Renewables Get Into the Mix
Feb 02, 2004 - Power Engineering The years of hard work are finally paying off for
renewable energy advocates. After toiling in near-obscurity for decades, persevering in
the face of significant technical and economic challenges, and enduring occasional
ridicule from conventional energy supporters, renewable energy is hitting its stride and
entering the energy mainstream on a global basis. Electricity consumers are putting their
money where their mouth is, participating in green energy programs that guarantee the
use of renewable energy technologies in exchange for a premium on the monthly bill. A
growing number of states have enacted renewable portfolio standards (up to the 20%
level) and/or have set aside public benefit funds for renewable energy generation.
Trading systems using renewable energy certificates are being established to market the
environmental attributes of renewable energy. And the costs and reliability of renewable
energy technologies have reached levels where utilities and consumers alike are more
inclined to jump on board.
Perhaps most importantly, for all of the success renewable energy has enjoyed in recent
years, the future looks even brighter. According to Navigant Consulting, renewable
energy's share of worldwide cumulative power capacity (excluding large hydroelectric
generation) is expected to grow at a 9.2% compounded annual growth rate between now
and 2013, climbing from 3% to more than 6% of worldwide capacity. In the U.S.,
installations of renewable energy are expected to increase from about 750 MW/yr in 2002
to more than 4,000 MW/yr in 2013, a 17% growth rate.
Identifying the drivers that have enabled renewable energy to become part of the
mainstream energy mix is not difficult. Notably, however, it is not one single driver that
is responsible for the renewable upsurge; numerous factors have combined to create
fertile commercial conditions for renewable projects:
* Improving economics - generation costs for wind and photovoltaic installations are onetenth and one-fifth what they were in the early 1980s, with wind energy costs now in the
3-4 cents/kWh range at sites with good wind speeds.
* Emissions benefits - renewable energy technologies have a substantially lower
emissions and environmental profile than conventional power generation options.
* Consumer support - residential, commercial and industrial consumers are
demonstrating financial support of renewable energy in certain stales via green power
programs.
* Government support - state and federal government agencies are actively promoting
renewable energy development via renewable portfolio standards, tariff structures, set
asides, production tax credits and net metering.
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* Energy security and price volatility concerns regarding fuel diversity, reduced
dependence on foreign sources of energy, and exposure to increasingly volatile energy
prices, have translated into greater support for renewable energy.
"Renewable energy sits at the heart of several reinforcing policy objectives," says
Michael Zimmer, Partner with Baker & McKenzie in Washington, D.C. "The
convergence of attitudes regarding climate change, fuels diversity, energy security, and
sustainable development is building and will only intensify in the future." For example,
geopolitical sensitivities in the Middle East elicit concern about fuel diversity and energy
security, and rising pressure on natural gas demand, pricing, and supply implicates
energy security and increases the popularity of alternative energy sources.
The escalating importance of climate change issues also cannot be ignored. In 1997, the
Senate voted 95-0 in favor of the Byrd-Hagel resolution, which preemptively rejected the
Kyoto Protocol as too costly to the U.S. In October 2003, the Senate voted down the
Lieberman/McCain Climate Stewardship bill, which would have compelled significant
CO2 reductions to manage climate change, but only by a margin of 55-43. The shift in
the voting tally represents a remarkable shift in perception, and bodes well for renewable
energy growth in the U.S.
Barriers remain, of course, which is part of the reason why growth opportunities remain
strong. High initial costs, uncertainty regarding government commitment to incentive
programs, grid integration issues, dispatchability concerns, and the nascent state of
renewable energy credit trading have limited renewable project development in certain
instances, but efforts to remove these barriers are destined to result in greater renewable
penetration into the energy sector.
TECHNICAL FOUNDATION
Although renewable energy technologies are still often thought of as new or emerging,
many, in fact, are relatively mature technologically. For example, onshore wind turbines,
landfill gas generation, biomass combustion and co-firing, low-impact hydro, and
crystalline silicon photovoltaics can expect only relatively modest technological
improvements over the next 10 years, according to Lisa Frantzis, Director of Renewable
and Distributed Energy for Navigant Consulting. Thin-film PV, wave/tidal power,
offshore wind, and several other technologies, on the other hand, can expect significant
improvements in the future to enhance market viability. This relationship between
technology maturity and market maturity is revealing (Figure 1), illustrating the gaps that
exist between the various renewable technologies on the technical and commercial
spectrums.
If, as many believe, the future of renewable energy depends on reductions in total
installed costs for the various technologies, where should research monies and
development efforts be focused? Some contend that a long-term perspective is required,
focused on technologies with commercialization horizons in the 15-year plus range.
Zimmer argues the opposite. "The Department of Energy needs to re-allocate its R&D
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resources away from nascent seed projects and more toward intermediate and final-stage
programs that offer greater commercial payback prospects and more timely contributions
to national policy objectives over the next 10 years. For example, technology
development related to biomass gasification, biomass thermal, distributed generation,
wind turbine blades, and advance control systems will provide a greater return than
similar investments in thin-film PV or tidal power."
A middleroad balance is the obvious compromise position. "There is a clear role for
government R&D dollars to support highrisk technologies that could have a significant
impact on national energy savings and emissions reductions," says Ryan Katofsky, Senior
Engagement Manager, Renewable Energy, Navigant Consulting. "However, there is also
a role for public funds to help bridge the gap between relatively mature renewable energy
technologies and conventional technologies. A good example of this is the wind energy
production tax credit, which has been instrumental in promoting wind power
development in the U.S."
INCENTIVES REMAIN CRITICAL
Incentives such as the production tax credit remain a critical mechanism for furthering
renewable energy project development in the U.S. "For new technology to penetrate and
flourish in mature markets, you can't rely solely on the market to get the job done," says
Zimmer. "Markets are notoriously unforgiving, so you need incentives to foster a market
where new ideas can compete." Zimmer points to the evolution of the cogeneration and
independent power producer market as evidence that incentive programs can work. "Over
the past 25 years, as the cogeneration industry grew into the independent power (IPP)
movement and ultimately the merchant power sector through the help of programs such
as PURPA, companies succeeded in large part because of the availability of incentives.
Incentives for limited periods of time enable companies to reach critical market
capitalization levels, to issue equity, to assume debt, and to attract Wall Street
confidence."
Congress's inability to pass the Energy Policy Act of 2003 is clearly a disappointment to
renewable energy advocates. While not a home run for renewable energy, the bill would
have definitely qualified as a "clean" base hit. A Federal renewable portfolio standard
(RPS) was not included, but elements such as the extension and expansion of the
production tax credit (PTC) until 2007 were critical. "Wind energy stood to be the main
beneficiary of the three-year extension of the PTC," says Frantzis. "In very good wind
resource sites, power can be generated for less than $0.03/kWh. Many wind power
projects will now go back into limbo awaiting word on whether another extension is
likely."
The energy bill also offered strong support for solar PV, hydropower, biomass and
biofuels. Now, facing a season of Presidential and Congressional politics in 2004, the
prospects for passage of an energy bill - despite the optimistic words of the key
politicians - are 50/50 at best.
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While many agree incentives are necessary, the question of when incentives should cease
remains a sticky one. Zimmer believes that federal and state incentives will be needed
until renewable energy builds an 8% market share (excluding the existing hydro base).
Beyond that level, the training wheels should come off and market forces should be
sufficient to support a competitive, free market position for renewables using a wider
array of technologies. This formula worked in the past for the cogen/IPP industry,
according to Zimmer. Incentives successfully encouraged the development of 50-60,000
MW of capacity by the early 1990s, out of a total installed capacity of about 700,000
MW at the time. That foundation established Wall Street confidence to move to the next
level.
Incentive programs are intimately tied to the value of renewable energy, which comes in
various forms. In addition to the typical market value of MWh (energy) and MWs
(capacity), renewable energy also possesses various "attributes" - such as its
environmental benefits, use of specific renewable fuel/technology types, etc. - that add
additional market and regulatory value. This value exists because of:
1. Regulatory programs - renewable portfolio standards; renewable production tax
credits; emission performance standards (EPS) imposed on retail suppliers; power
labelling requirements; and the award of emission allowances or emission reduction
credits for qualifying renewables under certain state or federal regulatory programs, or
international markets for CO2; or,
2. Market opportunities - premium, green power or green tag products desired by
customers who voluntarily purchase them, and the potential tax deductibility of green
power or green tags purchased from non-profit organizations or government entities.
"Sometimes most, if not all, of the renewable attribute values are expressly reserved for
the energy buyer in what is called 'bundled renewable energy,'" says Andy Greene,
Principal with Navigant Consulting. "That is, if you buy power under contract from a
wind farm, the contract may specify that the buyer gets all environmental values and
benefits, such as RECs, emission allowances, CO2 credits, production tax credits, etc."
In the near-total absence of federal policies and regulations that might define or police
these attribute markets, however, state policies, general commercial laws, or voluntary
certification provisions (such as Green-e) are defining the nature of attribute markets and
the "rules of engagement." These policies tend to be inconsistent from state to state.
UTILITY PERSPECTIVES
Utility perceptions regarding renewable energy ran the gamut, according to Frantzis.
Some are investing in renewable energy for portfolio diversification or because, in certain
instances, a particular wind, landfill gas, or biomass co-firing project represents the leastcost option. Others are only pursuing renewable energy development to meet RPS
mandates, or to meet consumer demand for "green" energy. Still others are resisting any
development at all, claiming that it is still too costly and intermittent.
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"Having a viable renewable component to our generation portfolio is now a necessity,"
says Eric Markell, Senior Vice President of Energy Resources, Puget Sound Energy.
"There really is no alternative because natural gas appears to be on a year-long price
spiral and it is now difficult or impossible to permit and build new hydro, nuclear or even
coal-fueled generating facilities."
Other utilities, while supportive, aren't as enthusiastic. Exelon Corp. has various
renewable energy projects within its service territories in Illinois, Pennsylvania and New
Jersey, and has found that customers are willing to pay $14-20/MWh for wind RECs
depending on volume and length. Exelon urges caution, however, when trying to equate
expectations with commercial reality, stressing that renewable energy needs to consider
the commercial aspects of getting a project completed, sold and sustainable. Expecting
utilities to accept long-term contracts at higher prices is not realistic and it ignores the
realities of today's power markets. While an RPS mandate seems straightforward, Exelon
believes it can amount to another tax on the ratepayer.
Exelon's preferred course is to set up market supports - such as price risk insurance - that
provide developers with a level of confidence over an extended time frame.
STATES TAKING THE LEAD
States are playing a huge role in the growth of renewable energy. In fact, 10 states will
probably ultimately account for 70% or more of the renewable energy capacity in the
U.S. At least 14 states currently have renewable portfolio standards in place, and a
similar number have public benefit funds aimed at renewable energy development. States
like California, Texas, Arizona, New York, New Mexico and Nevada are leading the
charge, but ambitious efforts are also underway in the Upper Midwest and the Northeast.
Massachusetts has been particularly active in incentivizing renewable energy. In
November, the Massachusetts Technology Collaborative (MTC) committed $32 million
from the state's Renewable Energy Trust to support projects that will generate about 100
MW of power. The funding comes from a first-of-its kind Green Power Partnership,
which will purchase renewable energy certificates (RECs) and provide other price
supports to facilitate the financing and construction of several wind, biomass, and
hydroelectric projects.
One project receiving support is a 3.1 MW landfill gas plant in Dartmouth, Mass., being
developed by CommonWealth Resource Management Corp. Constellation NewEnergy, a
competitive retail electricity provider, will purchase all of the energy and varying
percentages of renewable energy certificates from the project for a 10-year period. MTC
will provide a put and put-back option for 80-100% of the project's RECs in years 4
through 13 of operation. The put option gives CommonWealth the right to sell certificates
to MTC at a predetermined price if CommonWealth is unable to sell them to
Constellation or on the open market. The put-back option gives MTC the right to sell
certificates back to CommonWealth at a lower price. This arrangement provides
CommonWealth with certainty regarding project revenues and facilitates project
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financing. In return, RECs will be made available to Massachusetts ratepayers for
inclusion in green power programs or for compliance with the state renewable portfolio
standard.
States have more work to do in certain areas, however. In some states, too many agencies
have a degree of regulatory oversight into renewable energy project development, and
unless these efforts are harmonized, progress can be slowed, according to Zimmer. States
could also take a more active role in promoting renewables by providing offtake
commitments and by dictating that state facilities purchase a minimum percentage of
electricity from renewable sources to support the market. The presence of such an
"anchor tenant" would improve the viability of a project and its ability to attract capital
and financing.
State efforts related to renewable energy may also be jeopardized by budget crises around
the country. Due to the economic climate the last several years, legislators have begun to
eye, and in some cases already raid, funds set aside for renewable energy, energy
efficiency, conservation, etc. Several states have enacted legislation permitting the use of
set-aside funds for budgetbalancing purposes, to the tune of tens of millions of dollars or
more. Raiding these funds is arguably short sighted, potentially forfeiting the long-term
economic and environmental benefits associated with promoting and using renewable
energy.
BIG PLAYERS WORLDWIDE
The escalating importance of renewable energy is particularly evident in the level of
interest expressed, and amount of money invested, by large multi-national corporations
worldwide. For example, a coalition of 12 major U.S. corporations called the Green
Power Market Development Group has recently purchased 97 MW of renewable energy
certificates and renewable energy systems around the U.S. The deals made by the Green
Power Group - which includes Alcoa Inc., Cargill Dow, Delphi Corp., Dow Chemical,
DuPont, General Motors, IBM, Interface, Johnson & Johnson, Kinko's, Pitney Bowes,
and Staples include the largest corporate fuel cell purchase (35 MW) and largest. KEC
purchase (36 MW) in the U.S.
On the manufacturing side of the equation, the commitment demonstrated by companies
such as Shell, BP, Sharp, Mitsubishi, GE, Toshiba and Sanyo is testament to the
mainstreaming of renewable energy. Notably, however, the biggest players in the
renewable field were not from the U.S. in 2002. The largest U.S.-based wind turbine
manufacturer, GE Wind, came in fifth place in terms of world market share, behind
Vestas (Denmark), Enercon (Germany), NEG Micon (Denmark), and Gamesa (Spain).
The largest U.S.-based PV cell manufacturer, AstroPower, places sixth in world market
share, behind three Japanese companies (Shaip, Kyocera and Sanyo), and two UK
companies (BP Solar and Shell Solar).
The strong position of non-U.S. players reflects, at least in part, the increased sensitivity
to global climate change issues outside the U.S. The European Union, for example, has
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committed to an 8% reduction in CO2 between 2008 and 2012 relative to 1990 levels,
and its member countries have renewable energy targets from 6-12% by 2010. "The lack
of major U.S. players in the world renewable market may not have a significant impact
on overall technology penetration or consumer prices," says Navigant's Frantzis, "but if
U.S. renewable companies do not position themselves well over the next few years with
cost-competitive products and excellent customer service, they stand to lose market share
from the expected $35 billion equipment business potential in 2013."
"We may have given up some of our technological edge in certain renewable energy
fields," says Zimmer, "but we retain an edge in other critical areas: project development;
the packaging of technology with contracts and attractive regulatory and financial
regimes; the creative structuring and raising of capital; and the export of technology and
project structuring to developing countries. This is especially true for solar, hydro,
bionlass, geothermal and hydrogen-based technologies which must enhance their product
marketing and manufacturing base in this country to succeed. That said, however, we
don't want Lo let the balance shift completely offshore to where renewable energy
becomes another U.S. import akin to our growing energy reliance on imported oil and
gas."
Despite these concerns, the bottom line is that renewable energy is on a positive growth
path, and this growth is actually applying pressure to manufacturing capacity. In the solar
sector, worldwide shipments of PV cells and modules surged 52% in 2002, and are
expected to grow another 30% in 2003, according to a new report issued by Strategies
Unlimited, a division of PennWell. "PV manufacturers are scrambling to add
manufacturing lines and build new plants to meet demand," says Neil Dunay, Senior
Analyst with Strategies Unlimited. Global manufacturing capacity is expected to exceed
one GW peak in 2003.
Growing pains are not something that the renewable energy community could have
envisioned during much of the last few trying decades. Now that they're finally here,
however, they're expected to stay for quite a while.
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