LG, Samsung and

others – all of whom are in a race for market

share in the rapidly growing field.

Sonnet is reportedly unique among battery

manufacturers since it offers a platform that

allows solar hosts to share their self-produced

energy with non-solar customers (see article on

peer-to-peer trading on page 28). These types of

sharing platforms are rapidly proliferating since

in many markets more than half the customers

cannot install their own solar panels and/or

batteries due to space restrictions or because they

live in high-rise apartments. Sharing platforms

gives these customers the opportunity to brag

that they are self-sufficient and green.

Nothing wrong with the business model.

However, it is not clear who will pay for

delivering the electrons that are being generated,

shared and stored. That, one assumes, will be

added to the long list of issues regulators of

You ain’t see nothing yet: Renewables on exponential growth World energy consumption, 1990-2015


Renewable generation



distribution networks need to sort out, and with increased urgency (see related articles on page 18).

Not to be outdone, Statoil is investing in battery storage for its offshore wind farms. Likewise, Shell is

thinking about a new energy division, not unlike Total.

Major automakers, also concerned about the potential disruptions of autonomous cars and rapid

evolution of electric vehicles, are increasing joining or acquiring their potential competitors. The CEOs

of German automakers, for example, recently had a high level meeting with the German Chancellor

Angela Merkel. The topic of discussion was “what to do about Tesla?” The German auto industry is a

major source of employment, and is treated with respect.

The reasons for the executive concerns are not to be dismissed. According to Irene Rummelhoff,

Statoil’s Ex VP for New Energy Solutions, “The transition to a low carbon society creates business

opportunities and Statoil aims to drive profitable growth within this space.”

This explains the rush by some oil majors to diversify away from oil. Renewable energy, energy storage

and electric vehicles offer opportunities and may be good substitutes for oil in the critical transportation

sector.

But will such efforts succeed? Will oil and renewable ultimately mix? History of prior ventures by oil

companies into renewables and other fields does not offer much encouragement. Why would they succeed

now?

The skeptics point out that it may be too little, too late for oil majors to establish a beachhead in the

already crowded

renewable business since

there are so many

established players such

as the likes of SolarCity,

now being acquired by

Tesla.

Others argue that despite

the late start, now is the

time to get into the

thriving renewable and

energy storage business

even if it is crowded. So

much growth potential

remains to meet the

targets of Paris agreement

as described in article on

page 16.

Electric transportation and

storage appear as especially good fit for oil companies – after all they already know something about the

transport business. Moreover, for many cash-starved startups, having the deep pockets of a super major is

a huge blessing – given the expected exponential growth.

In the end, no pain, no gain. Companies that do nothing or wait too long may end up with fewer, or

ultimately no options.

Oil prices depressed in 2015, global renewable investments set new record Global renewable investment set new $286 billion record in 2015, annual in $ billion

Source: Global trends in renewable energy investment 2016, UNEP Bloomberg New Energy Finance


Humanity Can Survive Without Exxon; Not The Other Way Around Oil majors face increased pressures from shareholders to face climate realities

aving given up on the management, for a number of years, environmental activists have tried the

next best thing: to get enough shareholders to force new thinking at the top. And gradually, they

are getting closer to a majority vote – which will force top management to take notice and

respond. At this year’s annual shareholder meetings in May, 41% of Chevron shareholders and

38% of ExxonMobil supported such resolutions – a percentage that has been growing over time and is

expected to cross the 50% mark soon, perhaps as early as 2017.

Some oil majors including Royal-Dutch Shell have already made public concessions, while Total has

instituted dramatic change in its future direction. But the top 2 American oil majors stubbornly stick to

their old line that signing the climate agreement in Paris may be good but it is unlikely to change the

market realities any time soon, if ever. They prefer to carry on as if Paris agreement did not exist, or

matter.

It is yet another

example of large and

successful companies

who are very good at

what they have always

done, until the

environment around

them begins to change

– and in this case, it is

the environment and

climate change that

will exert pressure on

traditional

fundamentals of supply

and demand for oil and

fossil fuels over time.

John Watson, the

CEO of Chevron told

shareholders in late

May 2016 that while

signing agreements in

Paris was a “good start,” he personally doubts the signatories will achieve their goals. He said, among

other things,

“You can sign agreements in Paris, that’s a good step. But when you sign agreements and create

the impression that it’s going to be implemented … it’s just not clear that’s going to deliver.”

Referring to shareholder resolutions that were rejected by Chevron’s management and the board, Watson

said,

“We don’t think this proposal will advance our thinking.”

H

Sovacool says transition away from fossil fuels may be much faster than historical ones Global energy supply by fuel source as a% of total, 1830–2010 Coal surpassed the 25% mark in 1871, 500 years after the first commercial coal mines in England. Crude oil surpassed the 25% threshold in 1953, nearly a century after Edwin Drake drilled the first commercial well in Titusville, Pennsylvania in 1859. Hydroelectricity, natural gas, nuclear power and renewables have yet to surpass the 25% threshold.

Source: http://www.sciencedirect.com/science/article/pii/S2214629615300827

http://www.sciencedirect.com/science/article/pii/S2214629615300827


His message to the shareholders, in other words, was

not to worry. Fossil fuels are here to stay. And

Chevron will be around to deliver, as it always has.

It was a reassuring message for those who don’t

think the Paris accord will have much impact.

Shortsighted if you believe that COP21 spells the

beginning of the end for the fossil fuel age.

Rex Tillerson, the CEO of ExxonMobil, who also

faced similar resolutions from shareholder activists,

and who also rejected them outright, went even

further stating that until there were better substitutes

for fossil fuels, “… just saying ‘turn the taps off’ is

not acceptable to humanity.”

In dismissing shareholders’ and activists’ attempts to

force ExxonMobil to acknowledge the impact of

climate change on company’s future investments and

longer term strategy, Tillerson argued that oil and

gas would provide 60% of the world’s energy needs in 2040 – suggesting the need to invest trillions more

to meet the growing demand.

Pointing that Exxon had already invested $7 billion in green technology, he confessed that the science and

technology had not yet achieved the breakthroughs needed to replace fossil fuels.

“Until we have those (breakthrough technologies), just saying ‘turn the taps off’ is not acceptable

to humanity,” adding, “The world is going to have to continue using fossil fuels, whether they

like it or not.”

Nobody, of course, is asking the oil majors to turn the taps off – certainly not immediately – but merely to

begin to think about the end game before it is too late – and many are convinced that it will arrive much

sooner than Mr. Watson and Tillerson believe.

What is especially striking about the intransigence of the big oil – this editor has nothing against oil

majors – is that breakthroughs are

already here or just around the corner,

and are already competing with fossil

fuels in selected applications in many

parts of the world. Renewable energy

is already cost competitive with fossil

fuels in electricity generation – while

few challenges such as more storage

and transmission investments remain.

Adding a reasonable carbon tax, you

pick the number, will make them even

more competitive. Perhaps managers

of big oil are not reading the same

news this editor is.

By rejecting to at least acknowledge

the need for new thinking, companies

like Exxon and Chevron are doing

Would you fancy a carbon tax?

Source: Long-Term Costs of Cutting Emissions Grow Hazy by Amy Harder and Greg Ip, 24 Apr 2016, The Wall Street Journal


themselves, and their shareholders, a great disservice. Despite what Mr. Tillerson said, chances are good

that humanity will survive long after Exxon ceases to exist, or becomes a shadow of its former self – that

is if it carries on doing business as usual. What Mr. Tillerson misses is that Exxon needs the humanity to

survive, and not the other way around.

The good news is that despite the intransigence, some oil companies – most notably Total – are

beginning to work on a plan B, just in case plan A does not pan out. Others – including Shell – appear

schizophrenic in their thinking. On the one hand, they like to hang on to the status quo, the business they

know and like, while at the same time betting against it. Or maybe that is the best that can be expected at

this early stage of the game.

Speaking at the recent shareholder meeting, Shell’s CEO Ben van Beurden said, “We cannot do it

(transition away from oil) overnight because it could mean the end of the company.”

His message to shareholders was to stick with him and the status quo. He warned that making a switch to

other forms of energy would take time, adding that the world's top 10 solar companies represent $14

billion in capital employed and invested $5 billion in solar energy, but none had so far paid any

dividends.

And shareholders overwhelmingly agreed, with 97% voting against a resolution to invest profits from

fossil fuels to become a renewable energy company. Not surprising since most shareholders are used to

stable stock price and hooked on receiving steady dividends – oblivious to what may lie ahead.

Mr. van Beurden assured them that the oil industry needs to spend up to $1 trillion a year in oil and gas

exploration and development – the sorts of numbers that Exxon and Chevron would agree with. He said,

“If collectively we find a way to stay within the 2-degree Celsius limit, we will still need

significant investment in oil and gas…I am talking about up to a trillion dollars every year.”

The “if” in his statement is the key. Fossil fuel companies are still fixated on the “if,” not ‘when” or “how

soon.” And as long as there is no change in that mindset, they will want to carry on business as usual –

continue to expand their fossil fuel portfolios.

Hedging his bets, however, Royal Dutch Shell has

created a new division, which will focus solely on

investing in renewable and low-carbon energies.

Not unlike Total, Shell is combining its existing

hydrogen, biofuels, and related divisions as it

begins to explore renewables.

Responding to activist pressures, it published a

report, Energy Transitions and Portfolio

Resilience, which addresses how Shell is

positioning itself for a low-carbon future. In the

report’s introduction van Beuden highlighted

Shell’s “track record of successfully adapting our

business model, and delivering profitable growth,

over more than 100 years.”

In the report, Van Beuden says that the company’s

assessment of the current energy climate is that

(emphasis added),

Source: In the dark ages, The Economist, 6 Feb 2016


“… there will continue to be commercial opportunities for Shell in oil and gas for decades to

come, providing a foundation to position the company successfully for the energy transition to a

lower-carbon system.”

Not everyone agrees that investing a $trillion a year on oil and gas exploration is a good idea. Some 41%

of Chevron and 38% of Exxon shareholders voted in favor of the company providing an assessment of the

companies’ investment portfolios in view of the Paris accord requiring a 2°C climate change scenario.

The percentage has been steadily rising and may cross the 50% mark next year.

Andrew Logan, director of oil and gas program at Ceres, a Boston-based nonprofit advocacy group that

organized the shareholder campaigns, believes that “… that the deck is stacked against you (oil majors) in

these votes,” adding,

“This (growing shareholder sentiment against the status quo) adds up to a wave of pressure on

these companies that people (the management) will find hard to ignore.”

The Paris accord, many experts believe, has added momentum to keep global warming to as low as 1.5°C,

which requires rapid shift towards a low carbon future – fundamentally at odds with Big Oil’s modus

operandi. The nascent pressure from shareholders, investors and activists over their climate change

policies and their risk of stranded assets has just begun.

Logan’s message to CEO’s of oil majors: “We’ll be back.”

Why Saudi’s Vision 2030 Is A Mirage For Saudis, the transition away from oil-based economy won’t be easy, or fast

ohammed bin Salman, the Saudi Prince, the de facto ruler of Kingdom of Saudi Arabia and

apparent heir to the crown – his father is old and apparently failing – has embarked on a

journey to reshape the future of his country. His plan for the future, Vision 2030, is bold,

ambitious and exciting, and the 31-

year old prince is apparently impatient

to have it implemented quickly. The

problem, as described by ex-Shell

geoscientist Jilles van den Beukel in

the 20 May 2016 issue of Energy Post

is that – unless you believe in miracles

– the vision may be a mere mirage.

Simply put, Saudi Arabia’s cultural

and institutional setting are unlikely to

deliver anything remotely as good as

the blueprint, certainly not by 2030,

especially now that the kingdom has

fallen on hard times with the current

low oil prices. Van den Beukel argues

that only realistic, gradual reforms can

save Saudi Arabia from the apparent

dead-end it is in, and even that may

prove a daunting challenge for a

country that depends on oil revenues

M

http://www.mapsofworld.com/saudi-arabia/


for 3/4th of its government’s budget and lacks a private sector to speak of.

“For its security,” van den Beukel writes, “it relies on two pillars: oil money buying internal and

external support as well as the Wahhabi religious establishment, legitimizing the Al Saud

regime.”

“Both (of) these pillars are under threat. No one knows how long the global energy transition will

take but it has become increasingly clear that relying solely on oil money is unsustainable. The

measures enforced by the religious establishment (e.g., women not allowed to drive) are

becoming an increasingly heavy price to pay for their support.”

According to van den Beukel,

“Culturally, Saudis are not being asked to be competent or successful. They are asked to

comply; to their family, tribe, religion, the Al Saud regime, and to their husbands or

father/brothers (if they have the bad fortune to be female).”

“Economically, the country is not competitive in any industry, except for oil or industries

(petrochemicals, metal processing) that benefit from cheap oil and power.”

The prince’s 2030 vision is based on Saudi Arabia – Beyond oil, a December 2015 McKinsey report

that attempts to address the country’s chronic shortcomings “in the way that McKinsey looks at a western

company that has issues with its outdated business model.”

Referring to the McKinsey’s ambitious – unrealistic or Herculean may be more appropriate – blueprint,

van den Beukel asks,

“How realistic is it to expect that a complex military industry can be built up in a little over 10

years? How realistic is to expect tourists to come to a country where alcohol is prohibited? Do

they really expect a population that has lived in a rentier state for decades to change their

behavior overnight?”

Some elements of the plan, say the development of a

tourism industry, are laughable for a country that

does not issue tourist visas – and has even has

difficulty issuing legitimate business visas for anyone

who has had the misfortune of visiting a barren land

with few attractions aside from the holy sites, which

are essentially off limit to non-Muslims.

His assessment is that “Saudi Arabia deserves better

than (McKinsey inspired) Vision 2030. The

fundamental issues need to be addressed – in a

realistic way with achievable targets. Reducing the

current dependency on oil and emulating Dubai will

take decades, not years.” He says,

“Perhaps (the prince) … can be forgiven for thinking that he can change a country in the way that

he can implement change in his royal household: by ordering it. But the McKinsey consultants

should know that such a plan cannot work and should do more to justify their royal fees.”

On this point, McKinsey – and the business school community in general – deserve the criticisms they

often get. That turning around a big and failing business is not as simple as moving a few pieces around,

Top 10 global oil producers

https://en.wikipedia.org/wiki/List of countries by oil production

https://en.wikipedia.org/wiki/List


reorganizing and introducing key performance indicators (KPIs) – or whatever is the latest fad – as they

teach through case studies in business schools. For a country with the sorts of problems facing Saudi

Arabia, a successful turnaround strategy will be far more daunting.

On a positive note, however, the Prince must be congratulated in seeing the light at the end of the long oil

tunnel. Unlike some oil industry executives, he at least realizes that the time has arrived for a new path

forward. One can fault him on the details or the pace of change, but not on the necessity or urgency of a

different vision for his country – if in fact it has one.

California’s Duck Curve Has Arrived Earlier Than Expected What was anticipated for 2020 is already here

s early as 2013, California Independent System Operator (CAISO) was predicting that with

so much new solar generation expected by 2020, the mid-day hours on sunny days would be

inundated with a flood of solar power displacing thermal generation. CAISO was originally most

concerned about the sunny spring days when California’s demand tends to be low due to cool

temperatures while solar generation could be high.

The grid operator was also

concerned about the late

afternoon ramping required to

make up for the loss of solar

generation as sun sets with peak

demand following in early

evening hours. The so-called

California duck curve (left) has

become well-known around the

world. Similar patterns are now

common in other countries,

including Australia, for

example.

That was before the state

lawmakers passed a bill to raise

California’s renewable

portfolio standard (RPS) from

33% by 2020 to 50% by 2030,

promptly signed by Governor Jerry Brown, who is as green as you can get despite his brown name.

As it turns out, CAISO was spot on in predicting the deepening belly of the duck but under-estimated the

speed of solar uptake by at least 4 years. The data from March-April of 2016 confirms that the belly of the

duck is getting fatter much earlier than originally estimated.

In a Blog titled “The Duck Has Landed” posted on 2 May 2016, Meredith Fowlie of University of

California at Berkeley examined the hourly data for the period 28 March28 to 3 April for 2013-2016 and

as illustrated on page 11, the 2016 belly is far more pronounced that in prior years and already on par with

what CAISO had projected for 2020.

In her Blog, Fowlie notes,

A


“In the 2016 duck

season, we saw mid-day

net loads at or around

predicted levels.

Increased solar

penetration on both

sides of the meter

(utility scale and

distributed) has been

driving net loads down

when the sun is up.

Fortunately, the ramp

from 5 – 8 pm has not

been quite as steep as

projected because

electricity demand in

the evening hours has

been lower than

projected. Perhaps this

is due to unanticipated

demand-side energy efficiency improvements.”

With the new 50% RPS for 2030, California’s renewable march to green nirvana is set to accelerate,

making the duck even fatter by 2030 – which explains why CAISO, in collaboration with the regulator,

California Public Utilities Commission (CPUC) and other stakeholders is embarking on an ambitious

agenda to prepare for the challenges imposed by

variability of so much new renewable generation

added to network over a relatively short span of

time.

CAISO’s current energy mix (visual on right),

already clean and green, will become even more so

over time. Coal, virtually nil and historically

imported from out of state, will essentially be

phased out entirely, while renewables’ portion will

continue to increase by 2030. Solar’s contribution

already exceeds that of wind and expected to

continue to grow.

Adding behind the meter or distributed solar –

that is rooftop solar PVs on customers’ houses,

office buildings, car parks, schools, etc. – will

further eat into thermal generation and utility

revenues and CAISO’s net load. The growth of this embedded generation is completely hidden from

CAISO, who must increasingly guess how much its net load – that this the amount it should dispatch

from central plants under its control – is going to be.

In this context, among the challenges facing CAISO is what to do with the minimum load problem. As

illustrated on visual on page 12, bottom, the grid operator is already approaching the forbidden zone – that

it hours during mid-day when net load is dipping into resources that it cannot easily ramp down, turn

away or reject for variety of contractual, operational and other reasons.

The duck has landed

Data taken from CAISO website. Graph summarizes hourly data, 28 March – 3 April, 2013-16 Source: Blog posted by M. Fowlie, 2 May 2016

CA: Already clean and getting greener

Source: CAISO

http://www.caiso.com/green/renewableswatch.html


Nuclear, combined heat-and-

power (CHP), contracted QFs,

geothermal, biomass and biogass

and a number of other generation

resources either cannot ramp down

or have binding contracts that

allows them to operate at full

throttle even if CAISO does not

need their output.

The mid-day dip, shown for 2013

and 2015 is expected to get much

worse by 2021, eventually cutting

into these types of generation.

And yet the peak demand remains

peaky and potentially getting

worse (visual on left). As recently

as February 2016, CAISO

experienced roughly 11 GW of

ramping capacity during a 3-hour

period to meet peak demand. The

same graph shows actual net load

experienced on 24 April of

around 12 GW – more or less in

line with what was projected for

2020. This is the same point

illustrated by Fowlie in her Blog.

The other challenge will be how

to avoid curtailing zero cost,

green renewables during times when there is simply too much supply and too little demand.

During the hot summer months,

when demand peaks in California,

usually in July-Sept, virtually all

renewables, solar, wind, hydro,

geothermal, biomass, biogass, are

used and useful. As illustrated in

graph on right, for month of

August, typically a peak demand

period, there is no need for

curtailment as all the generation is

typically needed to run the state’s

massive air conditioning load.

But spring and early summer

months of March-June may prove

difficult. Under a 40% RPS

scenario by 2024 – roughly in line

with what it will take to reach 50% RPS by 2030 as mandated under current law – CAISO is projecting

CA story: Mid-day dip, followed by evening peak

Typical Spring Day

Net Load 12,546

MW on April 24,

2016

Actual 3-hour ramp

10,892 MW on

February 1, 2016

Source: CAISO

Over-generation is worse in cool & sunny spring when cooling demand is low

Source: CAISO

Solar PVs: Behind the meter, and growing

2015 2016 2017 2018 2019 2020 2021

BTM Solar PV 3,695 4,903 5,976 7,054 8,146 9,309 10,385

0

2,000

4,000

6,000

8,000

10,000

12,000

MW

Estimated Behind the Meter Solar PV Build-out through 2021

Source: CAISO


massive amounts of surplus capacity on many days. The over-generation goes as high as 13-14 GW on

some days as illustrated in this

simulation.

This is explained not only by ample

sunshine in the spring and little demand,

since there is no cooling load to speak

of, but also because spring months tend

to be windy and wet, with lots of run-of-

the-river hydro and wind flooding an

already saturated renewable energy

bonanza.

So what is CAISO doing to prepare for

this fast approaching future? Broadly

speaking 4 major ideas are being

explored:

Encouraging more flexible ramping generation resources, the type that can fill the 13 GW

ramping requirements in 3 hours to meet peak evening demand;

Increased reliance on existing pumped storage while expanding other kinds of storage both

utility-scale and behind the meter including the mandated 1.3 GW of storage already in the

works;

Expanding CAISO’s footprint – a central component of the energy imbalance market

(EIM) – which allows increased reliance on capabilities of the regional network to

export/import the shortfall/excess supply to neighboring states when feasible and economical

to do; and

Increased reliance on retail tariffs to encourage load shifting and demand curtailment

through more sophisticated rate structures including time of use (TOU) and real-time-

pricing (RTP).

Curtailment of renewables will

be attempted only as a last

resort, if all else fails.

Many believe that the arrival of

affordable utility-scale or

distributed-scale storage will

save the day. A large fleet of

electric vehicles charged at

proper times, for example, will

be a big help. Chilled water

storage systems will also make

sense. As will prices that better

reflect the scarcity or abundance

of generation in different

seasons and times of day.

CAISO is collaborating with

CPUC, the utilities and other

stakeholders to design retail rates that will be sorely needed to encourage consumption during certain

times while discouraging it at others as illustrated in visual on bottom of page 13.

More storage is the answer

Source: CAISO

Tariffs that reflect scarcity and abundance of generation

Off-Peak Peak

Super PeakSuper Off-Peak

Source: CAISO


All of these efforts, and more,

will, of course, be needed. For

now, a lot is riding on the fate of

CAISO’s expanding EIM (map

on right).

Many experts are convinced that

it will be a matter of time and

necessity for a much bigger

regional wholesale market to

emerge, one that may eventually

cover substantial parts of the

Western US, possibly with a

different name and

organizational structure

acceptable to a wider group of

stakeholders who are skeptical of

CAISO being California-centric. It is a valid concern and one that needs to be addressed sooner rather

than later.

That will take time,

and patient

perseverance. All

indicators, however,

are that the benefits

will outweigh the

costs. But convincing

the various

stakeholders will take

some effort with the

sovereignty of

various states and the

governance of the

emerging

organization at its

core.

Other regional

wholesale markets in

the US, most notably

PJM, MISO and SPP

have grown

substantially over

time to cover large multiple state parts of the US, and in the case of MISO, extending into Canada (map

above). There is no reason a similar approach will not work in the West.

The Duck has Landed posted on May 2, 2016 by Meredith Fowlie

Expended CAISO footprint will help

Source: CAISO

If other wholesale markets can do it, so can CAISO

https://www.wapa.gov/newsroom/NewsFeatures/PublishingImages/ISO-RTOmap_slider.jpg

https://energyathaas.wordpress.com/2016/05/02/the-duck-has-landed/

https://energyathaas.wordpress.com/2016/05/02/the-duck-has-landed/

https://energyathaas.wordpress.com/author/fowlie2012/


ERCOT’s Market Makeover For now, all seems well with Texas’ energy–only market

ack in 2011, regulators and politicians in Texas were rightfully concerned whether the lights

would remain on in the Lone Star State given falling capacity reserve margins and alarms from

the grid operator, Electric Reliability Council of Texas (ERCOT) that something had to be done

to avert impending disaster. Study after study showed that not enough new capacity was being

built to meet future demand growth.

Among the options considered were to introduce a capacity payment scheme to ERCOT’s energy-only

market, where generators only get paid for energy when and if they are dispatched, the classic missing

money problem. As often happens in such cases, the issue became heavily politicized.

The ensuing debate lasted several years at the Public Utility Commission of Texas (PUCT) on how best

to guarantee long-term grid reliability, and decide whether to supplement Texas’ energy-only market with

a forward capacity market similar to those in PJM, New England and New York.

In 2014, PUCT decided against a formal capacity market, instead opting for an operational reserve

demand curve or ORDC, essentially a day-ahead, real time mechanism that identifies looming supply

scarcity and provides extra revenues to available generating capacity. They also decided to gradually raise

ERCOT’s wholesale energy offer price cap to $9,000/MWhr, the highest of any market in the US. Only

Australia’s National Electricity Market (NEM) has a higher offer cap, currently AUS$12,500/MWhr.

As illustrated in graph on right, the fixes

appear to have done the job. Successive

estimates of reserve margins suggest they

have recovered with a reasonable safety

margin for the years ahead. Looking

ahead to 2022, the forecasted reserve

margin has risen from virtually nil to

20.5% against ERCOT’s target of

13.75%. And by some estimates, the

scheme has saved Texas electricity

customers billions relative to the cost of a

formal capacity mechanism.

More stunning is the drop in projected

peak demand. In 2012, forecasted peak

summer demand for 2022 was 80,700

MW. The latest estimate puts it around

72,800 MW. Far less capacity is needed to

meet demand.

The dramatic drop in peak demand is partly explained by depressed oil prices, which have reduced

economic activity as well as efforts to make customers pay higher demand charges for their peak demand,

now a feature of many tariffs offered by competing retailers in Texas.

On a related note, a report produced by The Brattle Group for Texas Clean Energy Coalition and

released in mid-May 2016 concluded that “natural gas and renewable energy can provide all of the new

electric power that Texas will need for the foreseeable future, at little increased cost to consumers,”

adding that existing “market forces are largely driving Texas toward a cleaner electric grid.”

B

All is well in ERCOT Texas Regulators Save Customers Billions

Source: America’s Power Plan, 23 May 2016


The report, Exploring Natural Gas and Renewables in ERCOT: The Future of Clean Energy in

ERCOT, looks at the Texas electric grid over the next 20 years and forecasts how market and regulatory

factors will affect future electricity generation, how much it will cost, and how much CO2 will be

emitted.

Texas Energy

EIA’s Latest Outlook: Missing The Mark? The latest EIA Outlook, acknowledges change, ever so slowly

he energy business is changing faster than our existing tools, forecasting models, historical trends

and imagination allows. That may be the best way to describe the latest World Energy Outlook

to 2040 released in mid-May 2016 by the Energy Information Administration (EIA) without

being too critical or judgmental.

The report, while

acknowledging many of the

fundamental changes taking

place at accelerated speed,

nevertheless falls short on

imagining exciting and bold

new realities – perhaps because

the pace of change is simply too

fast to be captured by existing

forecasting models, which in

turn are based on historical data,

trends and assumptions, all of

which are based on historical

trends and expectations. Call it institutional inertia.

For example,

Does it capture the recent announcements by Saudi Arabia, the world’s biggest oil exporter

to move away from oil?

Or Total’s vision to become a major player in renewable energy?

Or the fact that the number of electric cars, now barely 1 million globally, will double, triple,

quadruple – your guess is as good as ours – much faster than many expect?

Or the accelerated transition to low carbon renewables, not just in the rich countries but

increasingly among the developing countries?

Or projections of major breakthroughs in energy storage?

Or advances in improved management and control allowing much more efficient use of

energy in transport, heating, cooling, lighting, and motor drive?

Or the rapid shift away from energy intensive industries and towards services?

Or the emergence of new logistical means of delivering and distribution of goods and

services?

Or the full implications of shared economy, autonomous cars and similar alternatives to the

historical patterns of energy use?

T Evolving, but not fast enough

Source: International Energy Outlook to 2040, EIA, May 2016

http://www.texascleanenergy.org/TCEC%20Brattle%20Press%20Release%2017%20May%202016.pdf


As this editor sees it, the

EIA, along with everyone

else who is attempting to

forecast the future, is bound

to fail with the current fast

pace of change in costs as

well as the emerging

technologies and

disruptions. And EIA’s

latest projections are

indicative of the challenge

of incorporating the three

major drivers of change,

namely,

The rapid push towards low carbon energy sources, now broadly acknowledged as a

commitment most signatories to the Paris accord intend to comply with as best as they can;

The rapid advances in renewable technologies that has made them virtually cost-competitive

with fossil fuels even without an actual carbon tax or price; and

The rapid pace of technological and business disruptions – the shared economy,

autonomous cars, electric transportation, building energy automation and energy

management systems, energy storage to name a few – that suggest we can get by with far

less energy while enjoying high standards of living and wealth creation.

Take future of coal. The

EIA says coal’s share of

global electricity generation

will drop from the current

40% to 28-29% by 2040,

roughly equal to natural gas

and renewables. That is

good for the environment

but woefully inconsistent

with the Paris agreement.

To its credit, the EIA for the

first time acknowledges that

China’s coal consumption has already peaked and will decline, but fails to consider an even more

dramatic fall over time.

India is shown as

increasing its

consumption over time

(graph on left). During

his recent US visit,

India’s Prime Minister

Narendra Modi signed

an agreement to build 6

more nuclear plants and

announced the

cancelation of several

coal-fired plants. Both

Coal’s future is, well, history, trillion kilowatthours


Cleaner, but not fast enough, trillion kilowatthours


Electricity’s future is increasingly renewable, trillion kilowatthours



China and India are rapidly moving away from coal – as fast and as best as they can – and will do so even

more expeditiously if financially assisted by the global community. Other major coal consuming

countries are doing the same, albeit at different speeds and for different reasons.

In the US, future of coal is likely to be far bleaker than shown in graph on bottom of page 17.

Similarly, EIA’s projections of global CO2 emissions (below) is a relic of the past. It does not reflect

what needs to happen with the passage of Paris accord. Perhaps like many oil executives, the EIA also

assumes that the Paris accord is a mere feel-good agreement that puts the pressure off politicians for what

remains on their terms in the office. And perhaps they are correct.

Many companies, cities

and organizations,

however, believe

otherwise and are doing

their best to reduce their

carbon footprint with or

without government

mandates or regulations.

Many companies are

convinced that operating

more efficiently and

sustainably – whatever

that means – is simply

good business.

In a presentation to the Center for Strategic and International Studies in Washington DC on 11 May,

Adam Sieminski, the EIA’s Administrator, acknowledged the many challenges and uncertainties in

projecting energy demand and mix to 2040. For example, he noted that by 2030 natural gas will surpass

coal as the second global source of energy behind oil.

EIA, like everyone else who has been in the energy business for long, is simply incapable of envisioning

alternative futures where coal, oil and eventually gas will play second fiddle to renewables and energy

efficiency.

EIA has done a commendable job given its outdated models, database, and assumptions about the future.

2040 is likely to look quite different than what is predicted in 2016.

EIA

Regulation Biggest Barrier To Technological Innovation Uber’s experience begs how and whether to regulate the digital economy

irst, the good news: in early June 2016 Uber Technologies Inc. raised $13.5 billion in additional

equity and debt, including $3.5 billion from a Saudi sovereign-wealth fund designed to wean the

kingdom away from its over-dependence on oil (see article on page 8). Clearly, investors are

excited about Uber’s business prospects and are willing to put their money where their mouth is.

Now the bad news: A court in France fined the company $1.1 million – not much by Uber’s standards –

for violating French transport and privacy laws forcing the company to halt its popular car hailing service

F

How do you reconcile this against the Paris accord? world energy-related carbon dioxide emissions, billion metric tons


http://www.eia.gov/pressroom/presentations/sieminski_05112016.pdf


in France, one of its most lucrative markets outside the US.

Uber’s business model, which is highly disruptive to existing monopoly taxi operators, offers customers

better service at cheaper cost. That, in essence is the problem. And what do taxi drivers do to compete?

They complain to regulators, city officials, whoever they can find, to protect them against cheaper, faster

service offered through Uber’s sophisticated apps that allows customers to get rides with private car

drivers on their mobile devices.

As succinctly stated by The

Wall Street Journal (10 June

2016) the latest legal challenge

– Uber has been fighting the

regulators and bureaucrats in

cities and countries across the

globe since day one – “… is a

blow to San Francisco company

in the broader legal war

between Silicon Valley firms

and governments world-wide

about how and whether to

regulate the digital economy.”

Uber’s approach has been not

to ask for permission first – as

it would take years to get a

response and the answers may

not be what it wants to hear.

Instead, the company does what

it thinks would appeal to customers – and fight it out in the courts only when challenged, which is often.

According to the WSJ,

“In response to these challenges, Uber has deployed an army of lawyers and lobbyists and

organized groups of its customers to pressure local lawmakers into passing pro-Uber ordinances

in over 70 jurisdictions in the U.S.—including cities and states—as well as parts of Mexico,

Canada, Australia, India and the Philippines. The first place to pass a ride-hailing law was

California in 2013.”

What a dumb way to “protect” citizens, who are

basically shielded from receiving superior service at

lower cost.

Why talk about Uber in an energy-focused newsletter?

Because technology innovators in the electricity sector

are beginning to run into similar obstacles – where

powerful incumbents with deep pockets are pleading

regulators to intervene to protect them against similar

disruptive technologies that promise to deliver superior

services at lower cost.

The situation will only get worse and the regulators will

fall further behind as the pace of technological

innovations accelerates, and not just in taxi hailing services but in delivering a host of useful energy

Guilty of providing superior service at lower cost Uber executives Thibaud Simphal & Pierre-Dimitri Gore-Coty

Source: Uber suffers blow in legal fights, by Sam Schechner, Diuglas MacMillan & Nick Kostov,The Wall Street Journal, 10 June 2016; Reuters photo

When are you going to get Uberized? Number of London black cab drivers vs. Uber targets

Source: Edmund Reid, The smart shift to services: Transitioning from commodity to service provision, Lazarus, 21 April 2016


services in the so-called grid’s edge – meaning on the customer end of the distribution network.

Being a regulator was never glamorous or fun. It is getting decidedly more complex, more taxing, more

critical and definitely a lot less fun. And in this context, many are asking the same question posed by the

WSJ article, namely how and whether to regulate the digital economy.

New York Regulators Take Next Step Reforming the Energy Vision is gradually taking shape

s previously reported, regulators at the New York Public Service Commission (NYPSC)

launched the basic outline of an ambitious new regulatory framework called Reforming the

Energy Vision or REV following the devastation of superstorm Sandy. In mid-May 2016, they

issued a new Order Adopting a ratemaking and Utility Revenue Model Policy Framework,

the details of which may be found at the NYPSC website.

The latest order addresses what steps are needed to align

The regulated distribution utility’s business model and revenue streams in view of the

rapidly changing competitive environment; and

The rates that customers should pay for services derived in view of the evolving competitive

forces, new offerings, new service needs and Commission’s own policy goals

REV, which was launched 2 years ago under the leadership of NYPSC chair, Audrey Zibelman, seeks to

chart a new path for the regulation of New York’s electric utilities, who like their counterparts

everywhere, are entering new and uncharted territory.

As stated in NYPSC’s original order,

“The confluence of cost, reliability, and environmental concerns… lead to a conclusion that

conventional utility and regulatory practices no longer represent the best approach to satisfying

our responsibilities.”

With this as the context, the NYPSC embarked on new approaches to regulating, especially the critical

utility-owned monopoly distribution network. Among the REV’s objectives were to facilitate the

incorporation of distributed energy resources (DERs) in the distribution network.

In its major new order in early 2015, the NYPSC adopted a regulatory policy framework that described

the need to reform the utility business model and to align ratemaking practices with evolving policy

objectives. The centerpiece of the order was the establishment of a distributed system platform (DSP)

A

Aloha to Yeloha: Peer-to-peer trading is coming Sunshine delivered from host to recipient is only a few clicks away

Source: Yeloha website


structure by which

Utilities will facilitate the growth of DERs;

Limited utility ownership of distributed resources to mitigate market-power concerns;

Required utilities to create distributed system implementation plans (DSIPs) outlining

relevant system information and investment plans; and

Established interim energy efficiency targets.

The latest order represents the next step toward implementation of that vision. Needless to say, regulators

across the US and beyond are examining NY’s REV for useful insights to apply in their own jurisdictions,

as appropriate.

By way of background, distribution utilities in the US – many of whom are still vertically integrated –

tend to operate under so-called rate of return regulations. Basically, they are allowed to recover their

costs through a reasonable return on the invested capital. In practice regulators periodically adjust

customer tariffs so that regulated utilities can cover costs.

Whilst the simple mechanism worked reasonably well in the past, it has become apparent that it will no

longer work in an environment when demand may be flat or falling due to energy efficiency, distributed

generation and a host of new products and services including energy storage and peer-to-peer trading are

being offered.

Moreover, NYPSC, like regulators elsewhere must increasingly recognize that many assumptions about

the nature of business are no longer applicable in whole or part including the fact that

Customer demand is largely outside the influence of the utility;

Economies of scale favor utility-scale investments;

Large expenditures to create redundancies are necessary to support reliability; and

End-use customers are the only substantial source from which system costs – most critically

the fixed costs of critical distribution networks – can be recovered.

By rejecting these

outdated assumptions,

NYPSC plans to begin to

realign the revenue model

of New York’s utilities

with desired outcomes.

The Commission

recognizes that survival of

the distribution utilities is

critical to its vision of

proactive customers in a

changing business

environment.

Mindful that a lot is at

stake, the latest order

proposes a gradual

transition path with the

following 4 main

components:

DERs on the rise, one way or another

© Earth Policy Institute/Bloomberg Reproduced from Giles Parkinson’s Renew Economy, 7 Feb 2016

http://www.earth-policy.org/


Revenues tied to performance – The Commission has proposed establishing a new

Earnings Adjustment Mechanism (EAM), New York’s version of performance-based

incentives, to better align utility financial incentives with priority near-term outcomes:

system efficiency, energy efficiency, improved data access, and interconnection;

New source of revenues – The Commission Platform Service Revenues (PSRs) by which

utilities can earn revenues from operating and facilitating distribution-level markets;

More granular rates – The Commission is intent to transition customers in New York

toward more granular rates including time-based pricing options; and

Sharing customer data with DER providers – The Commission wants DER providers to

have better access to customer data, with permission from the customers, of course.

Few would argue with the Commission’s intent or its motivations. Yet the end result remains a rather

complicated mix of the old style regulation plus new requirements to allow new services and service

providers to find a footing on the grid’s edge.

For example, NYPSC has proposed the establishment of a scorecard tracking at least 10 measures of

utility performance – consistent with REV’s desired outcomes. Things get complicated in practice as the

text below suggests:

In the near term, as the DSP market is being established, PSRs may come primarily from the

utility’s ability to develop non-wires alternatives to traditional infrastructure investments, but

over time PSRs may be available. The NYPSC makes clear that PSRs are available to monopoly-

related services, and may be approved by the PSC "in limited areas of competitive services" as

stipulated by specific criteria in the Order.

Observing the merits of REV and NYPSC’s objectives, the Rocky Mountain Institute, in an article in

RMI Outlet dated 20 May 2016, wrote:

“The NYPSC’s recent order represents a major step forward in realizing the future of New York’s

electricity system. While New York is a national leader in comprehensive regulatory reform,

many states are tackling similar questions at varying levels of scope and scale. The latest

development in New York’s REV proceeding provides insights for regulators, utilities, and

stakeholders in states and localities that are facing similar challenges and opportunities in today’s

quickly evolving electricity system.”

It remains to be seen how the proposed changes will be implemented in practice and whether they will

lead to the intended outcomes.

As outlined in the preceding article on the difficulties facing Uber and frustrations it must overcome from

regulators, the key question in the face of rapid technological change is indeed how to regulate the

emerging digital economy, if at all. While the case of Uber may seem obvious, the logic and types of

regulations applied to regulated distribution utilities is much more convoluted and far less clear.

For those looking for clarity or simplicity, the REV may prove disappointing.

NYPSC Order Adopting a Ratemaking and Utility Revenue Model Policy, 19 May 2016

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0ahUKEwi2q8TGm9PNAhUD-2MKHYdBDCkQFggeMAA&url=http%3A%2F%2Fdocuments.dps.ny.gov%2Fpublic%2FCommon%2FViewDoc.aspx%3FDocRefId%3D%257BD6EC8F0B-6141-4A82-A857-B79CF0A71BF0%257D&usg=AFQjCNHniu0MWWdCtCfWlA3nFdpfUxhM2w&sig2=e8e2Mv1QJfJxko1H8Ban-Q


BP: Coal’s Annus Horribilis Has No End BP’s latest statistical review confirms energy world in transition

he 65th edition of BP’s Statistical Review of World Energy was released with the usual fanfare

that it deserves in London on 8 June with an introduction by the CEO, Bob Dudley and a

presentation by Spencer Dale, BP’s Group Chief Economist. The Review, which originally

focused exclusively on oil was expanded to cover all forms of energy starting in 1981. That was a

tacit acknowledgement that BP – not unlike all other oil majors – is in energy business, not merely oil.

And that oil increasingly competes with other fuels and energy sources on multiple dimensions across the

globe. Renewables, initially of marginal interest, have been slowly gained some prominence in the last

few years.

Having gone through a bruising 2015,

BP’s 2016 Review is full of humbling

lessons learned and insightful

observations about the rapidly

changing energy future. Despite

continuing to learn from the past 65

years, however, BP – like the EIA, the

IEA and others – appear to be at a loss

to fully embrace the tectonic

disruptions that continue to outpace

their ability to predict the future.

To his credit, Dale is spot on when he

says, “If energy demand is in a process of transition, global supply is surfing a technological wave.” As

the title of his presentation – Energy in 2015: A year of plenty – suggests, “This is truly the age of

plenty.” Globally, there is too much oil, coal, gas and increasing amounts of renewables, which explains

the depressed prices (graph above right).

As Dales sees it, much of this plenty,

low energy prices and rapid pace of

change both on the supply and

demand side can be explained by the

confluence of 3 major developments:

US Shale revolution –

which precipitated the

global oil supply glut;

Rapid growth of non-

fossil fuels – which he

acknowledges as “even

more striking;” and

COP21 – The Paris

climate agreement signed in December 2015 and ratified at the UN in May 2016, which is

likely to become a significant milestone in the annals of energy history as a major turning

point away from fossil fuels and carbon emissions – our words not his.

As everyone knows, lower GDP growth, improvements in efficiency of energy use, shift away from

heavy industry to light manufacturing and services, and rapid fall in the cost of renewable energy

resources – to varying degrees in different parts of the world – explain the complex story of supply,

demand and prices. The Review does a good job of explaining the history, not so in predicting the future.

T

Times are a changing …

Source: Spencer Dale, Energy in 2015: A year of plenty, BP, 8 June 2016 and BP’s Statistical Review of World Energy 2016 edition, BP June 2016

Coal’s Annus Horribilis Has No End



It is not a happy story for coal no

matter how you look at it. And as this

editor sees it, the story is likely to get

grimmer over time as more countries

begin to move away from the carbon-

loaded coal despite current low

prices. The Paris accord is a major

driver, but so are growing concerns

about health and environmental

effects of coal mining and

combustion.

Dale called 2015 “annus horribilis”

for coal – referring to a famous uttering by Queen Elizabeth during a horrible year for her Kingdom

when nothing seemed to be going well. A few highlights for 2015:

Global coal consumption fell nearly 2%;

Global production fell nearly 4%;

Coal prices plunged nearly 20%;

US coal consumption fell nearly 13%; and

China’s coal consumption – representing roughly half of global demand – FELL for the 2nd

year in a row.

The speed and scale of change in

coal supply and demand continues to

surprise nearly everyone (graphs on

page 23). In May 2016, for example,

solar electricity generation exceeded

coal in the not so sunny UK. How

can that be possible?

In the US, historically reliant on coal

for roughly half of its electricity

generation, natural gas has caught up

(graphs above) – and the future

looks bleak especially if the

Environmental Protection Agency (EPA) perseveres

in implementing its Clean Power Plan (CPP),

currently held up in the courts, and pending a decision

after the US national election in November.

Renewables, by contrast, had another field day in

2015 – and are likely to enjoy continued robust

growth, albeit at different rates in different regions of

the world. Global renewable generation rose 15% in

2015, simply stunning, meeting 38% of the increase in

global energy consumption, according to BP.

What is driving the growth of renewables? Improved

technology, falling costs, and policy – bolstered by the

Paris Agreement. If carbon prices/taxes are introduced,

Renewables are here to stay

Source: Spencer Dale, Energy in 2015: A year of plenty, BP, 8 June 2016 and BP’s Statistical Review of World Energy 20R16 edition, BP June 2016

Will the pace of change be as it has always been?

Source: Spencer Dale, Energy in 2015: A year of plenty, BP, 8 June 2016 and BP’s Statistical Review of World Energy 20R16 edition, BP June 2016

US coal: Best times are behind



it will further improve their prospects.

Dale concluded his presentation by looking at past for clues to future trends. Nothing wrong with that,

especially given that BP’s annual exercise is retrospective, it does not attempt to forecast as do others

such as the EIA (article on page 16), IEA, BP, and Exxon.

Setting the philosophical points aside, Dale identifies 3 major drivers for change:

China;

Pace of growth of renewables; and

Implementation of Paris Accord and carbon emissions.

Dale main observations and conclusions may be summarized in the following 3 statements with emphasis

added:

“The key lesson from history is that it takes considerable time for new types of energy to

penetrate the global market. Starting the clock at the point at which new fuels reached 1% share

of primary energy, it took more than 40 years for oil to expand to 10% of primary energy; and

even after 50 years, natural gas had reached a share of only 8%.”

“The growth rates achieved by renewable energy over the past 8 or 9 years have been broadly

comparable to those recorded by other energies at the same early stage of development. Indeed,

thus far, renewable energy has followed a similar path to nuclear energy.”

“The simple message from history is that it takes a long time – numbering several decades – for

new energies to gain a substantial foothold within global energy.”

The problem with looking at the past for clues for the future, however, is that it only works well if you

believe that the future will be similar to the past – i.e., no major disruptions or discontinuities. This

clearly is NOT the case today. Even BP admits rapid change and major disruptions in supply and demand.

As this editor sees it, the pace of

change coming from both supply and

more important the demands side, are

historically unprecedented. Past

trends are no longer helpful. They are

in fact misleading and lead one to the

wrong conclusions.

For example, the rise of nuclear

energy – referred by Dale in the

second paragraph above – is totally

irrelevant in deciding the future

penetration of renewables. This

editor was stunned reading Dale’s

assessment.

For one thing, nuclear was expected

to gain a major share in global

electricity generation and heralded by

some as “too cheap to meter.” But instead of experiencing falling costs with replication and enjoying

economies of scale, its costs escalated over time and the time it took to build reactors ballooned rather

than declining.

What happens now that we have an agreement to reduce carbon?

Source: UN


Today – aside from handful of cases that cannot be explained by their economic merits – nuclear energy

is not considered an option in the west not only because it costs too much but because nobody knows how

long it will take or how much it will cost to build a new reactor.

Moreover, Dale’s statement that” it takes a long time – numbering several decades” for change to take

place for all the obvious reasons, is also misleading for anyone looking beyond the next quarter or a few

years ahead.

Yes, it took 70 years for

Alexander Graham

Bell’s telephone to

become mainstream, but

Apple’s iPhone and

similar devices gained

phenomenal acceptance

by global customers in a

matter of years not

decades. Tesla “pre-sold”

nearly a quarter million of

its next model car in 3

days even before it had a

prototype to show

prospective car buyers.

Yes, energy sector may be slower to change – but that is only helpful to managers of the oil sector who

prefer the comfort of the historical knowns to the future unknowns and disruptions.

All indications are that major disruptions are to be expected, and a lot sooner than many believe as

described in the lead article in the June issue:

The transportation sector – the bread and butter of oil majors including BP – is likely to

experience major disruptions not only by rapid electrification supplied by renewable energies

but also the introduction of autonomous cars, which will increasingly be shared rather than

owned;

The electric power sector – never the focus of oil majors – will increasingly be supplied by

renewables and is likely to undergo major evolution in energy management, decentralization

and more efficient utilization; and

Concerns about climate change – codified and ratified by Paris Agreement – are increasingly

taken as de facto requirements by an increasing numbers of organization, companies, cities

and non-state stakeholders who are no longer waiting for top-down regulations.

In this context, looking at history for clues for future trends is as if you were looking in the rear-view

mirror of the car, rather than the winding road ahead.

BP-statistical review of world energy 2016 and BP energy economics/energy outlook 2016

Nuclear vs. renewables: There is no comparison

Source: Energy Information Administration, Monthly Energy Review

http://www.bp.com/content/dam/bp/pdf/energy-economics/statistical-review-2016/bp-statistical-review-of-world-energy-2016-spencer-dale-presentation.pdf

https://www.bp.com/content/dam/bp/pdf/energy-economics/energy-outlook-2016/bp-energy-outlook-2016.pdf


The Future Is In Services, Not Commodity Sales Facing shrinking sales, incumbents are looking for growth out of the box

ears ago, the energy efficiency guru Amory Lovins pointed out that utility sector is focused on

the wrong thing, namely selling kWhrs while customers need and want affordable energy

services. His colorful quote was that what customers ultimately want is “a hot shower and a cold

beer” – hence selling them kWhs of electricity or therms of natural gas is only meaningful in so

far as they can convert it to useful energy services – the cold beer and the hot shower.

With all the turmoil in the utility

sector and the growth of distributed

energy resources (DERs) energy

storage, micro-grids and other means

of distributed self-generation and

consumption, Lovins’ saying is more

appropriate than ever. And the

message is being taken up in more

places by utilities and their

competitors.

Writing in 3 May 2016 issue of

Energy Perspective, Edmund Reid

of Lazarus Partnership asks,

“Who wants to just sell

commodity products like gas

and electricity when there are

better service opportunities—

higher margin, lower risks

and far less political scrutiny—in selling home energy services?”

While his focus is on the retail electricity market in the UK, his insights are broadly applicable especially

now that passive consumers are becoming proactive prosumers – and who knows – with the emergence

of storage we may be entering the

age of prosumage.

In a report released in April 2016

titled The smart shift to services:

Transitioning from commodity to

service provision, Reid argues that

utility companies transitioning to a

service model are likely to grow,

whereas those that continue with the

business-as-usual model may find that

they are left behind.

Reid says utility companies are facing

unprecedented challenges as both

regulation and technological change

undermine their existing business models.

Making matters worse, over the last 10 years’ domestic gas and electricity demand in the UK have fallen

Y No growth in commodities in UK or elsewhere Annual domestic energy usage (tonnes of all oil equivalent per household)


Connected home



by 33% and 16% respectively, with the biggest reduction in energy usage for space and water heating

(graph on page 27 top).

Moreover, Reid argues that the smart home, which for years has seemed like science fiction, is fast

becoming a reality: the required technologies are commercially available and the real question is the

deployment rate. These technologies – based on smart meters, smart thermostats and microgeneration –

transform the home services market to proactive management of the home and, these kinds of services

have a far wider appeal to a growing number of customers.

Reid says the market for home energy management systems and smart thermostats is also growing

rapidly. Google’s Nest, for example, is able to self-program a schedule based on past preferences that

continually adapts to the user’s life, turning down when nobody is at home and recording an energy use

history to help users understand what they used and when.

The third type of technology,

microgeneration, is currently mainly solar

PV, with over 814,000 domestic solar

installations in the UK as of January 2016,

a 30% increase in 2015 despite the

uncertainty over solar tariffs.

In the US, reportedly a new solar PV is

installed every minute.

The bottom line? “Whereas the traditional

utility model has been based on providing a

commodity to a passive, price inelastic

customer, in the smart home world, not

only are customers producing and

potentially storing their own energy, they

can also more easily monitor and manage

usage,” according to Reid.

As described in the May 2016 issue of this newsletter, a number of companies including Edison Energy

are now developing a new business model

totally focused on delivering energy as a

service, rather than bulk commodity as in

kWhrs.

In describing Edison Energy’s new mission,

Ted Craver, the CEO of Edison

International, the parent of Southern

California Edison Company (SCE) said,

“… gone are the days of simply

taking power and paying the going

rate. Distributed generation and

distributed storage have taken on

central roles in corporate energy

management—especially as a means

of reducing energy costs—but that

means a new array of challenges that

non-energy firms aren’t well positioned to meet.”

UK PV installations Sub 4kW UK solar PV installations


Go where the money is GDP ($) per household and number of households (m)



Edison Energy is trying to reinvent the energy business by identifying and exploiting opportunities to

lower energy costs, reduce complexity of energy management, and meet the basic needs of large

commercial and industrial (C&I) customers. As a non-regulated entity, the new enterprise is free to

serve clients where ever it can find them, and not just within the parent’s service area in Southern

California. Nor is it limited in the range of products or services it can offer.

Reid’s analysis suggests that the time has arrived to focus on providing energy services rather than selling

bulk commodity. It is a message that needs to be heard.

Asset Light, Information Heavy? How Would That Work? Electricity business is not as simple as Airbnb

s incumbents and newcomers jockey for market share in the emerging electricity service sector

(preceding article) a debate is emerging about the future role of assets. Utilities, historically

vertically integrated and operating under rate of return (ROR) regulation – still prevalent in

many parts of the US and elsewhere – craved to invest in capital infrastructure.

As further explained in articled on New

York’s REV proceedings, the more assets

they could get away with the better since

their income, profits and ultimately

dividends were tied to how much

investment they had in their so-called rate

base, on which they could earn an allowed

rate of return.

In this context being asset heavy was

considered good not only by shareholders

but also rating agencies and the investment

community, who liked the stable returns that

the industry could generate.

This model may still apply to

portion of the industry that provide

natural monopoly services, such as

transmission and distribution, but

not to competitive retail or

generation in markets where these

functions have become

competitive.

Speaking at DistribuTECH2016

Conference in early May 2016,

Zarko Sumic, an analyst with

Gartner, predicted that by 2020

the largest power utility will not

own generation or network assets.

Hmm.

Pointing to new digital economy

stars such as Facebook – with

A

Have you got one on the roof?

Lot more energy on the rooftops

Source: John Farrell, Institute for Local Self-Reliance

https://ilsr.org/wp-content/uploads/2016/04/Local-rooftop-solar-potential-ILSR-2016-data.jpg


market capitalization of $230 billion – Uber – estimated worth $50 billion – and Airbnb – estimated

value around $24 billion – he observed that none own assets – in this case content, cars or rooms.

Welcome to strange virtual world, the sharing economy.

The sharing economy uses IT to distribute, share and reuse excess capacity in goods and services. In this

context, information is the fuel and the digital platform is the engine of business. Hmm.

Moreover, according to Sumic, the sharing economy operates in a market with customers and sellers and

the value of the goods and services shared is determined by the network effect – also called the

Metcalfe's law – and increases as the square of the number of nodes, say number of customers and

sellers.

That explains why Facebook has virtually no rivals – why would anyone worth his/her name want to put

his/her pictures somewhere else when billions are glued to their Facebook page?

Sumic, who probably understands the workings of the sharing economy, took a leap by making an

analogy with the electric power industry. He says as we move toward a future where energy flows are

increasingly determined by market forces – he made references to the nascent concept of transactive

energy previously covered in this newsletter – assets

become less important while managing and controlling

the flow of information becomes critical.

Where Sumic went next, while intriguing, may not be

entirely based on physical realities of the electric power

sector or the flow of electrons – which so far as this

editor can fathom, still depends on physical assets,

infrastructure and investments in hardware.

Using Facebook, Uber, and Airbnb analogy Sumic said

that by 2020, the largest energy company by market

value in the world will not own any network or grid or

generation assets. As he sees it, such new enterprises,

whatever they may be called, will primarily or solely

manage information about energy sources and

consumers.

He does not see any technical barriers to this vision. The

only thing standing in the way at the moment is current

regulation – a critical issue described in accompanying

article on page 18.

Sumic said, in part,

“ … the utility digital distribution platform creates new value by enabling an open energy

market, which brings together those who have energy with those who want it. It requires a

network operator who manages and ensures the reliability of the grid (similar to the role of

Network Rail in the UK) and a sharing energy economy platform operator (like Facebook, Uber

and Airbnb) who brings together energy providers and buyers including prosumers, and

calculates transaction and delivery costs.’

Would a nice guy like this disrupt your monopoly business?

Source: The Wall Street Journal 2 May 2015


Clearly, there is room for new players to

enter the archaic utility space with its

outdated regulations and bizarre, asset-

heavy business model, long protected

from competition, slow to innovate and

historically insensitive to the needs of its

customers.

Moreover, as others have correctly

observed, the industry under-utilizes its

assets far more than any other. The

infrastructure is designed to be

essentially fail-proof and with ample

capacity plus a decent reserve margin on

top so that it can meet the highest peak

demand imposed on the network.

Nobody wants the lights to go out on

their watch for lack of investment or

infrastructure, politicians, regulators,

utility CEOs or the grid or network operators.

But this is not Airbnb, where you can rent a spare bedroom to a guest. Sharing the assets, or even the

information about the flows, with outsiders could lead to less reliability or hacking. Until a host of safety

and reliability issues are addressed, no regulator is likely to want to relent control or change the protocols

that keep supply and demand in balance on a sophisticated network around the clock.

Sumic can say all he wants – and he is now widely quoted – but the power sector is not yet ready for

shared economy invasion a la Airbnb model.

Many entrepreneurs are already developing platforms for peer-to-peer trading and other forms of

sharing the electrons as previously noted in this newsletter. And there is no doubt that many will succeed.

But these platforms still critically and solely rely on physical assets – 130 wooden poles and millions of

miles of copper wires in the case of

US – to deliver the juice or

accomplish the transactive energy

trading that Sumic envisions.

Electrons are not packets of

information and cannot be digitized

and zipped wirelessly, effortlessly

and instantly among and between

parties.

If anything, we are likely to need

more assets – smart meters, smart

devices, poles and wires plus

distributed storage and distributed

generation – to handle the emerging

DER revolution.

The biggest challenge is how do we pay for the network that will critically be needed to support the types

of services Sumic envisions.

Will regulators stay on top of fast changing issues?

Michael Picker, President of CPUC with the editor in San Francisco

Energy independence in Freiberg

Source: Timo Leukefeld from Christoph Burger, ESTM Berlin


Right now, those who are developing the platforms for peer-to-peer trading are assuming they can get a

free ride on the existing network – or someone else will pay for it. That may work for a while, but not if a

large portion of customers begin to self-generate, store and trade.

Regulators, whether we like it or not, are in a critical position to decide and define the future of the

industry. Looking at the REV proceedings in New York, this editor is not encouraged that

They will get the pieces right; and

They will do it in time.

But perhaps visionaries like Sumic have a better crystal ball.

http://www.pittsh.com.au/latest-news/cedex/

IEA: Firing On All Cylinders Meeting the Paris targets no easy task

sustained global effort is needed if the goals of the Paris Agreement are to be reached,

according to the

International Energy

Agency’s latest Energy

Technology Perspective (ETP),

released in early June 2016.

With a record 150 GW of new

renewable capacity installed in

2015, the IEA says far more is

needed. And even that won’t be

enough. The IEA recommends an

“all of the above” strategy

consisting of a mix of renewables,

energy efficiency, fuel switching –

to cleaner fuels – nuclear and carbon capture and sequestration (CCS).

Even the IEA admits that CCS is not “on track” – it has largely fallen out of favor of late as being too

costly and not available on large enough scale to make a dent in the near future.

Since so much of the global energy

is used for heating and cooling,

mostly in buildings, the IEA has

identified it as a prime target. The

transportation sector, another

major emitter of carbon, is also

identified as critical.

As everyone knows, without

electrifying transport fueled by

renewable energy resources, there

is no hope for achieving the so-

called 2 degrees’ scenario (2DS) in

the graph on the left.

A

Meeting Paris target won’t be easy

Source: Energy Technology Perspective, IEA, June 2016

Electrified transport a MUST

Source: Energy Technology Perspective, IEA, June 2016


IEA, not unlike everyone else, has gotten into cities. It says cities in emerging and developing economies

can lead the low carbon transition while reaping many benefits. Who can disagree?

Special 30% discount offer for EEnergy Informer subscribers

Subscribers are entitled to a 30% discount when ordering copies of the just published book, Future of Utilities: Utilities of the Future, with further details provided at the end of this month’s newsletter. The link below will take you directly to the publisher's website and a 30% discount code ENG315, which you can apply at checkout. Please share with others who may be interested in ordering a copy.

http://store.elsevier.com/Future-of-Utilities-Utilities-of-the-Future/isbn-9780128042496/

EEnergy Informer subscription prices

EEnergy Informer is available by subscription only at the following options/prices:

Subscription type Annual price Regular subscription $450 Single reader, no distribution

Discounted subscription $300 Small business, single reader, no distribution

Limited site license $900 Distribution limited to 4 readers in same organization, single location

Unlimited site license $1,800 Unlimited distribution within same organization including multiple locations

Student subscription $150 Limited to students & qualified solo professionals (Please inquire if you qualify for this special discounted price)

How to subscribe to EEnergy Informer

To extend existing or start new subscription to EEnergy Informer visit website www.eenergyinformer.com under toolbar SUBSCRIBE TO EENERGY INFORMER and select the appropriate price. You will be prompted to provide credit card details, which are securely handled through PayPal. You will get an instant electronic transaction receipt and we will get notification of payment. You do NOT need a PayPal account and need NOT be a current PayPal user.

If you require a customized invoice &/or prefer to wire funds directly to our bank, please contact us at [email protected]. If you are paying with a check, it must be in US$, payable to EEnergy Informer and mailed to 1925 Nero CT, Walnut Creek, CA 94598, USA. Any questions or if you experience problems with the PayPal payment system, kindly notify us at [email protected] or the editor at [email protected].

EEnergy Informer

Copyright © 2016 July 2016, Vol. 26, No. 7 ISSN: 1084-0419 http://www.eenergyinformer.com

EEnergy Informer is an independent newsletter providing news, analysis, and commentary on the global electric power sector. For all inquiries contact Fereidoon P. Sioshansi, PhD Editor and Publisher 1925 Nero Court Walnut Creek, CA 94598, USA Tel: +1-925-256-1484 Mobile: +1-650-207-4902 e-mail: [email protected] Published monthly in electronic format. Annual subscription rates in USD: Regular $450 Discounted $300 Limited site license $900 Unlimited site license $1,800 Student/special rate $150

http://store.elsevier.com/Future-of-Utilities-Utilities-of-the-Future/isbn-9780128042496/


mailto:[email protected]





EEnergy Informer - Energy Economics · 3 July 2016 EEnergy Informer Page 3 Sonnen makes residential...

Documents

Transcript of EEnergy Informer - Energy Economics · 3 July 2016 EEnergy Informer Page 3 Sonnen makes residential...