Cleantech Perspectives

PwC's Cleantech Perspectives enable us to share some of the thoughts and insights we have gleaned from our groundbreaking project work and research in the cleantech indistry.

Each quarterly issue of Cleantech Perspectives features a segment on renewable energy, eMobility, smart cities, and tax policy. We will also plan to regularly address issues on China, given its considerable impact on the industry. In addition, each issue will feature a rotating topic; this month we focus on the LED market.

October 2012 issue:

Read other issues of Cleantech Perspectives:


Download: Residential and commercial solar - New models fuel expanding markets

Residential and commercial solar - New models fuel expanding markets

With construction of some of the world’s largest solar power plants, utility-scale solar in the U.S. has accelerated in the past two years, while the residential and commercial markets have experienced a quieter revolution. Declines in component and system pricing have improved the economic drivers for residential and commercial buyers and expanded the potential market. However, to achieve higher penetration into the U.S. residential and commercial markets, both a renewed focus on total installation costs and new business models will be required.

Today, suppliers serve the residential and commercial photovoltaic (PV) power markets through four primary channels:

  • Direct ownership: whereby individual homeowners or businesses directly purchase PV systems for their properties
  • Solar leasing/PPA: whereby a third party installs and owns a PV system at a host (individual or business), and sells the power to the host via a power purchase agreement, operating lease or capital lease. Often, the third party owner maintains the installation and guarantees an annual output for the system
  • Community-owned solar power: whereby individuals or companies can “buy-in” to offsite solar generation through direct ownership or lease of an installation that is not co-located with the end users/owners
  • Election into utility-owned PV generation: whereby individuals or companies can elect to buy PV-generated power from utility-owned PV power plants

Top investors target the residential solar leasing model

To address the growing residential opportunity, many of the world’s leading PV manufacturers have opened new business units and launched financing and hardware product solutions for the market. More importantly, the channel used to serve the residential market has shifted quickly in the past three years. In H1 2009, third party ownership with leases represented less than 20% of the California residential PV installation market, while in H1 2012 solar leasing claimed >70% market share.

The proliferation of the residential solar leasing model has garnered the attention and contribution of top tier investors. In the last 12 months, top investors – including Morgan Stanley and US Bancorp – have joined traditional investors in backing more than $1.7 billion in funds for U.S. residential solar leases. Among the transactions since 2011, several leading vertically integrated manufacturers have launched in-house U.S. residential solar leasing programs. In Q2 2012, one leading U.S. vertically integrated PV firm estimated that its residential solar lease program could generate 20% to 25% of its global business within the next two years.

While rapidly growing, the solar leasing model requires new operational functionality and presents new potential risks. Third party owners – either pure play or dedicated business units – need to manage portfolio risks and financing, expand monitoring and maintenance operations, design new sales force training, minimize customer acquisition costs, and target pricing strategies to successfully address the new distributed residential solar lease opportunity. Additionally, any update on the fair market value of solar systems may change the value that can be claimed under the 30% U.S. Investment Tax Credit (ITC) and accelerated depreciation rules.

Expanding community-owned solar installations make PV power accessible to new owner

Despite their growth, both the direct ownership and solar leasing models fail to reach many potential residential customers. Most renters, condo-owners and homeowners with non-optimal properties for PV installations have historically been unable to access PV-generated power through these models. However, recent large-scale pilot programs for community-owned solar are providing new opportunities to this previously untapped segment of the market.

In one example, a developer sells or leases a portion of a central PV-generated power system (up to 500kW in past programs, now expanding up to 2 MW) to individual utility customers. The utility consumers then receive a credit on their utility bill for the correlated portion of energy generated from the system, while the developer earns his return from the sale and/or lease revenue from the system. This program solicited a quick oversubscription by individuals and businesses, suggesting robust interest from this segment. In California, Senate Bill 843 proposed legal structures to enable similar programs for California residents seeking ownership in renewable resources, including solar PV. However, the bill did not receive a vote before the California State Legislature adjourned for the year. Nonetheless, the introduction of the bill may represent the first steps in an effort to enable access to centrally-generated, individually-owned solar power plants.

Both the opportunity and risk of community-owned solar programs are high. Robust interest in community-owned solar offers a new route to rapidly expand residential and commercial PV ownership while leveraging lower installation, maintenance and customer acquisition costs. Additionally, community-owned solar installations may be placed in preferred locations within a utility’s territory to optimize renewables integration. However, utilities – which risk reduced revenues and more limited control over PV generation assets – may face new challenges to economically maintain reserves and transmission facilities to serve all end users in high demand periods.

Balanced capabilities will define the leaders in evolving residential and commercial markets

As the diverse and discontinuous U.S. residential and commercial solar markets expand, a wealth of opportunity awaits innovative businesses. To succeed, new operational models are required, with an eye towards optimizing operational efficiency in a lower margin, highly competitive environment. Additionally, a complete and detailed understanding of financing structures, portfolio risk, and tax-based incentives for these new asset classes is essential to balance the opportunity and risk.

Contact

Johanna Schmidtke
Manager
(415) 498-6947
johanna.schmidtke@us.pwc.com

© 2012 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved.
PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Download: The LED industry - Building scalable operations for rapid, profitable growth

The LED industry - Building scalable operations for rapid, profitable growth

The potential for LED technology - Lighting the way

Today’s global lighting industry is responsible for approximately 19% of electricity use and 6% of greenhouse gas emissions . In this context, LED technology has the potential to be a game changer for the industry, with well-publicized environmental and technological advantages compared to conventional lighting (e.g., 50-70% lower energy consumption, no mercury content, and significantly longer life spans).

Commercial and industrial LED lighting is a major business opportunity as well, with a market size of $12.5B in 2011 and projected growth of 40% per year through 2016,. In the US alone, LED lighting has the potential to reduce US annual energy costs by $53 billion if it can reduce lighting energy usage by 40% . Given the huge market opportunity, how can LED manufacturers profitably serve it?

Solar industry transformation – A harbinger for LED lighting?

The global market for solar panels has grown an average of 66% over the past three years. However, a significant over-investment in manufacturing capacity and excess supply has rapidly driven down average panel selling prices. Solar panel manufacturers have struggled to remain profitable in this highly competitive environment.

LED lighting has similar industry characteristics as the solar PV market – rapid growth, large investments in manufacturing capacity in low cost countries, and expectations for manufacturers to quickly reduce costs (see Figure 1 for additional industry comparison).

Leveraging lessons learned from the solar PV market

As in the solar industry, we expect there to be winners and losers in LED lighting. LED market leaders should apply learning from the solar industry to best position themselves for sustainable, profitable growth. Specifically, companies can best adapt their business to both current and future market trends by focusing on four key operational strategies:

  • Transforming the supply chain to improve flexibility and reduce costs
  • Optimizing the global footprint
  • Developing an integrated, solution-driven value chain strategy
  • Delivering on product innovation

Transforming the supply chain to improve flexibility and reduce cost

Currently, the biggest roadblock for increased LED adoption is the high price of LED-based products. Many LED companies are driving market adoption by reducing product price and bidding aggressively on large projects, often at low margins. This pricing pressure, combined with short product lifecycles (typically 6-12 months) and volatile demand, often lead to high cost structures and operational complexity.

Companies need to employ proven supply chain capabilities to stay competitive. For example, developing planning capabilities such as supply/demand balancing and collaborative planning with customers will help manufacturers improve responsiveness to demand fluctuations. Also, building best-in-class strategic sourcing, supplier management, and end-to-end yield improvement capabilities will help players establish a more competitive cost structure.

Optimizing the global footprint

Asia is projected to be one of the highest growth regions and account for over 35% of the global lighting market and expected to rise to 45% by 20203. The primary growth drivers in Asia are high construction rates, major government funding for high efficiency building lighting, and replacement of existing outdoor lighting infrastructure. In addition to becoming the major LED lighting consumer, Asia is expected to be the chief supplier of LED chips and packages with factories in China, Taiwan, Korea, and Japan.

With product demand and component supply moving to Asia, companies outside Asia need to optimize their portfolio and global footprint to stay competitive. Manufacturers need to develop tailored products that address the unique needs and preferences of the Asia market. Additionally, they need to redesign their supply chains to minimize the total cost to deliver products to customers in this region. This may require aggressively locking up top CM capacity and/or repositioning key value chain partners and supply chain resources to secure material supply and low-cost manufacturing.

Developing an integrated, solution-driven value chain strategy

As competition in the LED industry has increased, many LED chip manufacturers are moving down the value chain to capture incremental value in luminaries and solutions. Two recent, notable examples are Cree’s acquisition of Beta-Ruud Lighting and Osram’s acquisition of Siteco. As experienced in the solar PV market, downstream investments are a reaction to potential overcapacity and commoditization in the upstream LED chip market and an attempt to better control demand for their components.

As part of their value chain strategy, downstream players should evaluate the potential of collaboration and partnerships with upstream players developing next generation chips. Upstream players should explore partnering or acquiring downstream fixture manufacturers and system integrators developing innovative and customized solutions to sell higher margin integrated products and move closer to end users.

Delivering on product innovation

In a relatively short time span, the global LED industry has become extremely competitive. VC funding in the US almost doubled from$167M in 2010 to $305M in 2011. Global competition has also increased with major technology firms such as Sharp, Toshiba, and Samsung entering the market to compete with both LED chip manufacturers (e.g., Cree, Lumileds) and traditional lighting players (e.g., GE, Osram). Additionally, government funding has fueled manufacturing capacity investments across Asia, including China, Taiwan, Malaysia, and Singapore.

With increasing competition and the threat of commoditization, LED companies need to bring new products and solutions to market faster and efficiently. They should improve R&D productivity, streamline product development execution, leverage global design investments more effectively (e.g., design for cost, platforming across product lines), and collaborate with partners in the ecosystem (e.g., co-creation, open innovation) to launch new business models.

Shaping the future - Applying lessons learned from other industries

Lessons learned in solar and other technology growth industries can provide valuable lessons and help LED companies avoid pitfalls. With a compressed industry maturation timeline, LED companies should heed these hard-won lessons and invest early in the key operational strategies needed to build both scalable and profitable operation.

Contact

Brian Carey
US Cleantech Advisory Leader
(408) 817-7807
brian.d.carey@us.pwc.com

Robert Chinn
Principal
(415) 498-6411
robert.a.chinn@us.pwc.com

Joshua Rao
Manager
(415) 498-5113
joshua.rao@us.pwc.com

© 2012 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved.
PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Download: Smart cities - From earthen walls to smart grids

Smart cities: From earthen walls to smart grids

Background

In ancient times, a "Smart City" included sets of earthen walls designed to protect property from flaming arrows; intricate use of moats, walls and portcullises to protect inhabitants from marauding invaders; and cisterns of stored rainwater to provide a safe drinking water supply during long periods of siege. Cities built with these features were the original sustainable cities, designed with the "triple bottom line" intent to protect people, planet and profit.

Over time, the concept of Smart Cities evolved - cities were placed on trade routes to maximize commercial opportunities and urban wealth; cities were placed near rivers used to generate energy for grinding wheat and other agricultural products; cities were placed near coastlines to facilitate trade across seas; city planners developed sanitary systems to move human and other waste away from populations; and libraries and schools were established to share knowledge and to educate younger generations.

In the 20th century, the focus of Smart Cities moved from developing infrastructure designed to protect human health and safety (or a "compliance focus") to more interest in operational efficiency. Smart Cities were designed with efficiency in mind - mass transportation systems to efficiently move city-goers from one neighborhood to another; water treatment plants intended to provide sufficient potable water; wastewater treatment plants to treat human waste; and multiple storied buildings to more efficiently use limited real estate. Smart Cities allowed greater numbers of inhabitants to more efficiently live, work and play in cities' limited real estate. Efficient or Smart Cities became more desirable places to live and populations, wealth and opportunities increased accordingly.

In the 21st century, Smart Cities have been using technology to make cities more sustainable, more attractive, and adaptable to landscape level changes. City leaders initially focused on implementing technological changes (e.g., moving from traditional incandescent light bulbs, to compact fluorescent bulbs, to newer LED and halogen light technologies). However, they are now implementing a number of behavioral changes (e.g. adopting congestion funding to decrease the number of vehicles entering into the cities, to launching new models for vehicle ownership and sharing, such as Zipcar and Citi Bikes in New York City). These examples not only reduce congestion but lower the total cost of ownership and use, as shared vehicles don't require garaging, reduce insurance premiums, provide additional flexibility of use and promote healthier lifestyles.

Adopting technology is smart

According to the Cities of Opportunity 2011 report, Smart Cities are increasingly differentiating themselves by highlighting their technological readiness and leadership using various criteria (e.g., Internet access in schools and broadband quality).

Technology readiness

Forward thinking nations and the top cities within them have had the resources and foresight to make high tech plans, put them into action, and attract big populations of tech-heads and related investors; notably including New York, Seoul, Stockholm, San Francisco, Chicago, Singapore and Hong Kong. New York, home to more than 10% of the nation’s financial technology workers, tops the list overall in technology infrastructure and measures of the city’s potential to nurture a high-tech future.

Smart Cities increasingly rely on high technology to demonstrate their value proposition:

But Smart Cities must continue to evolve and to adapt to even more complex landscape-level changes. Leading Smart Cities like New York are starting to understand that the surrounding landscape is changing and that earlier assumptions like the height of surrounding seas, the frequency and magnitude of storm events, and access to clean water and safe food may require adaptation strategies. While New York City is assessing infrastructure potentially subject to flooding due to more extreme storm events and rising sea levels, the city is building a 60 mile third tunnel at a cost of more than $6 billion to protect clean water coming from the Catskills. However, this may not be enough. A recent New York Times article noted that despite the high marks awarded to officials for environmental awareness, New York may not be acting quickly enough to tackle the city's significant flood risks. Severe flooding there could shut down the city's financial district, weaken its transportation infrastructure, and force mass evacuations. The article cited New York's response to Hurricane Irene last year, in which the city closed the subways and evacuated nearly 400,000 people, as evidence of how far New York must still go to truly prepare itself for the climate risks it faces.

These two actions - building a third water tunnel and commissioning exhaustive research on the challenge of climate change (e.g., expanding wetlands to accommodate surging tides, installing green roofs to absorb rainwater and prodding property owners to move boilers out of flood-prone basements) - are intended to make New York City more resilient to an increasing number of drought and severe weather events and to develop the next generation of Smart Cities.

Taking a holistic view of cities

At PwC, we believe that Smart Cities arise when the different components of a city's "living experience," such as housing, transportation, and health and education, are examined together, as parts of a larger overall unit. Historically, cities have taken action on these components by tackling them individually. Smart Cities recognize that these components are enmeshed in networks - mobility networks, social networks, etc. - and tackle urban challenges holistically. We are committed to helping these leaders understand their challenges and design integrated solutions to them.

The following list is not comprehensive, but it provides a framework and examples of how companies are partnering with Smart Cities to identify, fund and implement Smart Cities strategies and technologies - so that Smart Cities will continue to prosper and grow.

Housing

  • Smart metering and appliances - Smart meters and appliances help homeowners manage their energy demand to avoid peak hour charges, and allow utilities to better understand residential energy consumption. For example, California utility PG&E has rolled out a smart meter program to its customers, which includes a suite of online tools to track hour-by-hour energy consumption and understand how to reduce energy expenses.
  • Mixed-use neighborhoods - Improved design of neighborhoods leads to "beyond housing" outcomes, where inhabitants can live, work, and recreate in a local area that does not require vehicles for transportation. HafenCity in Hamburg, Germany is an in-development mixed-use area built over a former port area.
  • Energy efficient Heating, Ventilation, Air Conditioning (HVAC) - Modern HVAC systems save energy, particularly during summer months, and take advantage of cost-effective insulation techniques.

Workplace and retail space

  • Networked systems - Networked systems allow building owners and companies to manage and monitor their energy and resource use. The systems also tie business complexes to city analytics systems, allowing municipal temperature forecasts to inform thermostat settings and relay solar insolation data to utilities to determine energy inputs, among other benefits.
  • Collaborative renewables purchasing - Retailers may collectively enter into renewable energy purchase contracts, monitor group energy use, and negotiate lower prices with developers.
  • On-demand work spaces - Young, mobile entrepreneurs can create and reserve on-demand working locations to collaborate with others and save on rent and maintenance. The San Francisco Bay Area boasts many companies offering flexible work space arrangements, including Citizen Space, NextSpace, and WeWork.
  • Industrial ecology - Industries can co-locate facilities such that the waste products of one may be used as the raw materials for another, or so that energy may be shared through co-generation. For example, Kalundborg Eco-Industrial Park in Denmark enables its tenants to trade waste among one another, forming a "closed-loop" industrial system.

Safety and security

  • Re-lamping of public spaces - Public lamp retrofits lead to safer streets at night and energy efficiency gains through LED lights. San Diego is in the midst of a $16M streetlight retrofit that is estimated to save 16M kWh of electricity annually.
  • Networked emergency services - Network technology enables first responders to more quickly and comprehensively respond to emergency situations.
  • Smart utility infrastructure - Smart grid safety benefits for utilities include detecting gas or water leaks before they occur, using distributed energy systems to prevent cascading electricity failures, and improving cybersecurity.

Recreation and leisure

  • Parks and urban green spaces - Green spaces promote a more livable city, cleaner air, and recreational spaces for citizens. With the proper technology, these spaces also facilitate the capture of runoff and gray water, and can help mitigate flood and storm water risk. Through the New York City Department of Parks and Recreation, PwC is helping to promote routine maintenance and nurturing of trees.
  • Intelligent stadiums and public venues - Network technology can improve spectator event experiences by managing traffic flow (human and vehicles) and public safety in real time.
  • Urban hydroponic and aeroponic farms - Large complexes can use urban farms to assist in temperature regulation and provide recreational work for citizens growing food that they may then sell or consume. New Orleans announced its first aeroponic farm earlier this year, a test that yields forty pounds of vegetables per week within a closed-loop system.

Health and education

  • Energy efficient medical equipment - Efficient medical equipment helps hospitals save on energy use, greenhouse gas emissions and energy costs, and pass those savings on to consumers.
  • Wireless networks - Wireless technology promotes rapid digitization and dissemination of patient information and treatments to facilitate better care with fewer errors.
  • Co-located activities - Dense, mixed-use neighborhoods allow citizens to live and work locally, reducing traffic and air pollution, encouraging walking and bicycling, and improving the health of the city's inhabitants.

Transportation

  • Congestion pricing - Congestion pricing allows cities to incentivize the use of public transportation and reduce congestion by charging fees for use of public thoroughfares at peak hours. In 2003, London introduced a congestion charge for traffic entering central London between 7am and 6pm during the workweek, to help alleviate the city's infamous traffic problems.
  • Parking payments by smart phones - Smart phone payments enable users to more easily pay for parking, add money to their meters, and avoid parking tickets. The technology also enables cities to more easily implement demand pricing initiatives for parking. Seattle is rolling out a pay-for-parking smartphone app this year while New York City is in the process of testing its own system.
  • Mass transportation - Mass transit systems ease congestion problems and enable mass movement of citizens at low energy cost.

Over the years, Smart Cities have evolved from earthen walls designed to protect property from flaming arrows to cities offering a "living experience" where housing, transportation, health, and education are enmeshed in networks and urban challenges are addressed holistically. PwC is committed to helping city and policy leaders understand the challenges and opportunities in designing Smart Cities and to developing integrated solutions that make cities even smarter in the future.

Contacts

Rahul Gupta
Partner
(202) 756-1762
rahul.gupta@us.pwc.com

Nick Shufro
Director
(860) 241-7444
nick.shufro@us.pwc.com

© 2012 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved.
PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Download: Cleantech in China - Opportunities to improve clean water access and efficiency

Cleantech in China - Opportunities to improve clean water access and efficiency

China’s industrialization over the past 30 years has transformed the country from a developing nation, known only for low-cost manufacturing, to a strategic growth destination. While the speed and scale of China’s growth is unprecedented, it has also caused a significant impact on the environment.

An obstacle to economic growth

The Chinese government is challenged with striking a balance between alleviating its environmental issues and allowing its industries and businesses to continue growing, as an economic slowdown could potentially disrupt social harmony.

Among China’s serious environmental challenges, major water shortages are looming high on the list. The government has taken commendable steps to begin rectifying the situation, but there is still a long road ahead. Recent Chinese government studies show that two-thirds of all cities in China are experiencing water shortages and nearly 300 million rural Chinese do not have access to safe drinking water. And, according to China’s Ministry of Water Resources, only 2,100 cubic meters of water resources are available per capita, approximately 28% of the global average.

In January 2012, the State Council issued the strictest decree to date on water resources management, which calls for capping the overall use of water, improving efficiency, reducing water pollution and promoting water conservation. And, as part of the goals laid out in the 12th Five Year Plan (2011-2015), China has committed to investing $636 billion in water-related projects through 2020 and reducing water usage by 30% for every new dollar of industrial output. Other measures to spur energy efficiency and conservation, such as new restrictions on water-intensive industries like coal production, are also aimed at helping to decrease freshwater usage.

Business opportunities in the water sector

China's water-related goals and objectives have significant implications and present a range of business opportunities in the water sector. According to the China Greentech Initiative (CGTI), of which PwC is a strategic partner, major commercial opportunities exist in the following areas:

  • Sludge treatment and disposal – The sludge treatment and disposal marCGTI analysis of a major sludge treatment project in Dalian shows that a technologically advanced plant has the potential to be economically practical. However, the viability of such installations will depend greatly on the rate of adoption and utilization. Thus far, the development of the sludge treatment market has been hampered by issues such as limited China-specific operational and technical expertise as well as significant operating costs in handling, treatment and disposal.
    CGTI analysis of a major sludge treatment project in Dalian shows that a technologically advanced plant has the potential to be economically practical. However, the viability of such installations will depend greatly on the rate of adoption and utilization. Thus far, the development of the sludge treatment market has been hampered by issues such as limited China-specific operational and technical expertise as well as significant operating costs in handling, treatment and disposal.

  • Industrial water use efficiency – Industrial water use accounted for 24% of total water use in China in 2010 and is expected to keep increasing as per capita income rises. Interestingly, half of China’s major industrial bases are located in water-scarce regions. For sectors where water is a major input (e.g., energy, paper and pulp, raw chemicals and textiles), this is a significant consideration. China has defined target caps for total national water use and set targets to reduce industrial water use per output by 8.6% annually through 2030, with the success of these goals depending in great part on local implementation.A wide range of solutions are available for increasing the efficiency of water use for industrial processes, from heat exchange and cooling systems to wastewater treatment and reuse systems. However, a number of significant barriers remain in increasing industrial water use efficiency, including the sheer number of manufacturing and processing companies in China that must be monitored. These issues are exacerbated by the notion that declining water quality has increased the difficulty in treating wastewater for reuse, as well as the fact that very slim profit margins in some water-intensive industries reduce the incentive to make significant investments in water efficiency.
  • Graywater systems – Although non-industrial buildings consume 12% of China’s total water resources, they discharge 60% of total wastewater. Half of this discharged wastewater is classified as graywater, slightly polluted water from sources such as laundry and showers. Cost-effective graywater systems range from low-cost diversion devices for direct reuse to complex treatment and storage methods that can be easily integrated into new construction (versus costly retrofits), making China’s ongoing residential and commercial building construction market a prime opportunity. Graywater recycling systems also qualify for green building certification, such as Leadership in Energy Efficiency Design (LEED) and China’s domestic 3-Star, which has seen a five-fold increase since 2010. Buildings in major cities such as Beijing, Shenzhen and Tianjin are rapidly adopting graywater systems, but national regulators have tended to focus on large-scale centralized wastewater treatment and reclamation. Although data on graywater operating costs have shown that they can be economically attractive, even in light of relatively low water prices, uptake of graywater systems has been slow. This is often attributed to market fragmentation that has resulted in varying quality and service; lack of collaboration between systems providers, building developers and water users; and lack of public awareness and acceptance. With strong government backing in the form of policy and financial support, market opportunities for entrepreneurs as well as established companies exist across the entire water value chain. At the same time, there is significant competition from public and private Chinese investment. This increased market activity and competition will continue to vary by region and industry, but it’s clear that the water shortage and water quality issues in China provide a significant business opportunity for those companies with the products and services to improve clean water access and efficiency. In order to successfully access these opportunities, it is important to keep in mind some of the challenges that continue to face US companies investing in China. The regulatory environment continues to evolve quickly, and priority sectors such as water are likely to receive significant attention from the government. Among other issues, US companies in this sector will also need to consider the localized, relationship-driven culture as well as how to protect the intellectual property rights of their technology. Ultimately, doing business and investing in China remains complex, and the companies that are able to be agile and adaptive to changing market conditions can be better positioned for success.

Contacts

Alan Chu
China Business Network Leader
(213) 356-6520
alan.chu@us.pwc.com

Justin Chan
Manager
(213) 217-3163
justin.chan@us.pwc.com

© 2012 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved.
PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Download: Tax extenders - What the cleantech community should watch for

"Tax extenders" - What the cleantech community should watch for

Many valuable renewable energy tax incentives either have expired or are scheduled to expire soon. Congress frequently deals with these provisions and other similar tax provisions by passing periodic "tax extenders" legislation that continues these tax benefits for a year or two. In August, the Senate Finance Committee approved a tax extenders package and proposed draft legislative language to implement it.

Most importantly for the cleantech community, the bill would extend the production tax credit ("PTC") for wind energy by one year to December 31, 2013. The scheduled expiration of the PTC has brought new wind projects to a virtual halt in the second half of 2012, and this extension would be welcome news for the industry.

The Senate bill also would convert the 2013 PTC deadline from a "placed in service" deadline to a "begin construction" deadline. This change would apply to all types of renewable energy eligible for the PTC - not only wind facilities but also biomass, geothermal, municipal solid waste, landfill gas, marine and kinetic energy, and certain hydropower facilities. Finally, the bill also would extend provisions allowing companies to elect a 30% investment tax credit ("ITC") instead of the PTC for facilities that meet the 2013 "begin construction" deadline.

Several other current or recently expired renewables provisions, including credits for ethanol production and the Treasury Section 1603 grant program, were not included in the Senate Finance Committee's markup. Tax credits for solar and fuel cells are not scheduled to expire until 2016 and, thus, were not addressed in the bill.

What would this mean for cleantech?

Under current law, PTC projects must be completed prior to the statutory expiration dates to qualify for tax credits. If the Senate bill passes, converting 2013 to a "begin construction" deadline would give companies significant opportunities to plan and start projects next year for completion in 2014 or later. This could spur development activity similar to that seen at the end of 2011 under the Treasury 1603 grant program.Additionally, the ITC election has been an important structuring option for renewable energy projects since it was first allowed in 2009. We expect that most developers would elect the ITC instead of the PTC if that option remains available because the net present value of the upfront ITC typically exceeds that of a ten-year stream of PTCs.

What comes next?

Congress will not pass a tax extenders bill before the November election, and some of these provisions (notably the PTC extension) have become election year issues. However, while the Senate Finance Committee's action represents only the beginning stages of the extender process, it suggests that a compromise on extending the wind PTC and other renewable energy provisions may emerge as Congress addresses tax legislation after the November election.

Will 1603 Grants Fall Over the "Fiscal Cliff"?

On September 14th, the Office of Management & Budget (OMB) reported to Congress regarding the across-the-board spending cuts that will take effect on January 1st if the Administration and Congress fail to agree by the end of the year on legislation that would avoid an automatic "sequestration" of over $100 billion in federal spending. OMB confirmed that, if this so-called "fiscal cliff" is reached, the Treasury Section 1603 cash grant program would be subject to sequestration. Details of implementation remain unclear, but grant applicants could see their awards reduced by approximately 7.6 percent, and it is uncertain whether they would be entitled to receive the remaining grant amount retroactively if and when a budget deal is reached.

Contact

Matthew Haskins
US Cleantech Tax Leader
(202) 414-1570
matthew.haskins@us.pwc.com

© 2012 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved.
PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Download: CAFE update - What does the future hold for vehicle electrification?

CAFE update - What does the future hold for vehicle electrification?

The Obama Administration recently finalized the 2025 US CAFE (Corporate Average Fuel Economy) fleet standard at 54.5 mpg (miles per gallon), on top of the 35.5 mpg standard already in place for 2016. The administration estimates that the cost to the industry to meet these new regulations will be upwards of $192 billion, resulting in vehicles costing about $2,000 more than they do today. However, the administration also estimates that the potential benefits will be much greater, with consumers expected to save $515 billion in fuel during this same period. With energy security looming large as a national priority for the US, fuel costs on the rise, and political instability in key oil producing markets continuing, the push to develop and deploy alternative propulsion vehicles has perhaps never been greater.

The US National Highway Transportation Safety Administration (NHTSA) and US Environmental Protection Agency (EPA), who are jointly enforcing the new fuel economy and emission reduction regulations, are counting on the industry to introduce a host of fuel-saving technologies and applications in order to meet these increasingly stringent standards, including new Plug-In Hybrid (PHEV) and Pure Electric (PEV) vehicles. But for the industry and consumers, the question remains, how big of a role will these vehicles actually play over the next several years?

Through August 2012, hybrid, PHEV, PEV, and hydrogen fuel cell vehicles (HFCV) accounted for roughly 3.2% of US auto sales. However, when excluding traditional hybrid applications, that number shrinks considerably to 0.3% of the market. While a number of new electric offerings are expected from automakers in the coming years (today, there are ten PHEV, PEV, HFCV models available), continued high price premiums and an underdeveloped grid to support these vehicles will minimize their raw sales impact in the near to mid-term. Consumers are coming to terms with the increasing cost of vehicles due to safety and emission standards along with higher demand for in-vehicle technology, but the current premiums for electric and fuel cell vehicles don't appear to offer enough of a value proposition yet, even when taking into account increasing fuel costs. An argument can be made that these premiums can be additionally offset by lower maintenance costs and total cost of ownership, but at this point only a limited number seem willing to plug into vehicle electrification.

Preliminary results of PwC's Charging Forward electric vehicle survey, due out later this year, suggest that we still have a long way to go before EVs can become a viable mainstream option. Over 86% of those surveyed felt that consumers are either not willing to pay a premium (38.8%), or willing to pay no more than $5,000 (47.4%) after government incentives for a PEV, with similar results for PHEVs. Although battery costs continue to decline, the industry still has much progress to make for EVs to be more affordable. In addition, the readiness of the EV grid remains a primary concern to industry participants. Over 40% of those surveyed felt that having a sufficient number of conveniently located charging and battery swap locations was the most crucial element to developing a sustainable EV infrastructure. According to the Alternative Fuels Data Center, there are currently 4,364 public charging stations in the US, a good start based on the number of EVs on the road, but below the amount needed for mainstream consumption. By comparison, there are approximately 160,000 retail gas stations in the US, almost all of which have multiple gas pumps to service vehicles.

A Winding Path Towards Compliance

To meet CAFE standards, each automaker will have a different target to meet, based on the characteristics of their fleet (i.e. car vs. light truck, small vs. full-size applications). Therefore, a number of different strategies will be used to fit each automaker's individual needs and competencies. EVs will undoubtedly be part of the solution, but much of the needed fuel efficiency gains will be achieved by a host of currently available technologies such as engine downsizing via direct injection and turbocharging, advanced transmissions and micro-hybridization. Additional gains will be realized through advances in aerodynamics and increased application of lightweight materials. The rule of thumb for the industry is that there really is no one perfect solution; it's going to take a number of small, incremental gains (including EVs) to cross the finish line.

Looking Down the Road

PwC's Autofacts group is forecasting global hybrid & EV share to reach 5.3% in 2018, up from roughly 1.9% in 2011. Traditional hybrid applications will still comprise the bulk of alternative propulsion vehicles, with PEVs (1%) and PHEVs (1.3%) providing additional support. From 2018 - 2025, these technologies will continue to gain incremental market share, ramping up at an accelerated rate as the 2025 standard draws closer.

Make no mistake - progress is being made towards mass adoption of electric vehicles, but developing cost-effective offerings with acceptable range while simultaneously overhauling power grids to support millions of vehicles cannot happen overnight. Rather, the emergence of vehicle electrification is best seen as a generational change. Continued investment in research and development to improve EV efficiencies along with ongoing efforts to create clean energy solutions will ultimately determine their level of success. Electric vehicles are here to stay; just don't expect one to be parked in every driveway anytime soon.

Contact

Brandon Mason
Senior Auto Analyst
(313) 394-6098
brandon.w.mason@us.pwc.com

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