Clean Energy Future by Arno Harris

Motley Fool Weighs in on Calfornia FiT

The Motley Fool published a short piece today on recent developments in California solar feed-in tariff (FiT)policy.Specifically, it focuses on the apparent tension between the recently passed SB32 (signed by the Governor over the weekend) and the CPUC's soon-to-be issued FiT policy.The article is short but accurately captures the issues and industry positions on the issue.

SB32 was the focus of a fair amount of last-minute lobbying over the past few weeks. The bill purports to create a "european style" FiT for 1.5MW to 3MW projects. However, many in the industry (including Recurrent Energy, Suntech, and First Solar) are concerned that the legislation is simply a repeat of last year's FiT bill and sets the FiT rate too low to stimulate any development.

The other big industry concern has been that SB32 would take years to implement and undermine promising efforts at the CPUC (in proceeding R.08-08-009) to establish a market-based FiT for 1MW to 20MW projects. While industry efforts to postpone SB32 were not successful, many of us were glad to see the signing statement appended to SB32 by the Governor that directs the CPUC to continue its efforts on a market-based plan in addition to SB32 implementation.

As the Motley Fool noted, the CPUC program "could be a powerful program if crafted correctly." I'm keeping my fingers crossed and feeling pretty optimistic that we're on the right track.

The Risks of Going Big

Recent weeks have seen plans to build two large solar thermal projects come to a disappointing end. Last week BrightSource abandoned its 5,130 acre project in the Mojave Desert. And news is just coming out that Starwood Energy Group has terminated the PPA it was recently awarded by APS for a 290MW solar thermal plant in Harquahala Valley, Arizona.

The two projects were cancelled for different reasons. BrightSource's project ran afoul of environmental efforts to protect Mojave desert lands and local wildlife. Starwood's project was apparently cancelled because Lockheed Martin (the project's EPC partner) concluded the risk and cost of the project were too great.

The cancellations highlight an important reality that will become more and more apparent over the next few years. Power project development is difficult and until all the uncertainties associated with land use, interconnection, construction cost, and power sales are resolved, a project is at risk of getting derailed. The unfortunate truth is that we are inevitably going to see attrition of more projects like these as development uncertainties take their toll.

From a renewable energy standpoint, this underscores the risk we face as a society in meeting RPS goals if we bet the farm on a handful of big projects. Don't get me wrong, the big projects are important and we need them in the mix if we're going to hit our goals. But, the reality is that big projects face more environmental scrutiny and interconnection issues than smaller distributed-scale projects. And because of the complexities involved, they take much longer to get to the point where the project is a sure thing.

A more robust policy approach to meeting RPS goals is to place bets on a diversified portfolio of large and small scale projects. Distributed-scale projects (2-20MW) can still be delivered in large volumes. My company, Recurrent Energy, is pursuing a distributed scale development strategy and our pipeline of over 500MW of projects demonstrates that small scale doesn't have to mean small capacity.

Big News (4.8MW to be Exact) in Spain!

Today Recurrent Energy made some news with the announcement of our first 4.8MW of rooftop projects in Spain. These projects are the first projects to emerge from our efforts in Europe that were started last year. But what's really remarkable about these projects is how they were developed and what they indicate about the sizable role distributed-scale solar will play in the industry's future.

Recurrent Energy developed the Spanish projects through an innovative co-development arrangement with ProLogis (NYSE:PLD), the leading global provider of distribution facilities. Under the terms of the arrangement, Recurrent Energy leases rooftop space from ProLogis (which owns 450-million square feet of such roofs worldwide!) as a site for our projects. As the owner of the projects, Recurrent Energy provides the financing to construct and operate them. The projects generate income for Recurrent Energy through the Spanish feed-in tariff that provides 32 euro-cents per kilowatt-hour delivered to the grid.

To date, most commercial and industrial projects have been done one building or one owner at a time. That means for each rooftop, the developer typically had to negotiate a separate roof lease agreement and power purchase agreement (PPA). That's a lot of legal paperwork and expense to go through for smaller rooftop projects. Under Recurrent Energy's approach, we sign one master lease that covers a large number of buildings and sell the electricity under one tariff (or utility PPA in the US). That allows us to reduce the transaction cost associated with rooftop solar and aggregate significant generating capacity.

Why is that important? Because it points the way to a business model that enables us to do rooftop solar efficiently in large volumes. And that's important because it is business-model problems that have kept us from tapping the solar potential of large commercial and industrial rooftops. We've "cracked the code" on these types of projects, opening up a significant new resource for generating clean electricity right where it's needed most, in urban load centers.

Recurrent Energy has differentiated itself by pursuing a distributed-scale development strategy. Our vision is to build and operate a large fleet of 2MW to 20MW solar PV projects, selling clean electricity to utilities, governments, and commercial customers. Our Spanish project (and our pipeline of over 500MW across North America and Europe) demonstrates that we can aggregate small projects into a large portfolio and play a sizable role as a generator of clean electric power.

The Role of FiTs in California

Yesterday my day was all about feed-in tariffs. I participated in a really interesting panel addressing feed-in tariff policy in California that was part of the CPUC's 21st Century Thought Leaders Series. And just hours before the panel, the CPUC issued a ruling in the feed-in tariff (FiT) portion of the RPS proceedings that included a very detailed staff proposal to use a reverse auction process to implement the policy. The NYTimes covered the proposal in an article today.

My company, Recurrent Energy, develops projects in the US, Canada, Spain, and Germany so we have an informed perspective on the relative merits of various feed-in tariff policies. Overall, we think feed-in tariffs have proven to be very effective policy tool in emerging markets. They set a clear price signal and, when done well, they provide the long-term market stability needed to encourage investment.

However, feed-in tariffs are also something of a blunt instrument and they have a number of risks. Bottom line, European-style feed-in tariffs are a form of government price-setting. Regulators who try to set a price are almost guaranteed to get it wrong, either too high or too low. Set it too high and you overheat the market. Set it too low and nothing will happen.

Spain is a perfect example of the risks of setting an FiT too high. In 2008, the Spanish feed-in tariff burdened the country with $26B in obligations to pay for 20 years of solar power they permitted. The political backlash of that obligation is now likely to erode the long term stability of the market—it just wasn’t sustainable as a policy. Unfortunately, it also turns out that it's very hard to design a regulatory process that can respond to adjust pricing fast enough to approximate a competitive market. 

We believe feed-in tariffs have a very specific place in the policy toolkit—to get stuck markets unstuck. On the one hand, California has a very effective residential and commercial incentive program in the combination of CSI and net-metering (<1MW). While at other end of the scale, California's RPS is clearly stimulating demand for “mega solar” projects (200-300MW) out in the desert lands. The RPS is also starting to see medium-scale 10-50MW projects gaining momentum.

There is a clear gap right now in California's 2-10MW distributed-scale solar market. The irony is that it is this type of “urban infill” solar projects where PV shines best as a technology. Solar PV enables us to put clean, quiet generating plants right next to the load centers where clean power is needed most. There’s no other power technology that can do that.

We're very supportive of the CPUC's proposal to use a feed-in tariff approach as a transitional policy to ‘unstick’ the 2-10MW distributed solar market. And we definitely agree with the staff recommendation that a competitive solicitation via the Reverse Auction Market [note: you have to love the subtlety of the choice of acronym, RAM!] would be much better than a fixed price tariff. Such an approach is very likely to spur a large volume of PV projects in the state.

We’re also very supportive of the emphasis in the proposal for viability requirements--criteria that ensure bidders in the auction are actually in a position to execute the project if they win. After pricing, viability is the most important policy element to ensure this sort of program produces results.

Overall, there are only minor items in the proposal to disagree with. We favor longer delivery windows—the proposal was for 18 months, we’d like to see 3 years or more. We’d like to see slightly higher development securities ($30 vs $20/kW) because forcing developers to put real skin in the game aligns everyone's interests. And, we’d like to see interconnection filings as part of the submittal because interconnection is a key part of larger scale project viability.

I'm hopeful we'll see the proposal move ahead quickly in the proceeding to become yet another policy that enables California to maintain its leadership in solar power in the US.

Insights from Intersolar to Intersolar

I had the opportunity to speak at both the European and North American Intersolar conferences this year. The contrast between the two events provided some interesting insights into the transitional state of the industry and perhaps a glimpse of the future for the North Amerian solar market.

In Munich, I gave a presentation on some of the key differences in developing and financing projects in Europe compared to the US. It highlighted one of the key things we've learned from our efforts in Germany and Spain--that the developer skill set required to succeed varies depending on market structure and incentive regime. Renewable Energy World also interviewed me on the same topic. In short under a feed-in tariff regime like those in Europe and Canada, the primary development risks boil down to site control, interconnection, and system cost. Compare that to the US where successful developers also have to excel at power marketing, regulatory relations, and tax-oriented finance. This insight explains in large part why many successful European developers are stymied by the US solar market.

In San Francisco, I shared the stage with Laura Spanjian, Assistant General Manager of SFPUC (for whom we're building a 5MW project later this year). The focus of our presentations was on the benefits of the solar Power Purchase Agreement (PPA) approach for municipal utilities--avoided capital cost, access to federal stimulus funds, greater flexibility and diversity of power sources, and lower levelized cost of electricity (LCOE). We also talked about some of the challenges we faced getting political approval for a project that was initially considered a "slam dunk" in a progressive city like San Francisco.

The European show is billed as the "world's largest solar technology trade fair" and you feel it--60,000 attendees and 1400 exhibitors pack 104,000 m2 in Munich's Trade Fair Center. The sheer scale of the event reflects the current dominance of Germany and Spain as the worlds #1 and #2 markets. However, with declining tariffs in Germany, a cap on Spain, and uncertainty in project finance markets, most conversations turned hopefully to the US as the next driver of growth.

There was near unanimous opinion that the US would eventually be the world's largest solar PV market, but a great deal of head-scratching about when and how. To European players attempting to enter the US, the market is a confusing patchwork of regional markets and regulatory environments. Combined with tax-oriented finance, it's easy to see why new entrants have a hard time assessing strategy and finding market traction.

The North American show, in its second year, is quite a bit smaller attracting just 17,000 visitors. The mood seemed to mix optimism about the medium-term US market potential with a fair amount of nail-biting about the lagging state of various federal programs and capital markets. Large project announcements in recent months indicate a sea change underway in the scale that US utilities are procuring solar. It's also clear that the massive decline in solar module costs is stimulating a lot of development activity and opening up new markets--suggesting a volume of demand that is entirely new in North America. However, until the regulatory and project finance fog clears there is very little of that potential that is going to find its way into orders for modules and equpiment.

Solar Opportunities for Growth in a Downturn

Today marked a milestone for Recurrent Energy – we announced the acquisition of 350 MW of solar development assets from UPC Solar. The transaction significantly strengthens our North American presence and is a reminder of the power of a strong balance sheet in uncertain economic times. This deal promises to improve the terms we are able to offer our customers through economies of scale, which is key to driving the adoption of distributed solar power globally.

This deal was attractive for two primary reasons:

• Feed-in Tariff: The Ontario Power Authority recently announced the pricing of their feed-in tariff. When implemented, the tariffs would represent the first North American equivalent to policies that are driving substantial solar power development in Germany and Spain.
• Increasing International Expansion:  Recurrent Energy has been expanding internationally to diversify market risk, and believes that the quality of projects, the team in place, and the additional development opportunities that UPC Solar brings to the table meet our project criter.

Recurrent Energy will now develop, build, and operate the acquired solar projects, targeting 100 MW+ of operational assets by 2012. The projects are located across the continental US, Hawaii and Canada, with numerous 10 MW photovoltaic plants located throughout Ontario, Canada. The pipeline is a perfect fit for Recurrent Energy, which focuses on smaller distributed-scale power assets ranging from 2-20 MW.

This deal parallels other recent solar market activities that show how strong, well-capitalized developers are making moves and acquiring valuable assets as a result of the financial crisis and falling module ASPs. Combined, these acquisitions showcase the beginning of a larger wave of consolidation in both upstream and downstream solar markets. This is a painful but beneficial process and those left standing will represent a stronger and healthier industry. Recurrent Energy will continue to evaluate other solar pipeline opportunities as we grow our business in this time of opportunity.

Lastly, I would like to thank the team at UPC Solar that developed this high quality solar project pipeline. In bringing these projects to commercial operation, Recurrent Energy will significantly advance our global clean energy objectives.

Tax Equity Fix for Solar on Obama's Desk

Last week was a bit of a nail-biter for us at Recurrent Energy and everyone else in the solar industry, but it ended well. Late Friday the Senate passed the American Recovery and Reinvestment Act. We hear that it will go to President Obama for signing Tuesday. The final version of the Act contains several provisions that address the financing chokehold on renewable energy projects in the US that resulted from the economic crisis. Those provisions are critical to achieving the portion of the President's stimulus plan that relies on renewable energy projects to create jobs, re-establish US leadership in clean technology, and achieve greater energy independence.

I've blogged before about the challenges the crisis poses for the US solar industry. But, it's probably worth a quick refresher discussion here. Solar projects (like wind and many other energy projects) have benefited from federal tax credits and accelerated depreciation. However, most project developers don't have large tax bills, so they can't use the credits or the depreciation benefits themselves.

In order to use the tax benefits (and thereby reduce the cost of solar power delivered to a customer), a developer had to partner with a profitable bank or corporation with a large tax bill. In a typical financing arrangement, the developer would borrow cash from the partner and pay them back with the tax benefits from the completed project. The partner would in turn use the tax benefits to reduce the amount of cash taxes they owed to the government.

While somewhat complicated, these types of tax-oriented financings have been behind most solar and wind projects in the US. However, the financial crisis brought the industry to almost a dead stop late last year. As a result of large losses in the banking industry, many of the banks that had been active in tax finance either disappeared or pulled back from the market. Those that remained were very cautious because of huge uncertainties about how big their own tax bills would be in the coming year. If you don't have a tax bill, you can't use a tax credit--so banks were very cautious about "buying" more tax credits than they were likely to use.

The great irony last Fall was that while President-elect Obama was building support for his vision of renewable energy as a part of the economic recovery, the wheels were coming off the tax financings that were key to actually making it happen! The President's goals would have required tax financings to double in 2009, triple in 2010, and increase 5x by 2011--while in reality those same financial markets had almost completely collapsed.

Two provisions of the Act are the key to getting solar projects going again:

• Renewable Energy Grants - Solves the tax equity shortage by creating a new program through the Department of Treasury that provides grants directly to developers. The grants are equal in value to the tax credits. Developers can use the grants instead of tax credits, thereby eliminating the need to find a tax investor partner.
• Renewable Energy Loan Guarantee Program - Creates a temporary DOE loan guarantee program for renewable energy projects, renewable energy manufacturing facilities and electric power transmission projects. This program solves the secondary challenges of getting lenders to provide debt for projects by putting US government credit behind them while credit markets recover in 2009.

We're extraordinarily excited to roll up our sleeves and make use of the new programs to get US solar back on track to meet the goals set by President Obama. We owe a deep debt of gratitude to the industry advocates and policymakers who showed tremendous interest and willingness to understand a complicated financial problem and came up with a very effective solution quickly.

Links of interest:

• ARRA Div. A http://www.seia.org/galleries/pdf/Recovery_Bill_Div_A.pdf

• ARRA Div. B http://www.seia.org/galleries/pdf/Recovery_Bill_Division_B.pdf
• Reuter's story "U.S. stimulus bill likely to revive green power"

The View from Abu Dhabi

I've spent the last couple of days in Abu Dhabi at the World Future Energy Summit. The show is impressive for its size and for the high number of senior level executives and government officials in attendance. I came to spend time with investors and to explore opportunities here for Recurrent Energy's international expansion.

As everywhere these days, the topic of most discussions turned to the financial crisis and its impact on renewable energy. It's clear that we have a ways to go before we see a real recovery in project debt markets--and that will slow near term construction starts on new wind and solar projects. However, there is very strong optimism about the long- and medium-term among investors, policymakers, and industry players.

In particular, the optimism about solar's growth potential worldwide was very high as policy support continues to expand and PV module costs are falling to the point where grid-parity is within reach in many power markets. This mirrors our view at Recurrent Energy. We're fortunate to have the support of our investors who see the current environment as an opportunity. We're accelerating our development of projects in the US and internationally--building our pipeline while prudently managing our construction schedule based on what we see in debt markets.

The Middle East and North Africa region will clearly have a big role to play in our future. There is abundant sunshine, capital, and optimism here that was very apparent. It was nice to meet some of the people involved in Masdar City's 10MW PV project with Environmena, Suntech and FirstSolar. While the policy mechanisms are not quite clear yet, it's obvious there is an appetitite among stakeholders to make the region an important market for solar power. I'm looking forward to my next visit and to deepening our involvement with companies and investors.

Follow Up on SFPUC 5MW Project

John Coté wrote a well-researched article on the 5-Megawatt SFPUC solar project that was approved last week. As John points out, the “savings (that the City receives via third-party project ownership) should result in cheaper power”, nicely reflecting my points from the last blog entry.

A few other key points have come up in my discussions with the press over the last few days that I thought people might be interested in:

• The cost of non-renewable power versus solar power: Under the Power Purchase Agreement (PPA) with Recurrent Energy, the City is paying just 23.5-cents per kilowatt-hour for solar power. Although John compares this to PG&E’s retail power at 13 cents, it’s important to understand that retail and renewable power aren’t a straightforward comparison. Unlike retail power, several factors are involved in determining the value of solar energy, including its location, output during peak timeperiods, and the environmental benefits. An appropriate comparison would be to look at Recurrent Energy’s price as compared to another large-scale utility solar project: take Southern California Edison’s (SCE) 250 MW proposal, as an example. In their own analysis, SCE concludes their program will cost ratepayers the equivalent of 27 cents per kilowatt-hour – almost 15% more than the City will pay Recurrent Energy for its solar power. In sum, the cost that the City is paying for power is exceptionally priced for solar, and it’s substantially less than if they were to build and own the project themselves.

• The quality of sunshine in the Sunset: The SFPUC’s decision to place this project on the Sunset Reservoir was driven by the City’s realization that solar needs to be widespread, but space is limited in an urban setting. The Sunset Reservoir was the perfect starting point as the roof was recently seismically-retrofitted and offers a vast, flat opportunity for distributed power. Also, contrary to popular opinion, the sun does shine in the Sunset (which we confirmed in production calculations prior to bidding the project) and solar panels actually perform best on cool, clear days.
• The number of green jobs being created: According to current projections, this project will create upwards of 60 new jobs, including electricians, laborers and operators. That doesn’t include the hundreds of people who will be touching this project as it relates to development, engineering, financing, legal work, permitting, marketing, community relations, and numerous other key activities. The magnitude of the project showcases the benefits of solar as a great economic multiplier.

• The impact of the construction process: We’ll be discussing this topic further as the project nears final approval, but Sunset Reservoir neighbors and community members should rest assured with my personal pledge that construction will be as brief as possible. Solar is not only quiet when it’s in operation, but is also relatively quiet and low-impact in installation.

Stay tuned for more details as this project moves forward. As you can tell, this project has been incredibly well thought-out and we’re grateful to play a critical part in helping the City meet its renewable energy goals. 

SFPUC Approves 5MW Solar Project

It's been an exciting week. On Tuesday the commissioners for the SFPUC approved Recurrent Energy's contract to provide 5MW of solar power to the City. And yesterday, Mayor Gavin Newsom reiterated his support, praising the SFPUC's decision.

Under the terms of the contract, Recurrent Energy will build and own the 5MW system to be located on top of the Sunset Reservoir. The SFPUC will pay nothing up front for the system, but will buy the electricity it generates for the next 25 years under a Power Purchase Agreement (PPA).

To give some context for the size of the system, if completed today, the system would be the largest solar PV system in California and the largest municipal solar PV system in the country. It will comprise almost 30,000 solar panels and cover 12 football fields.

The project is a perfect example of why it makes sense for municipal utlities to use PPAs to secure solar resources. As Brent Bagin over at the SF Examiner points out, the system would have cost the City $45MM if it wanted to build it on its own. Instead through the PPA with Recurrent Energy, it will pay just $1.6MM per year for the system's output. In other words, the City gets all the benefits of a large solar system without the upfront cost to purchase the system.

Tax Equity Uncertainty Driving Downstream PV Consolidation

I have a good excuse for why I haven't posted anything in the last 6 weeks. I've been watching the financial crisis unfold and working hard with my team to keep ahead of the game. Frankly, I've been hesitant to write anything about it until now--the speed at which it has progressed and level of uncertainty has made predicting the outcome a fool's game.

While I think it's premature still to say exactly what will happen in the bigger picture, it's clear that uncertainty in construction debt and tax equity markets is having a Darwinian effect on the US downstream PV industry. The result will undoubtedly be consolidation and some short term pain.

The great irony is that after finally getting the solar investment tax credit (ITC) passed, tax equity markets have gone sideways, making it very difficult to actually take advantage of tax benefits to finance solar power projects. Tax equity investors have typically been large banks or corporations with big tax exposure who then invest in solar, low-income housing, or wind projects. They get a part of their return on investment in the form of tax credits which they use to reduce their tax bill.

The financial crisis has created large losses for many of those same investors. As a result, there is short term uncertainty about how big their tax bills will actually be, making it difficult for them to commit to large volumes of tax equity investments like solar power projects. The immediate impact is that there has been a short term "drying up" of tax equity relative to market indications earlier in the year.

There's good reason to think tax equity markets will come around. But, I think there will be many who don't have the staying power to wait for a solution. A phrase we're hearing often from banks is the "flight to quality" as they look very closely at who they think is viable in this environment. The key things they're looking for are the quality of the management team and the company's financial strength as a project sponsor. We're feeling very fortunate to have raised a large equity round earlier this year and that we have established good relationships with our banking partners.

While the ultimate outcome of the financial crisis is still unclear, I think it's safe to say that over the next six months the downstream PV industry is going to become a lot more concentrated. Those remaining will be the quality players who have the access to capital and banking relationships to execute their business at scale.