Trends shaping the grid of the future
A Deloitte study finds 'alternative energy’s shift to the mainstream is largely complete and likely irreversible'
By Herman K. Trabish | February 11, 2016
If there were any lingering doubts about renewable energy's emergence as a mainstream resource on the grid, recent numbers for renewables growth in the U.S. should help dispel that notion.
Nearly three-quarters of major energy deals made in 2015 were for renewables assets, and nearly three-quarters of the new generation capacity built in 2016 will be renewables, according to Marlene Motyka, the Deloitte U.S. Alternative Energy Team Leader. “Renewables are becoming mainstream and a big part of the U.S. energy portfolio.”
A newly released study, "Trends to Watch in Alternative Energy," from the Deloitte Center for Energy Solutions outlines 8 key trends driving renewables growth in the U.S. power mix. “Alternative energy’s shift to the mainstream is largely complete and likely irreversible,” the report said.
U.S. clean energy investment hit a record $329 billion in 2015, according to Bloomberg New Energy Finance (BNEF). And the long term extensions of federal tax credits for wind and solar just approved by Congress will add an estimated 37 GW of wind and solar capacity to previous expectations over the next five years, 56% more than without the incentives, representing $73 billion in additional investment.
“Utilities need to look at these trends as opportunities and not as disruptions,” Motyka said. “They can grow the utility’s platform and increase its revenue.”
The momentum behind renewables is accelerating. Growth is now regularly bigger than expected and “new sources of support are broad-based,” Deloitte reports.
This, too, was verified in BNEF numbers. Investment in U.S. wind bounced back from a 2014 drop-off to hit $11.6 billion in 2015 and investment in U.S. solar was $30.2 billion, the second biggest buy-in ever.
The Deloitte paper is directed at investors but utilities and system operators still dubious of the potential of renewables might want to take note, too, Motyka said.
Deloitte drew upon on these conversations to identify 8 trends driving renewables growth and shaping the grid of the future.
1. Renewables acquisitionDeloitte’s list of trends came from two sources. The first was ongoing conversations the consultant continues to have with clients that include private equity firms, utilities, independent power producers (IPPs), small developers, and financial institutions.
The second source was feedback Deloitte got at its 2015 Alternative Energy Seminar, Motyka added. “What was brought to our attention in those two ways helped us formulate these trends.”
The first trend, renewables acquisition, is clear: 2015’s 163 deals was up 42% over 2014 and represented a 17% capacity increase to 19.7 GW.
YieldCos boosted acquisition activity by independent power producers (IPP) in the first part of the year. As concerns about the tax credits grew and increased the volatility of stock values in Q3 and Q4, YieldCo values dimininished. But that drove an asset sell-off, with financial institutions and utilities acquiring 7.6 GW of solar and wind capacity.
With the extended tax credits now locked in, this year’s activity should be bigger, Deloitte reported. “Renewables are expected to account for 73% of the new generation that will be added in 2016.”
Utilities, private equity, and infrastructure funds continue to be the players, but the deal-making is no longer centered around natural gas, oil and coal.
“When you look at the asset acquisitions and corporate deals and exclude utility mergers, renewables accounted for 74%,” Motyka said. “Investors now see renewable energy technology as proven and the long term fixed price power purchase agreements they offer reduces risk around fuel volatility.”
With the U.S. Environmental Protection Agency’s Clean Power Plan and other policy drivers now firmly in place, “utilities will likely continue to demonstrate a strong appetite for solar and wind assets…[that will] propel merger and acquisition activity through 2017,” Deloitte reported.
2. Community solarThere are three reasons for community solar's appeal, the second trend Deloitte identified. First, it makes consumer ownership of solar available to those without suitable roofs for rooftop solar. Second, it allows utilities a way to offer solar to their customers. Third, utilities, financing institutions, and customers can all benefit from economies of scale.
“Each installation typically generates 1 to 2 MW, making them large enough to tap project financing and other efficient sources of capital,” Deloitte reports. "These funding sources can reduce the cost by as much as 50% compared with individual rooftop solar installations.”
Once again, the numbers speak loudly. “In 2010, only two shared solar projects existed,” the paper reports. “By 2015, there were more than 50 projects across 19 states, with a combined capacity of more than 170 MW.”
That could grow to as much as 11 GW by 2020, Deloitte reports from a National Renewable Energy Laboratory study. It depends on how many states work through the policy complexities and add to the 14 supportive regulatory standards now in place.
Some utilities are already seeing a new market opportunity in community solar and some solar developers are already finding a niche in it and both are pushing for better policy support, Motyka said. A new Deloitte profile already in the works will detail best practices in states like Massachusetts and Minnesota where community solar has taken hold, she added.
3. Integration of renewablesA big change in the attitudes of utilities and grid operators is revealed in Deloitte's third trend, grid integration of renewables: System operators are increasingly confident of mechanisms to manage renewables’ variability.
“Five years ago, they were reluctant to allow renewables on the grid to exceed 10% of overall capacity. Now, the level is 20% or more, and the National Renewable Energy Laboratory predicts it could exceed 50% by using more supply and demand flexibility options,” Deloitte reported.
Motyka said grid engineers are starting to recognize the system is flexible enough to handle higher penetrations of renewables.
“As penetrations grow, engineers are realizing the system can be pushed,” Motyka said. “But the pushing has not created any major issues and that is something investors should notice.”
Utilities and system operators have more accurate forecasting tools, planning processes, and grid automation that comes with new technologies like smart inverters, sensors, advanced analytics, and electricity storage. This allows new control over the voltage and frequency fluctuations that coincide with relying on variable renewables.
Hawaii and Japan are two places where grid flexibility is being tested. Hawaii lawmakers mandated 100% renewables for the island by 2045 and an assessment of Japan’s system found 100% renewables feasible there by 2030 with improved grid resiliency, Deloitte reported.
Both island grids have significantly higher electricity costs than in the overall U.S. system. That makes a big build-out of variability-smoothing storage more economically viable, the paper added.
“To get to 50% or higher, there may have to be changes to the overall grid and some of the technology behind it,” Motyka said. “Getting the U.S. to 100% renewables in the near term would be a technology challenge.”
An economic challenge could arise because of the huge U.S. fleet of baseload power plants varying in age, she pointed out. While they continue to operate cost-effectively, the sunk costs to shutter them would be prohibitive. “But, in the longer term we could have a much higher percentage of renewables," Motyka added. "It is an evolution.”
4. Leveraging renewables for grid resiliencyThe fourth trend, a new role for renewables in grid resiliency, is already adding to utility interest. While grid modernization is the path to reduced outages, renewables can also "speed recovery times after an outage occurs,” Deloitte reports.
Extreme weather propelled policymakers to consider more about resilience. Microgrids incorporating distributed generation and energy storage don’t necessarily go down with the system and consequently can “provide electricity during outages as well as valuable grid services year-round,” Deloitte explained.
Microgrids are already serving small interconnected systems like college campuses, hospitals, and downtown areas and “can separate from the main grid if a disruption occurs,” the paper reported. “This independence improves both grid resilience and local ability to deal with an emergency.”
ABB and other companies have added micro-grids to their business platforms and it is “an emerging investment opportunity,” Motyka said.
The bigger question is whether the U.S. evolves away from centralized generation to distributed infrastructure, she added. “One could imagine that homeowners could become their own little systems, with rooftop solar and net zero efficient homes and backup natural gas generation. But a lot would have to happen to support it, like more cost effective battery storage.”
5. The Clean Power PlanUnder the Clean Power Plan, the power sector must cut 32% of its carbon emissions nationwide by 2030 from 2005 levels. In getting there, “renewables will account for as much as 400 GW of generation by 2040, a projection some analysts in the industry see as conservative,” Deloitte reports, according to the Department of Energy’s Energy Information Administration (EIA).
Under the rule, plans must be submitted by September of this year and enacted by 2022. They will move the utility and energy generation industries “toward renewable energy, energy efficiency, and other low- or no-carbon emission alternatives,” Deloitte predicts.
But how big a role the CPP will play in the future remains to be seen. Earlier this week, the Supreme Court froze implementation of the plan, leaving its fate in limbo until litigation challenging the legality of the regulation is over. While states are mulling their next options, most utilities say it will be business as usual, according to EnergyWire.
The CPP and other policies are already influencing some corporations’ decisions about energy use because it has convinced them “a price on carbon is increasingly inevitable.”
6. Regulatory reformsSeveral states are leading the way with regulatory reforms expected to crucially affect utility business models. The most extensive is New York’s Reforming the Energy Vision (REV), Deloitte said.
The REV will overhaul the New York’s grid and regulatory syste in pursuit of “system-wide efficiency, reliability, resiliency, fuel diversity, affordability, carbon reduction, and increased customer choice and value…[and] promote greater use of wind and solar power and reshape the utility business model to deploy more distributed energy resources," according to the report.
State and regional cap-and-trade systems like California’s AB 32 initiatives and the Northeast’s Regional Greenhouse Gas Initiative are also driving renewables growth.
The third element in state-level policy is increasingly aggressive renewables mandates, Deloitte reporteds. In addition to Hawaii’s 100%-by -045 mandate, California increased its 33% by 2020 mandate to 50% by 2030 last year. Vermont changed its nonbinding 20% by 2017 to 75% by 2032.
And California mandated its Big Three investor-owned utilities to deploy 1.3 GW of electricity storage by 2024.
7. Corporations buying renewablesThe seventh trend, corporations buying renewables, is one of the biggest. Last year, Deloitte identified a shift in the private sector to capital-intensive efforts to meet sustainability and renewables targets. The survey found 39% of companies had solar or other distributed generation and 26% had electricity storage.
Apple, Intel, and Kohl’s have committed to 100% renewables by 2035, the paper noted, with Amazon, General Motors, and Facebook also inking major renewables offtake agreements last year. Google just committed to power all its operations with renewables through an 842 MW investment in wind and solar.
“As of November 2015, corporations had signed power purchase agreements for large-scale, off-site renewables covering 2 GW of power, up from 1.2 GW for all of 2014,” Deloitte reported.
Though the trend is toward corporate renewables goals, efforts like Rocky Mountain Institute's Business Renewables Center (BRC) are needed to streamline corporate investment, the report pointed out.
“For every successful corporate deal to source energy from large-scale off-site renewables projects, 5-10 deals fail or experience significant delays."
To facilitate such deals, the BRC-backed Buyers’ Principles have defined what 49 leading corporate signatories want in a renewable energy contract.
8. Finding and training the renewable energy workforceFinding and training people to sustain renewables growth is Deloitte’s eighth trend. Its Global Human Capital Trends 2015 Report identified the key “people-related issues that keep energy executives up at night: learning and development, organizational structure, culture, performance management, and workforce readiness.”
Working through these issues will reveal ways to support and engage the kind of personnel that meet leadership needs now and in the future, Deloitte suggests.
Looking aheadA "key pivot point" for growth will be integrating more renewables and distributed generation into the grid, Motyka said. “A lot of people are studying it from a technical perspective but we don’t know yet if it is a deal breaker.”
The thing utility leaders and system operators must understand, she added, is that “it is getting very hard to ignore alternative energy now. There is not a hierarchy among these trends. They form a web of interests woven together by renewables becoming a larger part of the U.S. generation strategy.”