BSI Completes Comparison of Renewable Energy Economics

Boston Strategies International (BSI) recently completed a study of renewable energy costs and value chains for a branch of the Mexican government’s Instituto Nacional de Ecología y Cambio Climático (National Institute of Ecology and Climate Change). BSI compared the costs and value added of environmentally sustainable technologies for the power generation sector (large scale solar, wind and geothermal, vs combined cycle natural gas technology) to support decision-making in environmental mitigation. The study analyzed the principal actors, elements and processes, as well as costs, value added, and barriers to entry attributable to each segment of the value chain, as inputs to energy policy formulation.

 

The Instituto Nacional de Ecología y Cambio Climático (INECC) produces valuable scientific and technical information on environmental issues and the training of human resources, in order to inform society, support decision making, encourage the protection of the environment, promote the sustainable use of natural resources, and support the Mexican Secretary of the Environment and Natural Resources in reading its goals. It aims to be a leader agency in applied environmental research, that develops and promotes scientific cooperation projects that contribute effectively to resolve the major environmental problems of Mexico, and support the conservation and restoration of the environment in the whole country.

Boston Strategies International is a consultancy that compresses lead time and reduces cost in gas, oil, and renewable power supply chains. Clients typically hire us to cope with legislative reform, technologically challenging projects, cost over-runs, strategic diversification, and major capital programs. We build ongoing project management competency and leadership by transferring our knowledge, analytical tools, and data to in-house staff during every engagement.

Contact us for more information on how we can help your organization.

What is Your Plan For the Upcoming Carbon Tax?

Multinational carbon taxation needs to be executed carefully in order to manage the market value impact in the conventional energy sector.

Of the 190 countries that have ratified the Paris Accord will need to tax carbon in order to meet their goal of limiting global average temperature increase to below 2°C above pre-industrial levels and 1.5°C from current levels. Forty-two countries have a carbon taxation or emissions trading plan in place, and fifteen of the major countries that currently tax carbon (Australia, Chile, Costa Rica, Denmark, Finland, France, Iceland, Ireland, Japan, Mexico, Norway, South Africa, Sweden, Switzerland, and the UK) are doing so at a rate equivalent to 18% per barrel of oil. The number of countries and their level of carbon tax will increase as these countries are tasked with setting more ambitious targets every five years, developing national climate action plans, and establishing accountabilities for execution.

Carbon taxation will pose an existential threat to some conventional oil and gas companies, and significantly impact power producers. Even if there is a long ramp-up period, few oil & gas companies will be able to handle this level of tax without profoundly restructuring their operations and business portfolio.

Economically, the optimal solution would be to apply the tax quickly enough to incentivize diversification into renewables, but slowly enough to allow fossil fuel producers to adapt. The phase-in period, and the structuring of the tax, will need to be tailored to each region, country, and fuel.

Boston Strategies International’s unique knowledge of oil, gas and power costs at every step in the supply chain can help you evaluate alternative scenarios of operating and capital cost adaptation, as well as alternative structures and time-phasing of potential taxes and mandates that would generate the greatest benefit for your organization. We know how much tax can be passed through, how much cost can be shed, and how much synergy can be realized between various types of conventional and renewable power. 

BSI is your best partner for adaptation advisory. We consult to the largest energy companies, lenders, law firms, government agencies and nongovernmental organizations. We have served national oil & gas companies including Saudi Aramco, PdVSA, and Gazprom; international oil & gas companies such as BP, Total, and American Energy; and power producers such as Vattenfall and Iberdrola. Our analytic tools have helped industry majors reduce cost by up to 30%. In addition, our Principals have written hallmark policy and methodological handbooks, including Optimal Supply Chain Management in Oil, Gas, and Power Generation (PennWell 2012); Guide to Supply Chain Management (The Economist 2009); and The High Cost of Low Prices (Business Expert Press, 2017), and we have been leaders in education at Boston University’s graduate school of business and training through numerous professional associations.

BSI Studies Energy Storage Applications in Electricity Markets

Boston Strategies International (BSI) recently conducted a study to assess the potential uses of batteries for energy storage in Mexico. The Mexican Energy Reform has brought up the creation of an electricity market in Mexico, where private generators and large industrial consumers can buy and sell power.

BSI provided an overview of the energy marketplace in Mexico and analyzed the technical, regulatory and economic aspects affecting energy storage systems in Mexico. The study compared principal actors, elements and processes, as well as costs, value added, and barriers to entry attributable to each segment of the value chain, and provided product development, marketing, and commercialization recommendations for energy storage systems.

The study was conducted on behalf of Nippon Electric Company, Limited (NEC Corporation), Japan’s first joint venture with foreign capital, which was established in 1983 by Kunihiko Iwadare in association with the U.S. firm Western Electric Company (presently Alcatel-Lucent). The NEC Group is currently focusing on leveraging its strengths in information and communications technology (ICT) to offer Solutions for Society capable of increasing the sophistication of infrastructure systems and services indispensable to society. Through these business activities, NEC remains committed to collaborating closely with each and every one of its stakeholders to create an “information society friendly to humans and the earth” based on value that helps ensure safety, security, efficiency, and equality, enabling people to live more abundant lives.

Boston Strategies International is a consultancy that compresses the lead time and reduces cost in gas, oil, and renewable power supply chains by up to 30% through technology development, value chain engineering, strategic sourcing, and supply contract negotiation. BSI leverages its proprietary economic models and frameworks to advise oil, gas & power operators, regulators and policy-makers, lenders, equipment providers and service providers in the formulation of national and energy tax, subsidy, and investment promotion policies. Our broad experience across all aspects of industrial value chains, combined with our strength in economic analysis, provides robust and trustworthy roadmaps for growth.

Please contact us for more information and services.

BSI President Speaks on the Role of Renewables in Canada’s Energy Future

Boston Strategies International’s President Mr. David Jacoby spoke on the Comparative Economics of Combined Cycle, Solar, Wind, Hydro, and Geothermal Power at the University of Calgary’s Haskayne School of Business (HSB) in Calgary, Alberta, Canada on October 19, 2017.

Renewable energy transformation is fashionable everywhere, but in most geographies, combined cycle power plants fueled by coal and natural gas will continue to dominate for a long time. Solar, wind, hydropower, and geothermal fired plants will compete for their shares of power generation, as coal and even oil recede and biomass fails to reach economic scale.

In the image (Left to Right): Dr. Jaydeep Balakrishnan (Professor, Operations and Supply Chain Management), Mr. David Jacoby (President, Boston Strategies International), and Ms. Bea Ewanchuk, Associate Director-HSB Development

The EU has issued clean energy mandates, Asia has established leadership in low-cost supply of equipment, and Latin America is following the guidance of the Paris accord. Nearly everybody agrees that green is a desirable direction, and solar and onshore wind have lower capital costs than conventional power generation plants, but gas-fired combined cycle plants can in many cases deliver a lower Levelized Cost of Electricity and generate more jobs than solar and wind. The battle for lowest cost production has yet to be played out. Fossil fueled power costs can be driven lower still through smart midstream technology such as UAVs, Radar/LIDAR, Infrared Imaging, and Smart Pigging. The political and economic battle for the best energy sources will ultimately also need to consider economic impact and energy independence.

 

This keynote speech provided a perspective as to the comparative economics of combined cycle, solar, wind, hydro, and geothermal power generation alternatives, and put the comparison into Canadian perspective, using actual project examples and case studies.

Click on the image for an executive summary of the INECC analysis.

 

To access full 43 page slide deck Combined Cycle, Solar, Wind, Hydro, and Geothermal Power featuring 25 graphs and tables, 9 descriptive figures and diagrams, and full text analysis, click on the link below.

BSI Shares Market Outlook for Solar PV

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Boston Strategies International’s President Mr. David Jacoby Shared BSI’s Analysis of the Solar PV Market at the SNEC Conference in Shanghai, China on April 17-21, 2017.

solar pv images

The SNEC Scientific Conference provided an excellent platform for the world’s PV experts and scientists to showcase and share the latest developments in solar energy technologies.

The conference programme encompassed a wide scope of PV technologies, ranging from silicon feedstock, PV materials, cells, modules, systems and quality assurance to smart grid technologies. The world’s top PV scientists along with CTOs from leading PV companies have been invited to join the International Scientific Committee as well as presenting on the cutting-edge technologies of solar energy at the conference.

Boston Strategies International’s President Mr. David Jacoby’s presentation on “Market Outlook for Solar PV” provided detailed insights about the long-term demand growth outlook for Solar PV and the world’s solar markets.

In his presentation Mr. Jacoby emphasized that cumulative global market for solar PV expected to triple by 2020 to almost 700 gigawatts, with annual demand eclipsing 100 gigawatts in 2019. According to the analysis, the bulk of the growth will occur in a small number of markets. While 8 countries might each add over 10 GW, 4 markets – China, US, Indian and Japan – are supposed to add over 20 GW, and China could exceed the 100 GW level in the High Scenario.

global market for solar PV

David at SNEC ShanghaiDavid also emphasised that Solar power as the lowest-cost renewable energy can provide enough clean power generation in time to meet the ambitious Paris Climate Summit targets. Utility-scale systems and rooftop systems will each have roughly half of the global market.

Rooftop systems are currently more expensive but the value of electricity delivered on consumption sites or nearby is greater.

However, as PV expansion is driven more and more by self consumption – the use of PV electricity directly at the same site where it is generated – grids may carry smaller amounts of traded electricity, raising concerns over how to recover the fixed costs of grids.

 

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SNEC solar PV conference

Mr. Jacoby explained how the global market for solar PV will no longer be Europe-centric and large solar markets in Asia are booming. China and Japan are leading the growth curve for the solar PV market and energy storage solutions will unleash latent growth in Latin America, Middle East and India.

He also discussed about the increasing rates of penetration for rooftop solar. According to BSI’s research, since the demand growth is coming mainly from emerging markets where utility-scale PV is currently the preferred application, this solar segment will continue its lead over the next 5 years.

He summed up by forecasting that energy storage solutions and emerging market potential promise long-term profitability for the industry.

To access David’s full SNEC 2017 presentation “Market Outlook for Solar PV” with detailed charts and analysis kindly buy it using this link.

 

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Distributed Generation’s Role in Colombia’s Future

Drought, electricity rationing, and increasing reliance on dirty thermal power are adding to the woes of the Colombian power sector.

El Niño has caused drought and high temperatures across northern and western Colombia since early 2015. Much more potent than usual, the current version is called ‘Super El Niño’ and is likely to last up to 5 years. In 2015, 9 of Colombia’s 32 departments (provinces) were in a state of emergency due to extreme drought in 2015. In recent months, El Niño dried up parts of the Magdalena River, the country’s main waterway. Electric power generation capacity, more than 70% of which comes from hydropower, has suffered. Power generating companies like ISAGEN, EMGESA, AES, and EPM have been squeezed, with little revenue to offset large fixed costs. Climate change scientists suggest that the intensity and frequency of this phenomenon will increase.

Unplanned outages of Colombian power generation plants like EPM-operated Guatape and Celsia-operated TermoFlores, sapped 10% of the country’s power supply in March alone. Additionally, about 15% of electricity is lost in transmission, leakages, and theft. Given the impact of El Niño and anticipating further reduction in hydropower generation, the government is likely to extend the electricity rationing that happened in March 2016.Colombia experiences 1.2 power outages in a typical month, and the value lost due to these power outages is estimated to be around 1.8% of sales, according to a World Bank survey. In an already constrained power system, electricity demand is growing at 13% annually, making the problem critical to the country’s future.

Distributed Generation’s Role in Colombia’s Future

 

The government plans to add 7 GW to the national grid network by 2027. While there has been a focus on reducing reliance on hydropower since the 1990s when its contribution was over 80%, more than 20% of the upcoming capacity will come from thermal generation, which is carbon intensive.

Distributed power generation – decentralized small scale technology producing anywhere from a few kilowatts to up to 50 MW close to the end user– can help mitigate the looming power crisis. Multiple units can even cater to a “micro-grid” that is either independent of the grid or connected to it through smart net meters. Previously, distributed generators relied on synchronous generators, induction generators, and micro-turbines (which were used as power back-ups), but these are gradually being replaced by solar PV, wind, biogas, and geothermal systems. Distributed generation based on renewable technologies reduces the cost of generation, cuts transmission and distribution losses, and can make self-sufficient 5-10% of the population, which is not connected with the national grid system and receives only about 5-10 hours of power daily.

The potential for distributed power generation is considerable. Small hydropower in Colombia can potentially produce up to 150,000 GWh of power per year from multiple generation sites which are less than 20 MW each. The country has significant solar power resources, with daily average radiation of up to 6kWh/m2. According to a study by the World Bank’s Energy Sector Management Assistance Program (ESMAP), approximately 190 million m3/yr of biogas generated from coffee plantations can produce 995,000 MWh of power. And, geothermal potential has been estimated at 2,210 MW (vs. current installed capacity of only 14.4 MW).

Colombia needs to finalize and articulate its electric market legislation for the country to realize the potential of distributed generation. It was among the last of the Latin American countries to have a renewable energy law. The law passed in 2014 after two years of deliberations. Limited policy development has failed to pass a provision to allow power purchase agreements with utilities, especially the largest ones such as EPM, ISAGEN, and EMGESA. Hence there is a relatively small number of small private sector players and investors.

However, there is reason to believe that even small scale development of renewable energy is on government’s radar, given that the government woke up to clean energy development to begin with. According to the plan published by the energy and mining planning agency (Unidad de Planeación Minero Energética, or UPME), 54 MW and 50 MW of solar and geo-thermal power capacity will be installed by 2020. Tax incentives give reasons to small and medium sized enterprises to invest in small scale distributed power generation: no value added tax (16%) on capital equipment, import duty exemptions for renewable energy projects, accelerated depreciation on capital equipment (50% in the first five years).

Even though the government woke up late in addressing the regulatory omissions, it needs to take it from here in an accelerated fashion. The future of distributed power generation lies mainly with small and medium players while the large players will be struggling with optimizing the performance of grid-connected hydro and thermal projects and their transmission. Future policies must focus of power purchase agreements and feed-in-tariffs so that the distributed generation sector attracts progressively more investment capital from the private sector for faster growth.

A Single Cyber Attack can Cause up to over $60b Loss for the US Economy

Attacks on control systems for critical infrastructure have risen by more than 250% over the past four years in the US, as web linked communication systems have proliferated and nation-states seeking geo-political and economic supremacy added to the incidence of amateur hacking. Of all the critical infrastructures targeted, power grids have become the ripest target because most or all sectors of economy depend on them: cyber attacks on power grids can be exponentially effective by crippling vast swatches of the industrial and commercial sectors. Furthermore, the absence of power paralyzes many national security systems, making physical terrorist attacks much more effective and more likely.

The Crippling Costs and Risks of Cyber Attack in Power Generation, Transmission, and Distribution

The US power grid has recently suffered three major cyber attacks. In 2012 and 2013, Russian hackers were able to successfully send and receive encrypted commands to U.S. power generators. In 2015, unauthorized cyber hackers injected malicious software into the grid operations that allowed spying on U.S. energy companies. And also, in 2015, US law enforcement officials reported a series of cyber attacks that were attempted by ISIS targeting the U.S. power grid. 

The costs of these cyber attacks are massive. A cyber attack targeted at 50-100 generators that supply power to 15 Northeastern United States, including Washington D.C., would leave almost 93m people without electricity and cause $62 billion to $228 billion in economic losses in the first year. Damage to turbine generating power plants and metering systems would cost $1 billion to $2 billion. Loss of electricity revenue would cost the utilities $1 billion to $4 billion. And loss of revenue to electricity consuming customers of the utilities would cost $60 billion to $222 billion. If recovery takes longer than a year, these costs would multiply. This damage assessment is according to a study by the Centre for Risk Studies at the University of Cambridge.

The U.S. power system is more vulnerable than most. It was never designed for network security. Moreover, since U.S. power plants are now connected to the internet as a part of setting up advanced grid and metering infrastructure, a wide range of new attack points are now available to attackers. Finally, the US electrical grid is also a decentralized network owned by numerous local operators, and security standards vary from utility to utility. More permanent damages, such as those inflicted by the Stuxnet virus in Iran’s nuclear program, cannot be ignored.

However, attacks are taking place in other countries, too. On December 23, 2015, three Ukrainian electricity distribution companies suffered power outages due to a massive cyber attack. The attackers used BlackEnergy and Killdesk malware to disable both control and non-control system computers. The attackers simultaneously flooded the utility call centers with automated telephone calls, impacting the utilities’ ability to receive outage reports from customers and decelerating the response effort. Altogether 30 substations were disconnected for more than three hours, causing approximately 225,000 customers to lose power across various areas. BlackEnergy malware had first appeared in the Russian underground for use in distributed denial-of-service attacks. An evolved version of it, BlackEnergy3, is a distinctive tool and has only been used for cyber espionage.

Areas of Particular Vulnerability

All three segments of the power sector supply chain are vulnerable to cyber attacks:

  1. Generation: SCADA systems in power plants are vulnerable through hardcoded passwords, weak authentication solutions, firmware vulnerabilities and ladder logic. Viruses such as ‘Stuxnet’ can be used to exploit these vulnerabilities to execute cyber attack on the computerized control systems in a well-targeted manner. Some of these sophisticated malwares can cover hide its presence until well after the damage is done.
  2. Transmission: Transmission systems have been the most targeted sub-system in the power system value chain..The relays on the transmission sub-system are time sensitive, and delays of even a few milli-seconds can negatively impact the performance of power transmission. The common cyber attacks in this area include Distributed Denial of Service (D-DOS), which can cause the network and communication channels send delayed responses and cause the malfunction of the Smart Grids.
  3. Distribution: Smart meters, which are increasingly common in network infrastructure, connect to the central control or Network Operating Centre (NOC) room of the utility to transmit and receive data. Poor security implementations in the smart meters could make it possible for an unauthorized third-party to intrude the NOC. The consequence can be disastrous if the meter has the “switch off” capability. Given the scale of utilities, which for large utilities could run into millions of smart meters, security vulnerabilities in this area can lead to widespread damage.

The four most vulnerable types of attack to anticipate are: 1) Intrusion in the intelligent electronic devices through false data injection attack, making SCADA send wrong information to the control systems. This can take place at the site of power generation; 2) Attacking power system control centers (PSCC), typically called DoS (denial of service) attack which causes de-synchronization and delay in the PSCC’s ability to take optimization decisions. Power generation and transmission are most prone to these DoS type of attacks; 3) Crippling electronic AC transmission system which controls power transmission capability of the power network. Both transmission and distribution networks are exposed this type of risk. ; and 4) Use of malwares to steal power network data which could be at the generation, transmission, or distribution points, where data is continuously being stored with respectto peak loads, voltage variations etc.

Supply Chain and Procurement: The Weakest Link

The infrastructure supply chain is particularly vulnerable. Malicious components enter into the supply chain nearly two years before an attack occurs, according to the Cambridge study. Even a slight oversight in procurement could bring the whole system down. Cyber attacks at the supply chain can occur when hardware and software have been counterfeited, tainted, or compromised, resulting in failure of components as designed. Components fitted with rogue malware entering into the supply chain and eventually in the utility, compromising the security mechanisms.

For example, a malicious code could be inserted into software that compromises security or kill-switches/backdoors, enabling attackers to steal data or disable the system. Maintenance and repair activities-software upgrades or equipment services, whether done onsite or remotely, could also allow hackers to corrupt or compromise systems. These compromised components could enter the supply chain from the secondary suppliers or contractors, which are less visible to the utility operators.

Major utility companies are now becoming aware of the risks that cyber attacks pose, and are investing capital to get their systems more secure to attack. Utilities are most vulnerable to cyber threat from a third tier supplier, which has no direct connection to the utility and supplies the equipment through a third party vendor or a distribution channel.  The second tier suppliers also carry the same risk but are more visible and vetted.

What Power Companies Need to Do

Taking into account the above scenarios, the second and third tier suppliers of components and services have to be examined and assessed more strictly.

There are already a number of mandatory standards and requirements for supply chain integrity led by both vendor and government organizations such as NIST, ISO, Common Criteria, and OTTF. While these standards need to become more robust given the growing sophistication of cyber attacks, the least companies can do is to seriously adhere to the existing standards and guidelines.To begin with, the power companies must disclose all features and disable what is not required, limit user capabilities, and block all unauthorized accesses.

As a part of the supply chain cyber security risk mitigation plan of action, the next most important step is to manage procurement risk. This includes joint development of procurement process with representatives from sourcing, legal, technical, and functional subject matter experts.The vendor pre-qualification criteria and all RFPs must clearly specify compliance to vital security standards.

Given the high cyber security risk emanating from second and third tier suppliers, the power companies must make good use of third party certification and accreditation for the vendors, and must also initiate audits as well as scheduled and unannounced inspections for pre-qualified vendors.

Alternative fuel vehicles:Have we passed the tipping point?

b2ap3_thumbnail_Terrafugia-copyTerrafugia’s production of the first U.S. Federal approved flying car, the Transition, suggests that we have taken a huge step closer to accomplishing a Sci-Fi like story. However, the recent global demonstrations on environment served to remind us that the key question we need to be answering is what fuels will various forms of transportation run on in the future?

Research within this arena has revolved on a number of different alternatives. Hydrogen in theory is an ideal fuel since it provides more energy per kilogram than petrol and only produces water as an exhaust.  When NASA scientists really needed a fuel that would go the distance, they used hydrogen to generate power on the Apollo missions. Unfortunately hydrogen does not seem to be the most favorable alternative – for the coming decade at least – because it is very expensive to produce and requires significant amount of space to store. Hydrogen additionally requires significant changes in the current operating infrastructure, such as determining the optimum process for producing hydrogen in the first place and establishing fueling station networks. Another alternative has been electric fuel through batteries, which can be charged using the current grid and produce no exhaust. However, batteries have a limited travel range and long charge times. Solar power is attractive in terms of cleanliness, but has so far required impractically large components to power vehicles.

The closest realistic alternative to fossil fuels in powering various forms of transportation has been bio-fuels. Despite the huge environmental debate related to this energy source, bio-fuels offer a number of advantages such as: no new delivery infrastructure is needed, it is renewable, and it can be considered carbon neutral. Combining this energy source with electricity to produce hybrid vehicles is also becoming a popular choice for auto producers. In fact, BSI’s 2007 report titled “Energy Prices Re-Shaping the Supply Chain: Charting a New Course?”acknowledged the possibility “that combination hybrid-alternative fuel vehicles will become mainstream within ten years,” but given the low baseline (0.2% of all vehicles in 2004), that prospect could take longer.

The alternative energy frontier has advanced more rapidly than expected. Between 2004 and 2014 the percent of new vehicles powered by alternative fuels in the US rose from 8.9% to 10.9%. With increasing attention being given to environmental stewardship and global warming, we can expect continued, even stronger, increases. Boston Strategies International is helping equipment manufacturers configure their partnerships and value chains for that future.

Who Can You Trust for Reliable Data on the Profitability of Renewable Energy Projects?

b2ap3_thumbnail_shutterstock_3721864-640x427The World Future Energy Summit in Abu Dhabi this week will provide interesting overview and policy perspectives on the need for solar, wind, geothermal, and other renewables. We all need to better understand the economics of some of these technologies in order to pave the way for them to gain critical mass and a sustainable investment base. If you know of conferences that focus on the cost and revenue economics of renewables, please reply to this post with a Comment.

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