Renewable Energy Workshop: Solar Power and DG Business Models


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Navigant’s renewable energy experts held a pre-conference technical training session on May 5, 2014 prior to WINDPOWER 2014 in Las Vegas, NV.

Karin Corfee
Managing Director, Navigant
Presentation: Solar and DG Business Models

Published in: Environment, Technology, Business
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Renewable Energy Workshop: Solar Power and DG Business Models

  1. 1. ©2014 Navigant Consulting, Inc. DISPUTES & INVESTIGATIONS • ECONOMICS • FINANCIAL ADVISORY • MANAGEMENT CONSULTING May 5‐8, 2014 Solar and DG Business Models AWEA WINDPOWER 2014 AWEA Renewable Energy Workshop Las Vegas, NV Karin Corfee| Managing Director, Energy Practice
  2. 2. 1©2014 Navigant Consulting, Inc. 1©2014 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. Agenda The Situation Solar Industry Trends DG Business Models California Solar Initiative Case Study
  3. 3. 2©2014 Navigant Consulting, Inc. » Technology advancements have driven costs down. – PV module costs have dropped from roughly $4/watt in 2006 to less  than $1/watt. – Total installed cost is expected to reach  $1.76‐$2.47/watt by 2018  (without subsidies). » Regulatory actions differ from region to region. – Renewable Energy Targets  (29 U.S. states) – Renewable Energy Certificates (RECs) – Feed‐in Tariffs (FiT‐ HI, OR, ME, VT, LADWP, Gainesville, LIPA,  Ontario, Germany, Spain, Czech, Italy, Japan, Taiwan, China ) – Net metering (40 U.S. states) – Other related mechanisms (e.g., CA storage mandate) The distributed solar PV issue is complex, at the intersection of energy  technologies, regulations, and markets. The Situation Technology RegulationsMarkets » Market evolution (revolution?) has accelerated. – Incentives (e.g., U.S. ITC) and financing alternatives like solar leasing and green bonds have  removed financial hurdles. – Residential “socket parity” (including incentives) is already reached in the U.S. Southwest. – In high‐cost retail electricity markets, such as Holland, Hawaii, the Philippines, the Caribbean,  and other island nations, distributed solar PV is at grid parity even without incentives. Source:  Navigant Research, Navigant Consulting analysis
  4. 4. 3©2014 Navigant Consulting, Inc. » A survey of over 500 U.S. electric utility professionals revealed concerns with current  regulatory and revenue models and a focus on distributed generation. Utility professionals view DG has a challenge. The Situation Source:  “The State of the Electric Utility.” Utility Dive, 2014. Related challenges
  5. 5. 4©2014 Navigant Consulting, Inc. » The majority of respondents identified distributed generation as the technology with the  most disruptive potential, and that it would actually be an opportunity for their utility. Opportunity or Threat?  The Situation Source:  “The State of the Electric Utility.” Utility Dive, 2014.
  6. 6. 5©2014 Navigant Consulting, Inc. » The majority of respondents anticipated minimal to zero demand growth for their utility  in the next five years.  Addressing Demand Reduction  The Situation Source:  “The State of the Electric Utility.” Utility Dive, 2014.
  7. 7. 6©2014 Navigant Consulting, Inc. » How big is the “threat” of distributed solar PV over time? – Revenue model/tariff structure – Earnings impact under several demand reduction/PV penetration scenarios o Revenue loss o Grid integration costs – Customer impact for those with, and without, solar PV – People/process impact… new skills/capabilities/roles, etc. » What potential opportunities exist related to distributed solar PV? – Utility rate‐based solar PV on distribution grid – Developer/owner/operator of distributed solar PV assets (through Pepco Energy Services) – Role as a market “enabler” for grid users – Other business opportunities » How should the impact (opportunities and threats) of distributed solar PV be  incorporated into the business planning process for the 1, 5, and 10‐year time horizon? Key Questions for Utilities The Situation
  8. 8. 7©2014 Navigant Consulting, Inc. 7©2014 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. Agenda The Situation Solar Industry Trends DG Business Models California Solar Initiative Case Study
  9. 9. 8©2014 Navigant Consulting, Inc. Solar Industry Trends A vision of the future filled with distributed rooftop PV  . . .  “Anyone flying into the airports of Southern  California can catch a bird’s eye glimpse of the  future of the electric power system. The vast region  is dotted with the reflections from shiny solar panels  on the rooftops of homes, schools, and businesses.  Photovoltaic (PV) solar systems also can be found on  some parking lots and warehouses. . . . In the electric  power business we expect to see more change in the  next 10 years than we saw in the last 100.”  Ted Craver, EIX Solar energy will eventually “takeover everything” because its costs keep on falling. Add storage, and its pretty much “game over” for traditional forms of power generation. Jon Wellinghoff, outgoing Chairman FERC at the 2013 National Clean  Energy Summit
  10. 10. 9©2014 Navigant Consulting, Inc. Solar Industry Trends News sources have contained startling messages about DG solar in  2013.  Companies Unplug From the Electric Grid, Delivering a Jolt to  Utilities Wall Street Journal, September 17, 2013 Why the U.S. Power Gridʹs Days Are Numbered: Homegrown  Green Energy Is Making Power Utilities Irrelevant Bloomberg BusinessWeek,  August 22, 2013 Disruptive Challenges: Financial Implications and Strategic  Responses to a Changing Retail Electric Business Edison Electric Institute, January 2013 An Epic Battle Between Solar Firms and Power Utilities Could  Leave One Side Unplugged Phoenix New Times1,  July 11, 2013 1. Phoenix News Times used to illustrate local news that utility executives will pay attention to in their own service territories. 
  11. 11. 10©2014 Navigant Consulting, Inc. » Learning rates (i.e., price drop for every doubling of production) for PV modules could  range from 22% to 40% going forward. » According to EEI, installed system prices are now “in the money” for approximately 16%  of the U.S. retail electricity market, and expected to reach 33% by 2017.  » In high‐cost retail electricity markets, such as Holland, Hawaii, the Philippines, and the  Caribbean, distributed solar PV is at grid parity even without incentives. – In other markets, such as parts of California, New England, South Africa, Germany, and Italy,  solar PV is reaching grid parity with incentives. Solar PV module costs (and total installed costs) have dramatically  declined over the past 5 years, a trend that is expected to continue. Solar Industry Trends Solar PV Module Price Trend Distributed Solar PV Installed System Prices
  12. 12. 11©2014 Navigant Consulting, Inc. 2,300 2,500 3,500 4,400 2,900 3,600 4,000 4,300 2,400 3,100 3,100 3,400 2,100 2,400 2,500 2,700 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 2013 2014 2015 2016 2017 2018 2019 2020 SolarPV[MW] Centralized Distributed 4,700 5,600 5,000 7,800 6,600 6,000 6,500 7,000 Navigant expects PV to be a 7 GW market in 2020, despite the market  dip caused by the ITC reduction in 2017.  Solar Industry Trends 1 Distributed is defined as projects < 1 MW whereas centralized is defined as projects ≥1 MW. 1 Source: Solar PV Market Forecast, Navigant Research, 2013. U.S. PV Installed Capacity Forecast (Annual Additions)
  13. 13. 12©2014 Navigant Consulting, Inc. U.S. PV Installed Capacity Forecast (Cumulative) 6,500 9,000 12,500 17,000 20,000 24,000 28,000 32,000 6,000 9,000 12,000 15,500 17,500 20,000 22,000 25,000 0 10,000 20,000 30,000 40,000 50,000 60,000 2013 2014 2015 2016 2017 2018 2019 2020 SolarPV[MW] Centralized Distributed 12,500 18,000 37,500 32,500 24,500 44,000 50,000 57,000 Navigant forecasts the total U.S. installed solar capacity to be just shy  of 60 GW by end of 2020; over 50% distributed.  Solar Industry Trends 1 Distributed is defined as projects < 1 MW whereas centralized is defined as projects ≥1 MW. 1 Source: Solar PV Market Forecast, Navigant Research, 2013.
  14. 14. 13©2014 Navigant Consulting, Inc. Source: SEIA Website, 2013. Source: “Solar Means Business : Top Commercial Solar Customers in the U.S.”,  SEIA, August 2013.  In April 2013, Walmart announced its goal of :   “Producing or procuring 7 Billion kWh of renewable energy globally by 2020 – an increase of over 600% versus 2010.” Solar Industry Trends In the C&I DG market, companies are installing solar as they realize  multiple benefits, including cost savings. 
  15. 15. 14©2014 Navigant Consulting, Inc. Arizona California Colorado Connecticut Delaware Hawaii Maryland Massachusetts New Jersey New York Oregon Pennsylvania Texas Washington D.C. Washington A growing number of companies in the residential leasing market . . . . . . are collectively expanding their footprint across the country . . . . . . and are significantly impacting market growth and ownership composition. Source: Navigant team analysis of  PowerClerk data, February 2013. Solar Industry Trends In the residential distributed market, growth is increasingly driven by  third party ownership (leasing and PPA) models across the country.  11% 7% 12% 23% 45% 71% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2007 2008 2009 2010 2011 2012 Share of Installed Capacity Third Party Ownership Market Share in CA Residential Sector
  16. 16. 15©2014 Navigant Consulting, Inc. 15©2014 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. Agenda The Situation Solar Industry Trends DG Business Models California Solar Initiative Case Study
  17. 17. 16©2014 Navigant Consulting, Inc. DG Business Models It is clear that utilities must adapt their business models to incorporate  distributed generation. Utilities are “in a flat to shrinking business, and as solar and batteries get cheaper and cheaper, they’re going to see their customer base of the best customers” install solar…“So I’m telling utility companies, this is coming down the line, so let’s think of a new business model where you can profit from this.” Former Energy Secretary Steven Chu Source:  McMahon, Jeff. “Steven Chu Solves Utility Companies’ Death Spiral.” Forbes, March 21, 2014. “The power company of the future will own both centralized generation and distributed  generation (i.e., residential solar) assets.” Nat Kreamer, Clean Power Finance “We are positioning ourselves to succeed during a prolonged period through which the  traditional centralized grid‐based power system co‐exists with the fast‐emerging high‐ growth distributed generation sector – much like fixed‐line telephony has co‐existed  with the wireless world for a couple of decades.” David Crane, NRG 
  18. 18. 17©2014 Navigant Consulting, Inc. DG Business Models Utilities are increasingly adding solar installation capabilities or  related solar investments to their portfolios. May 2013 – NextEra Energy Resources  acquired Smart Energy Capital (a commercial  solar developer). April 2013 – Clean Power Finance completed a $37M  equity round including Edison International, Duke  Energy, Dominion, and Clear Sky (of NextEra Energy). August 2013 – Edison International acquired  SoCore (a Chicago‐based commercial solar  developer). September 2013 – Direct Energy created a dedicated  investment fund with SolarCity for $124M in solar  projects for commercial and industrial customers. January 2014 ‐ Integrys Energy Services  and Clean  Power Finance partnered to create a residential solar  finance fund through the CPF Market. March 2014 – E.ON contributed to a Sungevity $70M  equity round; they are also reportedly working  together to expand Sungevity’s market reach. March 2014 – NRG Energy purchased Roof  Diagnostics Solar (the 8th largest solar installer  in the U.S.). November 2011 – NRG acquired Solar Power  Partners (a San Francisco‐based commercial  developer). February 2010 – TXU Energy partnered with  SolarCity to offer a solar program to customers. Acquisitions Investments Source: Company press releases and news coverage.
  19. 19. 18©2014 Navigant Consulting, Inc. DG Business Models The Solar Finance Company (SFC) market is expanding with increased  investment from the utility sector. » Investment announcements for 8 solar PV financing companies − Clean Power Finance, One Roof, Solar Universe, SolarCity, Sungevity, SunPower, Sunrun,  and Vivint.  $‐  $100  $200  $300  $400  $500 2010 2011 2012 2013 $ Millions Equity Investments Average Individual Equity Funding Largest Individual Equity Funding Total Equity Funding  $‐  $500  $1,000  $1,500  $2,000  $2,500  $3,000 2010 2011 2012 2013 $ Millions Project Funding Investments Average Individual Project Funding Largest Individual Project Funding Total Project Funding Note: Data through November 20, 2013, sourced from company press releases and news media. Equity figures include  SolarCity initial public offering (IPO) and subsequent issuances of stock and convertible debt, but exclude September 2012  Blackstone acquisition of Vivint, valued at $2 billion.  Source: Navigant’s California Solar Initiative Market Transformation Study (Task 2): Final Report, 2014 Equity Investments Project Funding Investments
  20. 20. 19©2014 Navigant Consulting, Inc. DG Business Models From a regulatory perspective, a utility pilot project design in Maryland  sets an example for the transition to electric services of the future.  » Utility 2.0: A pilot project that would test the application of new technologies, business  models and strategies with the key objective to foster changes in utility business  practices, reward structures, and the regulatory scheme for Maryland’s utilities. » Categories targeting improvement: » Potential pilot project tasks for participating utilities: Source: Utility 2.0: Piloting the Future for Maryland’s Electric Utilities and their Customers. Energy Future  Coalition, March 15, 2013. Reliability and resiliency Residential customer optionality Large customer optionality Utility system upgrades Utility business model changes Regulatory model adjustments Align utility compensation with  needs and values expressed by  customers, using five parameters. Support utility investment in an  interoperable, integrated suite  of smart‐grid technologies. Allow utilities to finance  customer Smart Grid and  efficiency investments. Optimize automated system  sectionalizing and reclosing,  and facilitate microgrids. Facilitate electric vehicle  deployment and utility‐ managed vehicle battery  charging. − Cost − Reliability − Customer service − Adoption of smart grid  technologies and services − Support for alternate energy
  21. 21. 20©2014 Navigant Consulting, Inc. DG Business Models A new model in the U.K. sets an example for a performance‐based  framework that rewards utilities for performance. Revenue = Incentives + Innovation + Outputs (RIIO) » RIIO is a performance‐based framework for setting price controls for energy network  companies in the U.K., regulated by Ofgem. − RIIO‐ED1 is the first electricity distribution price control, targeting the 14 Distribution  Network Operators from 2015 to 2023. » Model Objectives: − Encourage energy network companies to fully participate in the delivery of sustainable energy.  − Deliver network service with long‐term  value for money for existing and future  consumers. − Ensure the necessary investment in  Britain’s energy network at a fair price  to customers. − Promote long‐term planning, reward  innovation, and punish inefficiency in  network companies.  Source: RIIO Handbook, 2010 » RIIO retains a price cap regime, and  implements a system of rewards  and penalties tied to performance  on desired outcomes (outputs). Illustrative Overview of a Balanced Scorecard
  22. 22. 21©2014 Navigant Consulting, Inc. 21©2014 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. Agenda The Situation Solar Industry Trends DG Business Models California Solar Initiative Case Study
  23. 23. 22©2014 Navigant Consulting, Inc. California Solar Initiative Case Study With nearly 1,200 MW installed in the IOU service territories as of the  end of 2012, California leads the nation for installed capacity of  distributed solar PV systems. CCSE is the Program Administrator for the CSI Program in SDG&E service territory
  24. 24. 23©2014 Navigant Consulting, Inc. California Solar Initiative Case Study The Third Party Ownership (TPO) market has grown rapidly due to  a favorable policy environment, and will likely continue to grow. Source: Navigant team analysis of PowerClerk Data, February 2013 CSI Installed Capacity by Year, Sector, and Ownership Type (Incremental)
  25. 25. 24©2014 Navigant Consulting, Inc. California Solar Initiative Case Study TPO has particularly gained traction within the residential market. Source: Navigant team analysis of PowerClerk Data, February 2013 CSI Residential Installed Capacity by Ownership Type (Incremental)
  26. 26. 25©2014 Navigant Consulting, Inc. California Solar Initiative Case Study The Solar Finance Company (SFC) market is expanding under diverse  business models.  Source: Navigant’s California Solar Initiative Market Transformation Study (Task 2): Final Report, 2014 Solar PV Finance Companies: Incremental Capacity Additions for TPO Residential Projects
  27. 27. 26©2014 Navigant Consulting, Inc. California Solar Initiative Case Study Market Actor Integration Across the California Residential Solar PV  Supply Chain Source: Navigant’s California Solar Initiative Market Transformation Study (Task 2): Final Report, 2014
  28. 28. 27©2014 Navigant Consulting, Inc. California Solar Initiative Case Study Effective Lease or PPA rate for TPO Systems compare favorably to  offset rates. Source: Navigant analysis, based on a sample of PG&E TPO contracts from CSI PowerClerk data (n=52) 
  29. 29. 28©2014 Navigant Consulting, Inc. California Solar Initiative Case Study Most residential customers benefit from their TPO system. Source: Navigant analysis, based on a sample of  PG&E TPO contracts from CSI PowerClerk data (n=97) 
  30. 30. Key C O N T A C T S ©2010 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. Key C O N T A C T S ©2010 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. Key C O N T A C T S ©2010 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. Key C O N T A C T S 29©2014 Navigant Consulting, Inc. Karin Corfee | Managing Director 415.356.7178 direct