On Thursday I attended the User Group meeting of Plexos Solutions LLC, a boutique firm providing software and consulting to the rapidly changing California electric market. One of the presentations covered issues surrounding integration of renewable energy resources into the California Independent System Operator (CAISO). This is important to sustainable energy investors because virtually all the growth in generating capacity is forecast to come from renewable resources. While the fundamentals of this market have been overwhelmed by broader market conditions this last month, over time the fundamentals provide the tailwind that will lift stocks. And the growth expectations for renewables are very high in the California market.
Over the period 2007 – 2012 the CAISO is planning for increases over existing capacity of:
- 5,053 MW of wind, a 187% increase,
- 1,064 MW of geothermal, a 68% increase,
- 946 MW of concentrating solar, a 203% increase,
- 508 MW of utility scale PV solar, a 2,032% increase, and
- 221 MW of biomass, a 28% increase
These are huge numbers representing billions of dollars of projects and electric revenues. Striking are the growth expectations for the two main solar approaches.
In the concentrating solar sector, the state currently has 354 MW of large projects operating with the last one completed in 1990, 18 years ago. Most of this capacity is owned by FPL Energy, part of a large regulated utility. So the new capacity has to come from a sector that hasn’t, in California at least, been able to construct a project for many years. Equally noticeable it the paucity of publicly traded companies in the concentrating solar sector. Solar Millennium (S2M.DE) is one the few with significant concentrating solar activity.
The state currently has 8 projects with 3,689 MW of large concentrating solar projects in the permitting pipeline. But these numbers are deceptive. Of the 8, two projects are actually “solar/thermal” hybrids like the existing operating projects. These two projects represent 1,180 MW of capacity with 112 MW attributable to solar. The remaining 6 projects are a gamut of technologies ranging from troughs, reflectors, towers, and Sterling engines. These projects are all owned by private companies or municipal utilities and currently don’t present an opportunity for public market investors.
The PV solar sector provides more avenues for public investors to participate via investment in the PV supply chain. If the numbers work out the utility market represents a multi-year, very large opportunity. Let’s take a look.
As of the end of 2007 California had an estimated 279 MW of installed PV in homes and businesses and 25 MW of utility scale projects. This makes sense since the home and business markets are net metering against retail rates whereas utility scale projects have to compete against wholesale markets. So the premise is that PV solar is now becoming sufficiently competitive at the wholesale level to install over 500 MW in the next 5 years.
One of the first test cases was recently announced. On July 10, 2008 the California Public Utilities Commission approved a 7.5 MW contract between First Solar’s (FSLR) FSE Blythe project and Southern California Edision. Unfortunately much of the economic information was not disclosed but some key data can be gleaned from the record. First, the company is projecting an excellent 27% capacity factor for the project, significantly higher than typical estimates for PV projects. But equally important is the company is pursing the development receiving a price at or below the “market reference price” which is based on a highly efficient modern thermal plant. After accounting for some messy seasonal and time-of-use factors I calculate the project will receive approximately USD 0.14/kWh on average plus a 30% tax credit now that the Emergency Economic Stabilization Act of 2008 passed. If FirstSolar can make money at this project then they are very near the holy grail of grid parity (at least until the credit expires December 31, 2016). And the utility systems can, according to the CAISO, absorb large amounts of solar power for years to come. Game on.