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Sunday, October 31, 2010

America's RE problem: consistency, not dollars

Over the weekend, the NY Times ran an article summarizing the great building boom of utility-scale solar projects for the Mojave desert that has been approved in the past 60 days.

It minimized the difficulties the developers have faced getting federal, state and local approvals, and instead focused on the gun to their head: the looming expiration of federal subsidies.

As reporter Todd Woody wrote:
The Ivanpah plant is the first of nine multibillion-dollar solar farms in California and Arizona that are expected to begin construction before the end of the year as developers race to qualify for tens of billions of dollars in federal grants and loan guarantees that are about to expire. The new plants will generate nearly 4,000 megawatts of electricity if built — enough to power three million homes.

But this first wave may very well be the last for a long time, according to industry executives. Without continued government incentives that vastly reduce the risks to investors, solar companies planning another dozen or so plants say they may not be able to raise enough capital to proceed.

“I think we’re going to see a burst of projects over the next two months and then you’re going to hear the sounds of silence for quite a while,” said David Crane, chief executive of NRG Energy, on Wednesday after he announced that his company would invest $300 million in the Ivanpah plant.

With both Democrats and Republicans promising to rein in the federal budget, it is unclear whether lawmakers will extend the programs in any form. “That could stall a number of projects and even lead to the failure of some,” said Ted Sullivan, an analyst with Lux Research, a consulting firm in New York.
Reading this in my Sunday Merc was eerie, because it exactly echoed what I read Saturday night about the beginning and end of the first wave of Mojave solar thermal development during the 1980s, where the nine plants of the Solar Electricity Generating Systems developed by Luz International once accounted for 95% of the world’s solar electricity generation capacity.

Writing in a technical report for Sandia National Laboratories, Luz’s former business development VP, Michael Lotker, summarized how the company was repeatedly forced to plan its projects in between the institution of subsidies (such as RE tax credits) and their expiration. Often this meant that a 18 month project had to be completed in ten months — and in one case seven months — as the company was squeezed between knowing that the credit was available and the deadline for generating electricity before the credit expired.

Knowing that Luz had a gun to its head, investors, suppliers and even the unions exploited the company’s desperation knowing that it had to agree to almost any terms to make the project happen. As a result, the company ran out of money, which helped discourage any future company from taking the risks that it did.

If the government is paying for something — whether directly via procurement contracts or indirectly via tax subsidies — it has a strong interest in helping its suppliers (in this case of renewable energy) improve their efficiency. More efficiency is a win-win — either the government can get more of it supplied or it can get the same quantity at a lower price. So with the unpredictable, irregular or erratic policy — such as “temporary” credits renewed one year at a time — pushes up costs both for the firms and the society that is subsidizing those firms.

Both Woody’s story and the earlier report by Lotker highlight an important point for US renewable energy policy: the most important thing (as with any policy that impacts business) is consistency and predictability.

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