Will Solar Power be the New Wind Power?

Peter Maloney, Chief Editor, Platts Global Power Report

OVER THE PAST DECADE OR SO WIND POWER enjoyed tremendous success, and efforts are under way to extend that success to solar power.

Wind power accounted for about 30% of the capacity that came online in 2007, attracting $9 billion in investments and adding 5,244 MW to the grid.

Solar power is no where near the scale of wind power, but over the past year several deals for utility-scale solar projects moved forward, and developers are hoping that the number of solar projects under development will bring economies of scale to bear and push down the costs of building solar projects, making them competitive with thermal peaking power plants.

In California alone there were 44 solar power projects in the California Independent System Operator's interconnection queue as of mid-September 2007, representing 17,393 MW. The California Energy Commission lists seven solar power projects totaling 2,677 MW that are under review or announced. And Platts Energy Advantage lists 3,524 MW of proposed solar power projects in the United States.

Solar power used to be too small to attract the attention of larger developers, but as recent developments show, that is changing.

In July, Pacific Gas and Electric signed a 25-year power purchase agreement to buy the output from a 553-MW solar project in the Mojave Desert proposed by Solel Inc. that is due online by 2011. And in September, BrightSource Energy filed an application at the California Energy Commission to develop three solar plants totaling 400 MW in the Mojave Desert.

But not all the action is in California. In June, Acciona Energy North America's 64-MW Nevada Solar One project entered service in Nevada. The solar array sells power under a 20-year power purchase agreement with Nevada Power and Sierra Pacific Power. And in October, Florida Power & Light announced plans to build 300 MW of solar generating capacity in Florida.

And, as the size of the projects grow, financial institutions are becoming more interested. "The Nevada project really got our attention," said Kevin Walsh, managing director and head of GE Energy Financial Services' renewable energy team. Walsh said that EFS' "sweet spot" is large solar projects of $20 million or more. At $266 million, the Nevada project is well within that target.

GE EFS already has said it plans to invest about $50 million a year in what Walsh called "tech equity," which he defined as venture capital investments in emerging "clean" energy solutions such as biofuels, demand response, ocean power delivery, energy storage, and solar photovoltaics. In addition, spurred by Nevada Solar One, the company is now taking a harder look at direct investment in solar projects. "Solar thermal is picking up," said Walsh.

Goldman Sachs, which has been a wheeler dealer in the power industry with its investments in Horizon Wind Energy and Cogentrix Energy, is now taking a hard look at solar power.

"We are very interested in utility grade solar," said Larry Kellerman, a managing director with Goldman Sachs' fixed income, currency, and commodities group. "We see tremendous potential, about 30,000 MW from about 1,000 MW now."

Kellerman would not say how much money Goldman plans to invest in solar power, but he did say that Goldman would act as a developer and could take on partners, depending on the project.

Goldman could, of course, just buy a developer or a manufacturer, as it has in the past, but right now, says Kellerman, "there are not any companies that look like attractive acquisitions."

Many of the companies that are developing solar projects are not, in fact, "survivable in the long term," said Kellerman. "It is like the early days of PURPA," he said, referring to the Public Utility Regulatory Policies Act that was enacted into law in 1978 and spawned the independent power industry. "The smaller developers, just like in the early PURPA days, will blunt their sword on the market" and the larger players with more capital will move in.

Kellerman says that shift is already under way and is evident with the entry of players such as FPL and Acciona and, of course, Goldman.

What has changed to make solar power utility scale?

Kellerman cites several factors to explain the burst of interest and activity in solar power. The larger size of solar projects are bringing home economies of scale and beginning to drive costs down, in certain places, to the 10 to 11 cents/kWh "zip code," he said. This gives solar power the potential to be rationally competitive with other renewable resources at a time when the industry is suffering from the "indigestion of too much wind in the portfolio."

The big problem with wind power is that it is intermittent. Solar power, on the other hand, is predictable. The sun rises every day and gets hot at the same time of day and the same time of year. The only variable is cloud cover, and in the Southwest you can count on a sunny, cloudless sky about 350 days a year, said Kellerman. In short, solar power is almost peak coincident.

This gives solar power a big advantage over wind power, especially when trying to feed the power into the grid. "You can only put so much wind into the grid before the grid begins to choke. Man shall not live by wind alone," said Kellerman.

One of the biggest drivers of solar power projects right now is the willingness—in many cases, the obligation—of utilities to sign PPAs for solar power.

A total of 25 states have renewable portfolio standards that require them to fill their needs with a certain percentage of renewable power. Twelve states have explicit solar power targets within their renewable portfolio standards, according to data compiled by the North Carolina State University Solar Center. Topping the list is New Mexico with a requirement that 4% of the state's power come from solar resources by 2020. New Jersey is looking to source 2.12% of its power from solar by 2021. Delaware wants 2.005% solar PV by 2019. Maryland wants 2% solar by 2022, and Nevada is aiming for 1% of its power from solar by 2015.

Solar power is expensive, but developers are working to bring the costs down. Solel aims to bring the cost of producing solar power down to 10 to 12 cents/kWh, so that it is competitive with combined-cycle gas plants, which is the traditional choice for providing peaking power.

Another solar developer, BrightSource Energy, says it might be possible to bring the cost of solar power to a comparable level with gas-fired peakers in as few as five years.

An equally daunting task is financing solar power, which typically is two or three times as expensive as a coal-fired plant. A lot of solar projects are beginning to look for financing, but only one utility-scale solar project has been financed in the past decade and a half. Acciona's $266 million Nevada Solar One was financed as a leveraged lease by Banco Santander and BBVA, CAIXA Geral de Depositos, and equity investors JPMorgan Capital Corp., Northern Trust and Wells Fargo.

Wells Fargo, with HSH Nordbank AG, is also an investor in SunEdison's SunE Solar Fund III, which has raised more than $250 million for PV solar installations.

"Solar power is like wind power was 20 years ago," said Edwin Feo, co-chair of Milbank Tweed Hadley & McCloy's global project finance group. "Value is created by utility PPAs with guys who are under capitalized. They eventually sell out; the big players come along and buy up the smaller assets."

Big players are players who have profitable operations that enable them to use the tax credits that make renewable energy projects viable. Big players play in more than one sector. Big players also have deep pockets.

Acciona had $9 billion in revenues and $1.98 billion in earnings in 2006, and it is working on a variety of renewable energy technologies, from biomass and biodiesel, to wind power and a 46-MW photovoltaic project in Portugal. The company's experience with other renewable technologies could provide valuable lessons that it could apply in California or Colorado. The company could also bring its size to bear in realizing economies of scale in everything from financing to manufacturing.

Acciona sees a bright future for solar power in the United States. There is the potential for 300 GW to 400 GW of solar power here, said Peter Duprey, CEO of Acciona Energy North America. Overall, he said, "there is no reason why the United States could not source anywhere from 30% to 50% of its power from [a variety of] renewable sources."

Could something go wrong with this sunny outlook? It has before.

In the late 1980s solar power was beginning to thrive in an environment of high incentive-laden rates, positive political will and high oil prices. As oil prices fell and power prices rose, the luster began to fade.

Arguably demand, and not the machinations of a cartel, will keep oil at or near current prices, but there are no guarantees.

Another pitfall is the possibility that Congress will not renew the investment tax credit. Tax incentives are important, said Duprey. Acciona would not comment on the value of the tax credit for its project, but a rough estimate, based on a 30% investment tax credit and a slightly discounted debt level, yields a $72 million credit for the Nevada Solar One project.

Tinkering with any one of those contributing factors could drastically change the outlook for solar power, but right now solar power is hot and, as Duprey says, "the solar power industry is still in its infancy."

Figure 1. Proposed solar power projects in the US. Source: Platts Energy Advantage