Renewables Get Into the Mix
Feb 02, 2004 - Power Engineering
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 one-tenth 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.
* 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 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.
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 least-cost 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.
"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 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 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.