Coal-fired power plants produced a staggering 42% of the electricity used in the U.S. in 2011, but a new study by the Union of Concerned Scientists says that many of those plants are Ripe for Retirement and should be shut down. The health, environmental and climatic consequences of burning coal are well known and for many provide ample arguments for their prompt removal from the grid. But 42% of U.S. electricity is a big nut to crack and one that won’t be solved quickly.
UCS takes an unusual approach to making their case against coal. They begin by acknowledging all of those well documented problems associated with burning coal for power: sulfur emissions that lead to acid rain, mercury poisons fish and causes neurological damage in children, soot creates smog that causes lung disease and triggers asthma attacks, combustion leaves behind toxic ash, coal mining wreaks havoc on the land and the people who mine it, and coal-fired plants are the single largest source of CO2 emissions in the U.S. While all that is undeniably true, the Report makes the compelling case that these relic plants are simply no longer economical to operate and should be shut down in favor of cleaner, more sustainable - and cheaper - options.
UCS looked at 1,169 coal-fired generation units around the country and calculated their present operating costs to their operating costs once they had installed modern pollution control technology on four pollutants: sulfur dioxide (SO2), nitrogen oxides (NOx), particulate matter (PM or soot) and mercury. They then compared those revised costs against the operating costs of natural gas combined-cycle (NGCC) plants to determine economic viability. To develop a range of economic thresholds, they calculated costs for new NGCC plants (where capital costs had to be included) and old NGCC plants (where capital expenditures had already been recouped).
Those competing thresholds provided a low estimate of 153 coal-fired generators that were ripe for retirement (accounting for 16.4 GW of production capacity) all the way up to some 353 units representing 59.0 GW - a range of 1.7-6.3% of current U.S. electrical generation. (This is in addition to the 288 coal units already scheduled for retirement by their operators which collectively account for 41.2 GW or 3.8% of existing capacity.) But even if all of those units were shut down promptly the lights would still stay on - “the U.S. is projected to have 145 GW of excess capacity by 2014 above and beyond reserve margins required to maintain reliability at the regional power grid level,” the report’s authors found.
Because these Ripe for Retirement coal units are the older, less utilized and dirtiest units in the fleet, replacing their combined 100 GWs of capacity with cleaner alternatives could cut CO2 emissions by anywhere from 245 to 410 million tons annually, depending on what resource replaces the coal. That would account for 9.8 to 16.4% of 2010 CO2 emissions from the power sector!
Beyond a doubt, energy efficiency and renewables must play a major role in the replacement of this capacity. The good news is, they already are: “Over the next eight years (that is, by 2020) we project that existing state policies requiring the use of renewable electricity and energy-saving technologies will generate or save more electricity than would be lost (100 GW) through the closure of retired coal generators.”
That is the good news. The bad news is that even if all of these “Ripe for Retirement” units were shut down over the next eight years, we still have another 229 GW of coal-fired generators out there - belching CO2 into the atmosphere. The challenge will be to provide the regulatory - and political - environment where it becomes economical to shut down those plants as well.
Amidst the multitude of measures on next Tuesday’s ballot, Proposition 39 has garnered little media attention. For proponents of renewable energy, however, it might be the second most important vote you can cast on Election Day. Here’s our take.
Prop 39 seeks to close a loophole in existing state tax law that allows multistate corporations to decide for themselves how to calculate their taxable income. Present law provides either of two methods, the “Three-Factor Method” or the “Singles Sales Factor Method” as explained by the independent Legislative Analyst:
Under Prop 39, the first method would be repealed and every multistate business would pay state income taxes based on the proportion of its actual sales in California. Frankly, this only seems fair - if a company is deriving 75% of its revenue from sales in California, why shouldn’t it pay taxes on that 75%? Moreover, the other method allows a multistate company to reduce its California taxes by moving employees or property out of the state - why would we want to provide a financial incentive for them to do that? Indeed, this is such a common sense modification to the tax code that, according to Prop 39 proponents, it has already been adopted by both red and blue states including New York, Michigan and Texas.
Ok, so this makes sense as a measure of tax policy, but why should renewable energy proponents be backing this measure? Simple — Prop 39 splits the money it raises for the first five years between the General Fund (which will boost school funding thanks to Prop 98 and help close California’s budget gap) and a special fund to support energy efficiency and alternative energy projects in the state. (After five years, all of the money raised goes to the General Fund.)
Specifically, Prop 39 would create the Clean Energy Job Creation Fund to provide financial support for projects at schools (including public schools, colleges and universities) and other public buildings as well as support for innovative public-private partnerships like PACE programs. The ballot measure also creates a Citizens Oversight Board to provide for audits of the program and complete documentation of how every dollar of the Fund is spent. (You can read the full text of Prop 39 here.)
Prop 39 has extremely broad support (see a larger list here) including from the following:
Here’s a one-minute video from the measure’s sponsor:
We hope you will join us in supporting this tremendously important - if largely unheralded - ballot measure.
The Los Angeles Department of Water & Power (LADWP) has released an update on the status of its efforts to develop a Feed-in Tariff program (FiT) which provides some clarity while leaving many questions unanswered. Here is our take on what has been revealed so far.
As we have reported before, LADWP has taken a somewhat tortuous path on its way to developing a FiT - most notably by rolling out a pilot/demonstration program that did not provide for an up-front, fixed price for energy - generally considered a necessary element of a FiT. Instead, the pilot program was really much more of a reverse auction used by LADWP to provide “price discovery” for different sized projects throughout the LA area.
Although DWP has yet to disclose the pricing details from the pilot (those details are due out next month), it seems that the response was somewhat tepid: only 26 proposals were submitted (for a pilot program that was supposed to account for 10 MW of capacity) of which only 17 (65%) made it through the initial screening and just 15 had interconnection studies performed. Given that final project costs cannot be known until the results of the interconnection study are provided, it seems highly likely that some of these 15 will no longer pencil out and will fall away. Such are the joys of being a “price discovery” guinea pig.
Still, DWP believes it has learned something from the process, including the following bullet points (DWP text in bold italics):
Having concluded the bidding phase of its pilot program, LADWP’s full-scale FiT program of 150MW is set to debut by the end of this year. In an apparent effort to satisfy both large and small developers, the program as described will be divide evenly into to pieces: 75MW in the so-called “Individual Project Group” with another 75 MW allocated to the “Bundled Project Group” on private property (as well as another 150MW of utility-scale projects on LADWP property).
The very large allocation associated with the Bundled Project Group is really not a FiT at all. Rather, DWP is planning on putting out an RFP for the entire allocation and will select three vendors to supply it. Needless to say, this means only the largest entities will be able to participate in this program.
Of far greater interest is the Individual Project Group since that is closer to being a true FiT program, albeit with some wrinkles. Like a true FiT, this appears to an “open to all” program with set prices for energy from the outset. The 75MW total allocation is to be subscribed in 15 MW tranches, the first of which is set for next January, with additional tranches to be released every six months thereafter. DWP is suggesting that its set price will likely start out at $0.15/kWh for the first tranche and then step down by half a cent with each subsequent tranche.
However, DWP’s proposal is a bit confusing in that they say that any unclaimed allocation from one tranche will not be carried over into the next - which means, assuming we understand this correctly, that the 75MWs assigned to this program may never be allocated, let alone built. On the other hand, DWP says that the price will only decline when the 15MW associated with a price point has been allocated. Which means that tranche sizes are strictly tied to the calendar whereas prices are not. Somehow this seems backward - if I am deciding whether to put forward a proposal, the most important question is the price that my proposal will receive. Tying that to the calendar gives me certainty. On the other hand, the total amount of capacity to be installed should not diminish just because developers are not inline to request an allocation within a given window in time. We have asked DWP to clarify and we will update this post if/when we get a response.
Perhaps the most perplexing wrinkle is the introduction of “Time-of-Delivery” (TOD) multipliers which modify the amount paid based on the day of the year (high or low season, i.e., June-September or not) and time of day. Here are the TOD multipliers being proposed by DWP:
Energy produced in the summer between 1 and 5 p.m. receives a substantial bonus, but roughly a third of the energy produced is subject to a 50% penalty. Moreover, this substantially increases the complexity of the modeling process. If all energy produced were priced the same, then the CSI calculator would be sufficient to estimate system earnings in Year 1. You could then apply a depreciation factor (to allow for system degradation over time) to arrive at the earnings of the system on a year by year basis.
Instead, you need to model the array’s output on an hourly basis over the course of the year. (Fortunately, NREL’s PVWatts version 1 calculator will provide such an output that can be imported into Excel.) An appropriately coded function will then allow you apply DWP’s TOD multipliers to the hour-by-hour output to calculate the estimated earnings from the system in Year 1. Phew. Seems like a lot of added work for what is supposed to be an open to all process. (We have confirmed with DWP that the TOD multipliers apply to both the BPG - where it makes sense - and the IPG - where it is far less appropriate.)
Given the emphasis on summertime production, we thought it would be interesting to see how different azimuth angles would effect the year earnings of the system. We ran PVWatts on three different configurations of the same 100 kW (nameplate system) at 180, 235 and 270 degrees azimuth. (In each case we assumed an unshaded site and a panel tilt of ten degrees.) We also calculated what the earnings would be under a straight, $0.15/kWh without the TOD multipliers. Here are our results:
The three top lines reflect the TOD multiplier effect - certainly during those summer months the systems are all earning more money than their flat-rate brethren. The (perhaps surprising) loser here is the 270 degree azimuth. In the peak summer months it is matched almost exactly by the 235 degree system, but loses out to it (and to the 180 degree system) the rest of the year. Overall, the 235 degree system earns the most - about $24,416 in Year 1 by our estimation - about $170 more than the 180 degree system and nearly $800 more than the 270 degree system. (Is there a “sweeter” spot out there to be found - perhaps, but that determination is left to the student.) Overall, the earnings of the TOD based systems are roughly 9% higher than the corresponding flat-rate systems.
Which begs the question - why not simply raise the offered rate by 9% or so and avoid this complexity? After all, this is supposed to be a simple program that offers “price certainty” so why all of these additional hoops? Raising the initial rate to $0.165/kWh would cost the same amount of money and produce pretty much the identical amount of energy over time - particularly if DWP simply issued guidelines for acceptable system designs. The TOD multipliers should be relegated to the BPG projects where that level of complexity is par for the course and the participants will have the staff to properly predict their earnings no matter how complicated the pricing regime.
The most perplexing element of DWP’s proposal is their claim regarding anticipated Internal Rates of Return (IRR) for projects completed under the FiT’s IPG. Like lots of solar companies, we have developed our own model for determining the client’s return on investment based on the calculation of the project’s cash flow IRR. DWP published a chart purporting to show where different IRR values land between the cost per Watt versus payment per kilowatt hour graph. Here’s what they are projecting:
Take that optimal 100kW system we were looking at before - assume it costs $4.50/Watt which works out to $450,000. That system will earn roughly $24,400 in Year 1, subject to a degradation of about 0.9%/year. It qualifies for a 30% ITC tax credit from the federal government and is subject to accelerated depreciation for both the state and the feds. And that’s it on the plus side (there is no rebate since this is a FiT system). On the minus side, in addition to the annual reduction is system output, there are also O&M costs associated with this system which could well reach 1% of the system cost per year. Put that all together and you end up with an IRR of 7.3% - not awful, but a long way away from 12%! Again, we have requested clarification from DWP and we will update this if/when we hear from them. (Of course, if you think I’ve overlooked something crucial, please let me know in the comments.)
So what can we conclude from all of this? LADWP is moving toward a FiT, even if the actual open-to-all FiT program is limited to just 75Mw. However, questions of complexity in the application process (including the need for interconnection studies) and the pricing structure combined with some rose-tinted profitability projections cast doubt on just how desirable this program will be. LADWP is actively soliciting comments on their proposal - please consider this one long comment - and hopefully they will be open to making changes to address the concerns of the stakeholders who have been pushing for this program for a very long time.
UPDATE #2 - 12/13/2012 - After delaying its IPO for failure to secure sufficient investors to fill its order book - both at the original target price of $13-15/share, or even at the reduced price of $10/share - SolarCity (Nasdaq symbol SCTY) finally went public today with a bit of a bang. Having priced at $8/share, SolarCity opened today at $9.25 and quickly rose to a day high of $12.70 before closing at $11.79 - a one-day increase of 47% over the IPO price. Trading was busy on 8.3 million shares.
Of course, even with that significant run-up, at $11.79 the stock remained 9% below the low end of the range originally forecast.
UPDATE - 12/11/2012 - On the eve of what was to have been SolarCity’s IPO, the initial offering has been postponed for at least one day. While still confronting a host of legal issues surrounding the valuation of its leased systems, SolarCity was reportedly struggling to fill the order book for the IPO at the price range it was seeking - between $13 and $15 per share.
Ending months of speculation, SolarCity on Friday, October 5, 2012, filed papers with the SEC for an initial public offering of stock. (The form S-1 and its 105 supporting exhibits can be found here.)
It will take us some time to plow through this extensive filing, but there are some excerpts from the section entitled, “Risks Related to Our Business” that are relevant in light of earlier posts about SolarCity on this blog, particularly here and here. To wit:
The Office of the Inspector General of the U.S. Department of Treasury has issued subpoenas to a number of significant participants in the rooftop solar energy installation industry, including us. The subpoena we received requires us to deliver certain documents in our possession relating to our participation in the U.S. Treasury grant program. These documents will be delivered to the Office of the Inspector General of the U.S. Department of Treasury, which is investigating the administration and implementation of the U.S. Treasury grant program.
In July 2012, we and other companies with significant market share, and other companies related to the solar industry, received subpoenas from the U.S. Department of Treasury’s Office of the Inspector General to deliver certain documents in our respective possession. In particular, our subpoena requested, among other things, documents dated, created, revised or referred to since January 1, 2007 that relate to our applications for U.S. Treasury grants or communications with certain other solar development companies or certain firms that appraise solar energy property for U.S. Treasury grant application purposes. The Inspector General is working with the Civil Division of the U.S. Department of Justice to investigate the administration and implementation of the U.S. Treasury grant program, including possible misrepresentations concerning the fair market value of the solar power systems submitted for grant under that program made in grant applications by companies in the solar industry, including us. We intend to cooperate fully with the Inspector General and the Department of Justice. We anticipate that at least six months will be required to gather all of the requested documents and provide them to the Inspector General, and at least another year following that for the Inspector General to conclude its review of the materials.
We are not aware of, and have not been made aware of, any specific allegations of misconduct or misrepresentation by us or our officers, directors or employees, and no such assertions have been made by the Inspector General or the Department of Justice. However, if at the conclusion of the investigation the Inspector General concludes that misrepresentations were made, the Department of Justice could decide to bring a civil action to recover amounts it believes were improperly paid to us. If it were successful in asserting this action, we could then be required to pay damages and penalties for any funds received based on such misrepresentations (which, in turn, could require us to make indemnity payments to certain of our fund investors). Such consequences could have a material adverse effect on our business, liquidity, financial condition and prospects. Additionally, the period of time necessary to resolve the investigation is uncertain, and this matter could require significant management and financial resources that could otherwise be devoted to the operation of our business.
The Internal Revenue Service recently notified us that it is conducting an income tax audit of two of our investment funds.
In October of 2012, we were notified that the Internal Revenue Service was commencing income tax audits of two of our investment funds which audit will include a review of the fair market value of the solar power systems submitted for grant under the 1603 Grant Program. If, at the conclusion of the audits currently being conducted, the Internal Revenue Service determines that the valuations were incorrect and that our investment funds received U.S. Treasury grants in excess of the amounts to which they were entitled, we could be subject to tax liabilities, including interest and penalties, and we could be required to make indemnity payments to the fund investors.
If the Internal Revenue Service or the U.S. Treasury Department makes additional determinations that the fair market value of our solar energy systems is materially lower than what we have claimed, we may have to pay significant amounts to our investment funds or to our fund investors and such determinations could have a material adverse effect on our business, financial condition and prospects.
We and our fund investors claim the Federal ITC or the U.S. Treasury grant in amounts based on the fair market value of our solar energy systems. We have obtained independent appraisals to support the fair market values we report for claiming Federal ITCs and U.S. Treasury grants. The Internal Revenue Service and the U.S. Treasury Department review these fair market values. With respect to U.S. Treasury grants, the U.S. Treasury Department reviews the reported fair market value in determining the amount initially awarded, and the Internal Revenue Service and the U.S. Treasury Department may also subsequently audit the fair market value and determine that amounts previously awarded must be repaid to the U.S. Treasury Department. Such audits of a small number of our investment funds are ongoing. With respect to Federal ITCs, the Internal Revenue Service may review the fair market value on audit and determine that the tax credits previously claimed must be reduced. If the fair market value is determined in either of these circumstances to be less than we reported, we may owe the fund or our fund investors an amount equal to this difference, plus any costs and expenses associated with a challenge to that valuation. The U.S. Treasury Department has determined in a small number of instances to award us U.S. Treasury grants for our solar energy systems at a materially lower value than we had established in our appraisals and, as a result, we have been required to pay our fund investors a true-up payment or contribute additional assets to the associated investment funds. (Emphasis added.)
For example, in the fourth quarter of 2011, we had discussions with representatives of the U.S. Treasury Department relating to U.S. Treasury grant applications for certain commercial solar energy systems submitted in the third and fourth quarters of 2011 and the appropriate U.S. Treasury grant valuation guidelines for such systems. We were unsuccessful in our attempts to have the U.S. Treasury Department reconsider its valuation for these systems, and while we maintained the accuracy of the contracted value to the investment fund, we elected at that time to receive the lower amounts communicated by the U.S. Treasury Department. (Emphasis added.)
Other U.S. Treasury grant applications have been accepted and the U.S. Treasury grant paid in full on the basis of valuations comparable to those projects as to which the U.S. Treasury has determined a significantly lower valuation than that claimed in our U.S. Treasury grant applications. The U.S. Department of Treasury issued valuation guidelines on June 30, 2011, and no grant applications that we have submitted at values below those guidelines have been reduced by the U.S. Treasury Department. If the Internal Revenue Service or the U.S. Treasury Department disagrees now or in the future, as a result of any pending or future audit, the outcome of the Department of Treasury Inspector General investigation or otherwise, with the fair market value of more of our solar energy systems that we have constructed or that we construct in the future, including any systems for which grants have already been paid, and determines we have claimed too high of a fair market value, it could have a material adverse effect on our business, financial condition and prospects.
For example, a hypothetical five percent downward adjustment in the fair market value in the approximately $325 million of U.S. Department of Treasury grant applications that we have submitted as of August 31, 2012 would obligate us to repay approximately $16 million to our fund investors. (Emphasis added.)
We will have more to say about this over time. In the meantime, we would love to hear your thoughts in the comments, so please, fire away!
In this intense election season, we are accustomed to seeing lots of polls tracking the day-to-day changes in the “horse race” of the political process. But while various candidates struggle to “break out” of the pack, solar energy is an overwhelming consensus winner with strong support from 92% of the electorate - and when was the last time that 92% of us agreed on anything? Given that tomorrow night’s debate turns on domestic issues, it will be interesting to see how this issue plays, if at all.
We base our observation on a poll that was recently conducted by Hart Research Associates (Hart) for the Solar Energy Industry Association (SEIA). (You can find the poll results here.) The Hart poll got responses online from 1,206 registered voters, including an oversample of so-called “swing” voters (people who did not indicate a strong or consistent partisan voting history). The margin of error was ±2.8%.
Support for solar among voters cuts across party lines. 98% of Democrats and 95% of Independents think it is very important or somewhat important for the U.S. to develop and use solar power - but even among Republicans, support was at a very impressive 84%. And voters think that energy issues should be a factor in this year’s Presidential election with 27% saying such issues are one of the most important while another 47% say they are very important.
Despite an aggressive and well-funded ad campaign to support the quaint notion of “clean coal", of all of the different energy sources surveyed, only coal is upside down on its favorability rating: 34% of the electorate has an unfavorable view of coal, compared to only 32% with a favorable opinion. Solar energy, on the other hand, is on the opposite end of the spectrum, with 85% having a favorable opinion and only a miniscule 4% unfavorable. Here are the overall results:
Interestingly, the three greenest energy sources are at the top of the list while the two dirtiest, coal and oil are at the bottom.
As nice as it is to be supported, perhaps a more pressing question for policy makers/candidates is this: Which, if any, of these forms of energy should the federal government support through tax subsidies? Once again, solar energy was the clear winner with a full 64% of all voters (67% among swing voters) supporting federal tax subsidies for solar. In contrast, only 8% overall support subsidies for coal (4% of swing voters) and just 13% for oil (9% among swing voters). Yet subsidies for the coal and oil industries dwarf those provided to all renewable energy sectors overall and solar in particular. Here’s the overall chart:
These results, if not surprising, are nevertheless gratifying, particularly in an election year. We can only hope that voters will determine where the candidates stand on support for all energy sources, particularly solar, and use that knowledge to inform their vote next month.