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Natural gas prices threaten state renewable portfolio standards  

Credit:  By Felicity Carus, Aol Energy, energy.aol.com 9 April 2012 ~~

State Renewable Portfolio Standards may come under increasing pressure amid low natural gas prices, excess power generation capacity and the cost of compliance, leading energy analyst says.

“The world for renewables today is quite different from the renewables world we faced over the last several years,” Ron Norman, renewable energy specialist at PA Consulting Group, told a symposium held in San Francisco last week. “Before 2009, we had extraordinarily high gas prices and pending C02 legislation, low growth throughout the US and since that time we’ve had a crash in natural gas prices.”

Natural gas prices that recently hit $2 per MMBtu are reasonably forecast to remain in the $4 range for the next decade, he said.

Excess capacity had also resulted from gas-fired additions over the past decade compounded by lower loads because of the economic recession, he said.

The Trouble With Too Much

Around 237 GW of natural gas–fired generation capacity was added between 2000 and 2010, around 81% of total additions in the past decade, according to the US Energy Information Administration.

“Many of the power markets throughout the US remain oversupplied,” he said. “In the first part of the decade it was caused by excessive overbuilding of gas-fired capacity and since then, as we’ve tried to burn off that excess supply, we’ve had a reduction in load so the oversupply has lasted much longer than expected.”

Those conditions conditions, compounded by the overall state of the economy and the risk of tax credit expiration, could make state RPS goals more expensive, he said. Currently, 29 US states have RPS goals and nine of those states have mandated targets for renewable generation sources.

“In that context we’ve seen up and down commitment to incentives to renewables,” said Norman. “The current thinking is that federal incentives are likely to be weakened, if not lapse, and the states that have RPS are going to end up paying for these renewables programs on their own.”

“Renewable energy is competing with brown power, which is cheaper than people expected. So several states are looking hard at whether they should be reducing their requirement. And that may be the beginning of a trend that we expect to continue for some time if power prices in general continue to be low.

“The pressure for many states is going to be to reduce their requirements.”

Dividing Up A Very Large Pie

Norman said that over the next 10 years, capital investments might be split equally between renewables, additional conventional capacity and retro-fitting existing plants to comply with new environmental regulations.

“The last 10 years we exceeded $350 billion in the [energy] sector and so we’ve certainly reason to believe that the capital will be available. The question is exactly how it’s going to be divvied up and it is really reasonable to expect that much is going to be put into the renewables side?”

Technological evolution would help determine whether or not renewables will be a contender over the next decade in the US, said Juancho Eekhout, director of origination and portfolio design at San Diego Gas & Electric.

“The spot market has been trending down to a point where gas today is competing in some parts of the US with dispatch from coal. If the situation remains that there’s oversupply and high inventories in gas as some point the market is going to catch up to it.”

California Leads In More Ways Than One

California has the most stringent renewables mandate in the US – 33% by 2020. Although that target looks safe for now, Eekhout said that the California Public Utilities Commission set the Market Price Referent – the benchmark price of gas-generated electricity against which renewables projects are measured – when natural gas prices were higher in 2008.

The CPUC will have to set the MPR referent lower next time, which means that the cost of renewables projects will have to become even more competitive with conventional fuels, he said.

Greg Hazleton, managing director in the global power and utilities division at UBS, said that already this year he had seen “massive improvement in debt capital liquidity markets”.

“We set a high water mark for financing in terms of total capital markets activity in this first quarter than we have over the last five years. Year on year, it’s almost twice the amount of financing.”

He said that UBS was advising on some projects that showed “significant progress to commercial scale” in smart grids, energy storage and solar.

But he added that although the 1603 cash grant had provided “meaningful liquidity”, the potential expiration of the Production Tax Credit at the end of this year and the Investment Tax Credit in 2016 were “significant events”.

“From 2009 to November 2011, almost $10 billion in cash grants were distributed across 4,000 projects. That would facilitate 70% through private sources, $23 billion of private financing for a total of $33 billion.”

“In the next couple of years, almost $90 billion total investment will be made in the renewable space out to 2013-2014. So there’s a fair amount of capital going to work.”

Cushioning The PTC Blow

Regulatory uncertainty and the expiration of the PTC would particularly impact smaller developers, he said. UBS was working to develop products similar to REIT financing used in real estate to cushion the blow to wind developers.

“We’ll see some of that funding take place before the end of the year. There’s innovation on the technology and financial side,” he said.

Hunter Armistead, executive director at Pattern Energy, said that his company had targeted states with RPS targets rather than look to finance wind projects with the PTC via tax equity.

“We can’t stand the PTC – it’s too hard to finance, so the projects we built are in states with RPS,” he said. “The one positive thing is maybe we’re going to stop having tax credits as a way to fund our business it is the most inefficient, costly process.”

“In 2002, the wind and renewables was a niche business. This year, even with low gas prices, no load growth and no reason for any megawatts to be added the wind market will probably [install] about 11GW. That’s $22 billion worth of investments this year added to the $33 billion that we’ve done in the last two years.”

“But there are going to be three to four train wrecks in the industry to figure out where the industry is. But that creates opportunity.”

Source:  By Felicity Carus, Aol Energy, energy.aol.com 9 April 2012

This article is the work of the source indicated. Any opinions expressed in it are not necessarily those of National Wind Watch.

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