|Temple I natural gas-fired power plant (pictured) in Texas, which was developed by Panda Power Funds, utilizing Siemens technology, is a perfect example of flexible gas-fired generation.|
The recent UN Climate Change Conference in Paris, or COP21, has pushed the issue of clean energy to the top of the global political agenda – with a number of key governments making strong carbon-cutting pledges to reduce global warming.
Undoubtedly, this is a step in the right direction and should support the further development of renewable energy projects worldwide – in fact, developing world investments in renewables topped those of developed nations for the first time in 2015.
Yet to support renewables is not to reject fossil fuels entirely. Indeed, a global energy mix comprising only renewable sources is likely unattainable in our lifetime. Even under a low-carbon 2°C case – the ultimate goal of COP21 – 60% of the world’s energy in 2040 will still be generated from fossil fuels.
The first reason is simple economics. While costs will continue to decline as the renewable industries evolve, renewable energy typically remains more expensive versus most fossil generation alternatives. The incremental cost must be born by ratepayers, shareholders and taxpayers.
Secondly, electricity grid fundamentals cannot be ignored. When the sun stops shining and the wind fails to blow, other generators must quickly take up the slack to ensure power reliability and grid stability.
Natural gas-fired generation is, in many ways, the perfect partner for renewables – not only is it relatively climate-friendly, modern gas-fired power stations can also operate quite flexibly. The ability to ramp up and ramp down quickly allows them to respond to fluctuations in renewable energy output.
Temple I, Temple II and Sherman, natural gas-fired power plants in Texas, which were developed by Panda Power Funds, utilizing Siemens technology, are perfect examples of flexible gas-fired generation. The combustion turbines in these plants can begin producing energy in just 10 minutes. Siemens Financial Services played an important role in financing these three projects by committing debt capital.
Finding the funding
So what can be done to foster the complementary growth of renewables and clean, gas-fired generation? In short: better regulation, risk mitigation and reasonable return expectations.
Firstly, at the state and federal policy levels, regulation will be key. In my opinion, the best way to compensate generators is to pay for both capacity and energy. This would drive investment in peaking plants, those that don’t provide energy all the time but do provide reliable capacity, thus helping drive an efficient and flexible generating base. Of course, implementing this effectively on a broad basis would require better cooperation between regulators, utility commissions, federal and state politicians and energy companies.
At the project level, we are seeing investors become far more comfortable with the construction risk of large-scale energy projects – a key barrier just a few years ago in certain sectors. Yet assessing counterparty risk – especially as projects grow more complicated – and operational risk still mean that effective risk management is key.
As such, capital investment from stakeholders, such as technology/equipment suppliers and contractors, is essential to help make financial investors more comfortable with a project’s risk profile. This in turn attracts capital from banks and institutional sources.
Project Hummel, a natural gas-fired plant in Pennsylvania and our latest of seven collaborations with Panda Power Funds, is a case in point. In this joint-venture, Siemens delivered the technology for the 1,124 megawatt combined cycle power plant, as well as a $125 million equity investment to support its construction.
Ultimately, I believe that these types of clean, flexible power plants will facilitate the development of renewable energy projects without compromising the reliability of our transmission and distribution systems. This will support the goals of COP21 with a true “win-win” solution.
About the Author
Kirk Edelman is the chief executive officer of Siemens Financial Services’ (SFS) Energy Finance business, where he leads Siemens’ energy investing activities worldwide. In this role, he manages the activities of a global team that provides financial solutions throughout the capital structure - from debt to equity - in support of the energy industry. Kirk also has regional responsibility and is president and CEO of Siemens Financial Services, Inc., the legal booking entity that coordinates Siemens Financial Services’ activities in the U.S.