Solar’s outlook shines, but hurdles remain (Market Watch Story)
By Christine Buurma /Jan 9, 2007
Source: Market Watch
http://www.marketwatch.com/news/story/solars-outlook-shines-hurdles-remain/story.aspx?
NEW YORK (MarketWatch) — As utilities embrace renewable energy in an effort to cut pollution and reduce their dependence on fossil fuels, some companies are turning to a source long on the sidelines of the U.S. electricity market: solar power.
Solar power has historically lagged behind other generation sources in price and competitiveness. Only 508,000 megawatt-hours of power were generated by solar facilities in 2006, according to the U.S. Energy Administration, a mere 0.5% of all renewable power produced in the U.S. that year. Industry estimates price solar power at 15 to 25 cents per kilowatt-hour, which is well above the costs of other sources. Power produced by natural gas costs about 6.1 cents/kWh in 2005 on average, while coal-fired generation cost 1.84 cents/kWH and nuclear averaged 1.7 cents/kWh, according to the Nuclear Energy Institute.
Solar industry buzz grew louder in late 2005, however, when solar project developer Stirling Energy Systems Inc. signed agreements to sell the power generated by two large-scale solar projects to two major California utilities, Edison International (EIX) subsidiary Southern California Edison and Sempra Energy (SE) subsidiary San Diego Gas & Electric. Obstacles remain to bringing solar energy costs in line with those of other sources of power generation. A lack of necessary transmission infrastructure and high up-front development costs are significant hurdles to developing solar projects on a large scale. Solar developers hope, however, that technological advances, state incentives and requirements, and growing interest from financial backers will help expand solar energy’s presence in the U.S.
Large-Scale, High-Tech
Large-scale solar projects are the key to making solar power more competitive with fossil fuels, developers say. “As the technology is improving, the cost is coming down to where (solar) is very near the breaking point of being competitive with other types of less expensive renewable energy and even conventional power generation sources,” said Paul O’Hop, an attorney with Squire, Saunders & Dempsey, LLP, a law firm that represents several solar energy producers.
Under its 20-year power purchase agreement with Southern California Edison, Stirling will build a 500-megawatt solar generating station in the Mojave Desert, with an option to expand the project to 850 MW. The San Diego Gas & Electric project would entail a 300 MW solar power plant in southern California’s Imperial Valley, with options to expand the facility to 900 MW. The contract is also for 20 years. Stirling expects to complete the Edison project in 2012 and the San Diego project in 2013 or 2014. The projects would use solar dish technology in which giant mirrors direct sunlight into large dishes, heating up tubes filled with hydrogen gas that expand to drive the pistons of an engine that generates electricity.
Wall Street firms – particularly institutional investors, hedge funds and specialized investment funds – have shown a keen interest in financing solar projects, said Robert Liden, executive vice president of Phoenix, Ariz.-based Stirling Energy Systems. In June, solar technology producer Nanonsolar Inc. announced it had obtained $100 million in financing from firms investors including the multibillion-dollar hedge funds SAC Capital and GLG Partners. “If it’s a project with a credit-worthy offtaker and sound economics, it’s a fairly attractive market out there,” Liden said. He declined to provide estimated costs for the Edison and San Diego Gas & Electric solar projects. But the projects must be able to sell power to utilities at no more than 6.05 cents/kWh if they operate year-round and 11.42 cents/kWH if they operate only during periods of peak electricity usage, according to a 2005 report by the California Public Utilities Commission, which approved the utilities’ contracts. The state of California provides subsidies for some utility power purchase agreements with renewable power projects that offer promising new technology but would be too costly to be competitive on their own. Stirling’s contracts with Edison and San Diego didn’t qualify for the subsidies, but also didn’t need them, the CPUC said.
Trimming Costs
Although large-scale solar projects typically cost hundreds of millions of dollars, developers may be able to recoup some of the front-end costs associated with such projects through a sale-leaseback arrangement, in which the developer would sell the project to an independent power producer and then lease the project back from the company, Liden said. The developer could use the proceeds from the sale to complete the project.
A 30% tax credit for investment in solar power created through the Energy Policy Act of 2005 has been instrumental in facilitating large-scale solar projects, developers say. State renewable energy mandates also have helped the solar industry’s cause. In California, state law requires state-regulated utilities to use renewables for at least 20% of their retail power by 2017. State regulators have accelerated the deadline to 2010.
Obstacles remain for solar developers looking to generate solar power more cheaply, however. Gaps in the nation’s transmission infrastructure remain a challenge for developers of large-scale renewable energy projects, Stirling’s Liden said. Adequate transmission is key to completing large-scale solar projects, Liden said, and the process of building and permitting transmission lines can be costly for developers. Transmission access “becomes the long pole in the tent in terms of the deployment of these projects,” Liden said.
Stirling’s San Diego project will require state regulatory approval for a 500-kilovolt transmission line across the Imperial Valley, while the second phase of the Edison project will require a 170-kv upgrade to an existing transmission line.
PNM Resources Inc. (PNM) utility Public Service Company of New Mexico issued a request for proposals for renewable energy two years ago, but the company could not find any solar projects that fit its needs, said Evelin Wheeler, the utility’s director of strategy, planning and analytics.
The utility is monitoring the development of the Stirling projects and waiting to see whether Stirling’s technology is viable before investing in such a project, Wheeler said. The lack of transmission lines in remote areas, where many solar projects are built, is also a concern, she said. Meanwhile, PNM is in the early stages of considering a consortium with other utilities to develop a large-scale solar project, Wheeler said. “What it really comes down to is how we can appropriately share all of these risk factors,” she said.
The expiration in 2009 of the Energy Policy Act tax credit creates uncertainty for large-scale solar developers, whose projects can take several years to complete. “It really needs to be expanding to 2012 or 2015 to give (developers) a long lead time,” Liden said.
Developers of concentrating solar power projects must build on a large scale to keep costs down, but developers need contracts for high volumes of power output or equipment to justify ordering such large amounts of materials, Liden said. “It’s a perennial chicken-and-egg game,” he said. “Low volume costs are high, and you need high volumes to keep costs down, but utilities have been generally reluctant to order large-scale solar.” Still, larger scale projects could mean more inexpensive solar energy, industry watchers say. “Developers are realizing they have to start competing on a larger scale if they want to enter this market,” attorney O’Hop said.