Jennifer Runyon, Chief Editor, RenewableEnergyWorld.com
December 23, 2013 | 14 Comments
New Hampshire, USA -- “Some think it is the beginning of the end here for renewable energy in the United States,” began Adam Umanoff partner at Akin Gump at the start of his presentation for energy media in early December. As a renewable energy journalist based in the U.S. this was a very provocative statement indeed.
I followed up with Umanoff after the presentation to make sure I was clear on the reasons he gave in support of this view. While none of these reasons are new or even particularly insightful (Umanoff himself calls them obvious), the bottom line is that it will be a different playing field for renewables going forward.
On the next few pages, you’ll find three obstacles that stand in the way of utility-scale renewable energy growth in the U.S. and the solutions and/or mitigations to those problems.
1. Problem: Low Load Growth
The U.S. is building far fewer power plants today than it ever has before. Historically utilities enjoyed load growth in the 3 percent range but those days are gone. Umanoff pointed out that low load growth is the new norm. In some cases, the U.S. has even experienced negative growth. That means that we’re using less energy as a nation (some may call this a good thing) but it also means that the outlook for new generation plants being built is slim to none.
Solution: Rebound is underway.
Much of the negative load growth was due to the great recession, said Umanoff, and thankfully, most people believe that the recession is now behind us. While we won’t return to 2 or 3 percent load growth for a while (if ever), experts predict it to be in the 1 to 1.5 percent ranges for the next 3 to 5 years.
Solution #2: Retiring generation.
“We also are facing the retirement of a significant amount of generation here in the U.S.” said Umanoff. He listed older coal plants that are too expensive to retrofit and nuclear retirements around the country, noting the San Onofre plant in California that was permanently retired in 2013.
“So there will be demand drivers in the near future,” said Umanoff, “and that will help renewables in the near term.”
2. Problem: Cheap Natural Gas
Even though renewable energy generation costs have come down significantly, according to Umanoff, “the fact of the matter is that natural gas, due to the advent of hydraulic fracturing, is historically cheap.” Umanoff said that projections are that for the next 10-15 years, natural gas will be in the $5.00 per mBTU range. “With gas that low,” he said, even though renewable costs have come down, “the goal posts have now been moved.”
Solution: Cost-competitive renewables.
Umanoff believes that the real reason renewable capacity grew so much in the past two decades is because of the tremendous cost reductions that the industry has been able to make. He explained that wind generation (with a good wind resource where capacity factors hover around 50 percent) costs are now $0.04 to $0.05 per kWh compared to the mid-eighties when they were $.25 per kWh.
In some markets, wind and solar are approaching grid-parity, he said, including wind in Texas and the Midwest and solar in the Southwest. In some markets, solar generation costs are coming in around $60 to $70 per MWh range, he said, making utility-scale solar in California, Nevada and Arizona a real success story.
Solution #2: Policy support.
The U.S. still enjoys (although there is a looming end-date) good tax credit support for renewable energy. Umanoff explained that the production tax credit (PTC) for wind, which gives developers a $0.023 tax credit for each kWh of wind generation, will continue to support wind projects in the U.S. for the next two years. As long as a wind project commences construction by the end of 2013 and construction continues until completion and the project is online by 2015, it is eligible for the PTC.
The investment tax credit (ITC), which awards developers a 30 percent tax credit for investment in solar project costs, is available for solar projects that come online by 2016. The solar industry hopes to help pass legislation that will change the language of the ITC so that it would allow developers to take the credit as long as their projects commence construction by 2016 (as opposed to being online by 2016).
In addition, there are renewable portfolio standards that are going strong in 30 states plus the District of Columbia. “Current RPS’ on the books will require around 5000 MW of new renewable energy per year over the next 15 to 20 years,” said Umanoff.
3. Problem: Distributed Generation Solar
New growth will come from distributed generation for a very simple reason, according to Umanoff. Utility-scale renewables compete with wholesale energy prices, which have been very depressed over the past two years. “Distributed generation, whether it’s a residential consumer who wants to put solar panels on her home or it’s a commercial or industrial user that wants to do an ‘in the fence’ deal to provide power to their facility, they are competing against retail electricity prices.” Distributed generation will not only disrupt the utility business model, it will also impact the need for new utility-scale renewable energy generation.
Caveat: Financing is still an issue.
“Driving down the cost of capital in the distributed generation space is critical,” said Umanoff. He believes that ultimately “it’s going to be a volume game,” and that we should expect to see a lot of mergers and acquisitions among the distributed generation developers in this space in 2014 “as companies attempt to aggregate capacity so they have larger portfolios that they can take to market to finance.”
According to Umanoff, financing this space could make or break the growth in distributed solar. “To me that’s going to be the largest impediment or potentially success story to growth in the next two to three years,” he said.
Markets change, and in the U.S. large-scale renewables will face some uphill battles in the future. Said Umanoff: “Things are going to look a little different on the wholesale side.”
Lead image: Businesspeople facing obstacles via Shutterstock
In January, RenewableEnergyWorld.com will release its market outlooks for each renewable energy technology.