Renewable Energy Executive Roundtable

Issue 1 and Volume 116.

By Lindsay Morris, Associate Editor

Renewable energy in the U.S. is at a crossroads. With several federal tax grants set to expire by the end of 2012, utilities must decide if the falling prices of solar and wind technology make renewable energy competitive enough to invest in despite vanishing federal aid.

Associate Editor Lindsay Morris discusses the future of renewable energy with four renewable executives: Tom Doyle, president and CEO of NRG Solar; Michael DeAngelis, manager of energy research, Sacramento Municipal Utility District (SMUD); Steve Sawyer, secretary general of the Global Wind Energy Council; and Ed Feo, managing partner, USRG Renewable Finance.

How will the removal of the 1603 Treasury Grant affect renewable energy developments? Will we see more state renewable programs popping up to encourage renewable growth?

  Mike DeAngelis: The 1603 Treasury Grant Program is a significant incentive to renewable energy development. At SMUD, we’re in the final stages of negotiating sale and buyback agreements for our new 120 MW wind project in Solano that is now under construction. The sale is to a private party. The 1603 Program is a very important part of the deal. It is a sale with buyback provisions, but the 1603 Program is a critical piece of the deal which will lower the cost of wind energy for our customers.


  Ed Feo: I agree that the 1603 has been a significant program for renewables over the last two years. As of September 2011, the Department of Treasury reports that almost 20,000 projects have been funded for a total of more than $9 billion since the program began in 2009. Many of these, of course, are very small transactions for residential solar. When we look at transactions involving a third party tax equity investor, about half of these have relied on the grant instead of the Investment Tax Credit or Production Tax Credit. A number of the tax equity investors in the market in fact do not have the tax position to use the credits, and would not be participating in the tax equity market but for the Treasury Grant Program. Let’s assume for the sake of this discussion that the grant is not renewed or replaced with something very similar to it. If you do the math and back out the amount of the grant based tax equity transactions, the tax equity market suddenly falls from a volume of over $7 billion to around $3.6 billion.

We’re seeing a lot of effort being made to safe harbor assets under the rules of the Treasury Grant Program. Developers who have projects are acquiring equipment or doing work sufficient to meet the 5 percent safe harbor test so that the projects reaching operations in 2012 or thereafter would be grant-qualified. We are also seeing parties putting together what are basically grant qualification vehicles for the purpose of acquiring equipment to quality for the 5 percent safe harbor and then dropping in projects by the date at the end of September when applications need to be filed with Treasury. I haven’t really seen any analysis of how much grant qualification activity there is, but since the safe harbor is just 5 percent of project costs, there is a pretty significant leverage of the number of projects that could be grant-qualified in the next year. It may be, in fact, that if that grant qualification efforts are substantial, we may actually see a grant program continuing at a pretty brisk pace even in 2012. This expanded grant qualification into 2012 will be a positive effect on the volume of tax equity available next year.

Another factor affecting the tax equity market is the expiration of the Production Tax Credits (PTC) at the end of 2012. What we’re seeing is a pretty significant acceleration of wind development financing into 2012 that might otherwise have fallen to 2013. This acceleration of development and financing in wind will actually put more pressure on the tax equity market in 2012, and could have the effect of increasing pricing for the available tax equity.

  Tom Doyle: I agree completely with what Michael and Ed just stated. The other thing I would expect to happen in terms of the 1603 expiration: I think you’re going to see different types of development going forward. The large scale, utility-type development activity is going to be impacted the most by the loss of the 1603 grant. I think there will still be tax equity markets available for smaller projects. Distributed solar projects that look at more of a sale lease back or a partnership flip structure; those have already been proven for those smaller products. I think there’s going to be more of an emphasis on smaller deals rather than the larger deals that we’ve seen historically.

Will there be a time when renewable energy no longer needs government subsidies?

Doyle: The way we’re developing our business plan, we absolutely assume that there will be a point in time over the next five years when renewable energy no longer needs government subsidies. From a solar perspective, which is what we focus on, this is very state-specific. Obviously, insulation makes a big difference, but more importantly, retail and commercial pricing make a big difference. We see a lot of markets from a retail price perspective where solar projects can achieve grid parity without government subsidies. In fact, we’ve studied the U.S. market and believe that within the next three to four years, there are more than 20 states where we can compete without government subsidies.

DeAngelis: I would just add that all energy technologies have some level of government subsidy – nuclear, oil, gas included. Maybe the incentives began long ago, but there tends to be forces at work that continue the subsidies over time. Regarding declining costs, following on what Tom has said, we have really seen some of the renewable energy technologies moving down the price curve as production economies, learning curve progress, and innovation occurs over time. As that continues, I think we’re going to see excellent competitive prices from wind and solar photovoltaics over the next number of years, particularly if life cycle cost-benefit is fairly measured.

  Steve Sawyer: We have successful wind developments in New Zealand, Mexico and Brazil without any government subsidies of the kind that we’re used to seeing in the U.S. And I would echo the previous points made on subsidies – the International Energy Agency (IEA) has recently published numbers showing subsidies to conventional generation of between $500 and $600 billion per year. If we’re talking about a level playing field, I think that wind and solar in many locations are ready to compete right now. The trouble is, in the energy business, there’s no such thing as a level playing field.

What would need to happen in the U.S. to level the playing field?

Sawyer: The existing subsidies in the tax code which need to be eliminated. At the G20 meeting a couple years ago, governments agreed to reduce and eliminate subsidies to fossil fuels. Then the administration went back to have a look at some of those subsidies. It proposed cutting some of them, but then the usual suspects opposed this, and it was dropped, and we haven’t heard anything more since.

Feo: 2015 is a pretty key date in terms of grid parity of wind and solar. Of course, we also need to account for natural gas prices and other commodity prices, which I think is largely a function of what happens with the economy and what happens with additional exploration and exploitation of natural gas resources. With a more robust demand for gas, we may in fact see fossil fuel prices going up, and parity could potentially be achieved sooner. That having been said with respect to wind and PV, other renewable technologies may not quite be as well positioned to achieve grid parity.

I think the policy question is somewhat three-fold. First, how does one make a level playing field to deal with what have been historic subsidies for fossil fuels, and how do you achieve some particular level of fairness for renewables? Second, as you see technologies becoming competitive with lower or no subsidies, how do you move them off of those? I think that issue in particular is going to be a very first order of business for wind and solar over the next few years as we deal with the PTC expiration date coming up at the end of next year, and the ITC rolling down from 30 percent to 10 percent at the end of 2016. There’s really a good analysis policy debate that should occur in respect to those technologies. Third, with respect to other technologies, and particularly those which are less developed, what is the policy support, including subsidies, that should be available to them in order to permit those technologies to follow their own cost curve as well? There hasn’t frankly been much refinement in the U.S. as to how policy tools can be used flexibly to promote technologies but having the volume of incentives turned down as they become more accepted and also competitive in terms of price.

Sawyer: I think that’s absolutely critical, and we’ve seen in Europe the last couple years the consequences of not doing that. In particular, liability from the government with the feed-in tariff system that was in fact anticipated but was not corrected. In time, it put the whole situation in a financial bind. The Germans have a good system for regular review – the market conditions, technology costs, etc. for the feed-in tariff systems for renewable technologies. So they are revised on a very regular basis either every two or three years, based on precisely the kind of considerations we’ve heard raised here. And that’s the kind of thing that needs to happen, I think ideally at a federal level and a state level as well.

DeAngelis: I completely agree. Abrupt changes in large incentive levels wreak havoc in growing industries. If incentives need to decline, it’s always better to gradually phase them out rather than having an abrupt change.

Feo: It will be interesting to see how this plays out in the U.S. Will tax credits, for example, be scaled down over time, or will they just be allowed to expire, therefore creating disruption? Or will the solution be the usual solution, which is just to change the date in the existing law, because no one can agree on what’s a better course besides continuing (or ending) what’s already in place.

Sawyer: I think my colleagues at the American Wind Energy Association are looking at that latter scenario. It’s most likely that during the first half of ’12 the PTC discussion will be happening in earnest in Washington and elsewhere. I’m afraid politics may prevail over optimized energy planning. But one can always hope.

How do low natural gas prices and the overall “natural gas boom” affect the renewable energy market in the U.S.? Will we see renewable energy take a back seat to natural gas developments?

Doyle: From my perspective, low natural gas prices force us to sharpen our pencils and focus more aggressively on ways that we’re going to be able to drive down costs. I actually think low natural gas prices have been a benefit to the renewable space because I think we’ve all seen what’s happened with respect to prices in a very short amount of time. I do believe at some point in time, we’re going to see gas prices elevate north of the $4 level, and that’s only going to be an upside for a renewable space that has already worked out a lot of the major issues to drive down costs and achieve grid parity.

DeAngelis: There is growing natural gas supply and lower prices, and also there is declining costs of renewables. I think it’s true that increased natural gas supply and low prices will make it more difficult for renewables to compete in the U.S. However, a lot of states are taking the lead here. SMUD is located in California, where utilities are much more heavily regulated by the state than the federal government on many environmental and energy issues. California has very aggressive renewable portfolio standard goals adopted last spring, and also has greenhouse gas regulations through AB 32, including a Cap and Trade program that will begin next year and in 2013. So natural gas can become more plentiful and low-priced in California, but these California regulations will still need to be met by utilities. What that means is growth in renewable energy supply in California. I think there are many other states that have significant RPS goals and are considering regulations related to greenhouse gas emissions. And though natural gas is certainly much better than coal and petroleum in terms of greenhouse gas emissions, it still results in significant carbon emissions. If California is going to meet an overall goal of 80 percent reduction (of greenhouse gases) by 2050, then that means eventually reductions in natural gas use would be needed also.

The 290 MW Agua Caliente project is one of many solar photovoltaic endeavors being pursued by NRG Solar. The project is being constructed in Yuma County, Ariz. Photo courtesy NRG Solar.

Feo: The RPS programs really put renewables off in a separate procurement bucket so you don’t have this head-to-head competition between natural gas and renewables. But natural gas does affect what the price of power is, and that in turn affects what’s going to be considered an acceptable price for renewables. I think on the natural gas side, the impact is potentially greater on coal than it is for renewables, with gas becoming the dominant fossil fuel. It may be more of a battle between coal and natural gas than between natural gas and renewables.

In my own view, the bigger issue is not the abundance of natural gas, but economic activity and the amount of demand for electricity. Even though we have RPS programs, at some point there’s a limitation to how much new energy sources can be acquired or mandated when demand isn’t growing. For much of the last 15 years since RPS programs were implemented, electric demand has been growing and the RPS programs have largely been a means of filling new demand. Over the past few years, demand has been flat or down and the RPS programs therefore require a choice between new renewables and turning resource off, as opposed to just filling growth with renewables.

I think what’s going to be interesting looking ahead is the effect of improved economic activity on electric demand and the expansion of markets for North American natural gas. Those factors, I think, may create a bigger window for renewables as we go forward. While we are awash in natural gas currently, that will change as economic activity in the U.S. improves and natural gas demand increases. Demand for natural gas will also be affected by efforts to turn the U.S. into an exporter via LNG. If that occurs, then the price of natural gas in the U.S. should reflect the higher international prices —and the U.S. will not continue to enjoy this hole in the universe where prices are low relative to the rest of the world.

Sawyer: Slow – painfully slow – the world is moving to price carbon emissions. We have in Australia, finally, some legislation, and we have an evolving situation that is in effect capping carbon in China. That conversation is more robust elsewhere than in the U.S. right now, but it will come back eventually. The thing that’s interesting about this rush to gas – especially gas that is produced using the hydro-fracking – is that the production of that type of gas – the overall impact on the climate is not very different from coal. When you compare just the combustion of gas and coal, the advantage for gas is quite substantial, but when you include the fugitive emissions from the hydro-fracking process, the situation changes dramatically.

On the manufacturing side, does it look like the majority of wind turbines and PV modules will continue to come from other countries? If the U.S. were to gain the upper hand in the renewable technology market, would that be beneficial to American renewable developers?

DeAngelis: I think it’s hard to have a crystal ball on this topic. Particularly China has become a major force in photovoltaics and may be becoming significant also in wind manufacturing. However, they seem to be focusing on traditional technologies while the U.S., I think, is well known for innovation in both wind and solar. The Solyndra issue aside, I think the jury is still out concerning U.S. innovation and U.S. subsidies and whether they can overtake the government subsidies from other countries and the cheap labor applied to traditional wind and solar PV technologies. But yes, if the U.S. renewable growth continues, that’s certainly going to help support the industry and the economy in this country.

Sawyer: I can’t speak for PV, but I do not believe it will ever be the case that any significant percentage of the wind turbines erected in the U.S. will come from other countries. The two Chinese manufacturers, one in particular – Goldwind – has said with another order or two under their belt, they will open a plant in the U.S. They’re both building and will operate their facility in Illinois, with the clear goal of establishing facilities in the U.S. The economics of wind means that anything other than quite a small quantity will be shipped around the world. In any substantial market, you’re going to get local manufacturing. Certainly it would be great if there were more U.S. manufacturers. That’s always been a bit of a mystery to me – why it’s always been only GE really, and now Clipper, and why we don’t have more. I hope that will come.

Feo: In the wind sector, the U.S. actually has had an active manufacturing sector for both components as well as turbines. I think you may see some growth in the small turbine market. There are a number of U.S. companies focused on that space; most of them are start-ups. On the PV side, the list of the Top 10 companies has changed dramatically over just a few years. The Germans were pushed off the top tier by the Chinese. I think there are still two U.S. companies left in the Top 10, but everyone else is Chinese. As is always the case with international trade, the picture is much more complicated than the simple issue of the country of origin of the finished product.

Having been at SPI (Solar Power International) and having walked around the exhibit hall, I think it was noteworthy to see how many manufacturers were there from Asia, but also from Europe and the U.S. It was quite the drama to have the SolarWorld case announced in the middle of the conference. I think it’s going to be fascinating to watch that case develop — is this a matter of selling panels cheaper in the U.S. than at home, or simply a matter of more efficient manufacturing taking control of the market? The commentary thus far from developers is that they love that competition among manufacturers, whether it’s fair or unfair. At the end of the day, the competition results in lower prices and the ability to do more projects at competitive rates. If prices were to be increased, fewer projects would be economic. As Tom had mentioned, that’s an expanding universe the lower and lower prices go.

Doyle: I agree with almost everything that Ed has just said. I’ll take the manufacturing component of this first. One thing that people need to appreciate is that there are different types of PV manufacturing. I think what you’re going to see more of going forward in the U.S. is module assembly. It’s a low-cost effort that really does make it appear as though you’re fabricating in-country. I think the cell manufacturing will continue to come largely from China. I think the majority of the companies in the world right now buy their cells from one or two cell manufacturers. There’s a difference between a module supplier and a cell supplier. In the U.S., there are some companies that are believed to be PV suppliers. If you look at where the majority of their manufacturing is, it’s also overseas – Malaysia, the Philippines. There’s a component to module assembly that’s located here domestically. I will echo what Ed said as far as would it be beneficial to American renewable developers if we had more technology developed in-house? I don’t think it really matters that much. I think what’s important to developers right now is the intense competition to drive down PV panel pricing. It’s such an aggressive market that it’s significantly surpassed our expectation of what we thought we could see as a buyer of PV products.

Sawyer: That holds true for wind, although it’s much more situation-specific. There is fierce competition in China, with capex for turbines now below $650 per kW. It’s basically half price for what they’re selling in the States and Europe. It’s partly a result of there being a dramatic oversupply in the market in China, and it’s one of the reasons why they’re pursuing international markets in general and the U.S. market in particular at this time.

DeAngelis: There are technology improvements going on in wind very clearly right now – direct drive, new materials/components and other improvements. But inherently, wind has been penetrating grid-connected markets for a much longer amount of time than photovoltaics. I think there’s a whole series of PV technologies, particularly thin films and some of the concentrators, that are still in the development stage. The more developed countries, with high labor costs and the resources to manufacture advanced, innovative technologies, can become competitive compared to the traditional sliced crystalline cell technologies that might require more labor provided in countries such as China.

What can the utility industry accomplish in 2012, in terms of renewable development?

DeAngelis: Renewable energy growth should occur in 2012, despite the slow economy. Very clearly, there has been significant growth in renewable energy supply to date in the U.S. There is even larger growth occurring in California since the state is aggressively asserting legislative and regulatory authority to stimulate renewable energy growth much more than at the federal level. Last spring, as I mentioned earlier, the state of California approved legislation to increase its renewable standard to 33 percent by 2020. SMUD itself exceeded the 20 percent statewide RPS goal for 2010 – we supplied 24 percent of our retail sales with eligible renewable energy. Regarding signed contracts by utilities, the state of California is well on its way to achieve the 33 percent goal by 2020, so I would expect growth to continue.

Doyle: I think I would add that what I expect in 2012 is you’re going to see companies in the solar space, particularly in the PV space, focus more on driving down balance of system costs. That’s an area that’s largely been ignored, and it can be up to 50 percent of your total installed costs. Certainly NRG Solar is going to be one of those companies that pays attention to driving down a very large component of costs. I think there’s going to be a lot of success in that effort going forward. The result of that is going to get you toward grid parity in some states very soon. That’s going to be at the retail price level and it’s going to drive a distributed solar market probably sooner in some states than some grids are expecting it to come. Lastly, I think that in 2012, you’re going to see utilities start to become a bit more thoughtful about ways to procure a capacity product instead of in lieu of just an energy product from renewables. They are going to be looking for some firming component from developers in the space that really do offer more of a load-following product – a combined cycle-type product – than renewables have been offering to date.

Feo: I agree with all those comments. I would also emphasize that utilities can play larger role as investors, particularly as tax equity investors, in independently owned assets. Because they have knowledge of the technology and regulation, they fully understand the energy business. Most of the investor-owned utilities are taxpayers and can benefit from tax-advantaged transactions.

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