REPORT ON UTILITIES AND SUN

Electric Utilities Rise to Meet Solar Call-to-Action
Jopsephine Mooney, May 28, 2009 (Solar Electric Power Association)

SUMMARY
2008 Top Ten Utility Integration Rankings, from the Solar Electric Power Association (SEPA), shows rapidly growing investment by big utilities in solar energy-generated electricity.

12 utilities in 8 different states made either the annual or cumulative 2008 rankings of top solar users. The top 10 utilities’ installed capacity went from 711 megawatts to 882 megawatts in 2008, a 25% increase. The average utility increased capacity by 2 megawatts, enough electricity for 300 homes. California utilities Pacific Gas and Electric (PG&E) and Southern California Edison (SCE), with big head starts and lots of sun in their regions, continue to lead the lists. PG&E and SCE added more megawatts in 2008 than the whole country’s megawatts in 2006. And the lists are widening. Public power and investor owned utilities in every region of the country are showing more involvement.

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The solar marketplace is determined by 3 major factors: (1) The solar resource, (2) the retail price of electricity, and (3) state policy and market conditions. The first factor is not likely to change much but the retail price of electricity is beginning to go up, especially in urban markets. Utilities in those markets are taking an interest in solar energy as a means of stabilizing price and managing peak demand price spikes. In the Southeast, where electricity generated from coal remains cheap, there is less involvement from utilities.

State policies are changing a lot and fast. 28 states have instituted Renewable Electricity Standards (RESs) requiring utilities to obtain a specific portion of their power from New Energy sources. Many of the state RESs include a solar carve-out, requiring a specific portion of the New Energy to be solar energy. Florida, North Carolina, Maryland and New York utilities are all responding to such policies with increased solar development.

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On the whole, growth is enormous. Utilities have announced or have pending some 5,000+ megawatts of concentrating solar power plant (CSPP) projects and another 2,400+ megawatts of solar photovoltaic (PV) projects (up from 300 megawatts of pending and announced projects in last year’s SEPA utility report).

The CSPP concept appeals to utilities because its fits their existing business model of selling power generated from large, centralized sources. It also holds the promise of storage capacity and 24/7 availability. But CSPPs require a solar saturation not available very many places and distant from many of the biggest, most important load centers.

Until a national transmission system can deliver the Southwestern Deserts' sun to the rest of the country, rooftop PV systems will remain important in the solar energy world. Added to utilities’ other reasons to get involved with solar, a new model is emerging. Dubbed the distributed solar power plant, it combines the CSPP aggregated source concept with the advantages of PV and distributed generation.

Projects announced by Duke Energy in North Carolina and Public Service Electric and Gas (PSE&G) in New Jersey exemplify the distributed solar power plant idea: The utilities acquire rooftop space across a widespread urban region and use their capital to facilitate PV installations. In return, the utilities get the excess power generated from the rooftop systems.

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The implication is that the CSPP and rooftop PV business models are compatible. Utilities will be investing in both and both will play a role in the solar energy industry and utilities' engagement with it going forward.

Because the economic downturn has caused a retreat to cautious investing this year, utilities' investment in solar energy has temporarily leveled off. But utilities have their own quite substantial sources of capital, called ratepayers. Spurred by favorable state and federal policies, rising electricity rates and consumer demand for New Energy-generated power, their engagement with solar is expected to rise rapidly from 2010-11 through 2016.

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COMMENTARY
The growing number of state RESs is one of the key drivers of increased utility activity. Many of the state RESs include a solar carve-out, requiring a specific portion of the New Energy to be solar energy.

2 other drivers are at least as important, though their impact is just beginning to be felt. A national RES and cap&trade (or some other price on emissions) are coming. Even if the Democrats are unable to push through their energy and climate legislation this year, the changes are coming and utilities are beginning to prepare for them.

Finally, the extension and broadening of the 30% solar investment tax to cover the full price of solar systems and, more importantly to allow utilities to make use of it, has added a big new financial value for utilities that invest in solar.

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As utilities enter the solar energy market, there is a shift away from the image of the industry as driven by the individual customer and the residential rooftop system. It portends enormous changes in the industry.

The emergence of CSPPs is based on their appeal to utilities because:
(1) The scale of CSPPs is familiar.
(2) CSPP-generated electricity can be more smoothly integrated into the grid, even without storage capability, because when solar energy is used to boil water it allows for some slowing down and speeding up of generation to compensate for momentary changes in demand and supply.
(3) Tracking systems in CSPPs, by adjusting to the angle of the early morning, midday and late afternoon sun, allow for generation during more of the day.
(4) The potential for storage is very real, it is already being used on a limited basis in Spain and a 6-hour storage system is planned for an Arizona plant. Storage of this capacity makes CSPP-generated electricity more than a peak demand supplement and a reasonable alternative to traditional generation.

The solar industry is entering a growth phase similar to what the wind industry has gone through over the last 5 years. By the middle of the coming decade, solar energy-generated electricity is expected to be price competitive and a major power generation source. And the growth phase has several advantages over wind's 5-year spurt, thanks to the wind industry's pioneering:
(1) Solar will not have to struggle to make the need for new transmission known and to get policymakers involved.
(2) The distributed power plant concept allows solar to occupy smaller, urban niches and continue growing without the needed new transmission and new sites.
(3) The solar resource is strongest at periods of peak demand on hot summer afternoons, making grid integration less challenging than it was for wind (which is often strongest when demand is weakest).

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The distributed power plant model has raised some contentions between utilities and solar installers over who will do and own what. The first glimmers of resolution to the conflict have emerged in California where utilities and installers have reportedly agreed to share.

Transmission and storage remain major “ifs” in large-scale development of New Energy. SEPA and utility representatives are watching Spain very carefully for further reports on the CSPP storage experiment. They are also watching Spain carefully because the Spanish now get 17% of their electricity from wind. That much New Energy challenges the limits of grid integration technology. Last year’s DOE report finding it entirely feasible for the U.S. to get 20% of its power from wind stipulated no need for storage but a high need for adequate grid integration. Utility scale solar will be subject to similar parameters.

A final and crucial point about the emerging distributed solar power plant concept: It is driving economies of scale and, as a result, the cost of solar panels is falling. It is down 25% at present and solar energy industry experts predict it will be down as much as 50% by 2011. When supply-demand factors catch up, the price of solar energy-generated electricity will also fall.

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QUOTES
- From the SEPA report on utilities and solar in 2008: “What is notable about this year’s rankings is the amount of solar growth at a number of different utilities across the country. A doubling or more of solar megawatts in a utility’s portfolio was not unusual… Solar technologies are emerging as a generation solution for utilities and their customers with a wide variety of creative business partnerships.”
- From the SEPA report on utilities and solar in 2008: “There were not many changes in the cumulative Top Ten, with only two utilities switching places and no new entrants. In fact, the Top Ten utilities strengthened their “market share” to 94% of the survey total, only a slight decline over last year. Overall, utilities in six different states placed in the Top Ten.”
- From the SEPA report on utilities and solar in 2008: “The last 12 months have seen both utility-driven and utility-scale project/program announcements emerge as a new and significant solar market, on the order of 7500 MW…There is a likelihood that not all of these announced projects will come to fruition. Only time and the hard determination of the emerging solar economy will tell…. What can be said, however, is this: Utility-scale solar electric projects have entered a new phase of market development in which they will be the primary solar industry megawatts and cash-flow drivers. In addition, utility-driven projects are a new and emerging dynamic in the solar industry whose impact is still being played out. Significant additional market expansion is anticipated.”

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- From the SEPA report on utilities and solar in 2008: “Residential and commercial photovoltaic projects will continue to be important market segments, especially in secondary markets with small-business job creation, but the solar industry is diversifying away from rooftop net metered projects as its primary economic means. That is not to say that “solar farms” are taking over, just that the industry is becoming more diverse and expanding into new financial project propositions…”
- From the SEPA report on utilities and solar in 2008: “…the industry is growing rapidly, moving beyond the iconic vision of a residential solar rooftop future. The growth is still predicated on incentives, as much of the electricity industry is, in one way or another. The passage of the eight-year federal solar investment tax credit, with utility utilization included, will go a long way toward providing market certainty for utility and utility-scale projects, as well as manufacturing investment, job growth, and associated benefits. Certainly the economy, financing markets, transmission, and permitting are significant risks that can impact implementation. But the impressive list of solar projects in the queue provides a significant amount of market activity in the coming years, even utilizing conservative estimates.”