Renewable Incentives 100 Power Report ProjectFinance September 2004 www.projectfinancemagazine.com The interest in renewable energy is higher than ever, but the questions surrounding the viability and reliability of these alternatives are just as high. Regulators and politicians favour renewables and reward them with subsidies or tax credits. And improved scheduling can optimize the real value of renewable generation for the future. Renewables have a place in a diverse utility supply portfolio for several reasons: • Diversity of supply; • Compliance with strict federal and state air emissions requirements; • Concern about global climate change and related issues; and • Interest in generation technologies fostering sustainable development. Good analytics will lead to better planning and economics for renewables. This is especially important for wind power. Understanding the volatility and uncertainty of intermittent wind generation can improve the economics of wind projects and provide market intelligence about changes in prices and the locational marginal price implica- tions for the future. There is clearly an important niche market opportunity for renewables – even in the overbuilt regional markets – to achieve diversity and other public purpose objectives. But will renewables ever be more than a niche product in a market dominated by nuclear and fossil fuels? That depends on the competitive price of renewable energy long term and the effectiveness of regulatory drivers, incentives, and subsidies. Depending on subsidies is not likely to build a viable renewables business long term. Improved technology, more operating experience and lower costs from greater scale in manufacturing are having a marked effect on the economics of renewable energy. Costs of electricity for different renewable technologies are projected to continue to decrease through 2017 (Table 1). Table 1: Projected cost of renewable energy 1 (Without production tax credit, in 2003$) Levelized COE (cents/kWh) Technology (a) Size (MW) 2005 2008 2010 2017 Wind 75 4.1 3.4 3.3 2.7 Geothermal 50 5.3 5 4.9 4.5 Biomass 20 6.6 6.2 6.2 5.7 PV 0.25 27.5 22.9 21.1 15.6 Source: Henwood Setting aside their policy and environmental appeal, renewables are also greatly helped by a combination of regulatory push and financial pull. In California, a new Renewable Portfolio Standards Bill went into effect in January 2003. It requires retail suppliers of electricity – including electrical corporations, aggregators, and electric service providers – to purchase a minimum percentage of electricity generated by eligible energy resources. 2 Each electrical corporation would be required to increase its total procurement of renewable energy resources by at least 1% per year so that 20% of its retail sales are procured from eligible renewable energy resources by the end of 2017 3 . Because of to the size of the California market, this bill would make the state among the leaders in the world in renewable energy. 4 Figure 1 5 shows the planned renewable energy generation goals for California, and Figure 2 6 shows the renewable potential for California. But what is the optimal mix of installed renewable resources to meet this goal? While portfolio standards set the race distance, financial subsidies and tax credits get the runners across the finish line. In California, for example, the state’s energy tax credit of 15% plus a 10% federal investment credit significantly boost the relative economics of wind and other renewable energy technologies. Those who doubt the importance of financial subsidies need look no further than 2004 figures, which show little to no growth in installed wind generating capacity this year, compared with a near-record 1,687MW of new capacity installed in 2003. How much progress has state-level government made on renewables incentives programmes? Some, but not yet enough to catch up with Europe. By Gary L. Hunt, president, Global Energy Advisors, Henwood Energy. Wind works Figure 1: Renewable generation goals for California Source: 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 YEAR