Solar/Storage Threatens Utility Model, Says Morgan Stanley

Author: Todd Olinsky-Paul, Clean Energy Group | Project: Resilient Power Project

Solar-cells-on-a-roof-with-sun-flowersWe here at Clean Energy Group have been touting the growing market for solar combined with electricity storage for a while now.  But apparently when Morgan Stanley says something, people listen.

The multinational financial services corporation set off a minor furor in the investment world when it published a neat bit of research titled “Clean Tech, Utilities & Autos; Batteries + Distributed Gen. May Be a Negative for Utilities.”  The main conclusion of the report – “utility customers may be positioned to eliminate their use of the power grid” – sparked a flurry of discussion about the “disruptive technology” that is the marriage of PV and battery storage.

What’s new about this is the recent announcement by Tesla that it plans to build a $5 billion “gigawatt scale” battery manufacturing plant somewhere in the southwestern U.S., a plant that the company projects will produce more lithium-ion batteries than the entire global supply for 2013, while halving per-unit costs.  Already, SolarCity and Tesla have teamed up to offer a solar/storage package to residential and commercial customers.  The specter of plentiful, inexpensive batteries, coupled with the continuing decline in PV costs and projected increases in fixed grid charges related to non-generation-related utility costs, was enough to convince Morgan Stanley that many utility customers could find it cheaper to supply their own power as early as 2018.

For example, based on the assumptions that California utility bills will increase 5% per year, solar penetration will reach 20%, and solar customers will pay just half the fixed grid fees paid by typical utility customers, Morgan Stanley projects that an average residential utility customer in California would be paying $.26/kWh for electricity in 2020.  But, says Morgan Stanley, by 2020 Californians should be able to go completely off-grid with a solar/storage system for 10 to 12 cents per kilowatt hour.  And the off-grid solution has the added benefit that when the grid goes down, your home or business won’t.

Currently, most people who install solar panels retain their grid interconnection; even those with batteries tend to view the grid as a desirable backup system.  But Morgan Stanley sees a potential problem with this approach; as more and more people self-generate, the cost of utility infrastructure is spread over a smaller and smaller rate base.  That means the remaining customers on the grid will see increases in their electric bills.

The utilities have been arguing this point to state regulators, which is why a number of states are now considering allowing a fee on self-generation.  But Morgan Stanley sees a pitfall in this strategy.  The biggest danger for utilities, the report argues, is that they will push regulators to raise fixed grid charges past a tipping point, driving more and more customers to disconnect entirely.  “The higher the fixed grid charge required of distributed generation customers,” Morgan Stanley says, “the more likely they are to buy batteries and go off the grid.”  If Tesla were to provide an emergency backup service to their solar/storage customers – say, emergency battery replacement in case of equipment failure – Morgan Stanley sees the possibility that solar/storage users could unplug from the grid permanently.  To avoid this, Morgan Stanley believes utilities should integrate distributed generators into their business model, viewing them as an asset rather than a threat.

The fixed grid charge is one of two main drivers Morgan Stanley identifies as likely to impact the growth of the U.S. solar market.  The other is the 30% federal solar investment tax credit (ITC), which has provided significant financial support for the deployment of distributed PV.  The sensitivity of the market to these two drivers is illustrated in the following table, which shows Morgan Stanley’s projected results for three scenarios involving changes to fixed grid charges and the ITC.

What Morgan Stanley does not factor into its projections is the value of the resiliency benefit that solar/storage technologies can provide, perhaps because so far, nobody has come up with a way to calculate this.  But it’s clear that resiliency does have value.  Think of it as a form of insurance: if the grid went down, and your home or business lost power, what would the damages add up to?  And what would you be willing to pay to ensure that wouldn’t happen?  Big finance and tech firms, such as Apple, Microsoft, Goldman Sachs, Verizon and AT&T, have already invested in resilient power, because their business losses would be enormous without it.  As the cost of solar and batteries continues to fall, more and more companies and individuals will make the same calculation.  And, as is already happening in the Northeast, more and more states will turn to resilient power technologies to keep critical facilities up and running during natural disasters and their associated grid outages.

Storms are becoming more frequent and more severe; utility power costs are rising; and resilient power technologies, such as solar/storage, are becoming better and cheaper.  More and more, these “disruptive technologies” are looking attractive.  If utilities get Morgan Stanley’s message, and become more willing to work with distributed generation and resilient power rather than fighting it, so much the better.

Clean Energy Finance Through the Bond Market: A New Option to Finance Climate Mitigation and Adaptation

Authors: Lewis Milford, Clean Energy Group, and Mark Muro, Brookings Institution | Project: Clean Energy Finance

Clean Energy Finance through the Bond Market coverThe IPCC climate report issued this week is tough reading. It suggests we are far from deploying clean energy technologies at the scale needed to reduce greenhouse gas emissions in time to avoid catastrophic impacts. The bottom line is that we need to make much greater financial investment to massively deploy no-carbon technologies in the next few decades.

If there is any good news on promising approaches to solve these climate problems, it’s worth a note. Regarding the need for significantly more financial investment in clean energy, Clean Energy Group, Brookings Institution Metropolitan Policy Program, and the Council of Development Finance Agencies just released a new paper on a powerful but underutilized tool for future clean energy investment: state and local bond finance. The report, “Clean Energy Finance through the Bond Market: A New Option for Progress,” is available here.

For 100 years, the nation’s state and local infrastructure finance agencies have issued trillions of dollars’ worth of public finance bonds to fund the construction of the nation’s roads, bridges, hospitals, and other infrastructure—financing that literally built America. Now, as clean energy subsidies from Washington dwindle, these agencies are increasingly willing to finance renewable energy and energy efficiency projects, if only the clean energy community embraces these new bond finance tools.

So far, these authorities are only experimenting in bond finance for clean energy. However, the bond finance community has accumulated significant experience in getting infrastructure projects to scale and knows how to raise large amounts needed capital by selling bonds to Wall Street. The challenge is therefore to create new models for clean energy bond finance in states, and to establish a new clean energy asset class that can easily be traded in capital markets.

To that end, the paper argues that state and local bonding authorities and other partners should do the following:

  • Establish mutually useful partnerships between development finance experts and clean energy officials at the state and local government levels
  • Expand and scale up bond-financed clean energy projects using credit enhancement and other emerging tools to mitigate risk and enable more demonstration projects
  • Improve availability of data and develop standardized documentation so that the risks and rewards of clean energy investments can be better understood
  • Create a pipeline of rated and private placement deals, a new clean energy asset class, to meet the demand by institutional investors for fixed-income clean energy securities.

And it’s happening.  Already, bonding has been embraced in smart ways in New York, Hawaii, Morris County, NJ, and Toledo as well as other locations described in the paper. Now, it’s time for states and municipalities to scale up the use of bonds for clean energy purposes. If they can do that, it will be yet another instance of the nation’s states, cities, and the private sector stepping up with a major breakthrough at a moment of federal drift.

And there is even more at stake. The report comes just as the global scientific community has underscored the urgency of finding new ways to finance no-carbon technologies at massive scale. The bottom line is that we need to finance clean energy the same way we have financed large-scale public infrastructure like schools, water systems, and airports—with investment that will benefit generations, financed at low bond rates. Our current way of financing clean energy not only makes it too expensive, but it simply cannot meet climate mitigation and adaptation demands we will face in the next few decades.

UK Green Investment Bank invests for the first time in offshore wind projects during the construction phase

Author: Robert Sanders, Clean Energy Group | Projects: Clean Energy Finance, Offshore Wind Accelerator Project

blogphoto-Windmills-In-A-RowThe UK Green Investment Bank (GIB) today announced it will make two unprecedented equity investments in the UK offshore wind sector.  GIB will purchase a 50% stake (£241 million, or $402 million) in the 210 MW Westermost Rough offshore wind farm.  GIB will also purchase a 10% share in the 576 MW Gwynt y Môr offshore wind farm, a €2 billion ($2.76 billion) project involving 160 wind turbines.  Both of these projects represent institutional equity investment of nearly $700 million in large offshore wind projects during the construction phase.  Additionally, Westermost Rough will be the first wind farm in the world to use a 6 MW offshore wind turbine at commercial scale.

This is a significant development.  Investment during the construction phase represents additional risk that is not usually undertaken by institutional investors.  These risks include delays and losses incurred when installing equipment under adverse weather conditions, the quality and reliability of metocean data (including wind, waves, tide and swell conditions), and difficulties installing offshore cable. Indeed, most insurance claims and project delays are linked to the cable installation process.

To date, the UK Green Bank has invested in existing projects, recapitalizing existing debt of investors, allowing them to take out and reinvest their capital in other projects. Now for the first time, GIB, a for-profit green bank, is making equity investments in two large offshore wind projects during the development and construction phase, when the risk is greatest. GIB’s construction phase investments were structured on commercially reasonable terms and without additional credit enhancement.  They testify to the increasing comfort investors and lenders have in the construction and operation of large offshore wind projects in Europe, and with the experience and financial strength of the various project counterparties involved.

Taking construction risk by investing before the project is operational is a precedent of great significance to our fledgling US offshore wind sector.  Domestically, all we have is development and construction risk since there are no operating offshore wind projects at this time.  The GIB investments are a major financial engineering advance that has particular importance to the US OSW policy agenda and to the green banks and state clean energy funds here in our own country.

There are important lessons to be learned from GIB as we work to support our first utility scale offshore wind projects.  Having examples of early stage investors refinancing their initial investments in offshore wind projects on commercially reasonable terms is essential if additional institutional investors are going to take positions in new projects.  This financial innovation, together with the commercial deployment of a 6 MW wind turbine – nearly twice the size of most offshore turbines – are very important steps in reducing the costs of offshore wind construction and power generation.  Our emerging U.S. offshore wind industry is the direct beneficiary of these financing and technological strides being made in the UK.

For more detailed information on the UK GIB deal, click here.

Jobs from Offshore Wind: It’s Already Starting

Author: Valerie Stori, Clean Energy Group | Project: Offshore Wind Accelerator Project

blogphoto-Offshore-Wind-FarmThe New Jersey Board of Public Utilities’ (BPU) decision last week to reject the Fishermen’s Energy offshore wind project is another setback to building an offshore wind industry in the US, but at heart really points out a Catch 22—how do you get jobs in a newly emerging industry that requires substantial upfront public capital before those jobs are present?  This dilemma is at the heart of emerging US offshore wind policy.

The BPU maintained that the project failed to demonstrate clear economic benefits and also questioned the use of lower-cost Chinese-manufactured turbines, citing the machines as an unnecessary technology risk.

The irony of the decision is that the same week, the economic benefits of the Cape Wind offshore project in New Jersey were on full display. Cape Wind, a proposed 420MW project off Nantucket sound, recently announced two new contracts, ensuring US-based labor.  One of those contracts was awarded to New Jersey-based Caldwell Marine International to install the submarine intra array and export cables, which, incidentally, would be manufactured by Prysmian Cables in South Carolina.

New Jersey is not the only Atlantic state to reap some economic benefit from offshore wind development.  Although the U.S. lacks specialized port facilities, factories built to scale, and the load-bearing railways required of a heavy-structure industry, there are specialized industries, especially in land-based construction, here in the states with the workforce and skills to contribute to offshore wind’s development. In addition to contractors in NJ and South Carolina, Cape Wind has contracted with Cianbro Corporation to design and construct its electrical services platform at Cianbro’s Maine facility.  This $100 million contract should support up to 350 construction jobs.  Falmouth-based Lawrence Lynch Corp. was awarded the contract for laying the series of duct banks between the point of landfall and the grid interconnection station.

Cape Wind’s major construction contracts have yet to be finalized and contract figures have yet to be disclosed, but the project is well on its way to sourcing over 50% of its labor and components from US-based manufacturers.  That’s pretty impressive for a project under close scrutiny to cut costs and meet cost-benefit tests.

Further north, the proposed Maine Aqua Ventus project has 3 Maine-based partners that support the manufacturing of the unique, cost-cutting composite hull.  And South Carolina, a state with relatively low on-shore wind potential, is home to GE, a leading global wind manufacturer. Other large companies have also set up shop in the state–in 2012, Clemson University identified 1110 wind industry employees in 33 businesses in South Carolina alone.

If we can figure out how to get our state offshore wind policy off the ground in the US, these are significant economic benefits that states will obviously see.  In Europe, offshore wind farms have generated nearly 60,000 jobs along the entire supply chain.  These jobs are a direct result not only of long-term policy commitments, but also of the risks investors are willing to take.  Europe—its policy makers, developers, financiers, and investors—have supported this renewable energy industry for a decade, building a robust pipeline of projects that has ultimately led to European economic development.

The challenge for states is developing the right policies and support structures that create a pipeline of projects and de-risk the industry.  Partnership with European companies would be a way to leverage America’s manufacturing capabilities and reduce costs.  Joint ventures, at this time, are the most reasonable option and leave the door wide open for early market and specialized US supply chain entrants.  The rewards are enormous—the US Department of Energy estimates that as many as 40,000 jobs could be supported by offshore wind on the Atlantic coast.