Economic Head winds for renewable energy

There are some strong economic head winds that are going to impede and challenge renewable energy developers in utility scale space.

Interview with Advantage for Analysts' Richard Homich, by Maryruth Belsey Priebe

Back in 2008, we had a dip in the overall demand for electricity in the United States.  

In 2008 and 2009 the demand for electricity went down by about 5%, which is a reflection of what happens to us in a recession. That, combined with access to cheap natural gas, has diminished the appetite among utilities for signing up new agreements, whether that would be for renewable technology or any other technology for producing electricity. The demand for electricity is low for any new sources, which puts a stress on those folks hoping to develop renewable energy projects.

The other thing that goes along with that trend is that utilities, because they are regulated entities and closely tied to state governments, have a strong disincentive to put a burden on the rate payers by increasing rates. 

So in addition to lower demand, there is also lots of pressure to keep the costs of electricity low during this period of recession. 

What results from this is that since there are a lot of developers trying to get renewable energy projects across the finish line, there is intense competition in the face of low demand and fairly intense price pressure. That means it is going to be difficult to receive off-take agreements that have really strong economics for the project developer..

Unfortunately, I don’t have a whole bunch of positive things to say about the renewable energy future, other than the fact that the cost for equipment and technology has come down dramatically. 

That has been good and has been giving wind a fighting chance to compete with traditional sources of electricity. It’s pretty much at grid parity now. And we have hopes that solar may get to grid parity before the ITC (Investment Tax Credit) expires in 2016.

In addition to the economic issues, we know that the 1603 cash grant expires at the end of this year. The challenge is that traditional sources of tax equity don’t have a huge amount of tax capacity and there aren’t a whole bunch of new players that have been coming into the market. So it’s going to be very difficult for developers to get financing for their projects in the next 12 months.

What are some of the repercussions? If the folks that do receive an off-take agreement don’t have a strong balance sheet and are not part of a large organization, they will be looking to sell their projects to developers that have significant backing and a large balance sheet. This will result in consolidations in the next year or so. The residential space can operate fairly unimpeded and experience significant growth, as long as they can find sources of tax equity capital to support their operation.

To give you an example, we’ve been watching some of the request for bids in California, and observing that there are an enormous number of developers participating in those bids. From what we’ve seen, the bids for those off-take agreements have been extremely aggressive. Based on what we know of the current costs for these technologies, it’s difficult to see how some of those developers will be able to support the economics or achieve project financing in some cases.

Nevertheless, for 2012, I expect to see utility renewables to show growth from a percentage standpoint simply because it’s coming off a small base. 

Five years out, I’m expecting to see primary renewable technologies operating at grid parity, including concentrated photovoltaic which holds a lot of promise for helping PV to reach grid parity.