By David Wagman, Managing Editor
Look for utilities to take on an even larger role in renewable energy development and ownership during 2010. No longer “simply” power off-takers, utilities are emerging from the recession as a development force of their own Their greater prominence is driven by ongoing access to capital, growing comfort with renewable technologies, an array of financial incentives and—in the case of solar photovoltaics—a rapid drop in price that makes PV an attractive investment.
A related development is the growing use by utilities of investor equity, tax equity or pools of tax equity capital to undertake projects.
“Utilities have tax burdens that are roughly six to seven times higher than what has historically been the pool for tax equity finance,” said Chris O’Brien, who heads market development efforts for thin-film silicon maker Oerlikon Solar. “Now utilities can use the credits themselves, increasing the opportunity for them to invest directly in projects,” either to include in their rate base or as a non-regulated investment.
Most investor-owned utilities seem to have weathered the economic downturn better than other sectors. “The important thing was we (investor-owned utilities) continued to borrow on a long-term basis” during the financial crisis, said Mark Agnew, director of financial analysis for the Edison Electric Institute, which represents many investor-owned utilities. At the height of the financial crisis, many investor-owned utilities cut their capital expenditure budgets an average of 10 percent, Agnew said. As 2009 progressed, however, many cuts were reversed. “We’re back on track for capex in 2009-2010 in the mid-$80 billion range.”
More evidence of utilities’ expanded role as renewable project developers comes from a survey by the Electric Power Research Institute. For the first time, EPRI found that more than half of utilities surveyed said they were owner-operators of renewable energy projects. That may put additional pressure on component and system costs, said Bryan Hannegan, vice president of environment and generation at EPRI. “The days of freewheeling, ‘I’ll buy it at whatever cost’ are ending,” he said.
Utilities and their regulators are also taking a second look at their generating fleets to see how renewables can best be integrated. Hannegan said one lesson being learned is that fleet management is a primary factor in the ultimate cost of carbon. For example, many environmentalists advocate the rapid shutdown of carbon-based power plants. But that’s a more expensive option than bringing in low- or zero-carbon sources more gradually. The cost effects are important to regulators in particular and utilities by association. After all, regulators have a responsibility to ensure universal and affordable energy services, in addition to environmental considerations.
Hannegan says one strategy gaining traction is to use existing generating assets as a platform for adding renewables. For example, a coal-fired unit can be repowered to burn biomass, a steam cycle can be supplemented with concentrating solar thermal or a simple-cycle gas turbine can be seen as the equivalent of firming storage for a wind farm.
“Pairing assets offers a way out of this conundrum” surrounding carbon reduction and renewable energy deployment, Hannegan said.
Renewables and storage technologies also can play a role in maximizing generating assets. For example, many utilities consider frequency regulation settled issue, said Nadav Enbar, research manager with IDC Energy Insights. One common approach is to take a baseload plant and set aside a percentage of its capacity for frequency regulation. The drawback, of course, is that the set-aside capacity is unavailable for retail sale.
By installing a flywheel or other energy storage system powered by renewable energy, the utility can cover its frequency regulation requirements and return baseload power capacity to revenue-producing power generation.
Ongoing policy changes at the Independent System Operator and Regional Transmission Operator levels have created opportunities for flywheels in just this sort of frequency regulation role, Enbar said.
For example, Beacon Power has had a 1 MW flywheel operating on a pilot basis in Massachusetts and received Department of Energy support for a 20 MW facility in New York State.
American Electric Power is also testing community energy storage. The basis is a lithium ion battery that ranges in size from 25 kW to 75 kW and is installed at substations. The first test was installed near AEP’s headquarters in Columbus, Ohio. A second 1 MW system is being tested in Michigan.
Expect to see still more creative thinking about renewable energy and integration issues as still more utilities become renewable project developers, owners and operators.