opportunities for gas utilities in the coming distributed...

June 7, 2017

Opportunities for Gas Utilities in the Coming Distributed Energy Revolution

www.enovationpartners.com

https://www.enovationpartners.com/

ENOVATION PARTNERS - PRIVILEGED AND CONFIDENTIAL 1

On passing fads

“There’s no chance that the iPhone is going to get any significant market share. No chance.”

- Steve Ballmer, formed CEO of Microsoft – 2007

“There is no reason anyone would want a computer in their home.”

- Ken Olsen, co-founder of now defunct Digital Equipment Corp. – 1977

“Rooftop solar is a fad.”

- Commonly held view circa 2009 and prior

“Solar ‘not a fad’” produces 60,200 unique hits on Google since 2010

Are gas-fired DERs the next fad that becomes reality?


• Utility electric sales are shrinking, due to energy efficiency and increasing DER penetration

• Economics in the gas and electric utility industries are trending toward possibly significant distributed energy resource (DER) adoption by end users

• Rooftop solar gets all the press, but distributed natural gas generation is becoming increasingly attractive

• Natural gas utilities are positioned very well in the fast evolving DER environment

What we want to discuss today


Since 2007, U.S. gas demand has grown significantly, while electric demand has actually fallen

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Vehicle Utility - Electric

Annual Gas Consumption (Tcf) by Sector

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Annual Electric Consumption (TWh) by Sector

2007 – 2014 CAGR: 1.97% 2007 – 2014 CAGR: -0.11%

This trend will continue, driven by market fundamentals


Electric load growth has fallen steadily, due to declining electricity intensity - load growth now going negative in most states

Growth in US Resi. Load5y Moving Average

Growth in US C&I Load5y Moving Average

1960 1970 1980 1990 2000 2010 2020-2%

-4%

0%

4%

2%

8%

6% Electric Intensity

Real GDP

C&I Load

1960 1970 1980 1990 2000 2010 2020

10%

5%

-5%

15%

-10%

0%

Resi. Load

Households

Electric Intensity

Source: EIA, BEA, US Census Bureau, EP analysis

-4%

US Resi. Load and Households US C&I Load and Real GDP (2009 USD)

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1960 1970 1980 1990 2000 2010 2020

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120Households

Electric Intensity

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1960 1970 1980 1990 2000 2010 2020

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Electric Intensity

Real GDP

MW

h/H

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ouseholdsM

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milli

on $ Trillion U

SD

-10%


Projected vs. Actual

(percent difference)

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

AEO 1994 -0.6 -1.5 -2.8 -4.5 -4.5 -6.9 -7.3 -9.0 -7.3 -8.1 -7.6 -8.0 -9.9 -9.2 -10.5 -8.8 -4.6 -7.6

AEO 1995 0.6 -1.5 -3.8 -3.8 -6.3 -6.9 -9.2 -7.7 -8.6 -8.3 -8.4 -10.3 -9.5 -10.8 -9.0 -4.6 -7.4

AEO 1996 -1.3 -3.3 -3.4 -5.8 -6.2 -8.3 -6.5 -7.2 -6.6 -6.5 -8.1 -7.1 -8.2 -6.1 -1.2 -4.0 -2.4 0.7 2.3 2.4 4.1 5.7

AEO 1997 -0.8 -1.0 -2.9 -2.5 -3.8 -2.0 -2.5 -1.6 -1.4 -3.2 -2.0 -3.1 -1.0 3.9 0.8 2.4 5.5 6.9 6.9 8.6 10.0

AEO 1998 -1.3 -1.8 -1.7 -3.0 -0.2 -0.8 -0.2 0.0 -1.6 -0.3 -1.3 1.1 6.4 3.3 5.0 8.1 9.3 9.0 10.4 11.6

AEO 1999 -1.8 -1.5 -2.6 0.2 -0.3 -0.1 -0.4 -2.1 -0.8 -2.0 0.3 5.4 2.4 4.0 7.1 8.5 8.4 10.0 11.4

AEO 2000 -0.7 -1.8 0.2 -0.1 0.8 1.1 -0.4 0.8 -0.3 2.1 7.3 4.1 5.5 8.6 10.0 9.9 11.4 12.8

AEO 2001 -1.7 1.3 1.9 3.3 3.8 2.7 4.6 4.1 7.1 13.1 10.5 12.3 16.0 17.9 18.2 20.3 22.2

AEO 2002 1.4 1.1 3.6 4.6 3.6 5.4 4.9 7.7 13.7 11.1 13.4 17.2 19.3 19.8 22.1 24.2

AEO 2003 -1.5 1.0 2.0 0.6 2.5 2.2 5.6 11.6 9.2 11.5 15.5 17.4 17.9 20.1 22.2

AEO 2004 0.0 1.0 0.2 2.2 1.7 4.7 10.6 8.0 10.2 14.0 16.1 16.6 18.9 21.0

AEO 2005 0.0 -0.3 1.4 1.3 4.8 11.1 8.4 10.5 14.2 16.1 16.4 18.4 20.3

AEO 2006 0.4 0.8 0.1 3.1 8.7 5.9 7.9 11.4 13.0 13.2 15.1 16.7

AEO 2007 0.6 -0.2 2.8 8.2 5.3 7.1 10.5 12.1 12.2 14.1 15.7

AEO 2008 -0.6 1.1 5.8 3.0 4.7 7.7 7.8 6.4 6.8 6.9

AEO 2009 -0.2 1.7 -0.5 1.2 4.1 4.8 4.1 4.9 5.6

AEO 2010 -0.2 -3.7 -0.6 2.8 3.2 2.6 3.8 4.9

AEO 2011 -0.2 -1.5 1.1 2.1 1.0 2.2 3.1

AEO 2012 0.4 0.9 0.5 -0.1 0.7 1.2

AEO 2013 0.5 -0.7 -0.9 0.7 1.9

AEO 2014 -0.1 -1.0 1.2 2.7

AEO 2015 0.0 0.6 1.9

AEO 2016 0.0 0.4

AEO 2017 0.0

Average Absolute Percent Difference 0.6 1.0 1.9 3.1 2.8 4.3 3.8 4.9 3.0 3.2 3.0 3.1 3.3 3.4 3.4 4.1 6.9 5.3 5.9 8.1 8.8 8.3 9.3 10.1

National-level forecasts haven’t registered this trendAnnual Energy Outlook Electricity Sales Projections vs Actual (Percent Difference)

Consistent pattern of over-estimating future

growth since ~2001

Impact of 2009 Recession reverberates through

subsequent years

Source: EIA AEO


These forecasting errors don’t yet reflect potential impact of DER, which we believe is likely to accelerate…

Key Assumptions

Exported energy Current

ITC 10%

PV cost decline 6%

Key Assumptions

Exported energy Wholesale

ITC None

PV cost decline 6%

Wholesale Export – Sized at 90% of Total Load, with Storage if Economic

Status Quo

Source: EP analysis

2026 Residential PV Project Economics


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… or of the dramatically increased pace of new efficiency standards19

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Number of Final Standard Issued by DOE – 1992-2016

Pre-Obama-Era Average:0.6/year

Obama Administration Average: 5.2/year

2019

2021

2020

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2022

Vending MachinesUPSPre-Rinse Spray ValvesRefrigeration ProductsDehumidifiersCeiling FansCeiling Fan Light KitsSmall AC and Heat

Large RefrigerationC&I Pumps

Portable ACPool PumpsBoilers

Compressors

Central HVACComm. FurnacesComm. CAC and HPComm. Ice Makers

Future Standard Effective Dates


• Economic activity• Population• Electricity intensity ( C&I - MWh/$ GDP; Resi. - MWh/ person)

Total Regional Consumption

Energy Efficiency

DER

Electrification

• Electricity and gas price and tariff structure, subsidies• DER technologies cost, performance, economics*• DER adoption propensity

• Electricity, motor fuel, natural gas price• EV costs, performance; electric appliance, C&I equipment costs• Adoption propensity

Future Utility Load

• Programmatic savings (efficacy x spending)• Non-programmatic savings (standards, technology)

• Consumption and peak load, by rate class, through 2031• By scenario

“Envelope”

Dec

rem

ents

/ In

crem

ents

* DER analysis driven by Enovation’s proprietary DER analytics data base and tool set

Enovation employs a proprietary load forecasting methodology to incorporate changing fundamentals


EVs and electrification may partially offset DER, but increasing efficiency will dominate electricity sales trends

-19%

-14%

-17%

DER 2031 Forecast (after additions)

Electrification2031 Forecast (before

additions)

Energy Efficiency

2017 Load Economic and Demographic

Drivers

EV

PV Electrification (low)CHP Electrification (high)EVRecipNon-Prog. EEProg. EE

TWh

Base case load range with electrification impacts

EVs and net electrification were not analyzed in detail, but could counterbalance only a small portion of the EE/DER decrement, even given optimistic assumptions.

Illustrative

“Sanitized” Client Example of Load Forecast – 2017 to 2031

Over five scenarios of varying economic growth and relative gas vs. electric prices, utility electric sales declined by 15-30% by 2030

Declining sales will put significant upward pressure on electric rates, and push electric utilities to seek new growth engines


Solar PV’s growth has received the greatest attention…

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Solar Installed Capacity and Installation Cost

Source: SEIA / GTM Research Solar Market Insight (Q2 2015), EP analysis

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Annu

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CAGR 2013–201651%

24%34%

Residential

Utility 35% CAGRCommercial

Forecast Additions

• Strong early growth (CAGR 2005-09 = 37%) attributable to rebates

• Accelerated recent growth (CAGR 2010-14 = 49%) due to price decrease spurred by PV oversupply

• Commercial sector had its first decline in 2014, but growth appears to have resumed in 2015

• ITC extension through 2020 creates foundation for sustained growth

Observations

• Longer term GHG constraints (and shorter term in selected regions)

• Continued regulatory reforms to drive DER vs. overturning net metering

• Cost improvements

Drivers of Future Growth


… supported by increasingly economic energy storageDemand Management for Storage*Frequency Regulation for Storage

*Available market for demand management BTM offerings are dependent on tariff-specific demand charges and terms. Volume (GW) in horizontal axis of graph is based on assumed C&I contribution to peak ISO capacity, NOT likely BTM storage market sizeSee Appendix pages for assumptions behind regional revenues and storage costs by use caseSource: Enovation Partners analysis

By 2020, cost declines will reduce the revenue required to meet desired returns, thereby drastically expanding economically viable markets for BTM storage

‘000 $/MW - Yr ‘000 $/MW - Yr

Available Market (MW)

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Legend

Available Market (GW)

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CA-only

2016 Required Revenue for Storage

2020 Required Revenue Storage

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Non-CA

CA-only

CA-only


DEREconomics

• Number of opportunities, MW, and value potential

• By building/business type, utility, and state

Policies & Rate Structure• 55 utilities; 10 competitive• 3 -5 representative rate structures x

customer type x utility• Relevant RTO products• State & federal subsidies (e.g. NEM, tax

credits, upfront / annual incentives, etc.)Source: OpenEI, DSIRE, FERC

Load Curves• 10 Commercial Building Types• 3 Industrial Types• 1 Residential• 15 climate zones

Source: NREL, CBECS, RECS, DOE, ORNL

Use Cases• Use cases with a range of applications

• Net Meter – Solar PV• Demand Management– Recip & Fuel

Cells• Net Zero – Solar PV + storage

Source: EP

DER Costs and Performance• PV (rooftop, ground)• Storage (Battery)• Gas reciprocal engines• Fuel cell• Insolation by regional cities

Source: Lazard, EPA, GTM, PV Watts, EP

Enovation Partners recently has conducted a granular, bottom up analyses of DER economics for EEI and many gas or electric utilities


Solar DER may become ubiquitous in several parts of the U.S. by 2025…

Residential Rooftop

Residential Ground Mounted

Commercial Rooftop

Industrial Rooftop

2020 2025 2020 2025

2020 20252020 2025

12.5+ Years 10.0 – 12.5 Years 7.5 – 10.0 Years 5.0 – 7.5 Years < 5.0 Years Not Assessed

Source: EIA, EP analysis A significant long-term consideration in Southeastern U.S.


DER generation has been and is expected to be a significant if under-appreciated component of the US generation fleet

Distributed Generations Installs

Source: Power Systems Research, SEIA, EGSA, Navigant, EIA, Enovation Partners

0

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35,000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

US

Inst

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(MW

)

Diesel Gensets NG Gensets Solar PV Fuel Cells Small Wind

Market Share Trends:￭ Historical DG CAGR = 12%￭ Forecast DG CAGR = 7%￭ Solar PV is not the largest source of

DG growth￭ DG is forecasted to grow to over 70%

of all generation capacity additions by 2020

New Market Participants:Aggressive non-utility players offering

an array of behind the meter products and services…but opportunity for utility

investment and creating stickier customers by bundling a new array of products and services that address reliability, power quality, environmental footprint and cyber security

How can natural gas gain DG market share from diesel, and encourage more base-loaded DG?


Unlike some other U.S. regions, the electric vs. gas spark spread for commercial customers is not projected by EIA to widen in FloridaAverage Annual Florida Gas Prices

Average Annual Florida Electricity Prices - FRCC

But Enovation believes that gas sales will be higher and electric sales lower than EIA expects- so gas rates will continue to rise slower than electric rates

CAGR = 4.4%

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($/M

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Citygate Industrial Commercial Residential

CAGR = 3.2%

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Industrial Commercial ResidentialSource: EIA


Gas-fired DG has become highly competitive with electric prices in some states – but Florida is handicapped by high retail gas prices

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Electric LCOE vs Delivered Gas Price

Recip Fuel Cell - CHP CT - CHP

City of Lake WorthClay/New Smyrna

Glades Electric Coop

Sumter Electric Coop

Source: EIA Form 861, Enovation Partners

Average 2017 Florida rates Industrial Commercial

Commercial Gas DG Heat Map

12.5+ Years

10.0 – 12.5 Years

7.5 – 10.0 Years

5.0 – 7.5 Years

< 5.0 Years

Not Assessed

Gas rate design changes to meet needs of high load factor customers would improve economics


Munis and coops in Florida service territory serve over 25% of Florida’s electric customers – and tend to have high commercial rates

IOUs Munis Coops

Assessment of potential gas DER market in your gas territory will require analysis of:• Population of large C&I customers by business segment (and energy profile)• Current gas and electric tariffs• Cost structure of incumbent utilities, and flexibility for tariff restructuring• Forward cost curves for DG equipment and installation, and gas commodity costs• Customer needs on reliability, power quality, footprint, environmental permits• Financing needs and options (abundant capital available for project financing)


C&I market size estimates indicate a significant technical potential as defined

7,042

3,764

1,770

1,1950

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Total Potential Non-TargetBldgs

<125 kW Target Market

Technical Potential Target Building (MW)

62 62 51 41

23797 73 60

222329

126 157

358 366

229 201

879 854

479 459

0100200300400500600700800900

1,000

State 1 State 2 State 3 State 4Hospitals HotelsSecondary School Supermarket

Technical Potential By Target Building / State (MW)

• Buildings with agency constraints (retail, offices, and apartments) make up over half of the building population

• Applications in target building types that are too small (<125 kW) are not included from the target set

• Secondary schools provide the largest average installation size at 1.5 MW

• Hotels are only 17% of the installations on a MW basis, but account for 38% of the potential customers

Sources: EP analysis

Technical Potential


Our economic model converts technical potential to economic potential

31 23

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3318 15

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90 13

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5926

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9261

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Hospitals Hotels

Secondary Schools Lg. Supermarkets

State 1 State 2 State 3 State 4

Projects 456 254 112 105

MW 252 125 66 43

$MM 353 174 92 61

$MM Economic Capex Deployment Opportunity

1,704

247 205 184 22676

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<5% 5%-10% 10%-15% 15%-20% 20%-30% >30%

MW

MW by Project IRR – Technical Potential

Economic IRR Range

Source: EP analysis

Economic

• Supermarkets and hotels offer very good initial C&I market entry points

• It is important to note that these economic IRR estimates are a snapshot; as time goes forward and rates continue to increase, the lower end of the spectrum will “move to the right”

NearEconomic


Our building population dataset is built up from the county level NAICS data, we use Google Places API to develop specific DER targets lists with contact and demographic information

12

4

2

• 19 Target Hospitals in the Omaha metro are– Douglas County – 12– Sarpy County – 4– Washington County – 2

• Google Places API provides access to information on 100 million buildings and points of interest

– Name, address, phone number– Pictures and property square footage

Source: SNL Maps, NAICS, Google Place API, EP analysis


The C&I gas opportunity varies by customer type, reflecting the interaction of rates and load shapes

IRR for Demand Management Using Natural Gas Recip. Engines

Muni Utility 1 - 2026 Muni Utility 2 - 2026 Muni Utility 3 - 2026

Building Type Load Factor Small Comm.Service

Large Comm. Service

Small Comm.Service

Large Comm. Service

Small Comm.Service

Large Comm. Service

S School/L Office 36% 9% 4% 10% 0% 6% 6%

QSR/FSR 52% 12% 5% 13% 0% 6% 6%

Supermarket/L Hotel 60% 12% 4% 12% 0% 5% 5%

M Office/P School 36% 10% 5% 10% 0% 7% 7%

Strip Mall/Warehouse 32% 10% 6% 10% 2% 9% 9%

S Office/Midrise Apt 40% 12% 4% 12% 0% 5% 5%

Standalone Retail 33% 11% 6% 11% 0% 8% 8%

Small Hotel 50% 12% 4% 12% 0% 5% 5%

Out Patient 47% 11% 5% 11% 0% 6% 6%

Hospital 67% 13% 5% 13% 0% 6% 6%

< 6% 6-8% 8-10% 10-12% 12%+

Helpful for reducing DER origination costs for larger utilities; more informed targeting


Rate Schedule HospitalUtility PPLTariff GS-3Customer Charge ($/mo.) 40Energy Charge ($/kWh) 0.109

Demand Charge ($/kW) 4.19

Effective Gas Rate ($/MMBtu) 5.5

Bill Growth (elec. / NG % p.a.) 3.2 / 2.2

DER ProfileStart Year 2016Size (MW) 0.6 (60% of load)Capital Cost (2020 $/kW) 1,710O&M ($/MWh) 10

SavingsBoiler Efficiency 85%Electric / NG Savings ($k/yr.) 715

FinancialsPayback (years) 3.2

CHPs for commercial segments likely even more attractive

Source: EP analysis

1,070 81 15 58 111 5…

129 22 598

$0$200$400$600$800

$1,000$1,200$1,400$1,600

$k

CHP Savings Comparison

Current With CHP

Observations• Financial analysis does not include potential upside of

selling excess steam to third parties• Additional benefit in avoiding capital for boilers and

potential chillers, with tri-gen design• Savings from CHP could fund upgrade of air handling

system to solve core infrastructure and reliability challenges

Illustrative Project EconomicsHospital Example


I. Revenue model

II. DER participation

III. DER integrationIssues

A.Decoupling (inc. PBR)

B. Rate structures

C. NEMreform

“Excessive” DER adoption

DER mis-located

Lost demand = lostincome

DER control

Electric utilities do have tools that could blunt the DER threat

Gas utilities should anticipate and address competitive responses

Policy Lever Fit

Primary Partial Not applicable


Gas LDC’s have long-standing access to attractive customers and could be valuable partners in delivering gas-fired DER Solutions

Gas for generation Gas transportation

Gas for everyday use Gas for heating

Gas conversion successes of LDC’s in the past few decades

• Increase demand for gas

• Enhance customer relationships

• Add to bottom line• Align with

company goals and capabilities


LDCs can increase revenues and valuation, and enhance brand; customers get cost savings and resilience/reliability

Benefits to LDCs

Operational• Increased gas

throughput• Potential

investments to support increase demand

Financial• Increased gas

revenues• Potential for

additional services and revenue

• Material impact on earning and growth

Customer & Brand• Stronger brand as

provider of best energy solutions

• Deeper relationships with most valuable customers (C&I)

Valuation• High ROE

investments to build “value growth” platform

• P/E multiple expansion

Benefits to Customers

Cost Savings• Lower total energy

bill• Ability to arbitrage

between electric and gas prices

Resilience & Reliability

• High reliability baseload energy

• Long-term back-up when grid is down

• Retention of grid backup

Revenue• Potential sales of

excess energy at a profit

• Potential revenue from other energy services (reserves, peak reduction, ancillary services)

Brand• Community visibility for

cleaner, more efficient energy through natural gas


Multiple participants across the value chain offer opportunities for partnering

• The CHG/DG space has a diverse set of customers• The players tend to be OEMs, industrial conglomerates, or DER-focused startups• LDCs have specific advantages over all these players namely gas expertise, brand, and

customer relationships


Business Model Description Utility Holding Company Examples

Typically commodity lead in deregulated markets with services as a value adder

Broad range of services – DG, EE, DR, system design, energy audit, etc.

Larger on-site generation for backup, load mgt., CHP/process heat, etc.

HVAC services, lighting, EE/ER, etc.

Typically ground mounted solar PV or roof top PV for C&I customers

Asset/lifecycle management System performance optimization Reliability & restoration

Load management, demand response Performance contracting Building management / lighting solutions Audit, measurement, verification

“Islanding”, reliability / facility hardening System operation, reliability & restoration DER, DG, EE, DR

Utilities (both gas and electric) see the growth of behind the meter generation services and are also getting into the business

Retail Energy Services

C&I Energy Services

Distributed Renewable

EE/DR

DSO / O&M

Micro Grid

Energy Systems Group Power/Industrial Projects


… and IOUs/REPs rapidly building DER capability

Type Company Storage DateAmount

($MM) Description

Investments

8/2015 12.3 • A leading provider of grid-scale energy storage software and integration solutions

6/2015 • Developer of fast-charging systems for lithium ion batteries

1/2015 11.6 • Developer of learning software and energy storage

12/2015 18.3 • Provider of grid-scale energy storage software and integration solutions

1/2015 12.6 • Producer of power generation, smart-storage and distribution solutions for off grid applications

Project Development

7/2015 • 25.6 megawatts of BTM storage providing demand management in Southern California.

10/2014 • Partnership to deploy EV charging stations with integrated batteries

M&A5/2016 • 80% stake; incorporating storage into C&I and

public energy services offerings

2/2016 431 • General contractor EPC specializing in solar PV, but with storage and other DG experience

7/2013 • Integrated C&I solar and DER developer and service provider


From a gas perspective, spectrum of risk/reward options available

PURE COMMODITY

• Provide customer acquisition interface

• Provide natural gas support

• Use 3rd party network to install, maintain, and operate solutions

HYBRID MODEL



• Use 3rd party network to install, maintain, and operate solutions

• Participate in 3rd party network revenues by providing brand

FULL SERVICE PROVIDER



• Leverage internal capabilities to install, maintain, and operate solutions capturing full revenue

Direction of increasing value

Dire

ctio

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incr

easi

ng

part

icip

atio

n an

d ris

k

Purely Regulated Participation

Non-Regulated Participation


DEPLOYMENT PERIODINSTALLATION PERIOD

Degr

ee o

f diff

usio

n of

the

tech

nolo

gica

l rev

olut

ion

Big-bang Crash Next Big-Bang

TimeInstitutional Recomposition

Next Great Surge

Previous Great Surge

Turning point

Bubble economyDivorce between paper and real valueAsset inflation

Production capital at the helmRecoupling of real and paper wealthCoherent growth

Financial capitalSearching on its ownDecreasing investment opportunities“Idle money” moving to new areas, sectors and regions

IRRUPTIONLove affair of FK with revolution

FRENZYDecoupling

FK-PK

SynergyRecoupling

FK-PK

MATURITYSigns of

separation

Solar PV has already gone through its turning point toward mass deployment – is gas-fired DER the next big surge?

Source: Carlota Perez, Technological Revolutions and Financial Capital. The Dynamics of Bubbles and Golden Ages. 2002


• Explore how electric and gas rate structures affect economics of distributed generation

• Assess economic performance of DG/CHP by customer sub-segment

• Develop a market penetration outlook

• Identify regulatory/governance barriers and develop strategy for gas sector to engage with regulators and state/local legislators

• Explore partnering opportunities with other players in DG value chain

• Build the business case and execution roadmap for DG/CHP growth

Opportunities for the gas utility sector


Energy + Innovation = Results

Bill Kemp, Senior Managing [email protected]

opportunities for gas utilities in the coming distributed...

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