Archive for the ‘Solar Bankability’ Category
Of all the events I’ve attended in my 20 years in the solar industry, I will always remember the renewable energy finance conference I attended in 2012 where the major investment banks, pension funds, and project finance entities gave one presentation after another stating they treat wind and solar as any other energy generation asset class when looking at returns and risk. This was a major turning point for the renewables industry, as finance is the heartbeat of the rapidly expanding industry.
Consider the following facts: renewable energy industry growth is >30% YOY on average reaching $30B in 2016, renewables are the largest
generator of jobs in the U.S. in the last 4 years and it’s by far the largest sector of new electricity generation for the last 4 years. Since that conference, my phone has been ringing repeatedly, and weekly, with calls from the finance community looking for projects to purchase. Demand for projects far outstrips supply. The rate of return and the low risk profiles are that good.
So it amazes me that our new president and other elected officials can stand in front of the country and claim over and over that wind and solar power does not “pay off in less than 18 years”. Clearly Wall Street and other finance entities do not put capital work into a near USD $1 trillion global industry that are not producing solid, predictable long term returns. (See: global renewable energy investment market to exceed USD 350 billion by 2020) Of course when confronted with actual facts, the conversation go right to the specious argument that taxpayer funded subsidies makes renewable energy projects possible. Anyone that knows me knows my rant on this topic: the fossil fuel industry has 10X more embedded and ongoing subsidies than renewables.
The renewable energy industry has done remarkable work in bringing solar and wind to compete with a highly subsidized fossil fuel industry to a point that it’s now less costly than coal and on par with natural gas derived energy. The investment opportunity has never been better.
An excellent fact book on the U.S. sustainable energy transformation can be found at the bi-partisan Business Council for Sustainable Energy.Share this:
In my previous Diversification Chronicles post I covered some of the high level reasons why the time is right for fossil fuel and electric utilities to pursue profitable diversification into the renewable energy industry. Below, I outline recent events and news that further highlights the legal, regulatory and market drivers that should create urgent diversification strategy development or expansion for companies with large CO2 and GHG negative externalities as a result of their business operations.
On August 9th, the federal 7th U.S. Circuit Court of Appeals ruled for the first time on the legality of the Obama administration’s estimated social cost of carbon (SCC). SCC was determined by federal agencies who worked together starting in 2008 to create an accurate SCC, a metric that represents the long-term economic damage to society, in U.S. dollars, from each incremental ton of carbon dioxide released into the atmosphere. The latest estimate placed the SCC at $36 per metric ton of CO2.
The recent ruling upheld the Department of Energy’s use of the SCC metric in its analysis of standards for commercial refrigeration equipment. DOE used them for issuance of 2 rules in 2014: one of the rules set energy efficiency standards for 49 classes of commercial refrigeration equipment, while the other stipulated test procedures for the standards.
The refrigeration industry challenged DOE’s use of the social cost of carbon, but DOE’s use of the SCC metric, “was neither arbitrary nor capricious” according to senior federal judge Kenneth Ripple, who was appointed to the bench by President Reagan. The ruling was definitive in its entirety.
While this ruling only applies to the refrigeration industry in Indiana, Illinois and Wisconsin, the implications are enormous for the oil & gas and electric utilities. The SCC metric as established by the US government is now a benchmark going forward. This may well be the first domino falling which would affect all CO2 & GHG emitters in near term.
For the first time ever, CO2 emissions from coal-fired power plants will drop below those from natural gas in 2016, according to a new analysis from the federal Energy Information Agency. Renewable energy, energy efficiency, historically low prices for natural gas, and other factors have driven coal use down by >30% while natural gas has been replacing that fuel for generation.
It was always assumed that natural gas would be a solid 50-year bridge fuel combined with renewables, energy storage and other technologies. But with its rapid rise in use, less energy density, and methane issues, natural gas is becoming a larger CO2 & GHG contributor with projections putting it past coal emissions in its heyday.
In addition to overproduction, very low oil prices, and legal challenges surrounding potential prior knowledge of the impact of their industry on climate change, the oil & gas industries are facing a potentially game changing problem of how Wall Street will value each company’s fossil fuel reserves.
Typically, an oil & gas company’s stock market valuation is weighed heavily on proven reserves and ability to extract. With many countries looking at putting a price on CO2 and limiting extraction of oil & gas as a result of the COP 21 Paris Agreement, this becomes a crucial data point for both the investment community and the operating companies themselves.
Industry observers believe that it’s only a matter of a few years before the investment community significantly reduces the value of oil & gas companies and limits their equity positions. Additionally, the Securities and Exchange Commission is coming under pressure to change its rules to require energy firms to be more clear on what their material climate change risks are.
Combined with climate change symptoms seemingly accelerating over the last few years, these market and regulatory challenges make diversification into renewables an imperative. Short-term and weak green-washing strategies of the past will not stand up to public or government scrutiny going forward. The time is now for government and corporations to lead the transition to renewable and clean energy.Share this:
PV Advocate synopsis:
- Cost of installing a PV system continues its rapid YOY decline, 5% – 15% over the last year
- Utility scale solar has declined quicker than commercial rooftop and residential sectors
- For the first time ever, price decline came from reduction non-module hardware and lower soft costs as module prices held consistent throughout year
- Capacity factors have increased as a result of more tracker use, better system design and advances in module technology.
- Full access to the original LBNL 2016 report
The fate of the world depends on driving down the cost of solar power.
Yes, that’s a melodramatic way of putting it. But it’s not wrong. Any scenario that has humanity avoiding the worst ravages of climate change involves explosive global growth in solar power.
So how’s that going?
Happily, Lawrence Berkeley National Laboratory (LBNL) releases a set of reports each year devoted to tracking solar prices; they’ve just released the latest editions. Long story short: Prices are steadily falling, more or less on schedule
There are two reports, one for each type of solar power. One is on “utility-scale solar,” which means solar systems larger than 5 MW. The other report is on solar photovoltaic (PV) systems under 5 MW.
Those are two very different markets, but I’m going to squish them together in this post, with the help of a bazillion charts.
Solar is growing, growing, growing
Here’s a good scene-setter. It shows historic and projected solar power capacity additions, by technology. (We’ll get into the difference between CSP and varieties of PV below — ignore for now.)
A few things to notice about this chart. First, there’s about 29 GW of solar installed in the US now; LBNL expects that to clear 100 GW sometime around 2020. That’s crazy-fast growth (from almost nothing in 2007!), but it will still only put solar at around 3 percent of the US electricity mix in 2020.
Third, the giant spike in utility-scale PV happening this year is an artifact that reveals how much solar still depends on policy. Everyone thought the 30 percent federal investment tax credit (ITC) for solar was going to expire this year. Contracts signed in 2016 would have been the last to qualify. So there was a huge rush to get projects on the books.
As it happens, the ITC was unexpectedly extended late last year (it will phase out over the next five years), or else the spike would have been even bigger. As it is,more than twice as much utility-scale PV capacity will be added in 2016 than in any previous year.
Prices for utility-scale solar are falling
Prices are falling for both big and small solar, though at different rates and for different reasons. Read the rest of this entry »Share this:
Lazard Ltd. puts out their annual Levelized Cost of Energy (LCOE) Analysis in Q4 every year, and I always greet it as a worthy piece of market research. Others, however, shower it with critique – some dubious, some accurate. (2014 post on this research here) While there are significant variables that affect the effort to quantify LCOE in one metric, this annual research is quite accurate and appropriately footnoted regarding these variables.
LCOE is defined as all the expense line items of a PV system’s installed cost + the total lifetime cost of the PV system divided by the total amount of energy output in kW hours that the system will put out over its lifetime. (A simple LCOE calculator here).
The latest Lazard research reveals what others including Deutche Bank, UBS, NREL and other analysts have been saying over the past year: utility-scale solar and wind power are increasingly cost-competitive on the wholesale level with traditional energy sources such as coal and nuclear, even in the absence of subsidies. At the retail level cost comparison, its widely competitive unsubsidized with highly subsidized traditional fossil fuel generated power.
The research also shows the all-important progress of energy storage cost reduction and the large benefits of coupling storage with PV to reduce the demand charges and/or provide instant grid frequency stabilization. (A great list of all the energy storage benefits can be found here.)
As a long-term participant in the utility and solar energy industries, it’s breathtaking to see the progress of the PV industry and its market penetration in the last 3 years. The industry has continually had to compete with highly subsidized fossil fuel generation while consistently improving LCOE through hardware, process and regulatory efforts to name a few. Significantly, all of this market penetration progress was achieved with 10X less in government subsidies than traditional fossil fuel-based industries. And with current cost reduction roadmaps throughout the supply chain showing continual lowering of cost’s, the future looks bright.Share this:
As I have written previously, the concept of bankable solar products and services is complex and contradictory and has many interpretations depending on where you sit in the industry. When looking at the bankability of modules (aka panels) the situation is quite confusing.
In the PV industry, there is continual chatter about which module providers are tier one or tier two, and who is on various analysts’ bankable lists and who isn’t. The general metrics involve the business health of the manufacturer, the technology they employ, the manufacturing process, vertical integration and being in business for more than 5 years. Many of the tier 1 companies are relatively new, stand alone companies with weak balance sheets, so they don’t have the financial health to meet bankability standards and yet they are considered bankable. This contradiction was illustrated in spectacular fashion over the last 2 years with the bankruptcy of the largest PV module manufacturer in the world, Suntech, and another large Asian company, LDK, among others. Both were publicly traded with high visibility on the NASDAQ and had been considered highly bankable.
With this history, it’s hard to understand how module providers with weak business fundamentals continue to show up on various analyst and industry tier one vendor lists. Many times the answer to this contradiction is that the module company has supplied a couple of large projects with the project financed non-recourse by well-known capital providers. The analysts are relying on the finance entity and the finance entity is relying on the analyst, and then it would seem that herd mentality takes over.
From a technology standpoint, a crystalline PV module is a mature (40 year old), proven technology that desperately needs the kind of
manufacturing standards that are found in many other commodity product industries. Manufacturing and materials standards tied tightly to verification protocols would go a long way toward lowering the risk for long-term owners of PV systems. With adherence to standards and robust verification, business-side bankability becomes less of a pain point. Standards are paramount if the PV industry is going to continue its steep growth curve.
The crystalline PV manufacturing industry is maturing with the reentry and/or scale-up of diversified, large multi-national corporations’ PV programs. As a result, the secure bankable route has developing clarity with companies such as BYD, Hanwha, Hyundai, LG Electronics and other similar companies who can bring confidence to finance entities via large balance sheets, continual technology improvement and strong manufacturing heritage. Additionally, a few of the original large stand-alone crystalline module companies are becoming more stable again as growth has returned to the market, and their balance sheet burden due to manufacturing capacity over expansion in the past few years is diminishing.
In my next post I will discuss PV thin-film version 3.0 bankability. Thin-film CIS and CdTe is rapidly achieving performance parity or better when compared with crystalline poly modules, and there is potential for disruption to the crystalline vendors in particular application segments.
A good update from Lazard’s annual look at Levelized Cost of the Energy (LCOE) for alternative and conventional energy sources illustrates two interesting developments: 1) the continued progress of solar photovoltaics (PV) reduction of cost and competitiveness with conventional brown fuel generation and 2) the cost reductions in the battery storage market.
A key metric for project finance entities, PV LCOE has been significantly reduced by ongoing year-over-year cost reductions of PV hardware, balance of systems (including installation methods) and financing. The result has been a robust PV market both in North America and globally at a time when government support has been steadily declining. (LCOE is defined as all the expense line items of a PV system’s installed cost + the total lifetime cost of the PV system divided by the total amount of energy output in kW hours that the system will put out over its lifetime. A simple LCOE calculator here). A signifcant recent example is SunEdison’s utility scale PV project for the City of Austin which is supplying energy in year 1 at just under $0.05/kWh as part of a 20 year supply contract. This contract will likely save the city’s electricity rate payers money compared to conventional brown fuel sources.
The most interesting data in the Lazard report is the all-important progress of energy storage cost and performance. Renewable energy has large value generally when the renewable fuel source is available–when the wind is blowing or the sun is shining. For example, in the early evening a solar array is winding down production at a time when the peak energy demand on the utility grid is still elevated. Solar battery storage significantly increases the value of solar during this time, as solar power stored in the batteries can service this demand at a competitive cost depending on the location.
In addition, solar battery and other storage media can also provide voltage, frequency regulation (Hz) and ramp rate control for PV systems, which enable grid operators to have more control and confidence in the interegrity of their grid with a large number of intermittent distributed resources on their systems.
Notably, energy storage is not required for renewables solely because of their inherent intermittent generation function. Some of the Independent System Operators who manage the transmision and distribution grids nationally need storage throughout their grid to manage their ongoing demand response and frequency regulation challenges. This is due mainly to localized issues such as in the PJM ISO where they have a dearth of energy generation and other grid architeture issues. PJM embraces and rewards energy storage operators whose storage, placed strategically throughout the grid, helps them smooth out demand spikes and control frequency swings.
In a future post I will review the various storage technologies including battery, compressed air, hydro and thermal.Share this:
Gem of a video here showing the progress of PV solar energy proliferation in Germany. (runs fast, so freeze frame to digest statistics) Now 21% of the energy mix, renewable energy in Germany has provided 380,000 jobs and a road map for other countries to follow. Over the last 12 years of successful policy implementation, PV solar energy (near 10% of German energy) has eliminated the energy peak in Germany which is reducing costs and environmental degradation considerably while increasing energy security.
Germany is demonstrating that a large number of distributed renewable inputs from solar and wind can be integrated successfully into the grid infrastructure without stability or reliability issues. This is a common misconception about intermittent generation sources that, after 12 years of operation, the German market has proved otherwise.
Germany is also demonstrating that the distributed generation model works and is real threat to established utilities working in the standard centralized model used the world over. While its easy to be in the solar energy and say that we may
have the utilities on the run in the near future as distributed generation makes in roads, that one side “we win” mentality is a no win proposition. It would be prudent for utilities and the renewable industry and government to work together on policy and a road map that takes into account the enormous past and current investment of the utilities in existing infrastructure while following an economic and technological road map that leads to a smooth and profitable transition to a distributed generation model for all stakeholders.
Some interesting snippets from Energy Rebellion, the producer of the video:
. . . . . . . solar gold rush that lead to investments around the globe was mainly driven by demand in Germany up until recently. The first effects of this rush is prices for PV-solar systems have fallen by up to 70% and continue to decline.
. . . . . . . today industry experts claim that photovoltaic & multi-kWh energy storage will become the cheapest source of electricity even in OECD countries within the next 10 years. This will lead to a very fast structural change of the entire world economy.
. . . . . . . . large scale market development has just started, but with 24.5 GW of PV-Solar capacity installed on more than 1 million roofs in Germany, the first signs of this new industrial revolution can already be observed. For example even during the dark & windy winter month of January, PV-solar produced up to 7 GW or 10% of peak-load demand in Germany. When a deadly cold wave brought the fossil & nuclear dominated energy system of France close to collapse, German PV-solar kept many gas & oil fired power plants offline, which significantly lowered the spot-prices at the European Energy Exchange.
With the PV industry, nothing is as it seems. The industry is influenced by a myriad of technological, business, economic and competitive forces both inside and outside the industry. Current media rhetoric holds that the industry is crashing (more on this erroneous assertion in my next post) and the finance community is fleeing the industry. The latter claim couldn’t be further from the truth.
While working on various PV project developments over the years, I often heard from finance entities that they viewed solar PV energy as highly risky, which created a higher cost of capital and demands of higher IRR’s, among other negative effects. As one partner from a large national bank said, “We know how to finance a combined cycle natural gas plant – the entire product comes from GE or other well-known sources and the technology risk is well understood. With PV projects, there are a number of different component brands which make up the generation asset along with a number new variables that we don’t know or understand. It has our risk antennae up significantly.”
But in the past 12 months, and most recently at the REFF 2012 in Manhattan, I am consistently hearing from marquee finance entities that they now view a PV generation asset no differently from other assets, as the risk and business models are now well understood. This is a major milestone for the PV industry, and when combined with the inflection point of declining solar PV energy cost at retail parity with brown fuel generation cost, bodes well for the continual growth of the solar energy in the next 5 years and beyond.
Continued weekly monitoring of various entities throughout the supply chain shows the average selling price (ASP) on the spot market continues to decline in all categories except the inverter.
Of particular note is the sharp drop in poly silicon ASP from the previous week. Its widely believed that the efficient silicon refiners cost basis is approximately $25 – $28/kg and we may well see further substantial reductions if the demand situation remains week.
While the data above is sampled broadly from Tier1, 2, and 3 providers, the weaker entities with little or no bankability status will be feeling the pressure, soon, to idle further production and in some instances find an acquirer. Over the last 5 years, there has been speculation about consolidation of the many industry manufacturers when demand has temporarily weakened. This current market demand bust may be the one that results in bankruptcies and acquisitions of the lower tier players. The large Tier 1 players with weak cost structures are looking for strategic partners or majority acquirers such as the deal we saw between Sunpower and Total last month. This may also be the opportunity for the mega sized electronic manufacturing services companies like Flextronics, Foxconn and others substantially grow their PV industry presence with acquisitions.Share this: