California Faces Home-Made, Alternative Energy Conundrum

While California may have a big lead over other US states in the nation’s green energy race, snags in permitting and financing renewable energy projects could hobble its stride.

“It’s definitely an ambitious goal,” says Alex Klein, research director at IHS Emerging Energy Research, referring the state’s plan to generate 33 percent of its electricity from renewable sources by 2020. “It’s going to require a significant amount of investment to reach that goal.”

Source: First Solar A First Solar (FSLR) solar photovoltaic plant. The firm is contracted with Pacific Gas and Electric (PCG) to provide 550MW of renewable electricity capacity by 2013.

Sacramento’s fractious legislature passed a law this spring, upping the goal from 20 percent renewable energy by 2020.

Currently, 37 states and District of Columbia have legislated renewable energy goals, resulting in a doubling of installed renewable energy in the last six years. Most have 10-20 percent targets for the same 2020 timeframe.

But none has set the bar as high as California. The state’s “big three” investor-owned utilities — Pacific Gas and Electric

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[PCG  Loading...      ()   ], Edison International’s Southern California Edison

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[EIX  Loading...      ()   ], and Sempra’s San Diego Gas and Electric

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[SRE  Loading...      ()   ] — will need to hit this goal or face fines.

Southern California Edison and San Diego Gas & Electric have publicly said they favor the bill, Pacific Gas and Electric has publicly questioned the cost to consumers of the new, aggressive target.

At the moment, the “big three” are using renewables for 18-percent of their needs; once all municipal utilities are factored in, the state-wide rate is about 15 percent.

Klein says the three utilities have enough signed contracts with renewable energy developers to reach that goal by 2020, but many of the plants necessary to achieve that may never get built.

Industry watchers say the two biggest hurdles to getting all those plants built are financing and permitting.

On financing, while many project developers rush to sign agreements with utilities to show their bankers that they have a multi-year revenue stream, like any big project there can be delays in generating those revenues.

Those delays will likely doom many new renewable energy plants, says Sam Enoka, president of California-based renewable energy services firm, Viasyn Inc.

“Most failures are because the myriad problems developers face to get their project built will extend the time frame—and the associated carrying costs—to a point beyond which they’ve financed for,” he says.

“Investment returns get driven down to the point where developers may just walk away from a project,” he adds.

While the agreements between developer and utility can prevent some of these defaults, “many projects inevitably will fail to reach” their startup date, he says.

Permitting is also a critical issue, says IHS’ Klein.

“It’s really difficult to permit or build anything in California,” he says, with varying laws from county to county. He adds this can add years to a developer’s timeline.

Jesus Arredondo, principal and founder of Advantage Consulting LLC, an energy regulatory and government affairs consultancy in California, says that ever-louder pushback from community groups is also dragging out the permitting process.

“There is the major issue facing many projects—will a project be sued?” he says. Opposition from local residents and environmental groups will likely strangle some projects, he adds.

“Every renewable project faces some likelihood of litigation,” he says.

Arredondo says the California Independent System Operator, CAISO, the agency that manages the state’s power system, has a queue of proposed renewable energy power plants with “three times more renewable megawatts waiting to be reviewed than what are needed to meet the State’s 33 percent [goal].”

But he adds that of the 71,000 megawatts of renewable energy under development in the state, CAISO expects “many of those projects will drop out over time.”

Viasyn’s Enoka says that developers are often unaware of upfront costs—like connecting their plant to the grid—or operational ones, which impacts necessary financing.

“A lot of developers are unprepared to deal with these barriers and as a result, get squeezed because their pro formas get haircuts when they face the realities of the market,” he says.

Some projects have better chances than others, says Klein, because the cost of some technologies have have dropped significantly.

Solar photovoltaics and wind power—the two dominant and most mature technologies among the planned power plants—cost 30-40 percent less now than in 2008.

But some of the projects in the queue use unproven technologies with potentially large generation capabilities, like PG&E’s 200 megawatt space-based solar project with Solaren, which puts the utility at greater risk if the plant doesn’t get off the ground.

“Maybe some developers were a little ambitious,” says Klein.

What's more, Arredondo says CAISO faces “an overabundance of alternative power proposals,” and has to find the financial resources to fund studies that could help prioritize these projects.

Add it all together, and that project pipeline gets smaller, quickly.

“Can [33 percent] be done by 2020?" says Enoka. "It will be a challenge."