Concentrated Solar Power and the New ITC
When the financial turmoil began, I sold my riskiest stocks. Even a successful bailout bill is unlikely to return us to the heady days of 2006 and 2007. Yet there is a bright side for clean energy investors. Despite the recent evidence to the contrary, a financial crisis is likely to convince legislators of the importance of getting the economy going again, and of doing so with the least amount of public money possible.
Concentrating Solar Power
It was with this thought in mind that I attended CSP Today's Second Annual CSP Summit US in San Francisco. CSP, or Concentrated Solar Power, is a proven technology. Several CSP plants have been operating reliably in the California desert since the late 1970s. The technology uses mirrors to concentrate the sun's heat, and that heat is used to create steam to run a turbine, just as the heat from fossil fuels is used to create steam to run a turbine in a conventional gas or coal fired power plant.
What do utilities like about CSP?
- Steam and turbines are familiar technologies. It's hard to underestimate the attraction of the familiar, especially in a conservative industry like electric utilities..
- The generation profile of CSP is an excellent match for load shape, especially in the sunny locations where CSP works best. In this aspect, CSP is a better match for load shape than even photovoltaic solar power, because the thermal latency of the system means that, even without storage (see below), CSP tends not to be subject to temporary losses of power each time a cloud passes over (cloud transients.)
- Thermal Storage. Unlike chemical storage (batteries) which degrade when charged and discharged, thermal storage such as the commonly used molten salts are unchanged when they are heated and then cooled. While these salts (a mixture of ammonium nitrate and potassium nitrate, both also used as fertilizer) are expensive in the quantities used in CSP, expanding storage capacity on a CSP plant is just a matter of building bigger insulated storage tanks and buying more fertilizer. This means that a CSP plant can be built to be a nearly perfect match for a utility's load, and even used for voltage support and load following.
- Price. According to California's Renewable Energy Transmission Initiative (RETI) report [.pdf], referenced by Mark Rawson of the Sacramento Municipal Utility District as an accurate analysis of cost figures, the levelized cost per MWh for CSP varies from $140 to $190 per MWh (or 14 to 19 cents per kWh.) This makes CSP price competitive with natural gas peaking turbines, and although these prices are more than twice the prices usually quoted for wind power, this is not a barrier for power which fits a utility's load. Hal LaFlash of PG&E mentioned that the most recent RFP from San Diego Gas and Electric was offering four times the price for power produced in the afternoon compared to power produced at night. In markets like that, firm, dispatchable, on peak power at three times the price can easily out compete power from wind, which tends to be anticorrelated with load.
As with all new energy, there are barriers.
- Incentives. The nearly universal refrain at the conference was that CSP needs an 8 year extension of the Investment Tax Credit (ITC.) The complex permitting issues, transmission connection times, the large size of the plants, and wait times for the turbines mean CSP has a longer development cycle than most other renewables, hence the need for the 8 year extension of the ITC. Since an 8-year ITC extension for solar was included in the financial "rescue" package which was just signed by President Bush, and this bill also makes the ITC exempt from the Alternative Minimum Tax (ITC), CSP was a big winner from the delay of the rescue package. The first version of this bill did not contain the tax credit extension.
- Transmission. CSP is not a distributed technology, and it relies on direct ray radiation, and project sizes running into the hundreds of MW. We currently have no national transmission planning, and only a few states have gone through a process of locating renewable energy resource zones and have a plan to get the transmission to where the power is needed.
- CSP, like all thermal electric technologies, uses water for cooling, unless designed for dry cooling. But dry cooling comes with a penalty of about 15% higher capital costs and about 9% lower efficiency of power production. Despite the efficiency hit and added costs, most CSP projects in California are looking at dry cooling.
- CSP is land intensive, producing only 4 to 6 acres per MW (according to Michael DeAngelis of SMUD). According to Rainer Aringhoff of Solar Millennium, the current West Mojave Plan strongly hinders CSP development. Even though the Mojave Desert has the highest direct ray radiation in California (and the world), the West Mojave Plan allocates only 1% of the land area to renewable energy... less even than the 5% allocated to off-road recreation. This is only dramatic one of the many environmental barriers to CSP development, but the consensus at the conference is that CSP faces a regulatory thicket which must be dealt if CA will be able to bring on the 800 MW of CSP a year it needs to meet its recently passed goals in AB 32. (Numbers also according to Rainer Aringhoff.)
- Financing. Especially for newer technologies, banks are uncomfortable financing a project they are not certain will work. The companies which will have an advantage getting financing will be the ones with technology that banks and tax investors can be confident the power plant will continue to operate long enough to pay off their investment.
The Light at the Other End of the Tunnel is the Sun
Overall, CSP is likely to be a relatively calm place for investors during the coming years. The financial rescue package is not going to make the underlying problems which cause the current financial turmoil go away... it will simply smooth the current market and probably avoid the collapse due to loss of liquidity of many financial institutions. But this does not change the fact that Concentrating Solar Thermal Power is the only renewable energy resource that is can deliver dispatchable, firm power and also has the scale to meet a large percentage of our electricity needs. In the Southwest US, which does not have the wind resource of the Great Plains, solar is the only renewable option which states can use to meet renewable portfolio standards once they get into the double digits. Since CSP costs considerably less than PV solar technologies, and can match local peak demand with just a few hours of storage, CSP is likely to be a large share of it.
Investing in a Shifting Landscape
All Renewable technologies are likely to benefit from the ITC and PTC extensions in the recent bailout bill. But the big winner is Solar, and specifically large scale CSP. The scale, permitting, environmental, and interconnection issues of these giant plants mean that without the long term certainty that the 8 year extension of the ITC, the plants would have had trouble getting financing.
The good news for CSP does not stop there. With the ITC exemption came two changes to the current ITC. First, the tax credit has received an AMT exemption, which, according to Michael Bernier, and attorney at Ernst & Young, this allows a much broader class of investors to invest in CSP for the tax benefits, and allows existing investors to invest more. This new source of funds will be critical for CSP given the gigantic capital costs for the projects. Where previously the only major tax credit investors were investment banks and General Electric (NYSE:GE), new investors such as Property and Casualty insurers will become interested.
The second change in how the ITC work was the lifting of the "Public Utility exemption." Previously, a utility could not own a solar plant and take advantage of the ITC. Now they can. Since many utilities would prefer to own generation so that it can be incorporated in the rate-base and earn a return on equity, vendors of CSP technology and developers who can sell a turnkey plant to the utilities will gain an advantage over developers who want to own the plants and only sell the power to the utilities.
The changes also mean that developers with proven technology, who already had an advantage getting financing, have an even greater advantage because the new tax investors will not know the industry as well as the current investors. This means that developers will need to spend more time assuring investors that their technology is reliable, and a long track record will be an advantage in doing so.
For public company investors, the options for CSP investments are still slim. Acciona (ACXIF.PK) is a diversified Spanish renewable energy company with a strong presence in CSP, and United Technologies (NYSE:UTX) has a small exposure to solar thermal through their investment in solar tower vendor Solar Reserve. On the bright side, both of these companies have what it takes to reassure a new crop of tax credit investors. Acciona built the only recent full scale CSP plant in the United States, Nevada Solar One, while Solar Reserve's less proven but more efficient power tower technology was demonstrated by the same engineers now working for Solar Reserve demonstrated the technology (and thermal storage with molten salts) at Solar Two in the Mojave desert in the late 1990s.
For investors willing to take a less direct approach, we can be certain that a large build out of CSP plants will have to be preceded by a large build-out (or at least upgrading) of transmission lines in the desert Southwest. I discuss several transmission stocks which should benefit in this entry on renewable energy and transmission.
DISCLOSURE: Tom Konrad and/or his clients have long positions in GE, UTX, ACXIF.
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