California PPAs to take different shape

The two year deadline for projects to qualify for the Renewable Energy Investment Tax Credit (ITC) by December 2016 is beginning to cast a shadow over new contracts for utility-scale PV projects in the US.

Utility-scale PV projects now generating to the California grid as result of...

Along with US Department of Energy’s Loan Guarantee Program, the 30% ITC blazed a sudden bright comet of big solar onto the US grid.

More than half went to California to meet its ambitious mandate for 33% renewable energy by 2020. Power Purchase Agreements (PPAs) with the state’s big three Investor-Owned Utilities (IOU)s; PG&E, SCE, and SDG&E now include most of the world’s largest solar projects.

In a gigantic solar gold rush that was brought into being by the Recovery Act funding of the DOE’s Loan Guarantee Program, which backed loans with nearly $5bn in guarantees, and the ITC - making solar investment attractive, and California’s 33% demand; all three worked together and created the biggest solar boom in US history.

But with the end of the renewable loan guarantees, and the sating of California’s 33% demand; the looming end of the ITC threatens to return the US to the dark ages in two years.

Big solar and the 2-year build process

Roughly two years are needed for the physical construction of utility-scale PV over 150 MW, assuming financing was obtained in the meantime.

“Once you have the permit you can lay it down pretty fast,” says Andrew Bell, an attorney who advises solar developers on utility-scale permitting in California and Nevada.

“You can put them down as fast as you can mobilise resources and people, so it's really a question of logistics, but you're probably looking at something like a two year time frame to build a larger utility-scale project of 150 MW or more,” says Bell.

For example, NRG Energy’s 250 MW California Valley Solar Ranch project signed its PPA with PG&E and began construction in 2011 and was online by the end of 2013.

Goodbye to solar heyday?

Utility-scale PV projects now generating to the California grid as result of all three incentives include NRG Energy’s 250 MW California Valley Solar Ranch and their 290 MW Agua Caliente project. First Solar’s 550 MW Topaz project won its PPA in 2012, and came online in early 2014. Its 550 MW Desert Sunlight project, contracted in 2011 will be complete in 2015.

But while large PV projects from earlier contracts signed during the brief period of Recovery Act largesse are still coming online, the size of new PPAs being awarded this year has shrunk in comparison.

Solar developers ready to sign contracts in 2014 are finding there is little IOU - or investor - appetite left for large projects.

Instead, utilities now tend to sign much smaller contracts. Partly the dwindling is the effect of earlier success. The need has been met.

As a result of earlier years’ targets met, more than 4 GW is expected to complete construction and be on the California grid by year end. Renewable projects now under construction, with huge PPAs signed already are expected to add just over 2 GW more in 2015. So the 33% RPS was a huge success and easily met with on-time projects now in operation.

Utilities signing smaller PPAs

But new PPAs being signed this year are much less ambitious. In the first quarter of 2014, the CPUC approved new PPA contracts representing a total capacity of just 213 MW - spread among 16 projects.

Most were in the RAM (Renewable Auction Mechanism) program, which has put about a gigawatt of capacity online now, but is restricted to just small distributed projects of 20 MW or under, some on commercial rooftops.

“The appetite for PPAs now seems to be for smaller PPA's on the order of 20 MW or 50 MW as opposed to large single GPAs of 300 MW or 250 MW,” says Bell. “And so what you're finding is that projects are getting smaller and-or projects are looking for multiple off-takers for the same project.”

Any PPAs signed today would be expected to be on the grid in 2016 or 2017. But all three of the big IOUs have not only sufficient contracts to meet these RPS targets, but are over subscribed through 2020.

A buyers market

“One of the issues in the US is that there are no federal requirements, nor a federal renewable portfolio standard. You have state by state renewable standards,” says SolarReserve CEO Kevin Smith. “And a lot of the utilities have met a good portion of their renewable requirements, even in California, so utilities aren’t being as aggressive on the renewable energy side.”

California’s big three IOUs have an embarrassment of riches. Developers bid 30 times the combined target of 3,100 GWh that they had to meet in 2013. The lucky shortlisted bids averaged just $62.03 per MWh.

The many smaller municipal utilities and community choice aggregators are now also regulated under the RPS. But simply because their loads are smaller, their needs are lower.

The newly formed renewable utility Sonoma Clean Power, for example, buys solar generation in a FIT payment - essentially a 20 year PPA - at 9.5 cents per kWh, in their ProFIT program, but only from very small systems; under 1 MW.

Any large-scale PPAs signed today would be expected to be on the grid in 2016 or 2017. And all three of the big IOUs have sufficient contracts to meet the 33% RPS by 2020. Even if up to a quarter fail to meet their milestones and get dropped, they have enough projects in reserve to replace them.

Temporary ITC

And as we draw close to that final two-year sprint to Dec 2016, any contract signed now would have to get financed and start construction with barely two years building time left till the ITC deadline, when Cinderella’s coach turns back into a pumpkin.

“The problem in the US is that the ITC tax credits expire in a few years,” says Smith.

“Unfortunately, US renewable incentives are not structured like all the tax credits received by natural gas and coal. Theirs are to some extent perpetual, built in to the tax system.”

Now SolarReserve has begun looking overseas, and recently completed 150 MW of PV in South Africa, with an additional 96 MW expected to come online this year.

California lost its appetite for new utility-scale solar because the ITC is impermanent, and the RPS is now too low.