The Renewables Part I: The New Kids In Town

This is the first in a five part series on the ascent of renewable energy sources. Over the course of the next several weeks, we will address the changing energy mix in the US as solar and wind dominate marginal additions to the powergrid, and aging fossil-fuel power retires. The evolution of energy in the US also means the map of energy production is changing. New polices from the States–some helpful, some hurtful–will impact the otherwise strong renewable buildout. In a case study, we’ll take a look at Los Angeles, as that city struggles to free itself from the automobile. Finally, we’ll examine the future landscape of US energy. New players in the utility business are set to rise, as the race to dominate new platforms and new technology gets underway.

The newest of California’s solar power stations form a wide arc across three hundred miles of desert, from the photovoltaic blanket that makes up the Topaz Solar Farm in San Luis Obispo County to the triptych of boiling water towers at the giant Ivanpah, the concentrating solar installation, just shy of the Nevada border.

The speed, and the ease, at which these sunshine-capturing giants have been constructed is at least as impressive as their scale. Topaz, which currently shares rank with solar powerhouse Desert Sunlight as the world’s largest PV power plant, was erected in a tightly compressed 36 months, from November of 2011 to November of 2014. An unusually short construction timeline, for utility scale power generation. Shouldering 550 megawatts (0.55 gigawatt) of capacity, the $2.5 billion dollar project is notable for another trend it represents: independence. The federal government provided no loan guarantees. Across the California desert and, more broadly, across the world, solar installations are increasingly popping up quickly, financed by capitalist seeking profits and dividend income, rather than governments.

Topaz Solar Farms

Solar and wind power suddenly appear to be a dangerous technology to incumbents in the aging business of electricity generation. As half-century old coal and nuclear plants retire – with their uneconomic creaking parts and outdated machinery — renewables have stormed into the gap. Quietly, yet rather quickly, the various energy inputs to electricity production are changing: in the US powergrid, it’s now out with an old form of power generation that relies on burning energy, and in with a new form of power generation that relies on capturing energy.

The numbers are startling: In the last two years alone, 4.3 GW of nuclear capacity has been retired. These include the 42-year-old Vermont Yankee Power Plant outside of Brattleboro; the 39-year-old Kewaunee Station near Green Bay, Wisconsin; and the 30-year-old San Onofre plant in San Diego County, California. More nuclear retirements, in the aging US nuclear fleet, are sure to come. And if it were only US solar growth that was being called upon to “make up” for these nuclear losses, that gap would be larger. But in 2013, 1.1 GW and in 2014, 4.8 GW, of new wind capacity were also added in the US. And these were actually relatively slow years for new wind power construction.

The numbers hold true for sun-based power as well. New solar power installations in the United States added to the grid in just the past two years—a collective that includes everything from utility grade solar to rooftop solar on businesses and homes—have provided 4.75 GW of capacity (in 2013) and another 7.26 GW of capacity in 2014, according to data and estimates from BP Statistical Review and the SEIA (Solar Energy Industries Association). By comparison, a typical nuclear power plant has about 1.5 GW of capacity, and a typical coal-fired power plant about 0.5 GW of capacity. Of course, both nuclear and coal generating stations run 24/7 generating far more electricity directly from their built-capacity than a solar plant which only runs during daylight hours. The challenge for existing utility players however, many of whom bought very old nuclear and coal plants over the past 15 year at fire-sale prices hoping to scalp a profit, is that US electricity demand overall is not growing. According to the EIA (Energy Information Administration), total generation last year was only 1.5% higher than it was ten years ago.

This makes for a rather atypical set of circumstances. Though solar and wind power are not as energy-dense, nor as robustly continuous, as fossil fuel or nuclear power, they enjoy falling costs as their technologies rapidly advance. With the overall market for electricity flatlining, the young technologies of wind and solar are therefore now the preferred choice in the market for new energy infrastructure.

If demand for electricity in the United States were growing more robustly, the momentum would likely push a broader array of energy sources into the power grid: new nuclear, new coal, and new natural gas–along with wind and solar. Demand for new fossil-fuel power plants is also constrained in Europe and Japan, where slow economies and huge renewable buildouts are also underway. The popular notion of a “war on coal” a favorite theme of coal-state Republican leaders like Mitch McConnell of Kentucky, mistakes reality for a policy choice. Global demand for coal has weakened considerably. And a 40- or 50-year old coal plant is simply near the end of its design-life.

If there’s one constituency that’s not trying to drive national energy policy, and is certainly not conducting a war of any kind on any particular energy source, it is the millions of American homeowners installing solar on their homes.

Solar City, the largest installer of residential solar in the United States, deployed about a half a gigawatt of residential solar in 2014. The company forecasts doubling that pace of installation this year: to a full gigawatt (GW). If that prediction for new rooftop solar in the US comes true, it will effectively kill off another tranche of demand growth that the incumbent power industry so desperately needs. Collectively when you install a full GW on thousands of homes, it reduces demand for centralized power coming from the grid.

Solar City announced in its February earnings report that it now had 190,000 customers, with plans to have a million customers by 2018.

So why the rush to embrace residential solar, though? Tax credits? Or something more high-minded? Say, energy independence or perhaps just old fashioned, Emersonian self-sufficiency?

The popular notion of a “war on coal” a favorite theme of coal-state Republican leaders like Mitch McConnell of Kentucky, mistakes reality for a policy choice.

One of the dynamics that’s likely driving the trend towards distributed generation –electricity that’s not delivered from a central utility but is created and consumed on site — is that many Americans, despite the recent declines in oil prices, remain bruised by recent energy shocks, and the rising cost of energy, over the past 15 years. Many remember how rising energy costs played at least some role in hurting the economy coming into 2007 and 2008. Garvin Jabusch, co-founder and Chief Investment Officer of the sustainable asset management firm Green Alpha Advisors in Boulder Colorado, wrote in a recent Sierra Club essay, “Tech Energy and Commodity Energy: Different Worlds”, “When we grow and use more fossil-commodity–based energy, that energy becomes more expensive — and economic growth is thwarted. But as we grow with technology-based energies, the increasing power demand decreases the cost of that energy and further stimulates economies.” Jabusch added in a recent interview “I think few realize how economically emancipatory this will become.” It’s compelling, therefore, that as the US economy continues to recover, but recovers quite slowly, the cost of solar continues to decline.

Solar power has, counterintuitively, thrived in a slow-growth economy with ongoing, ultra low, interest rates. The economics of solar are rather simple. At the utility scale, prospective solar developers line up PPAs (power purchase agreements) with utilities, thus creating a visible 10- or 20-year stream of future income. A similar financing dynamic is at play in rooftop residential and business solar: the future stream of income from thousands of small rooftop PV systems is often bundled and sold to investors. “I think the low interest rate environment has had a big role. Investors are so hungry for yield, any investment that can kick off a dividend that is reasonable risk is more viable,” Green Alpha’s Jabusch told me. “These are people who might not have considered such an investment before, but a 4% yield backed by a power plant with a PPA looks good.” Perhaps most famously, famed investor Warren Buffett has also recently embraced renewables. Buffett has committed over $15 billion – so far – in wind and solar projects, according to Bloomberg news. In fact, Buffett’s Berkshire Hathaway Energy holding company now owns the previously mentioned Topaz Solar Farm, in San Luis Obispo County.

COMING SOON

  • Part Two: Remaking the Map of US Energy Production
  • Part Three: Case Study: Los Angeles
  • Part Four: Making Gains, But A Need For a Grid Storage Solution
  • Part Five: Winners and Losers

Despite the fast construction timelines and attractiveness to investors, solar power still draws criticism, if not derision, from skeptics. Seen through the lens of the broader energy system, solar power as of 2014 provided less than a half of one percent of total power generation in the US. That tiny share is often decried as the sign of solar power’s powerlessness.

Solar is the start-up of the energy world. Today, it is a gnat, compared to the energy giants. Tomorrow it will be a hummingbird. Just project some of those solar growth rates out into the future – like Solar City’s expectation of doubling deployments in a single year, or, total US solar generation which more than doubled from 2012 to 2013, and doubled again from 2013 to 2014 – and by the end of this decade solar could be pushing above 7% of total US power generation. According to Jabusch of Green Alpha Advisors, solar has clearly entered it’s rapid growth phase: “The low interest rate environment has contributed to rapid scaling, and the company Solar City is installing one out of every three home systems. More importantly, we are starting to see a tipping point, and a virtuous cycle is starting to take hold.”

The moment when renewable energy is actually harnessed into energy – or, more amazingly, to manufacture even more renewable energy – is one of the holy grail ideas that’s been theorized for decades. Imagine for example a solar manufacturing plant, running on solar power. Jabusch concurs and notes that, “for example, Tesla’s gigafactory outside of Reno (which will produce batteries) will largely be itself powered by wind and solar, meaning the renewable economy is exiting bootstrap mode, and is now beginning to power itself.”

On the flipside of the tremendous gains in US wind and solar are of course the tremendous losses in US coal and nuclear. The past several years have seen a strong run of retirements, particularly in old coal plants. These include the 2013 closure of the 54 year old .713 GW Kammer Plant in Moundsville, West Virginia; Ohio’s 1.53 GW Muskingum River Plant, whose first unit was built in 1953; and the still larger 1.71 GW Hatfields Ferry Power Station in Masontown, Pennsylvania, closed in 2013, which was 44 years old. Total retirements of US coal plants actually slowed down a little in 2013 to 6.2 GW, compared to the big wave in 2012 when 10.2 GW was shuttered. Closures slowed even further last year, when only 3 GW was retired. But there is little reason for hope in the coal sector. The EIA just released fresh projections for 2015, and a huge 15 GW of coal power will be put to sleep this year.

Elias Hinkley, who leads the energy practice at Sullivan and Worcester in Washington DC, says conditions for power generators are quite challenging, particularly because demand growth for power is slow. “Currently it’s hard to strike long-term agreements. In order to get good financing power purchase agreements have to be at least 10, if not 20 or 25 years in length. The current low interest rate environment suggests this would indeed be the time to strike long-term contracts–but there is a fundamental aversion to risk on the part of utilities to enter into any agreement that might, at a later date, seem imprudent. The second problem is the threat of uncertainty about how much power we’ll actually need in the future, because demand growth has, at best, been slim. And at worst, there is the risk of outright contraction.”

Also damping overall growth in power generation are the gains starting to feed through the system from improved efficiency. “The whole system has been so inefficient for so long, that the easy (efficiency taking) measures are finally starting to land. So even if you do have overall absolute increases in use, the inputs to that demand are not necessarily increasing,” says Hinkley. “In alot of these situations, the efficiency overlay is happening not only in use, but in the transmission and grid system as well.”

An estimated $1.5 billion will be required to close Vermont Yankee–and it’s not clear, beyond the reserve fund which was granted to Entergy in the original sale, who will pay the final cost.

Restrictive EPA rules on emissions also played a role in these closures, of course, but their shuttering is more accurately connected to the lifecycle, economic returns, and the regulatory matrix that surrounds all power plants in the US. There is a natural, terminal phase: all fossil fuel power plants die. First, a basic calculation of business profitability applies broadly here: any aging piece of infrastructure has long since paid back its original investment. Accordingly, as long as current running costs are not onerous, the cash generated by an this infrastructure is largely unencumbered. The typically large upfront costs of building new infrastructure acts as a deterrent to new projects. And before long, you have a fleet of old coal plants pushing an average age of 50 or 60 years, because it’s just easier to keep them running.

And the same is true for nuclear power plants. In 2002 the company Entergy was enticed to purchase Vermont Yankee with an estimated ten years left in its design-life, for just $180 million. Insiders believed the Nuclear Regulatory Commission would extend the license of Vermont Yankee, and other aging plants like Pilgrim, in Plymouth Massachusetts (which Entergy also purchased). Entergy made the- reasonable – calculation that returns would remain positive, over the next ten years. But, like many aging nuclear power plants, Vermont Yankee ran out of the originally designed storage capacity for spent fuel rods, and, suffered cost overruns and periods of closure. Profitability suddenly looked quite bleak. And every power plant must be de-commissioned eventually. The painful feature of nuclear retirements is the time and the cost: an estimated $1.5 billion will be required to close Vermont Yankee–and it’s not clear, beyond the reserve fund which was granted to Entergy in the original sale, who will pay the final cost. Crucially, in recent years, it just got a lot tougher for aging power plants like Vermont Yankee to strike the essential long-term PPAs they need to run profitably.

Vermont Yankee Power Plant/Wikimedia Commons

But the array of negatives for older power plants is not limited to slow growth, a competitive pricing environment, or their own inefficiencies. Political constituencies in Western Pennsylvania, Southern Ohio, or the Carolinas can claim there’s a “war on coal” underway as they watch plant after plant close down. But the fact is that wind and solar power are themselves starting to break free from their own past, where start-up loans from the government or tax credits were needed to get them off the ground.

Nothing illustrates this better than Apple’s recent decision to power its new headquarters in Cupertino with a new massive, photovoltaic (PV) farm to be built in Monterey County. The 0.13 GW installation will be built by First Solar, and strengthens a new trend coming out of Silicon Valley. In an earlier era, mainstream energy sources would have assumed the soaring power needs of companies like Google, Amazon, Facebook, and Apple. These companies have deployed burgeoning cloud services and armies of hot servers in need of cooling that would have driven demand onto the grid, benefiting traditional power players. Instead, the tech giants of the West Coast are increasingly conducting an energy-balance sheet accounting, and concluding they can easily offset 100% of their companies’ electricity needs either by sourcing power from existing wind and solar, or building out wind and solar themselves. The result is a kind of double-blow to operators of fossil-fueled power assets. The new demand is absorbed by a suite of commercial rooftop and large scale PV. Additionally, new wind and solar adds to supply, eclipsing the need to build new coal or nuclear power.

In 2013, after a spiral of bewildering engineering catastrophes, the San Onofre nuclear generating station (SONGS) in San Diego County closed, shuttering 2.25 GW of power capacity. A software error, which had been used to design very costly replacement steam generators, was to blame. The newly installed generators, intended to extend the life of SONGS, began to wobble almost imperceptibly, thus eventually damaging themselves and other parts of the station. With economic losses so extreme, Southern California Edison was forced to capitulate to economic reality and announced the plant’s permanent closure. The alarmist calls began almost immediately: California was now in a precarious position, having lost 1 of its two nuclear plants; no amount of new power generation could make up the loss; and California’s energy mix was slated – as a result – to be dirtier, having lost the ‘clean’ nuclear fuel. The fears, came to naught. In 2014, the year following the loss of SONGS, California made up for that loss and then some, adding 2.57 GW of new utility grade solar. And the buildout of California solar–mega projects in the deserts and on the rooftops of its major cities continues, unabated.

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