Renewable Energy Development: Challenges to Green Growth

Renewable Energy Development: Challenges to Green Growth

The keynote address to begin the Renewable Energy Finance Forum (REFF) held in New York last month felt a lot like the U.S.A's performance in the World Cup -- down a goal in the first ten minutes of the game. Like the U.S.A, the rest of the conference was spent trying to recover from the deficit.

Michael Morris, the CEO of American Electric Power -- one of the nation's largest utilities, consisting of 40,000 MW of generating capacity, 70 percent of which is fueled by coal -- outlined the challenges the renewable energy industry faces. Critical to his statements is his underlying belief that the development of the renewable energy (RE) industry is separate from the climate change movement, which he categorizes as a tangential benefit.

Morris believes the focus of the RE industry is on developing sustainable, competitive businesses. In this vein, he notes that the major driver historically has been "world policy shift," not economics nor improved efficiencies. Whether or not you believe climate change is a more critical issue than renewable energy, his points on the challenges facing the industry were insightful:

1. Resource location. Most energy-generation assets are built near the location of the feedstock. For instance, coal plants are built near coal mines because it is easier to transport electricity than it is to haul the equivalent amount of coal.

Similarily, RE resources are distributed widely across the U.S., from Wind in the central U.S. and the coast lines, solar in higher concentrated regions, to geothermal patches and biomass feedstock locations. Once these resources are tapped, if they are not in pre-wired locations, transmission lines need to be created to transport energy to population centers.

The process of building transmission lines can take time, but nothing compared to the time required to obtain the regulatory approval, which can often take in excess of a decade. Solar energy (not including from concentrated solar power farms) are often located literally on top of energy use, and will not face this hurdle as much as wind resources.

2. Intermittency. Integrating intermittent or variable resources such as wind and solar can be difficult for utilities, which have traditionally been built to accomodate predictable and reliable generation sources. Another wrinkle is that although solar generation peaks in sync with peak demand, wind often generates a large portion of its capacity during off-peak hours.

These challenges will be mitigated with standby natural gas resources, which can complement variable generation. Additionally, storage capacity coupled with generation, historically hydro-power but increasingly compressed air energy storage (CAES) and batteries can help provide a predictable, and even fixed, output.

3. Price point. Very simply, renewable energy resources are more expensive than available fossil fuel resources on a dollar-per-kilowatt-hour basis -- although this situation will only shift in renewables' favor over time.

The most direct challenge today is the availability of natural gas produced from share, or shale gas. At a current cost of $5 per million BTUs (MMBTU) of shale gas, natural gas plants can produce electricity at a cost of 3.5 cents/kwh. Neither solar nor wind resources, even with government subsidies, can currently be produced under 10 cents/kwh. If shale gas price rises to $7/MMBtu, electric costs then rise to only 4.9 cents/kwh (multiply $MMBtu by 7/10 to get cents/kwh).

4. The Green Movement is "running into itself." Morris pointed out a recent article in the Denver Post about a green energy project "tangled in green tape." A proposed uranium mill is apparently one of several alternative-energy development projects "mired in intense regulatory review, local opposition, lawsuits and a weak investment economy." Consumers seem to have assumed a NIMBY attitude about these projects, even while saying they place high importance on the creation of renewable energy.

If listening to the hurdles facing the industry causes the green hairs on the back of your neck to rise, the fact is that natural gas provides the cheaper form of generation to consumers compared to RE resources today. Like every utility CEO, we are all in favor of renewable energy, but we all may not be ready to pay for it.

In the session following Morris's keynote, Mindy Lubber, President of Ceres, was vocal in her view that climate change and renewable energy are inextricably linked, and to determine the true cost of fossil fuel generation sources, we have to compute a price and develop a cap for carbon emissions. For the industry's sake, we hope the policy makers and legislators agree.

"Wait and See" Items for Renewable Energy Players

In addition to utility industry leaders, the REFF conference also brought together RE project developers, investors, bankers, policy makers, and other key influencers. Although challenges that Morris laid out in his keynote are among the biggest facing the industry, there were several other issues sitting on the sidelines that could have significant impacts on the growth of renewables in the U.S.

1. No more stimulus? Fine, but can we keep the other incentives in place?

Many of the DOE-established programs to drive renewable energy development are set to expire. Highly effective in encouraging RE investment are programs such as the Investment Tax Credit (ITC), the Production Tax Credit (PTC), the Advanced Manufacturing Tax Credit (48C), and the Treasury Grant program (Section 1603 of the Stimulus Act).

The former two programs have been extended into 2012-2013, but the latter two programs are set to expire by the end of 2010, threatening to slow the pace of RE deployment. In response, REFF conference organizers, including Michael Eckhart of the American Council on Renewable Energy (ACORE), are preparing to work with lobbyists to prevent the expiration of these successful incentives.

2. Utilities re-evaluating PPA accounting treatment?

Lisa Frantzis, the managing director for Renewable & Distributed Energy at Navigant Consulting, highlighted a potential issue for utilities arising from how the Financial Accounting Standards Board recognizes power purchasing agreements.

If the FASB sees PPAs as debt, then utilities would be seen as having a larger debt burden, which may affect their credit rating and interest rate for borrowing, resulting in costs that would be passed on to their rate-payers. This means that, with the rise of smaller-scale generation -- from home solar, wind or other renewable systmes -- the number of PPAs any utility has at a given time will increase, and could lead to significant debt increases from an accounting standpoint.

3. Bankers declare the "market is open" - that is, for high quality issuers.

Two panels on banking, and one on project finance, shared the view that investors are out there, whether they be buyers or equity and debt investors, for those projects or companies that are of a high quality.

But what defines "high quality?" Characteristics would include realistic valuation expectations, limited capital intensity, limited technology risk, and validation by an industry player or expert. To highlight just how important that last characteristic is, please refer to the Tesla IPO.

Sid Singh is an investment banker currently focused on advancing energy efficiency and renewable energy initiatives leveraging his deal making experience, industry knowledge, and network of contacts. Other articles by Sid can be found at

Photo CC-licensed by steevithak.