Electric-bill increases follow renewable targets

Written by Lisa Sibley, Cleantech Group

Wednesday, 09 September 2009 09:41

R.J. Lyman, a Boston, Mass.-based partner at Goodwin Procter, is no stranger when it comes to helping his clients navigate renewable portfolio standards (RPS).

He told the Cleantech Group there’s likely to be a rapid deployment of projects from renewable resources once regulators, utilities and political leaders are honest with the consequences: It’s going to mean hikes on electricity bills.

But currently, he said, he’s not seeing enough being done to meet the RPS initiatives.

Lyman is a member of the firm’s Clean Tech Incubator Group, which brings together a bi-coastal group of experts with more than 40 partners focused on cleantech and energy clients.

He represents clients in various aspects of commercial real estate and renewable energy project development, including site acquisition, project permitting, debt and equity financing, and property disposition.

Lyman started his career as a project manager at a consulting engineering firm representing independent power producers and other energy and commercial developers. He has also served as assistant environmental secretary under the former Massachusetts Gov. William Weld.

He shared details with the Cleantech Group about current RPS targets, how U.S. utilities are trying to meet them and some of the associated hurdles. Here are excerpts:

What is an RPS, and what do you think about it?

RPS exist in 28 of the 50 states and the District of Columbia; they require a specified amount of total power generation to be bought by utilities from renewable sources. The quantity of power that needs to be produced from renewable sources and the date by which that needs to occur varies from state to state.

The concept is usually called the RPS, but in the Waxman-Markey bill that passed in the U.S. House of Representatives and may become law, it’s called the national renewable energy standard (see New paper advocates U.S. carbon tax shift [1] and Rice calls carbon cap-and-trade 'ridiculous' [2]).

California’s standard requires all utilities in the state to be 20-percent renewable-powered by 2010, and 33 percent renewable-powered by 2020 (see PG&E to meet renewable energy requirements - sort of [3]). The number is at 20 percent for some states and 10 or 15 percent for others. The way people typically blend those together is to say that 20 percent is really the aggregate, and 2020 or 2025 is the time frame we’re talking about.

It is an essential goal from a global perspective, from a national perspective and from an economic perspective. From a global perspective, because the burning of fossil fuels is an indisputable contributor to global warming … and this is a way to provide for the powering of our electric supply, with less dependence on fossil fuels; from a national perspective, because, if we continue and accelerate technology development and component manufacture, this is a way to stop our borrowing money from China to buy oil from the Middle East; and from an economic perspective, because it allows the revival and enhancement of our electric power supply, and this is an essential component of our public infrastructure to support private economic development.

Is the RPS a mandate? What happens if the utilities don’t meet it, and who is leading at meeting it?

It's different state to state. The consequences are typically financial. The utilities under most state mandates have what are known as alternative compliance payments (ACP), which is a way of financing the buying of renewable power from some other source when they haven’t bought it directly themselves.

If the pricing is too low or the ACP requirement doesn't apply, then the RPS is nothing more than a guideline. In making progress, California is indisputably the leader, although the Pacific northwestern states have substantial production and in the southwest, Arizona and New Mexico are doing well, in part because they have excellent natural resources. New Jersey has a particularly well thought through RPS and corresponding set of financial incentives.

How does this compare to other nations?

There is no doubt that other countries, particularly in Europe, are way ahead of the United States. Germany has more installed solar power than any other country in the world, thus proving it's a myth that renewable power can only be developed where the sun shines brightest or the wind blows hardest. In Germany and Spain, feed-in tariffs are set by the government, and they are expected to provide a reasonable return on the project investment. These have proven to be a wild success (see Spain leads 2008 solar market [2]).

What kinds of plans are you seeing U.S. utilities set up to meet the target?

Not enough. South California Edison [3] recently announced a 550 megawatt project with First Solar [4], which is an Arizona-based solar project development company (see First Solar, SCE sign PPA for 550 MW solar projects [5]). I said at the time it was a welcome announcement. But announcements like that need to happen every week, week after week, month after month, for a decade to come.

Certainly there is a lot of thoughtful innovation occurring in technology development across a wide range of renewable technologies—solar, wind, biofuels from feedstock and non-feedstock materials, and, to a lesser extent, from wave and tidal hydropower. The pace of acceleration in project deployment seems the greatest in wind and solar, but there's a lot to be done across the spectrum.

What kinds of challenges are you seeing utilities face to finance and develop projects?

There are three different types of challenges, all of which are ultimately financial. The first challenge is the one everyone has on the tip of their tongue—the recent credit crisis. Getting banks to lend money is difficult in every line of work, and the renewable power business is no different, although that is changing a bit.

The second challenge is in the context of the purchase of equipment for these projects. The cost of equipment is dropping in wind and solar, in both instances as a result of long-term trends, and that’s a good thing.

The final challenge relates to the economics of utility rates. At the end of the day, when you build any renewable power project, the power is sold to the utility, and the utility recovers its expenses by charging homeowners, commercial businesses, and institutional users of power. Getting approval from regulators for the required rate increase is a challenge for utilities because the regulators are charged with protecting affordability of utility service for homeowners and other rate payers. This remains a substantial hurdle in many jurisdictions.

What steps do you think the utilities need to take to get back on track?

The production costs for equipment and the credit markets are moving in the right direction.

Regulators, utilities and political leaders need to be honest that there will be cost increases in electric bills as renewable power production increases. Once there’s a widespread understanding of costs going up, then you will see a much more rapid acceleration of project development. That is already happening. California’s Gov. Arnold Schwarzenegger has been the most clear cut about this.

What are the costs of the projects, and how big are they?

Coal, which is our cheapest power source, and natural gas are in the vicinity of $1 per watt. Wind is probably $3 to $4 a watt. Solar is somewhere from $4 to $5 to $6 per watt; there’s a lot of variation.

Virtually all of the wind and solar projects that have been built or are proposed right now are smaller than conventional fossil fuel fired plants, but they are increasingly getting to a size that is utility-scale to power hundreds if not thousands of homes.

With the 550 MW solar facility announced by Southern California Edison, that’s somewhere in the vicinity of a $2 billion to $3 billion project. More typically, the kind of projects I see are in the several hundred million dollar cost range.

Where is the financing coming from, and how are you helping companies?

We help clients develop, construct and finance their projects. This runs the full spectrum, from locating and securing sites, to engineering the project, to reaching agreement for the utility to purchase power, to securing tax and cash equity investment commitments, to borrowing the remaining required capital, to procuring the components and constructing the project. The financing market is very different from just a few years ago, when Lehman Brothers [6] and other domestic investment banks were the market leaders; now much of the debt financing is coming from European and Asian commercial banks.

With which utilities are you working?

Mostly I’m working with independent power producers who contract with utilities. The interesting point here is that there are a number of kinds of actors in this space: First, it’s the sort you’d expect, entrepreneurial enterprises promoting renewable power, owning a patent or nimble enough to see if they can develop a project.

Secondly, and more initially surprising, it’s the kinds of companies that have always built large projects, albeit in different contexts, the defense contractors, investing in these types of projects. As an example, Lockheed Martin [7] [not a client of Goodwin Procter] has been public about a facility it’s building in New Mexico in a joint venture with Starwood [8] (see Lockheed Martin, Starwood Energy to pursue utility scale solar [9]).

The third sort are conventional project finance enterprises, folks in the power production business, previously in the gas and to a lesser extent coal business, domestic and foreign actors that have built projects at this kind of scale in conventional power and are now turning to renewable power, often from a portfolio diversity basis.

What kinds of advice are you giving your clients to navigate RPS successfully?

At the end of the day, project development is a nuts-and-bolts undertaking; it's a thousand details, dealt with one after the other. But in the current environment, with extensive regulation imposed by and substantial incentives available from government, it is essential not only to give would-be developers conventional project development and finance advice, but sound policy insights as well.