Renewable Energy Roundtable

The renewable energy industry faces what could be a defining moment in its evolution thanks to the recent recession and growing talk on Capitol Hill to reduce or end incentives. However, the industry remains one of the U.S. economy’s most consistent jobs creators and renewable energy enjoys widespread support among politicians and the public. State renewable portfolio standards are a key driver so proponents breathed a sigh of relief last November when California voters rejected a referendum that would have eased the state’s renewable energy goals.

Against this backdrop, Chief Editor David Wagman convened this year’s Executive Roundtable, which included Barry Worthington, executive director of the U.S. Energy Association; Mark Ahlstrom, CEO of WindLogics; Jayesh Goyal, vice president of sales for Areva Solar; Pat Dinkel, vice president, Power Marketing, Resource Planning and Acquisition at Arizona Public Service; and Allan Marks, partner in the Global Project Finance Department of Milbank, Tweed, Hadley & McCloy LLP.

David Wagman: While industry leaders continue to advocate for a national energy policy that would cover everything from a national renewable portfolio standard to a price on carbon, the new Congress does not look in a mood to take on such a large legislative item. What’s the best that the renewable energy industry can hope for from the new Congress?

Barry Worthington: Well the best it could hope for would be extension of the tax credits and a renewable portfolio standard. I’m not sure what would be on anybody’s radar screen that they would want if the industry could have both those things. And I think they both are relatively dim, to be honest.

If I were an industry advocate I would be looking for a recipe that preserves what you have in hand today with a notion that it’s easier to keep something that you already have than it is to get something that you don’t now have. There’s going to be tremendous pressure, I believe, to cut spending of every stripe and any kind of tax breaks, incentives, direct stimulus-style funding is going to be very, very difficult.

Allan Marks: I don’t find it overly gloomy; at least the glass is half full. It’s the empty part that’s the problem. I fully agree there are significant challenges to get anything done on the national level at the moment. One of the ways to try to preserve what is currently there is to focus on policies which are perceived to be revenue-neutral and don’t increase costs and are viewed to be continuing on past successful programs and not try to reinforce things which are not viewed to be as successful.

I think there is a decent chance of continuing programs like the production tax credit and the investment tax credit which have been successful in the past and in particular—perhaps in a modified form—maybe finding a way to extend the cash grant in lieu of the ITC, which has been so successful in helping projects achieve financing despite the recession and the pullback in the credit markets more broadly.

Jayesh Goyal: I do think there are two rays of hope here. One is that we aren’t completely dependent at the federal level for legislation. There’s been a lot of progressive legislation at the states themselves, especially in the western states, that I think will continue to promote renewable.

The other thing is although there is this environment of let’s cut spending there’s also a strong environmental urge to get jobs to help the economic recovery. And so for that reason there still may be some legislation that helps in the renewable energy space. Practically speaking, the best we can probably hope for is an extension of the Treasury grant program.

Pat Dinkel: I do think that extending the tax credits is one of the most positive and important things that the renewable industry can and should look for that provides some stability and some consistency. Part of the breakdown of that question is where is the substance behind it? The loan guarantee program has not been particularly constructive.The in-lieu grant program has been.

We look at the renewable market and see that it is very much a regional market and so we care a lot about solar here in the desert southwest. That’s really our inroad into renewable. And there’s a bit of a different dynamic there. We look at it too that the state corporation commission carries renewable across the finish line.

So for instance I look to a federal renewable standard, which probably won’t go through, but even had it gone through that doesn’t get you even across the 50-yard line in a lot of cases because you need a whole set of financing structures and state policies that really move the industry forward.

Mark Ahlstrom: As was just pointed out, we’re not totally dependent on federal action here. A lot of this has been driven by state-level portfolio standards and will continue to be for quite some time. That said, at the federal level energy legislation has historically tended to be bipartisan. And I think the issue around jobs is key here. Renewables is still our best growth industry and it has both job benefits and potentially other benefits in terms of lowering prices to ratepayers and the markets as well.

Worthington: You’re absolutely right: generally energy is not partisan as much as it’s geographical and kind of bi-coastal versus the rest of the country, in some respects.

Ahlstrom: And there has been floating these ideas about what they’re not going to a clean energy standard, which would maybe extend it a little more broadly beyond the renewable that have been discussed so far and the renewable energy standard. We need a victory. We need to just start with some sort of energy legislation. And anything at the federal level would be better than nothing.

Wagman: Let me paint a Draconian scenario and that would be that Congress repeals or votes not to extend existing tax supports for renewable energy, citing it as a way to cut the deficit and balance the budget. What does the industry look like after such an event? And more broadly, what signals should we look for to indicate renewable energy no longer needs government incentives?

Dinkel: We have some anecdotal experience here in that APS is in 11 of the counties in the state and that covers most of the state. We’ve got next to us a public power company Salt River Project that covers half of metropolitan Phoenix. Just a few months ago, Salt River Project decided that they’re essentially going to drop their distributed incentives. Now for us you can cover 60 to 80 percent of your overall costs with the utility incentives and of course the tax incentives; so the state and federal, although the federal is the bigger piece of it, generally speaking. So here you had the utility SRP dropping that and you see their activity just go to nothing in their part of the territory while we’re still going gangbusters. The point is, when you’re covering the vast majority of the capital cost for—in our case—solar programs, you cut the ITC on this (not to mention the accelerated depreciation and those things) and the market would just freeze up. We’ve just seen instances where we have delays for a couple of months while we’re waiting for regulatory approval of incentive mechanisms and you see just a shock to the market. So I think you’d have a very, very profound impact. I’ll just speak to the desert southwest: California, Arizona. We rely heavily on state incentives and federal incentives and tax incentives. So it would have a very big impact.

Wagman: What kind of signals would you look for that would indicate that renewable energy is able to stand on its own?

Dinkel: The first thing I would look for is either ramping down or phasing out of these two different state and federal benefits. And there’s a lot of confusion at every level on how much to subsidize, as with many energy products.

Ahlstrom: But all energy sources are subsidized, aren’t they, and they all have incentives?

Dinkel: And that was a comment I made: they all have it. Some are more explicit than others.

Ahlstrom.: Yes, renewable just wear it on their sleeves a little bit more than oil and coal and gas.

Dinkel: Wear it very heavily on their sleeves. If you’ve got 60 to 80 percent of the capital cost covered that’s huge. When you get to the point where that’s 20 or 30 percent now you’re starting to get to the point where you say, OK, now you’re getting close to the finish line and you’re truly competing. Like I said, I hope we get there sooner rather than later. But I understand the picture is very complicated. You’ve got incentives on every energy form one way or another.

Ahlstrom: we were just talking about the distributed PV type impact. I think you would have a big impact there. I think you’d have a big jobs impact locally. There’s a lot of labor and installation and so forth as well that’s involved with the PV industry.

I spend more time on the utility solar and wind activity and I think we’re not as heavily dependent on the subsidies, perhaps, to actually get stuff done, but it is going to make it tough if subsidies are reduced, especially on the smaller to medium-sized developers. That would tend to steer more of the business over time toward the developers with the larger balance sheets. Those sorts of developers also have options about whether they’re going to continue to invest at the current rates in the United States or elsewhere. And they’ll go where they need to go to earn the returns they need to make the deals happen.

That said, we are seeing a lot of improved pricing on equipment and on construction and other things that are lowering it down the point where even without subsidies I think we’re not that far away from, for example, new wind being our cheapest source of new generation.

So I don’t think it’s so Draconian; certainly not a killer for the renewable industry if we would have to face something like that. But it would be very disruptive, especially for the larger population of smaller to medium-sized players. You’d probably see even more consolidation than you’ve been seeing recently, by the way.

Marks: The production tax credit has not always been consistently extended. The six or seven times when it’s come up for renewal there have sometimes been gaps. And if you look at the impact that has had on—say—the development of wind projects, you can see a lot of lumpiness where there have been periods when everyone is rushing to get their deals done before the deadline. So there’s lots of activity, lots of financing, lots of late nights. And then when there’s a lull, when it looks like it’s not clear whether the credits will be extended or even allowed to lapse for a period of months, there’s a chill in the investment.

One of the problems with these programs is that there’s so much uncertainty about how long they are going to last. It doesn’t do anybody any good to have a subsidy which is permanent, certainly. But by the same token, if some of these projects were planned in a more stable regulatory environment you would see much more investment.

My concern is that we keep developing our energy program for the subsidies, the mandates, the tax credits or everything else, in a way which is very haphazard and uncertain. And that tends to kill off investment as much as anything else.

One of the purposes of these federal policies which are designed to encourage investment in renewable power is it stimulates technological innovation. If you look at wind for instance in the 1990s and even the early part of this century in the United States largely it was improving technology, partly because of European subsidies and the help that gives European manufacturers, which made the projects much larger in scale, more robust technologies, and these advances in efficiency, reliability and scale were what enabled wind to become much more competitive and even approach grid parity with more traditional generation sources.

Goyal: In the short term the incentives are absolutely needed. In fact, if you were to cut them off right now I would agree with the other panelists that you would see a significant slowing down the momentum that we’ve had. And of course capital would start to flow toward countries where the returns are more attractive.

The signals are already there that the need for the incentives is getting less. And by that I mean the decline in prices that we’ve seen. If we just take Areva as an example, we’ve seen a decline in the prices that we’re charging of about 50 percent over the last three years. If that trend continues, then I think it will be another four or five years that you would start seeing that people are able to make bids and people are able to make project terms work without the incentives. Today they are still very much needed even to get close to grid parity.

Worthington: History has shown, particularly in the wind business, that when you have the tax credits in place domestic manufacturers run full bore and then when the credits either aren’t extended or expire manufacturing grinds to a halt. Congress has seemed not to be able to understand that it’s a terrible way to run a manufacturing business.

Where I think there’s even a potential a larger problem is that the tax credits expire, but the utilities on a state by state basis still have to meet their RPS standards and they increasingly turn to foreign manufactured units. You’re going to see a stronger backlash and Sen. Schumer has already been making noise about why U.S. dollars should essentially by going to subsidize Chinese wind manufacturers. That would just make it that much more difficult for the industry to get those tax credits back.

Dinkel: How close can we get to parity with the current evolution of the current technologies. In other words, we’ve seen a dramatic decrease in solar panel prices but that’s been because of a global market. The real question is can we wean ourselves of these current explicit subsidies over the next few years and have these current technologies get us there, or do we need some technology breakthroughs?

Wagman: Are there any as-yet undiscovered or little used policy avenues at either the state or the federal levels that might help promote renewable energy?

Dinkel: One area I would throw in and this is a small, local, but a pretty power example, we have a small town south of Phoenix called Gila Bend. And what the town has done is created a solar overlay zone.”They’ve worked with their current zoning, permitting processes to create an expedited approval process for solar projects within their city limits. And they’re somewhat typical of towns out here that are looking to grow dramatically, so they have some very large city limits that extend well beyond the current population. They’ve figured out the whole process and what they can legally do, but they take a process—and we have experience with a project within their city limits where we’ve used this solar overlay zone—but what they’ve done is taken a process that might take a year or more to get the various permits and zoning modifications to the point now where it can take literally just a few months to be able to take a project and get it approved by the city. Particularly for a photovoltaic project that doesn’t take that long to construct it has a real big impact on risk and the deployment of those technologies.

Marks: One of the things that come to mind that isn’t directly related to any particular generating resource, but rather is policies around transmission. I know there’s been some really quick done recently, especially by FERC in trying to promulgate rules with respect to access and increments at which pricing occurs so that intermittent resources have a fair shot. I think more broadly if you look at state policies and also the role that the federal government can play in helping to smooth the way first to locate and then to build out transmission capacity, I think that could have a significant effect in making a lot of these projects more feasible, especially in those areas of the country like the southwest where there‘s a very abundant resource of wind or sun which is not located near the load centers.

There’s a lot of variety around the country in how costs are allocated for upgrades that are needed for either the transmission system or even on the distribution system, especially if you look at more distributed generation and small-scale wind and solar applications. We could do a lot of improvements and fine tuning through our state and local rules that relate to cost allocation that would encourage a more holistic approach to transmission development. As we repower existing base load stations and as we move to more distributed generation and utility-scale renewable that may be located in different areas our existing transmission grid, which may be biased toward our existing thermal or nuclear producers, probably needs to develop in ways that are different than it currently is.

We hear a lot about smart grid but I don’t think we hear enough about the regulatory reform that will enable a lot of that investment to be made and that would allow the costs to be allocated in a way which is both fair and transparent so you don’t have free-rider problems or, at the other extreme, obstacles to new investment.

Ahlstrom: You raise a couple of excellent points, first of all that transmission of course is extremely important for renewable and for lowering power prices to businesses and consumers all across the country. But the other issue is that in times where you can’t get stuff done through legislation you still can get stuff done through regulation. The new FERC Notice of Proposed Rulemaking for renewables is really encouraging all of the system operators and utilities to make some changes that will in general be good for renewables: moving dispatch closer to real time, making sure that any costs that are assigned for the variability and uncertainty of renewable are reasonable and only applied after you make reasonable operating changes to reduce those costs and things like that. So to the extent that FERC continues with progressive policy around both transmission and the integration issues a lot could happen there.

Goyal: States are going to find ways to make sure that there is still growth in their particular neck of the woods even in the absence of federal policies. So you’ve seen states announcing feed-in tariff programs even though there’s nothing at the national level. You’ve seen incentives as in the example provided in Gila Bend, Ariz. Areva also has a wind business. We’ve heard that New Jersey just passed a very aggressive offshore wind bill. They provided basically 1,100 MW of capacity and would provide renewable energy credits. That just effectively created a market there for offshore wind and of course promotes jobs in that area.

Wagman: How does natural gas affect decisions related to renewable project economics, finance and recourse procurements?

Worthington: Particularly when you look at shale gas formations in the mid-Atlantic—the Marcellus Shale formation—you see the potential for a game-changer in many different respects. And it probably doesn’t help the renewable business, but it probably doesn’t hurt it all that much. The notion of being able to have plentiful and low-priced gas available is going to challenge particularly new nuclear and new coal plants even more so than it has already. I don’t think the impact on renewable is going to be nearly what it will be on potential new nuclear and new coal.

Wagman: Even with some of the pressure on power purchase agreements?

Worthington: Well, it might in some cases, but the thing, too, to appreciate is that there’s different versions of what the future price of natural gas is going to be. There are some who are suggesting that it’s always going to be $5 and that with the new resources that can be economically developed we’re in a whole new day. But we’ve heard that story before with a variety of different energy sources. It’s only been about six years ago that we were going to be utilizing LNG for up to 20 percent of our domestic gas. And it was only a few years ago that gas prices in December in New York were $15. So there are those who will hesitate before plunging all the way down the gas path again.

Dinkel: We’re not betting on $4 gas and shale being the answer to everything, just as LNG was not. I do think natural gas can help defer our baseload needs. When you can do natural gas at the prices we are looking at long term And build the equipment with the relative security that you can. But we recognize there’s an uncertainty from a price perspective. We have a three-year hedging program that our commission has approved so that dampens some of the near-term price volatility. But it doesn’t do anything for us beyond that three-year period. So we believe, like any kind of portfolio, it belongs in the portfolio, but you can’t give it overweight. So we are not looking at increasing our overall percentage of natural gas.

Natural gas is kind of the glue that binds the rest of the portfolio together. We are roughly equal on nuclear, coal and natural gas with pretty rapidly increasing amounts for energy efficiency and renewable. But it’s the natural gas units that allow us to effectively integrate intermittent wind and solar projects. We think it’s quite important to have those kinds of quick-dispatch units at a reasonable price so that we can effectively integrate the renewable and energy efficiency programs that we want to integrate. A very important glue that binds it all together. We think it’s an important part of our portfolio, but we don’t want to overweight on it.

Wagman: Let’s discuss some reforms that might be possible or necessary at the state level given the current economic and political conditions.

Marks: If you look at a lot of RPS standards, there’s the idea that renewable are separate and apart . But really what the ideal RPS is doing is that renewables should be a larger part of the mix in order to provide not just insulation from price volatility and not just environmental benefits but also system reliability. It’s an energy security issue as much as anything else. I don’t think we should have one size fits all. I think one of the advantages of RPS so far is that they do differ by state.

I would also say that in a recession with falling demand coupled with the success we’ve had in increasing recession as a percentage of our generation mix for installed capacity, these targets which we thought were going to be impossible to hit are actually proving to be achievable to the point where some California utilities will potentially hit their longer-term targets, which no one thought they would be able to do.

The last point is that obviously in a recession some pushback by ratepayers who may perceive renewable to be a more expensive resource.

Goyal: The emphasis really needs to focus on how do you enable those policies to be successful or how do you enable the renewable projects to take off. Whatever the states can do in the area of like permits, like transmissions; that’s really what you’re going to need, maybe even in finance whatever can be done is really going to make the difference. So I guess my comment would be the policies are fine; it’s the enablement that we would need to focus on.

Ahlstrom: At the state level the policies have been very effective and efficient in getting a lot of renewable on the grid with very little cost. Most utilities are finding maybe initially they’re concerned about these standards but they seem to find very cost-effective ways of meeting that , which have been a good way of making progress.

I would certainly like to see more growth, if not of national at least regional views around this like we’re seeing with various state governors’ associations in different parts of the country where they create regional consensus and markets, at least for RECs. But I think the state-level stuff is definitely where we’re going to see a lot of the action and often the states will figure out how to do this and maybe that will eventually show up in federal legislation when you take the best practices from the state levels.

Worthington: The most important thing on the state level is stressing the local jobs that are created. States are going to come under their own budget pressures . New Jersey is a good case in point where the new governor is slashing every dollar he can find. There’s talk about rolling back the renewable portfolio standards and removing New Jersey from RGGI just as an example. You also see a growing clamor—particularly, I would say in the mid-Atlantic and New England regulators—rallying against transmission to bring Midwest resources to the east coast. Instead, they’re under political pressure to take decisions that would bring jobs to their state rather than developing employment in Ohio, Illinois, Texas and so on.

Dinkel: The downside of these standards is that they were contrived. No one knew exactly how you were going to get there. The question is, are we getting close enough within a window of the maturation of the various renewable technologies that we can start to wean ourselves of RPS’s and all that. You can’t do that until you get sustainable markets. My dream is that we don’t have standards some day because all of this stuff is nicely integrated into what we do nationally and locally for utilities at the energy level. But clearly we’re not there yet. My sense is that the current standards in place generally speaking are pretty effective.

Wagman: Favorite project of 2010?

Ahlstrom: The one project that really made me realize that solar was coming on much more quickly was the DeSoto PV project in Florida that Florida Power & Light built. It’s a 25 MW AC project. To see that actually getting in the ground and then seeing how it can be integrated into the systems there and starting to get a lot of good science and data understanding how solar variability and smoothing with larger project sizes and geographic dispersions really has made me realize that there’s a lot of synergy between what we’ve learned about wind integration and what we’ll be able to do with solar integration.

Goyal: Rather than pick a project I would like to pick a program. And the program I was most impressed with in 2010 was the Solar Mission Program that India announced. It was the first instance I saw of government saying here’s our policy for where we want to be each year from here to 2020; here’s the program we’re putting in place; here’s the policy and here’s what you need to do. So that particular program is an example of how a renewble energy project or a grand project over many years could be structured and made a national priority was something that was pretty impressive.

Dinkel: You’ll forgive me for a little bit of self promotion, but the project that I thought was pretty transformative and is out Community Power Project that we’ve launched and that our corporation commission approved. And the reason I think it’s important from an industry perspective is that we’ve done in one of our communities on a single feeder we will put over 200 customers with distributed generation resources. We’re putting on over half a megawatt of energy storage as well as a small utility scale photovoltaic system. This is an example of what it takes to put a dense amount of distributed renewables along with smart technologies.

Worthington: The Cape Wind project getting approvals; while certainly that project has a long way to go to be in operation, it’s encouraging that the federal government apparently is going to encourage offshore wind along the Atlantic. Again, Cape Wind has a long way to go but seeing that movement that we’ve seen this year is important.

Marks: One is the lease financing that we’re just about to close for a wind project that shows t me that there’s a renewal of interest that the markets are coming back with a wider range of players with an appetite for tax equity. The institutional investors and not just the capital markets and the bank markets are going to be important part of debt finance for projects going forward. We also will see—especially in the cross border projects—project bonds come back. To me, it’s very reassuring and a reminder that there’s a reversion to the mean .

The other one is one of the few successes for the DOE loan guarantee program and that was the first project financing that they close on and that we worked on, which was the Kohuku wind project in Oahu in Hawaii. Not only did that show that the government actually can get one of these deals closed in a way that moves the market forward , especially at a time when the banks probably could not have done so, but it also shows innovative technology. That project has a battery storage device, which is meant to smooth the gap between the intermittent nature of the wind resource and the demand curve from the local utility. Any technology that enables us to store power so it can be dispatched later will have long-term significance for renewable resources, especially for solar and the environment in general and probably also for system reliability.

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