Ransomware and the Pipeline

May 2021

In the last week, one of the largest fuel pipelines in the United States has been shut down as it deals with a ransomware attack.  This is the highest-profile infrastructure cyber-attack on the energy system in the US, and a reminder that this “new” problem is getting much worse – and will continue to do so.  Today we’ll take a look at some implications of this latest attack, and of cyber-risk trends for infrastructure.

The Colonial Pipeline System

Infrastructure Ideas has been writing about infrastructure cyber-risks for some time, and one of our Ten Infrastructure Predictions for 2021 was that these risks would grow for utilities.  Unfortunately, we were right.  The attack on the Colonial Pipeline, which operates the largest fuel pipeline between Texas and New York, has disrupted availability of gasoline and jet fuel for a week – with long lines at gas stations in some areas, and a state of emergency declared by the Governor of Virginia.  The 5,500 mile pipeline carries nearly one-half of the motor and aviation fuels consumed in the Northeast and much of the South (see “What We Know about the Colonial Pipeline Attack,” from the New York Times).  Colonial, the pipeline operator, reported that hackers had infiltrated corporate data, not control of the pipeline itself, but that Colonial had shut down operation of the pipeline to prevent further damage and contain risks.  The FBI has attributed the hack to a Russia-based criminal group known as “Darkside,” which specializes in ransomware attacks against English-language targets.  As of this writing pipeline operations have yet to return to normal.

A customer help pumping gas at Costco, as other wait in line, on Tuesday, May 11, 2021, in Charlotte, N.C. Colonial Pipeline, which delivers about 45% of the fuel consumed on the East Coast, halted operations last week after revealing a cyberattack that it said had affected some of its systems. (AP Photo/Chris Carlson)

The Colonial Pipeline ransomware attack is far from the only headline regarding cyber-attacks on infrastructure in the first months of 2021.  A report in February from the industrial cybersecurity firm Dragos named four separate hacker groups with ties to Russian intelligence services as having targeted industrial control systems in the United States.  One group, named “Kamacite,” reportedly works in cooperation with the GRU, Russia’s largest foreign intelligence agency and has targeted US electricity and oil and gas firms, and is said to have gained network access to firms on several occasions.  Another February report, this one from IBM, found the energy sector to be the third most frequently targeted in 2020 (after finance and manufacturing), up six places from 2019.  Aside from energy, other attacks have targeted the water sector.  An as-yet-unknown hacker gained access to the controls of a water treatment facility in Oldmar, Florida, and attempted (unsuccessfully) to introduce large amounts of lye into the city’s water.  In February, an ex-employee of a water company near Little Rock, Arkansas, was indicted for accessing and attempting to disrupt the company’s systems after being let go.  In 2020, a likely Iranian hacker was found offering to sell network access to a water treatment plant in Florida over the messaging app Telegram.  A recent study profiled in Wired (Water Supply Hacks Are a Serious Threat – and Only Getting Worse) found dozens of hacking incidents at US water installations, with a continued rise over the last decade.  Water utilities turn out to be far more vulnerable to cyber-risks, in spite of the focus of most headlines on electric utilities, as so many water utilities are small and lack the administrative capacity and resources to protect themselves against rapidly evolving attack risks.

The underlying dynamics indicate that infrastructure cyber-risks are, unfortunately, getting much worse.  For one, the growing use of digital controls to manage electricity and other energy installations opens new entry points for hackers to exploit.  Second,  the sheer number of actors involved or with the potential to be involved cyber-attacks is growing rapidly: barriers to entry are low, and the trend towards ransomware attracts criminal groups across the  board.  As one cyber-expert cited in the Dragos report puts it, “A lot of groups are appearing, and there are not a lot going away.”  One element of this week’s Colonial Pipeline attack highlights the issue: the group apparently responsible, dubbed “Darkside”, operates on a business model whereby it develops hacking tools and then sells, rents or leases them to other parties.  It does not require much imagination to see how this will accelerate the availability of hacking tools.  Third, with the multiplication of actors comes a multiplication of targets.  One group Dragos has dubbed “Stibnite” has targeted Azerbaijani electric utilities and wind farms using phishing websites and malicious email attachments: if firms in Azerbaijan are becoming targets, firms in places such as Jordan, Indonesia, Mexico and elsewhere cannot be far behind.  Utilities in lower-income countries, lacking in managerial and financial resources to adequately defend themselves, utilities in areas of internal or external conflict, attractive targets for political or ideological reasons, and utilities in high-crime countries with already diversified and sophisticated criminal groups, are all going to be at particularly high risk in coming years.  Fourth, the types of infrastructure cyber-risks are also expanding.  Ransomware attacks are the flavor of the day, and with the proliferation of hacking tools among criminal networks will doubtlessly expand.  These are expensive and disruptive, but the damage to date from these attacks has been limited in scope and in time.  Yet more aggressive and destructive attacks are unlikely to be far away.  As an alarming new book by Nicole Perloth, This is How They Tell Me the World Ends: the Cyberweapons Arms Race (for a short version, see the excellent review by Sue Halpern in the New York Review of Books, “Weaponizing the Web”) points out, an important feature of cyber-weapons is that they are very cheap compared to traditional “hard” weaponry.  Perloth tells the story of seeing a young Iranian at a hacking conference in Miami demonstrate how to break into the power grid in five seconds: “With his access to the grid, he told us, he could do just about anything he wanted: sabotage data, turn off the lights, blow up a pipeline or chemical plant by manipulating its pressure and temperature gauges.  He casually described each step as if he were telling us how to install a spare tire, instead of a world-ending cyberkinetic attack that officials feared imminent.”  Hacking tools can give intruders access to even critical infrastructure such as nuclear facilities, the power grid, and air traffic control.  But they are relatively cheap compared with other weapons of mass destruction, and for sale in a market that is robust, largely out of sight, and welcoming to anyone with piles of cash at their disposal, whatever their motivation. 

Disruptive technologies continue to change the face of infrastructure.  In many cases, this is bringing lower costs, better services, more convenience and reduced emissions.  Technology, though, is agnostic: the Colonial Pipeline cyberattack is a reminder that disruption can be negative as well as positive.  For infrastructure operators and investors today, there is a clear message from these attacks.  Cyber-risks are not going away, and are going to get worse.  Investments in cyber-security (the FBI, after the Colonial Pipeline breach, has issued a useful “tip sheet” to key US infrastructure providers), insurance, and the ability to re-launch systems after an attack are all going to be increasingly important.  The worst situation will be to be unprepared. 

Previous Infrastructure Ideas columns on Disruptive technologies

The Demise of Loon

February 2021

Disruptive technologies have been reshaping the face of infrastructure as never before.  From wind turbines, to solar cells, smart meters, distributed generation, and now battery storage, new technologies have almost completely displaced traditional fossil-fuel sources in electricity supply.  Electric vehicles, automation, and mass-data-enabled business models like Uber and Lyft are similarly turning transportation infrastructure upside down – with Tesla now worth far more than General Motors. Hardly anyone remembers rotary phones, let alone land lines.  Yet not all promising technology breakthroughs survive to become the “next normal,” even with the deepest pockets behind them.

Meet Loon.

It was only a year ago that Loon balloons were being touted as the next big thing in telecommunications, especially in remote or disaster-hit areas.  Owned by no less than Google itself (through Google’s parent company, Alphabet), Loon’s high-flying balloons were, well, high fliers.  Enabled by artificial intelligence, Loon’s helium-filled polyethylene balloons were able to hover in one place for extended periods, serving as air-borne cellular towers in areas where such towers either didn’t exist or had been knocked out.  AI helped predict wind speed and direction at various heights, then use that information to raise and lower the balloon accordingly.  Loon’s balloons work by beaming Internet connectivity from ground stations to a balloon 20 kilometers overhead. The signal is then sent across multiple balloons, creating a network of floating cell sites that deliver connectivity directly to a user’s phone or computer router.

A Loon Balloon in action

Each Internet-enabled balloon covers a large area—roughly 30 times greater than a ground-based system—Loon can provide service to traditionally hard-to-reach or underserved regions.  Loon’s earliest markets were, not surprisingly, exactly these kinds of places: outlying areas of Brazil, Indonesia, New Zealand, Peru, Puerto Rico, and Sri Lanka, and disaster zones.  The first big commercial contract came in Kenya, where a 2018 agreement with Telkom Kenya to support internet access for the 70% of Kenyans who did not have it was followed by emergency grants of balloons to help the Kenyan government deliver health care messaging during the early months of the COVID pandemic.  For Google, all this was great public relations, as well as part of a strategic approach to diversify into other cutting-edge technologies.  The company touted Loon’s ability to bring the internet to the “bottom of the pyramid,” or “the bottom billion.”  A $125 million investment from partner Softbank in 2019 made the future seem promising.

Then in late January, 2021, came the news from Google headquarters: it was pulling the plug on Loon.  In a blog post, Google said “the road to commercial viability has proven much longer and riskier than hoped. So we’ve made the difficult decision to close down Loon.”  For all its promise and disruptive technology, Loon ran out of money. 

What happened?  A mix of good and bad news.  On the positive side, Loon’s technology worked.  The underserved and disaster-hit were able to get cellular and internet service.  At the same time, on the positive side for the under-served “bottom of the pyramid,” but bad news for Loon, other existing technologies were at work narrowing the innovation’s market window.  When Loon was started a decade ago, the share of the world’s population without internet availability was 25% — nearly 2 billion people.  Today it is about 7%, a bit more than half a billion, only a quarter of the market opportunity it was before.  The bad news for Loon is that is that its model is more expensive than more traditional existing technologies, and that the remaining population without service is the most expensive to reach, and the least likely to be able to afford the prices that would keep Loon airborne – not to mention the problem of administering payment of bills.  Potential commercial success had gone from “around the bend” to out of sight.

Google and Alphabet will go on.  New technologies will continue to appear.  But as always, spreading the benefits to the least well-off is the hardest part.  For now, the remaining poor unserved will continue to fall behind the rest of the world.  Yet Loon’s failure is a failure to be applauded.  Perhaps a foundation will partner with international funding agencies to continue stationing floating cellular towers to reach the poor – on a fully subsidized basis – if connectivity is deemed an important enough developmental goal.  A lot of rooftop solar has been built this way in low-income countries, and product development costs – possibly as much as half a billion dollars – have already been absorbed by one of the few companies which could afford it.  Time will tell.

And in the meantime, this tale illustrates that technological disruption in infrastructure continues to broaden – and that the early winners become the likeliest to have the money to kickstart more innovation.  Loon’s balloons may or may not live another life; that there will be more tales such as Loon’s is certain.

Previous Posts on Disruptive Technologies

Revisiting Micromobility

August 2020

In June of 2018, Infrastructure Ideas ran a series on the Mobility Revolution (an overview, implications for investors, and implications for policy makers).  Two years on, let’s see how the world has changed.

The Mobility Revolution continued at high speed through the rest of 2018 and 2019, and micromobility had as bright a future as any industry at the end of 2019.  In 2018, the number of rides Americans took via dockless scooters, bikes, and traditional bikeshare systems more than doubled from 2017, to 84 million trips.

Micromobility Trips

McKinsey was predicting the industry would be a $300-500 billion market by 2030, and Barclays went even better, projecting micromobility as a nearly trillion-dollar business in a decade.  For investors struggling to find bright spots in the infrastructure world, this was a big piece of the future.  Ride-hailing giants were at the forefront of acquisitions: Uber acquired Jump Bikes in May 2018 for $200 million, and Lyft acquired Motivate, the country’s largest operator of traditional bikesharing systems.  Two Chinese bikeshare firms, Ofo and Mobike, arrived in the United States, and together raised over $2 billion in venture capital funding.  In fact, Venture Capital investment in urban technology, mostly mobility, surpassed that in pharmaceuticals from 2016 through 2018.

Mobility numbers looked good during 2019: Lime surpassed the 100 million ride mark, and three other providers passed 10 million rides for the first time.  There were some significant shifts across segments, and bad news for some – mainly in bikeshare.  The two Chinese giants crashed and burned, with Mobike being sold and retreating from foreign markets, and Ofo going bankrupt in June.  Uber’s acquisition of Jump Bikes went south, and it sold the small remnant of the company to Lime in early 2020.

Then came the pandemic.

In the first half of 2020, with concerns over COVID infections, macro and micro travel came to a grinding halt.  In the cities where micromobility had been booming, people now worked from home instead of commuting, and curtailed outings to see friends, go to the gym, and eat meals.  Ridership, revenue and investment in mobility all plummeted.  Based on an analysis of Apple iPhone data, the number of passenger-kilometers traveled by private and shared micromobility vehicles decreased by an estimated 60-70% in Europe and the United States since the onset of the COVID-19 crisis.  Several providers halted operations in different markets, and laid off large parts of their workforce.  An article in Wired Magazine asked: is Micromobility a bust?

It is impossible to know exactly what the future holds, for this “aspiring trillion-dollar business,” which lost half its market in six months.  But some optimism may be in order.

For those who survive, the future may not look so bad.  As reported by Bloomberg’s Laura Bliss in early August, micromobility is already showing signs of life.  In American and European cities that have made progress on reducing the incidence of COVID-19 and in reopening their economies, demand for electric scooter, bike, and moped rental services is growing again.  It appears that compared with “closed-space” transport alternatives such as car-share and mass transit, being exposed to the air on a bike or scooter – only needing to wipe down and disinfect handles – feels like a healthier and lower-risk transport option for clients.  Ford’s scooter subsidiary, Spin, has reported an increase in ridership in cities where lockdown restrictions have eased. Lime reported record growth in new user signups and in ridership in some cities.  Gotcha, which operates fleets of shared scooters and bikes, reported spikes in the number of rides, the number of unique riders, and average trip length in many of its markets.  So it seems that some of the people who stopped getting on shared bikes and scooters have decided to get back on them.

Beyond this short-term rebound, there are also a number of underlying developments which may bode well for micromobility companies in the longer term.  These include: average trip lengths increasing, dedicated lanes becoming more widely available, more commuters are getting into the act, and less competition.

Longer trips by riders should mean better revenues per trip, and better asset utilization.  Industry giant Lime reported a 34% increase in average trip durations during the second quarter, as well as a similar increase in average trip distances, to now over two kilometers. Shared moped operator Revel measured similar upticks. Data from Ford’s Spin subsidiary shows significant growth in trips of two kilometers or longer in several cities in May 2020, compared with a year earlier, and a 44% increase in average trip duration.

Worldwide, the lockdown has driven an increased focus on bicycle lanes. Better cycling space and less battling with automobile traffic should encourage more riders and more trips.  Milan has announced that 35 kilometers of streets previously used by cars will be transitioned to walking and cycling lanes after the lockdown is lifted.  Paris will convert 50 kilometers of lanes usually reserved for cars to bicycle lanes, and plans to invest $325 million to update its bicycle network.  Brussels is turning 40 kilometers of car lanes into cycle paths.  Seattle permanently closed 30 kilometers of streets to most vehicles, providing more space for people to walk and bike following the lockdown.  Montreal announced the creation of more than 320 kilometers of new pedestrian and bicycle paths across the city.

The penetration of the commuter segment, in addition to the leisure and impulse segment, would also hold the potential for significant revenue increases for micromobility providers.  Some of the first positive indications in this regard are coming out of Germany.  Here Spin reported from a customer survey that one third of Germans “believe there will be a reduction of car traffic around inner cities in a post-pandemic world and favor the use of micromobility vehicles such as e-scooters.”  “Spin scooters are being used now more than ever as a utility rather than for leisurely activities,” said Euwyn Poon, Spin’s President.   Location of scooter usage also illustrates this new trend.  Downtown areas were formerly the hub of activity for scooter companies, with white-collar workers using the vehicles to commute short distances to work or to grab lunch or coffee during the workday. But in the era of remote work, residential neighborhoods have become new micromobility hotspots, according to maps of Lime rentals in San Francisco and Berlin.   Demand for longer-term rentals is also materializing.  Spin now rents its scooters by the month in San Francisco; a similar option is available for e-bike rentals for delivery workers in Washington, DC. Unagi, a scooter maker that sells directly to customers, introduced a monthly subscription option for riders in L.A. and New York earlier this month. Bird and Lime have offered monthly rentals for their vehicles since spring 2019.

McKinsey believe (The Future of Mobility) that private- and shared-micromobility solutions will experience a complete recovery in the number of passenger-kilometers traveled, with no significant drop from pre-crisis levels.  With what we are seeing, this increasingly looks like a good bet.  But usage is only one part of the story.

Making money has been the big issue for micromobility providers during the pre-2020 growth period.  Now with a number of players exiting, through closure or acquisition, the financial picture should look better.  If forecasts of market size in the range half a trillion dollars materialize, even a few years later than originally forecast, we’re talking about a business on the order of 15-20% of total global infrastructure investment.  Hardly anything “micro” about that.


Offshore Wind: The Next Big Thing

Offshore wind: The Next Big Thing
January 2020

Offshore wind has been beyond the horizon for energy planners everywhere but the North Sea, until the last few years. That’s no longer the case: offshore wind is becoming a major piece of the energy future for multiple countries and jurisdictions. Bloomberg reports offshore wind financings in 2019 came close to a whopping $30 billion, and in September 2019, the UK saw bids for offshore generation at under $0.05/KwH, cheaper than coal and natural gas alternatives. It’s a whole new water world out there.

Among the offshore wind projects reaching financial close in Q4 of 2019 alone were the 432MW Neart na Gaoithe array off the Scottish coast at $3.4 billion, the 376MW Formosa II Miaoli project off Taiwan at $2 billion and the 500MW Fuzhou Changle C installation in the East China Sea, at $1.5 billion. And in November Vattenfall was announced the winner of the Holland South Coast Phase II project, having already won Phase I; the 1.5 Gigawatt project will be Europe’s first subsidy-free offshore wind farm.

What happened? Only five years ago, offered prices for offshore wind tended around $0.15-0.20 a kilowatt-hour, well-above the price for competing sources and requiring government subsidies to proceed. Now larger and more efficient turbines, bigger projects, access to better offshore wind resources, and more developed supply chains have been driving prices down rapidly. Capex per MW of offshore wind capacity dropped from 4.5 Euros in 2015 to 2.5 Euros in 2018, a decline in costs of over 20% a year, according to Wind Europe. This has enabled the advantages of offshore turbines to come through: wind is much stronger off the coasts, and unlike wind over the continent, offshore breezes can be strong in the afternoon, matching the time when people are using the most electricity. Offshore turbines can also be located close to urban demand centers along the coasts, eliminating the need for new long-distance transmission lines

Offshore wind has already become the next big thing on the US East Coast. In November, New Jersey Governor Phil Murphy signed an executive order backing a goal of 7.5 GW of offshore wind by 2035, and said he expects that offshore wind could provide New Jersey with half of its electricity. Those figures would probably represent $15 billion of investment in New Jersey alone. In December, Connecticut awarded an 804 MW project with an (undisclosed) offset price “lower than any other publicly announced offshore wind project in North America,” expected to generate the equivalent of 14 percent of Connecticut’s total electricity supply. New York state announced in early January a 1 GW procurement of offshore wind in 2020, after 2019’s award of 1.7 GW of capacity, and announced a 9 GW offshore capacity target for 2035. And in early January Virginia’s Dominion Energy awarded a $7.8 billion, 2.64 GW offshore project – the largest currently on the drawing board in the US — to Siemens Gamesa.

The Land of Giants. With the average capital costs of offshore wind projects now easily in the $3-7 billion each range, the competitive landscape in the industry has evolved very differently than for the solar and onshore wind sectors. Solar in particular was characterized in its early days by many dozens of developers, at times trying to launch projects with capital costs of less than $50 million on a shoestring and selling them on to raise funding for their next investment. Not only are offshore wind turbines far larger than their onshore counterparts, but offshore wind players are far larger as well. The biggest current developers are Dong Energy in China, Scandinavians Ørsted (today’s market leader) and Vattenfall, and Iberdrola. All these have Balance Sheets with equity in the $100 billion-plus category. Vestas, Siemens Gamesa, and General Electric lead among turbine suppliers. An interesting sign of the times was the recent announcement from EDP of Portugal (itself partly owned by Three Gorges of China) and Engie that they would join forces in developing offshore wind projects, in order to gain the scale needed to compete.

Financing amounts are sufficiently forbidding that most developers have been financing projects on Balance Sheet, and until recently little commercial project finance debt has been available, outside of the policy banks in China for Chinese projects. The bulk of third-party financing for offshore wind has largely been in the form of ownership syndications and post-construction refinancing. The large scale of projects, while a major hurdle for many banks and smaller developers, is conversely an advantage for institutional investors such as pension funds and insurance companies, who have large minimum investment thresholds. These institutional investors have more typically invested in wind and solar through portfolio purchases rather than single project financing, as for example this week’s purchase of 50% of Total’s wind and solar portfolio by Caisse des Depots in France. From late 2018 European banks began to enter the UK offshore market with large amounts of non-recourse debt; as this model gains traction, it may allow smaller developers to become more active. As the sector is becoming more established, one can also expect the gradual development of a merchant risk-based financing model.

Offtake models have also been affected by the large scale of offshore wind developments. Corporate renewables, an increasingly big – and often well-priced – source of demand for solar and onshore wind projects, has not been a factor yet for offshore. In December, Ørsted announced the largest-ever corporate offshore wind deal, with German chemical company Covestro, for 100 MW.

What’s next? Tenders are planned in many countries, and are spreading beyond initial markets of Europe, the US and China. Vietnam, already with 99MW of offshore wind in place, is looking at what could become the world’s largest offshore wind farm with a capacity of 3,400 MW. ESMAP, a unit of the World Bank Group, published a study in October 2019 looking at eight non-OECD markets: Brazil, India, Morocco, the Philippines, South Africa, Sri Lanka, Turkey, and Vietnam. The ESMAP study estimated these eight markets alone have a technical capacity of over 3 Terrawatts – that’s 3,000 Gigawatts – for offshore wind. Globally, Wood Mackenzie expects 128 GW of offshore wind capacity to be built between 2020 and 2028, while Bloomberg New Energy Finance forecasts 188 GW of capacity to be installed by 2030. Those projections would imply capital investment in the sector in the range of $300 billion over the next decade. China is forecast to remain the largest country market, but with about half the global share that it has seen in solar (25% vs 50%).

Nonetheless, it may be difficult for offshore wind to gain more than a fraction of the geographic diversification that onshore wind, and particularly solar, have achieved. Many emerging markets are too small to consume the output of even a single offshore wind farm – at least in offshore’s current form. Construction timelines will also be an issue: an attraction of solar for lower-income, electricity-deficient countries is that solar farms can be financed and built fairly quickly, bringing new generation capacity on stream in a year or less after a country’s decision to proceed. An offshore wind farm typically takes five to ten years to develop. One possible model for smaller markets, for instance West Africa, might be multiple country offtakes.

A big factor in the longer-term development of offshore wind will be the feasibility – and cost – of floating wind farms. 99% of offshore wind farms to date are bottom-anchored, a big factor in the cost and scale of projects, and a limit on geographic deployment. Floating wind farms can in principle be deployed across many more areas, and could be built at a smaller scale. Indeed, the ESMAP emerging markets study puts 2/3 of identified potential offshore wind technical capacity in the floating, rather than fixed, category. IRENA’s late 2019 “Future of Wind” study forecasts floating platforms to make up a more modest 5-15% of total offshore capacity. Yet to date less than 50 MW of floating capacity is operational, so time will have to tell on this part of the technology. We’ll have to see how the winds blow…


Infrastructure in 2020: Ten Predictions

Infrastructure in 2020: ten predictions
January 2020

1. Wind and solar keep growing.

Growth in global renewable energy investment in 2018 and 2019 has been akin to the Sherlock Holmes tale of the curious incident of the dog that didn’t bark – there hasn’t been any. After a down year in 2018, global renewable energy investment stayed essentially flat at $282B in 2019, according to Bloomberg New Energy Finance (though still more than double BNEF’s estimate of investment in fossil fuel-based generation). Look for numbers to head back up in 2020, on the back of renewables’ cost advantages. In the US, the EIA forecast last week that wind and solar will make up three-quarters of new capacity additions in 2020, breaking previous records of annual capacity additions. The big variable for the coming year will be the largest renewable market in the world, China. The missing global renewable growth would have been there in 2018 and 2019 were it not for declines in China, whose $83B 2019 investment level was down for a second straight year, primarily in solar which is down 2/3 since its 2017 peak. As China transitions away from its Feed-in-Tariff mechanism for domestic solar generation towards competitive auctions, Infrastructure Ideas expects prices for new capacity to tumble, as they have everywhere else that auctions have taken hold, and growth in solar installations to resume in response. For Emerging Markets other than China and India, wind and solar investment rose 22% to a record $47.5 billion. In 2020, look for $300B in investment, a record 200 GW in new wind and solar capacity, and renewables as a share of net new generating capacity added worldwide to cross 70% for this first time.

2. Offshore wind is the new big thing

It looked like a curiosity for many years, but offshore wind is now breaking into the mainstream of electricity generation. Only five years ago, offered prices for offshore tended around $0.15-0.20 a kilowatt-hour, well-above the price for competing sources. But larger and more efficient turbines, bigger projects, access to better offshore wind resources, and more developed supply chains have been driving prices down. In September 2019, the UK saw bids for offshore generation at under $0.05/KwH, and now offshore is able to compete without subsidies in many markets. Bloomberg reports offshore wind financings in 2019 came close to a whopping $30 billion. Tenders are planned in many countries, and are spreading beyond initial markets of Europe, the US and China. Vietnam is looking at what could become the world’s largest offshore wind farm with a capacity of 3,400 MW. Look for many offshore wind headlines in 2020.

3. Challenges mount for power grids and utilities

Grid operators will continue to see a ramp-up of challenges associated with the energy transition in 2020. In developed markets, these challenges include continued switching to lower-cost generation sources, transmission, integrating storage, and integrating growing numbers of electric vehicles. The average EV traveling 100 miles uses as much power as the average US home does daily. California projects that EV’s will use over 5% of the state’s generation capacity by 2030. In developing markets with technically weaker grids, dealing with intermittency will be a bigger challenge, as well as integrating distributed generation and storage. Emerging Market cities may also create new demands as they start adopting electric buses in large volumes, the way we’ve seen in China. Large EV bus fleets will put significant pressure on charging infrastructure resources, while also offering potential storage solutions for urban utilities, especially as Vehicle-to-grid technology, or V2G, becomes more available. Look in 2020 for larger transmission investments in developed markets, and increasing concern in Emerging Markets – particularly those with state-owned grids – about how to modernize grids.

4. Non-lithium batteries get serious

As recently headlined in the Economist, Generating clean power is now relatively straightforward. Storing it is far trickier. Total investment in storage in 2019 came to around $5B, 99% in lithium-ion batteries. While this has been a major success, grids will need complements to lithium-ion technology soon. Though the cost of lithium-ion batteries is falling quickly, longer-term storage is likely beyond its practical capacity. Capacity to keep growing with solar and wind is also a question: the Institute for Sustainable Futures states that a world run fully on renewables would require 280% of the world’s lithium reserves, while concerns over sustainable sourcing of cobalt remain. Companies focused on longer-duration storage alternatives saw a major influx of investment in 2019, led by Energy Vault $110 million funding round, the single largest equity investment in a stationary storage company, according to Wood Mackenzie. Highview Power signed the first liquid air storage offtake deal, for 50MW in Vermont in December 2019. While 2020 project announcements with non-lithium batteries will remain small, look for them to make big headlines. And look for them to spread faster into smaller, low-income developing countries. The economics are more favorable in remote or island grids, where imported diesel creates a much-easier benchmark for storage to beat on price. Canada’s e-Zn targets remote communities that stand to benefit by offsetting diesel generator usage. NantEnergy, using zinc-air batteries has installed some 3,000 microgrids.

5. Green House Gas emissions: alarm keeps climbing, but no global agreements yet

One of our safest predictions. New studies and projections will continue to show climate change having a larger impact sooner than their predecessors. And politics, centered but not limited to the US, will again prevent significant concerted action to reduce emissions. The 2019 Madrid Summit was a glaring display of the stand-off. The only possible change for even 2021 here is the November election in the US.

6. Emissions-free city zones multiply

Though no global climate agreements are on the horizon, there is much climate policy activity at the local and national level: one big example is emissions-free city zones. This month, Barcelona opened southern Europe’s biggest low-emissions zone, covering the entire metropolitan area. Petrol-driven cars bought before 2000 and diesels older than 2006 are banned and face fines of up to €500 each time they enter the zone, which is monitored by 150 cameras. The new Spanish government is said to be planning low emission zones for all towns with over 50,000 residents. Whether driven by national or municipal authorities, we can expect to see such initiatives multiply rapidly, driven both by concerns over global climate inaction and over local air quality. Such zones now create opportunities for carmakers, though one can also expect to see EVs increasingly favored by such mandates, tilting the new opportunities towards EVs – and providers of EV infrastructure.

7. Unilateral “100% renewables” commitments multiply

Between frustration at the lack of global progress on reducing emissions, and the prospect of increasingly cost-competitive renewables and storage resources, a growing number of US states and utilities are setting targets for reliance on 100% clean energy. Thirteen US states, along with Puerto Rico and the District of Columbia, have now set 100% clean energy targets. Another four large states have announced plans to do so. Half-a-dozen large private-sector utilities have also committed to 100% clean energy targets, including famously coal-intensive Duke Energy. These mandates will continue to open new opportunities for renewable energy and storage providers, and importantly will likely offer less price-sensitive demand for longer-duration storage providers. The mandates will also start to impinge increasingly on natural gas demand for generation, and risk beginning to strand fossil-fuel generation capacity ahead of technical end-of-life timetables.

8. Financing premiums appear for climate risks

A big piece of news in the finance world last week was Blackrock’s announcement it would put in place a coal-exclusion policy. But even with Blackrock’s heft — it is the world’s largest investor in coal – this by itself is not a huge game-changer: not much new coal is going up in Blackrock’s geographies. Expect the bigger news in 2020 for infrastructure financing to instead be the appearance of the higher financial costs related to climate risks. In many ways it is shocking this has not happened yet, though a good piece of reporting from the New York Times last September pointed a finger at a big reason for the US. The Times reported that US banks are shielding themselves from climate change at taxpayers’ expense by shifting riskier mortgages — such as those in coastal areas — off their books and over to the federal government. Regulations governing Fannie Mae and Freddie Mac do not let them factor the added risk from natural disasters into their pricing, which means banks can offload mortgages in vulnerable areas without financial penalty. That cannot last without soon bankrupting the two biggest pieces of the US mortgage system (although it would be consistent for the Trump administration to prefer that option). The broader insurance industry is also suffering. According to Swiss Re, 2017 and 2018 were for insurers the most-expensive two-year period of natural catastrophes on record, most of them related to global warming. 2018’s most expensive insurance payout anywhere in the world was for the California Camp Fire. Fortune noted that new research shows that the wildfires of 2017 and 2018 alone wiped out a full quarter-century of the insurance industry’s profits. Unlike Fannie Mae and Freddie Mac, private insurance companies can react, and they will have to charge more to stay afloat. Expect 2020 to be the year that insurance prices begin to factor in climate-related catastrophe risks in a big way, and for that to begin flowing through to financing costs.

9. Delivery vehicles become the new EV focus

Electric car and bus sales volumes continue to grow, but expect electric vans to get a lot of the attention in 2020. Already in September 2019, Amazon placed a massive order for over 100,000 electric delivery vans – worth about $6B. The continued rocketing growth of the e-commerce delivery business, and the frequent use of diesel vehicles for delivery, make for an attractive and fast-growing market for electric vans. As noted by Wired, urban deliveries don’t require all that much range. Routes are predictable and plannable, and because the vehicles return at the end of every shift to a depot, recharging them is a breeze. Add the concerns of many cities about transport emissions, as noted above, and the attraction of the new market segment is easy to see. Now 2020 has started with a $110 million investment for Arrival, a UK start-up making electric delivery vans, from the combination of Hyundai and Kia. Arrival promises that its vehicles will be cheaper than their traditional, diesel-powered competitors, even without further declines in battery prices. Interestingly Arrival’s business model will also facilitate more rapid expansion to Emerging Markets than for makers of other EVs. Rather than building a huge new production plant, Arrival will work from “microfactories” that make only 10,000 or so vehicles a year, but sit closer to where their customers are, and making geographic expansion simple. Look for major changes in the logistics business in emerging country cities to flow from this soon.

10. More alarms over hacking of infrastructure

Many new opportunities are opening for infrastructure investment. Yet risks are growing as well. The hacking of Ukrainian energy company Burisma late in 2019 by the Russian military was clearly politically motivated. Hacking capabilities continue to grow far faster than defenses. Look for more widely-publicized attacks on infrastructure assets in 2020.



The Drones are Here

The Drones Are Here
November 2019

Drones are here. Production is up, prices are down, and they’re showing up practically everywhere. Including, of course, where you don’t want them – as the headlines of drones interfering with firefighters in California last week illustrated so clearly. Infrastructure will never be the same again.

Hot off the press are the “drone airlines.” In late September the first of these became certified in the US by the FAA, run by UPS (UPS now runs the first official drone airline). UPS Flight Forward now has the same status as business jet operators, or airline services that run on-demand rather than scheduled services. UPS can now expand from its North Carolina pilot, where it has run over a thousand revenue-generating flights on a hospital campus, moving supplies around. Only a few weeks later (or a few weeks ago, however you want to think about it), Alphabet’s Wing began commercial deliveries using drones. The first operating segment of Wing’s business is just north of UPS’ pilot, in southern Virginia, and is being used to deliver packages for major clients, such as Walgreens. By the end of October, Uber had gotten into the contest, showing the design of the new six-rotor (for vertical takeoffs and landings) drone, with about 20-mile range, it plans to integrate into its Uber Eats delivery chain.

drone run by alphabet

While it’s possible that pilotless airlines will eventually be a thing, the real impact that these flying drones will have in transportation is on logistics. As costs continue to fall, and range continues to increase, and the machines continue to get smarter, and urban roads continue to be congested, drones have the potential to create major advantages for logistics companies. Increasingly they are as cheap or cheaper to buy than ground transport vehicles, and they can get from point to point faster than most vehicles can – at least within the range of the drones. For now the transport advantage is limited to small and/or high-value cargo, but one can see this boundary evolving rapidly in the near future.

To date (well, one month into official commercial drone services), only a handful of companies are involved. The early adopters already have major investments in electronics and technology surrounding transport logistics. But while it is logical that these players have gotten out the door first, the barriers to other firms adopting drones as part of their own logistics chains are pretty low. Sure, regulation is an issue, especially today in jurisdictions such as the US where most services are regulated; it is not surprising that Europe has seen little or no movement in drones to date. Rules are coming. Putting in place the surrounding technology to use and organize a large fleet of drones is a major investment, but the technology is getting simpler – and the costs keep coming down. Expect the use of this technology to spread fast. Some of the biggest potential for drone transport may well be in the mega-cities of the developing world. There logistics are the most inefficient, and therefore costly for users, and entry regulations likely to arrive later than in heavily-regulated Europe. The relative value-added of cargo transporting drones may be especially high in places like Mumbai, Bangkok, Buenos Aires, and Lagos.

The prospective infrastructure market for drones is not limited to transport. Some power utilities have shown significant interest in the technology (see “Why Power Companies Love Drones,” from Bloomberg New Energy Finance). Here the driver is not so much the ability of drones to carry things from one place to another, but rather their ability to carry increasingly powerful, increasingly small, and increasingly cheap imaging technology aloft over hundreds of miles of power transmission lines. As BNEF points out, drones offer a cheaper and more effective way of monitoring infrastructure than traditional methods of sending workers to dangerous, remote terrain. Drones have already come into widespread use by power companies in the US, and it is forecast that upwards of 400,000 will be deployed in the energy sector by 2020. Aside from transmission lines, drones can also inspect wind turbines and solar panels for nicks and other issues which may reduce production efficiencies. They can also potentially be used for simple repairs on lines – as seen in their use by Duke Power after Hurricane Maria in Puerto Rico. The market is not trivial. Price Waterhouse Coopers has estimated the market for drones just in the US energy sector at $9.5 billion. Again, while this technology is rolling out initially in the US, one can see – especially as prices keep dropping – its very high value for utilities in the developing world, where logistics of getting to lines and monitoring is often made more complicated by geography and poor surface transport. For utilities in sub-Saharan Africa in particular, which often have extremely high Transmission and Distribution losses, drones may offer a low-cost means of saving very large amounts of money – not to mention significantly improving the availability of electricity.

An intriguing corner of infrastructure where drones may offer even yet higher value is: water. The impact of flying drones on an infrastructure service delivered largely below-ground may not seem intuitive. The important thing to focus on here is what a drone is: it is not primarily a “mini-airplane;” rather, it is a mobility platform – technology to move something else around. The something that gets moved around in logistics is a client’s cargo. The something that gets moved around for a power company is imaging technology, specifically above-ground imaging technology. For a water utility, moving imaging technology around can be extremely valuable: it just has to be underwater imaging technology, rather than above-ground. Now, this exists. And it is cheap. Check on Google, and you’ll find several submersible drones you can buy yourself – some for under $1,000 (see Forbes: Most Drones Fly. This Drone Swims). Water utilities have higher transmission and distribution losses than power companies – in fact for many water utilities, “non-revenue water,” essentially water lost somewhere in the underground pipe system, is the highest cost element for the company, and higher than profits. The problem for water utilities is that it is difficult to see underground pipes: it’s expensive and disruptive to dig them up. Ideally, you want to be sure that you know exactly where a leak is before you dig. This is where drones come in: a submersible drone with a camera makes it much cheaper and faster to find leaks, meaning that pipe maintenance becomes much cheaper, less risky, and faster. One can see potentially large impacts here on the economics – and service standards – of water utilities. And again, one can see the potential value-added being the highest where the inefficiencies today are the greatest: in the developing world.

For infrastructure investors, what are some of the implications of drones? The most visible and likely will probably be in logistics. As we saw above, the more inefficient a market for commercial transport is today, the greater the potential impacts of drones to carry cargo. So one can see logistics companies everywhere in the world wanting to improve their business by incorporating them. With the hurdle of mastering some of the technology involved, one could also potentially envisage in some markets a type of company which does not exist today: cargo transport companies specialized in drone usage, especially in markets with many large urban areas and challenging ground transport conditions – say Brazil, or Nigeria. Given the potentially widespread use for drones in any geography, one can also foresee the creation of companies specialized in selling, servicing, and/or leasing drones in multiple markets – potentially across different infrastructure sub-sectors. For power and water utilities, where drones can potentially have a significant impact on reducing transmission and distribution costs, yet where incumbent utilities may not be at the forefront of deployments of new technologies, one can see the possible development of wide-spread programs to encourage, facilitate, and finance the deployment of drones. And many more. Investors will want to become conversant with this new technology, look for related investment opportunities which have not existed previously, and be a channel for clients to see how these can impact their businesses.

Yet another disruptive technology impacting infrastructure. As with some of the others – wind turbines and solar panels – drones have the potential to enable the delivery of services more cheaply and efficiently. But as with some of the others – dockless scooters for example – they have a less favorable side too. As we saw this Summer with the attack on Saudi Arabian energy facilities by drones launched from Yemen, a mobility platform to move things around can carry destructive cargo as easily as useful cargo. So as with the proliferation of more efficient electronic control systems and data management which has helped utilities, but also opened them up to more risks, so with drones. Drones will have a big market, and a big impact on infrastructure – and they’ll be one more element of risk for companies to keep an eye on. Off we go!

Checking in on Energy Storage Costs

Checking-in on Energy Storage costs
September 2019

Blink and you’ve missed something.

The energy storage market, seen as slowing down in 2018, has been on fire in 2019. If your understanding of batteries and storage is based on what you saw a year ago, it’s out of date. Actually, if your understanding is three months old, you’re still out of date! The size of energy-plus-storage projects has jumped, while their price has plunged.

Let’s look at the numbers. Based on the data collected by Bloomberg New Energy Finance in their annual battery price survey, the best available industry pricing benchmark, the average battery pack price fell 85% in the eight years from 2010, reaching an average of $176 per megawatt-hour in 2018 (see graphic).

Battery Prices 2010-2018

Battery technology has driven a price decline of the same magnitude as that which we’ve observed for solar energy. And as we’ve observed with solar, understanding the competitive position of an energy source using prices of the past, or even the present, leaves planners well out of date. Price being quoted for renewables-plus-storage of only five years ago, in the 20 cents per kilowatt-hour range – making them far more expensive than thermal electricity alternatives – have given way to prices 50-75% below this level, as we’ll see below. In only a few years, storage has gone from a niche concept to the new game in town. And much in the same way that solar energy price “records” have been being set continuously, each being greeted by disbelief that prices can reach this low, solar-plus-storage price records are now the stuff of headlines.

Four 2019 examples from different US states illustrate the bigger and cheaper trend.

  • Hawaii. In January 2019 the Hawaiian Public Utilities Commission approved contracts for six projects, with a capacity of 247 MW of power and 998 megawatt-hours of storage. This was the second largest “solar-plus-storage” project globally, behind only Moss Landing in California. The price range for the six projects came to between $0.08-$0.10/ KwH, prices cheaper than both Hawaii’s gas peaker plants and current cost of baseload fossil fuel plants (around 15 cents, given the high cost of transporting fuel to the islands). Developers include AES, Innergex, Clearway and 174 Power Global.
  • Florida. In late March 2019, Florida Power & Light Company announced it was building the world’s largest battery energy storage system, The FPL Manatee Energy Storage Center. At 409MW capacity, the project is claimed to be four times larger than the largest battery currently operating worldwide. FPLC also announced that the plant would help accelerate the decommissioning of two 1970s-era natural gas power units. Manatee Energy Storage Center would be linked to an existing PV plant, and start operating in 2021. FPL expects customers will save more than US$100 million through the change. This was a twist for FPLC’s existing modernization program which had focused on replacing oil-based power plants with U.S.-produced natural gas units. The natural-gas units were no longer the cheapest alternative for FPLC.
  • Nevada. Nevada in 2018 announced a huge solar-plus-storage procurement at then world-record prices, just below four cents a Kilowatt-hour. In June 2019, the Berkshire Hathaway-owned utility beat the one-year old record, announcing three new solar projects totaling 1,200 MWs paired with 590 MWs of storage. One of the projects, at 690 MWs, would blow past FPLC’s Manatee project to become the largest solar plant in the US. The winning bidders were developers 8minute Solar Energy, EDF Renewables and Quinbrook Infrastructure Partners with Arevia Power. 8minute said its project could run 65% of the time during peak summer hours, more than double the 30% average for solar in Nevada. 8minute said its project, at 300 megawatts of solar and 135-megawatts of 4-hour storage, will sell electricity at $0.035/KwH, a new world record low.
  • California. In early September, 2019, Los Angeles’ municipal utility approved the contract for Eland, a project for 400 MWs of solar power with up to 300 MWs and 1,200 MWHs of energy storage. Winning bidder 8minute offered a power-plus-storage rate of less $0.04/KwH for 25-years. The effective capacity of the project is expected to be 60%. Buyer LADWP is the largest municipal utility in the U.S., serving more than 4 million people.

With these there are now 9 energy-plus-storage projects underway with a capacity of over 100 MW (The Biggest Batteries Coming to a Grid Near You: the 100 MW Club is about to get a lot busier). With these new utility procurements dominating the news, the US is expected to regain the position of the world’s largest market for energy storage. 2019 is also widely expected to be the first year in which energy storage investments top $1 billion, from $500 million in 2018. Interestingly, the world’s largest market for storage in 2018 was South Korea, helped by a combination of strong incentives to reduce reliance on imported oil and coal and its well-developed domestic technology sector. South Korea procured over 1 GW of energy storage in 2018. However, fires related to Lithium-ion batteries have occurred at some 35 locations in the country, leading regulators to significantly slow down procurement. Problems appear to have been related to battery management systems rather than the batteries themselves, and similar issues have not been reported from other markets.

Interestingly as well, one can note that the world’s largest market for energy storage these last two years was not the one which might have been expected: China. In related technologies China has become by far and away the world’s biggest market for solar energy, and has an even larger lead in electric vehicles and vehicle batteries (almost 99% of the electric buses on the road today are in China). Yet China does not have a similar leadership position in solar-plus-storage – yet. China brought on-line a reported half-gigawatt of energy storage in 2018, equal to previous installed capacity, but well behind the US and South Korea. This surprising slow market development seems to stem from administrative regulations, which have compensated storage on an essentially cost-plus standalone basis, and the relative novelty of solar auctions to date in the country. With the announced administrative changes from China’s National Energy Administration, integrating storage into spot market pricing, demand is expected to jump substantially. Wood Mackenzie projects China’s cumulative energy storage capacity to grow to 12.5 gigawatts in 2024, a 25-fold increase in the current installed base, and about 14% of the projected global market in 2024. Looking at China’s track record in solar and in batteries, this may well be under-estimated. India also began to procure energy storage in 2017, and tendered for just under 100 MWs in March of this year. To date, India, though the second largest global market for solar power now, is a tiny player in storage. Lack of policy clarity has been a major issue, with a set of 2017 tenders having been cancelled without explanation early in 2019. Prime Minister Modi has launched a National Mission on Transformative Mobility and Battery Storage, under which a program will support the setting up of battery gigafactories across India. One can also expect the energy-plus-storage market in India to grow substantially.

Where to from here?
Looking forward, four key items stand out in attempting to foresee the renewables-plus-storage market of the future.
1) Still-lower prices and continued fast demand growth. Bloomberg NEF projects, based on a historically observed experience curve showing prices dropping 18% for every doubling of volume, that average prices of battery packs will fall from the current $176/KwH to around $94/Kwh by 2024 and $62/Kwh by 2030. Based on BNEF’s calculated present $0.06-0.07 premium to add four-hour storage to renewables, this would imply prices of energy-plus-storage falling below $0.06 per kilowatt-hour fairly widely – well below the cost of producing energy from greenfield coal plants. BNEF’s latest report on the battery market states “batteries co-located with solar or wind projects are starting to compete, in many markets and without subsidy, with coal- and gas-fired generation for the provision of ‘dispatchable power’ that can be delivered whenever the grid needs it (as opposed to only when the wind is blowing, or the sun is shining).” As we have been seeing already in several states, these declining prices will lead to rapid substitution – for investments in new electricity capacity — of renewables-plus-storage for fossil-fuels. Wood Mackenzie estimates that by 2024 global cumulative capex investment in energy storage will top $70 billion. This is a big deal, and a big disruption – or better put, yet another big disruption – for “traditional” energy markets. We can, in tandem with this growth, expect sharply declining demand for gas-plants (and so continued historically low natural gas prices). Wood Mackenzie projects that over 6 GW of planned gas-peaker capacity is at risk of cancellation in the US in the next few years; if storage costs continue to decline at double-digit levels annually, as they have done, then gas cancellations just in the US could run to 15 GW, or 80% of planned additions through 2026. In markets where natural gas is more expensive than it is in the US, substitution may occur even faster.
2) The hunt for the Next Big Thing continues. There is, of course, a catch to the rosy picture of renewables-plus-storage. It’s not in the well-publicized issue of the cost of cobalt, a key raw material for lithium-ion batteries of which more than half comes from war-torn Democratic Republic of Congo: costs of cobalt had spiked in 2016-7, but have fallen since as more efficient battery processes reduce demand. The catch is that lithium-ion batteries work well for providing critical four-hour storage, but not more. So while they are rapidly are becoming the best bet for dispatchable peak power, they don’t yet provide the equivalent of baseload, available 24-hour a day power. The search for the best longer-duration options continues. Pumped-hydro, which uses extra power to pump water uphill which can be used to turn a turbine and generate electricity when needed, is cost-effective but capital and space-intensive, so cannot be used in that many places. Flow battery technology gathers a lot of interest, but prices are prohibitive today for deployment, so much depends on whether the technology will gather the kind of cost-reduction which lithium-ion has.
3) Emerging Markets lag far behind. If we look at trends in relative economic growth, electricity consumption, and solar energy investments, we would expect that in the near future Emerging Markets would account for a large share, and certainly more than half, of demand for a centrally important energy technology such as storage. Yet unless we consider OECD-member South Korea to still be an Emerging Market, these countries account for less than 5% of today’s renewables-plus-storage market. By contrast, Emerging Markets account for roughly 2/3 of all solar and wind investment globally. The big bottleneck in emerging economies’ adoption of energy storage at scale is – and will continue to be — administrative capacity. We can see in the booming US market the amount of work which went into setting standards, regulations, and procurement programs. And we can see that in the two biggest emerging economies, China and India, policy choices have contributed to a slow rate of adoption to date. It seems that now China may have found a better procurement approach, but time will tell. We can also expect, as a corollary to this issue, that there will be a very large need for capacity-building, policy and technical support across emerging economies, to help them on the next stage of power availability and cost reductions. We can also expect that their success in doing so will have a very large impact on how big the storage market becomes, and how fast. Failure to get the procurement and regulatory environment right will likely mean a smaller global market than now estimated. Success, especially in China and India, may imply a significantly larger global market for battery storage than analysts are now projecting.
4) A push from policies? Wind and solar generation, in their early growth years, benefitted from significant policy support and subsidies. Now both technologies have reached the point that they are outcompeting alternatives on an economic basis without subsidies. In contrast, energy storage has benefitted significantly less from subsidies, as has renewables-plus-storage. For wind and solar in their early years, the medium-term question in forecasting market size was whether they would lose subsidies. For energy storage, a key medium-term question may be the exact opposite: will storage see new subsidies and policy support that it has not previously? If so, then the market may become much larger much faster than analysts presently predict. In an age of fiscal constraints and anti-renewables stances like that of the current US President and the oil and coal industries, this may seem far-fetched. But as Infrastructure Ideas has noted previously, energy policies may become substantially different in the future. Such a change depends largely on one’s views on the unfolding of climate change. If extreme weather events – floods, storms, wildfires and drought – continue to rapidly become more frequent and severe, as seems to be the case, and if data shows that keeping emissions even close to, let alone below, 2 degree warming scenarios has become essentially impossible, then the likelihood of more drastic climate-related policy actions increases substantially. Infrastructure Ideas sees this as the likeliest scenario, and probably within a five-year horizon from now. In such a scenario, “organic” growth of renewables and storage in electricity generation – as impressive as that growth now looks – may come to be seen as far short of what is wanted by voters and policy-makers. And in such a scenario, subsidies and other preferential polices favoring renewables-plus-storage combinations become one of the likeliest policy tools – further accelerating the current “organic” growth of storage. Stay tuned to the Weather Channel…

And the Prices Keep Falling (II)

And the Prices Keep Falling (part II)

In the first of this two-part post, And the Prices Keep Falling, Infrastructure Ideas highlighted the hugely positive side of this Summer’s remarkable solar auctions in Brazil and Portugal. With the price of new solar – and wind – generating capacity continuing to fall to record low levels, energy is getting cheaper for nearly all. And cleaner.

Yet there is a dark side.

Today’s post outlines some less positive consequences of these falling prices for two important sets of players. And we don’t mean the fossil fuel industry. Falling prices have downside for solar investors and lenders, and – surprisingly – for some of the countries who most need solar and wind power.

Falling costs (as distinct from prices) can affect industries in different ways. In some industries, producers are able to maintain previous price levels, or at least ensure that prices fall more slowly than costs. This drives higher profits, and is naturally the outcome to which most firms aspire. In other industries, prices fall as fast, or even faster than costs. This is the kind of outcome which disproportionately benefits consumers. As economists would frame it, consumers are capturing most – if not all – the benefits of falling costs. The solar and wind generation sectors are an example of the latter.

Why this should be the case is a good question, but one with a simple answer. Consumers, and consuming countries, have captured most or all of the benefits of falling solar and wind costs for one reason: competitive auctions. The across-the-board switch from older power procurement methods — negotiated contracts, and feed-in-tariffs – to competitive price-based auctions was pioneered in large Emerging Markets, notably Brazil and South Africa, in the early 2010s. now it is highly unusual to see utility-scale procurement on any different basis. A Bloomberg New Energy Finance analysis in 2016 found that the switch to auctions was responsible for as much of the price decline in countries which adopted them as were technology cost declines.

But what is great for buyers is becoming increasingly problematic for investors and lenders. Prices in recent PPA auctions are falling to such levels that little room is left for either unforeseen operational risks, or for the cost of capital. Already in mid-2018, UK consulting firm Cornwall Insight projected that unsubsidized solar projects would be unviable by 2030 (what happens when renewables eat their own profits?), in this case because of pushing wholesale prices in the UK down so far. Wood Mackenzie’s Emma Foehringer Merchant wrote back in January 2019 of a “finance bubble” in the solar industry. Looking at results of recent solar auctions, Merchant noted “A flood of new investors, like pension funds and insurance companies, now view solar as a stable asset. That “wall of money” going after a smaller pool of projects has created a market so competitive that many sponsors are willing to accept lower-than-average returns. Power-purchase agreement prices have also fallen to new lows, and contract terms have gotten shorter. Industry financial experts say, taken together, those trends have led to a mispricing of risk.” The chorus has become louder after this Summer’s below 2 cents/KwH auctions. A piece by Wood Mackenzie’s Jason Deign (Key to those record-low solar bids?) looked at the mechanics of bidders’ approaches to preparing these super-low priced bids, and concluded that bidders were offering very low prices for Power Purchase Agreements with the idea that they could sell power for higher prices in later years in merchant markets. An assumption which, given the recent history of how fast prices are falling, would seem highly unrealistic.

These emerging risk profiles for new solar and wind generation investments are getting further and further away from “traditional” electricity industry risk profiles, which assumed steady long-term revenues and predictably stable conditions for the life of 15 to 20-year loans. Normally lenders to such projects would adjust to higher risk and lower predictability by charging higher interest rates, but with prices falling so far and margins getting squeezed, new projects and owners have no room to accommodate higher rates – and indeed are strongly pressuring lenders to squeeze margins further down. A likely outcome? Lower profits and higher risks for renewable energy lending portfolios.

As solar becomes a larger and larger – and lower cost — market, one would think this is all good news for industry players, though we see it is not. And there’s another group for who one would think it’s all good news – but it’s not – or at least not for some of the group. This group? Low-income countries.

In principle low-income countries are the potentially biggest beneficiaries of low-cost wind and solar. Often the countries with the biggest electricity deficits, the highest costs of power, and the least money with which to add generation capacity, low-income countries stand to benefit disproportionately from plunging solar costs. And those that move to join those countries establishing competitive procurement auctions will do just that – benefit disproportionately. Their development and economic gains will be huge. The catch? Not all will manage to do so.

The difficulty for many low-income countries lies in organizing access to this new bounty of cheap solar (and wind). It will not happen by itself. Implementing competitive auctions is not an impossible task, but it does require organization, administrative competency, and ability to deliver on a process once it is announced. Many low-income countries face two important hurdles to achieve this. The first hurdle is weak administrative capacity to organize auctions. Auctions, after all, often differ radically from existing procurement mechanisms in many low-income countries, and a poorly handled process can significantly limit interest from solar companies – leading to less competition and unnecessarily high bid prices. This is a hurdle which can be surmounted, but often requires assistance from advisers who have done it before. The second hurdle is probably the higher. The second hurdle is the power of vested interests who benefit from existing arrangements – often high cost, inefficient arrangements. Foremost among these may be the national monopoly utility, and those in charge of supplying raw material – oil or coal – to the existing generation fleet. These vested interests may have significant political power and influence, enough to derail the implementation of administratively complex and novel competitive auctions for solar.

For countries which fail to overcome these two hurdles, the future is bleak. In a world where more and more countries are able to achieve lower energy costs through procurement of low-priced wind and solar generation, those countries whose energy costs are dominated by high-priced, “traditional” thermal electricity resources will become less and less competitive, and fall further behind their neighbors. Failure to join the low-cost renewable energy club will carry very high opportunity costs, both in terms of development, and of foregone economic competitiveness.

So cheer low cost solar. And encourage all not to be left behind.

$3 billion for Mobility in the Middle East

In June 2018, Infrastructure Ideas surveyed the mobility revolution in transport. It was clear that capital was soon going to be flowing here in amounts rivaling traditional transport sectors such as ports, airports and railways. And while 95% of the capital to date in these sectors was being deployed in OECD countries, we predicted that soon, as in most areas of infrastructure, the majority of new capital would be seeking out higher growth opportunities in Emerging Markets. It didn’t take long to check that prediction.

Last week, Uber announced that it would acquire the Middle East’s largest ride-sharing service, Careem, for over $3 billion.

This will be one of the largest private infrastructure transactions to date in the Middle East. And for a company that is barely six years old. Careem, based in Dubai and operating across fifteen countries in the Middle East and surrounding areas, was founded in 2012. Ride-sharing was not even its initial business, as it was founded as a corporate car service, before following consumer demand into ride-sharing and delivery services similar to Uber Eats. Large markets served by Careem include Pakistan and Turkey.

For Uber, this is not only big money, but a departure from how it has addressed its Emerging Market competition to date. In China, in Indonesia, and in Russia, Uber has previously chosen to sell its in-country operations to local rivals, preferring to raise cash to cover losses, rather than maintaining loss-making operations in more countries. The Careem acquisition signals that as it edges closer to breaking even and to profitability, Uber may now be more willing to pay for control of Emerging Market rivals. Uber is initially signaling that Uber and Careem services will run in parallel in the dozen or so countries where the two both operate. CEO Mudassir Sheikha will continue to run Careem, according to Uber’s announcement. China’s Didi Chuxing, the biggest ride-sharing company in China, has been one of Careem’s largest investors. Careem’s previous fund-raisings had generated some $800 million, and analysts place Uber’s acquisition price at about a 50% premium to previous valuations.

The announcement follows by days the IPO by Lyft, which valued Lyft at $22 billion. Uber’s preparations for an IPO have been widely covered, with an expected valuation of around $120 billion.

This is another sign of how technology, after revolutionizing the energy business, is having a larger and larger effect on other parts of the infrastructure world. As we’ve previously written, for investors, staying locked into traditional segments and failing to understanding the impacts of technology will carry a high cost in missed opportunities.

EV Buses: the next big thing (maybe)

EV Buses: the next big thing (maybe)

Over the last two years, electric buses emerged as “the next big thing” in infrastructure for cities around the world. As noted by Infrastructure Ideas last year (“Notes from the Revolution: implications for infrastructure investors”), the market for electric buses has been developing even faster than the much-publicized market for electric cars. McKinsey calls this “the most successful electric vehicle segment,” with a 5-year sales growth rate of over 100%. Bloomberg New Energy Finance forecast, due to EV buses’ advantages in operating and maintenance costs and concerns over urban air quality in many mega-cities, that electric buses will capture as much as 84% of the new bus sales market as early as 2030. The European Commission has called for 75% of all buses to be electric by 2030.

For those readers who don’t ride buses, especially those in North America where e-buses are barely beginning to be introduced, this might look like a quaint but largely irrelevant sideshow. Yet this is already be a $50 billion dollar a year infrastructure market, and global investments in electric buses will likely be well over $1 trillion through the end of 2030. Not a market to sneeze at.

Yet as 2019 gets going, the prospects for EV have gotten cloudier. A lot of advantages and enthusiasm remains, but the experience of early adopting cities has also raised concerns to be addressed. Let’s see what is happening.

Over 100,000 electric buses were sold in 2018, costing between $300,000-$1 million each. Of those, over 85% were sold in China, which has a huge lead over the rest of the world in adoption and production to date. So the experience in China is by the far the deepest. But let’s begin with the more limited European and North American experience.

The experience to date with EV buses in the USA and Europe was summed up recently by City Lab’s Alon Levy in his column “The Verdict’s Still out on Electric Buses.”  EV buses have been shown to struggle when it’s too hot, too cold, or too hilly. Much of the issue has related to charging range, with for example Albuquerque finding that their new fleet – purchased from Chinese market-leader BYD – is showing a range of about 2/3 the contractually indicated range of 275 miles per charge. Most of the buses there ran on the city’s Central Avenue route, which features a large elevation change – consistent with the experience of Hong Kong, which also found that EV buses struggled on the hills there. Albuquerque has reportedly returned their buses to BYD. Phoenix, also in the Southwest, reported issues when temperatures hit Summer peaks over 100 Fahrenheit. Meanwhile cities in Minnesota and Massachusetts have found that EV bus charging range drops off significantly when temperatures drop to freezing or below. In Moscow, where Mayor Sergey Sobyanin has made a big push for electric buses, early experience indicates that roughly double the number of buses anticipated have been needed on routes run with EV buses, due to higher than planned time required to charge the buses.

If performance is problematic, and translates into higher – as opposed to lower – operating costs, this burgeoning new market may be in trouble. After all, like with other electric vehicles, EV buses still cost more to purchase than traditional diesel buses – up to 30% more. Notes of caution, as a result, are becoming more common across transit agencies.

China, as noted, now has much more experience with EV buses than North America – in fact, more experience than the rest of the world combined. How has this gone? The answer: much better, but to some extent the verdict is also still out.

Chinese cities such as Shanghai and Shenzhen have become world leaders in electric mass transit. A recent profile of the Shenzhen experience – where all 16,000 buses are now EVs — in The Guardian (“Shenzhen’s Silent Revolution: the world’s first all-electric bus fleet”) was extremely positive. Service levels have been satisfactory, annual CO2 emissions have been cut by nearly a million tons, air pollutants cut as well, and fuel expenses slashed. Because of the volume of the market, EV buses cost less than half (about $300,000) than they do in the US. Which still implies that Shenzhen has bought about $5 billion worth of buses. In the next two years, another 30 Chinese cities plan to achieve 100% electrified public transit, including Guangzhou and Nanjing. Yet a big piece of the success has been on the back of public subsidies. These subsidies make all sorts of sense in terms of public interest in China, with air pollution having been a major health and policy concern in many Chinese cities for years. But they are large – reportedly at around 50% of the capital cost of a bus, plus some operating cost support. These subsidies are due to lapse after 2020, so it will be interesting to see how the domestic market evolves subsequently. Investment in charging stations has also been substantial, with Shenzhen building around 40,000 charging points. And, as elsewhere, hilly terrain (Hong Kong) and cold (northern China) have negatively affected EV bus performance.

What to make of all this? EV buses, like most other disruptive technologies, will take some time to shake out issues. And the issues are real. Yet, it’s easy to forget that the early generations of wind turbines and solar farms failed to meet performance expectations, and experienced various teething problems. These problems haven’t prevented wind and solar from accounting for the vast majority of new electric capacity additions. And both charging technology and bus batteries are still evolving rapidly, with costs continuing to fall and capabilities improving. Perhaps some jurisdictions will decide that unusual conditions – cold, heat, or terrain – should make them late adopters, or hold-outs on EV buses altogether. And many cities will exercise some more caution in planning and procuring their next generation of public transit capacity, which is a good thing. In many Emerging Market cities, with substantial numbers of informal buses plying routes, transitions will take a lot of effort to manage. And it will take a lot of money, which cities will need to finance.

But in the end, EV buses are a superior technology, with rapidly declining costs, and that will be the determinant of the market. Cities will only face more demand for better air quality. Charging costs are far lower than diesel fuel costs. Technology advances and larger manufacturing scale will turn the current upfront cost disadvantage of EV buses into a large cost advantage over the coming decade. “Range anxiety” will find solutions, in improvements of both battery technology and convenience of charging. As for the reliance on subsidies, this is of course an important issue. Yet again the parallel with solar power generation is instructive: subsidies in early years raised production volumes, and accelerated the technology-driven decline in costs. In 2012/2013, for instance, an observer of solar power would have seen something similar to the EV bus market: an apparent reliance on subsidies driving volume, especially in China, and a 20-30% cost disadvantage over alternative technologies. Five years of cost declines later, the cost disadvantage has become a large cost advantage, and subsidies irrelevant. Hard to find reasons that the same story won’t play out with EV buses.

For cities, and for investors, a note of caution on EV buses is fine. Ignoring the coming of a $1 trillion market would be an expensive mistake. Not all cities will spend $5 billion on bus fleets like Shenzhen, but there an awful lot of big cities in the world. This will be a capital-intensive transition. Stay informed and up to date. The diesel bus is heading in the direction of the coal-fired power plant.