Energy Finance Report

Hedging with Distributed Renewable Generation Sources in Times of Fossil Fuel Price Volatility

Posted by Joshua L. Sturtevant on 3/11/16 2:20 PM

Volatility_Ahead.jpgCo-author Morgan M. Gerard

Until very recently, mainstream power purchasers have not viewed renewable energy as a reliable hedge against other energy sources, mostly because the costs associated with constructing or purchasing the output of renewable energy systems were very high. However, renewable energy generation systems are increasingly being viewed by large and small consumers alike as a viable hedge against fossil fuel price volatility.

Two main factors have contributed to this. First, recent price declines in both hard and soft costs have precipitated a decline in installation costs. In other words, systems are cheaper to install, making renewables more attractive on an absolute basis. Second, myriad models for both direct ownership and third party ownership have allowed beneficiaries of renewable systems to lock-in long-term pricing certainty. Against this backdrop of profound changes to the cost and ownership structure of renewable energy sources, volatility in natural gas prices has forced power consumers to evaluate the attractiveness of alternatives.

Renewable Energy Prices are Falling

The price of constructing renewable energy projects has dropped precipitously in recent years. For example, according to the Department of Energy (DOE), wind power prices have reached an all-time low, and Power Purchase Agreements (PPA) for wind fell from rates around 7 cents/kilowatt-hour (kWh) in 2009 to an average of 2.4 cents/kWh in 2014. Dramatic price declines have been seen in the solar space as well. For example, between 2008, and 2014, the cost for a PV module declined from $3.57/watt (W) to about $0.71/W. Total install costs declined due to these hardware declines, the reduced soft costs brought about by DOE and industry efforts, and the increase of standardization in contract terms: the total cost of utility-scale PV systems fell from $5.70/W in 2008 to $2.34/W in 2014—a decrease of 59%. Additionally, Deutsche Bank recently predicted that the price of solar would reach grid parity in most states this year. That prediction seems increasingly sound in the face of the extensions of the Investment Tax Credit (ITC) and Production Tax Credit (PTC) late last year.

 Renewables Provide Price Certainty for Offtakers

It is both the decline in costs noted above and the ability of renewable sources to provide cost certainty over long time periods that allow these sources to be utilized in a hedging capacity. Consumers benefit from the output of renewables in two main ways. The first is through direct ownership, also called ‘on balance sheet’ ownership. The second is through a contractual relationship with a third party owner, typically through a lease or a Power Purchase Agreement (PPA). Direct ownership is most prevalent among large, sophisticated entities such as utilities and corporates, while contractual relationships predominate in residential and commercial and industrial (C&I) contexts, though these are by no means hard and fast rules.

Regardless of whether the system is on balance sheet or not, the usefulness of the system as a hedge is simply a function of cost certainty. In the context of an on balance sheet system, there is a known up-front cost and relatively easy to calculate annual costs in the form of insurance and maintenance; once the solar or wind facility is built the owner of the generation source will be able to forecast his fixed costs over the lifetime of the project. In the context of a contractual relationship such as a lease or PPA, the costs are typically clearly known by the consumer as contracts are often set price, or contain an easy to calculate escalator. While obvious, is also important to emphasize what is not a part of the long-term cost structure of renewables; fuel inputs. Given that costs are possible to calculate, the lack of input prices, and the fact that certainty is locked in for the long-term due to long asset lives and contracts terms, renewables provide the best widely available opportunity for long-term energy pricing certainty in existence.

The contrast against traditional sources could hardly be more stark. According to the Wall Street Journal, as natural gas has become an increasingly prominent fuel in the international energy mix, increasingly erratic weather patterns (like El Nino and last year’s polar vortex) have sent commodity traders “scrambling.” Data from BNP Paribas SA shows that realized volatility (a measure of day-to-day price moves) hit an eight-year high for the two-month period covering this past December and January. Additionally, natural gas trading in 2014 “was four times as volatile as the U.S. stock market by that measure, the data shows.”

Renewables May Provide for Future Additional Cost Savings and Revenue Streams

On top of current cost savings and hedging opportunities, renewables have the added benefits of both producing monetizable environmental attributes and helping owners avoid added costs related to carbon production in the future. Environmental attributes already have value in some jurisdictions, and it seems likely that list will grow with the implementation phase of the Clean Power Plan potentially looming and developments such as New York’s Reforming the Energy Vision program underway. Additionally, it has been reported that one of the goals of COP 22 will be the implementation of a “carbon tax”. While it seems unlikely that the U.S. would sign up to a carbon tax regime in the near term, the likelihood of it doing so within 10, 15 or 20 years seems potentially higher. In addition, given that fossil fuel markets are global in nature; additional carbon tax programs abroad could conceivably impact volatility in the U.S., another factor that makes a potential hedge in the form of renewables attractive.

Conclusion

Renewable energy has traditionally been more expensive for the output provided than fossil fuel sources. Additionally, as a result of the energy boom in North America consumers in the United States have paid slightly lower prices for electricity in recent years. On a strictly short-term basis, it is often true that traditional sources are cheaper than renewables. However, the extreme volatility that exists in commodity markets reduces the ability of consumers to effectively account for their fuel costs in the long-term.

In contrast, the price declines in renewable energy sources coupled with the ability to accurately account for long-term costs have made renewables attractive, and consumers have taken notice. Berkshire Hathaway Energy has already adopted renewables as a fuel-hedge for its various portfolios. Additionally, tech players like Google, Apple and Microsoft are all experimenting with distributed renewable energy to take control of their energy consumption regarding both price and source. Big box stores like Wal-Mart, Walgreens, and most recently Whole Foods, have chosen renewables not only as an environmentally responsible energy choice, but a smart fiscal choice as well. Even as the price of traditional energy remains relatively low, a combination of commodity price volatility in that space and price declines in the renewables space have led consumers of energy to find renewables to be an attractive alternative.

Topics: Distributed Energy, Solar Energy, Renewable Energy, Distributed Generaton, Wind Energy, Grid Parity, Natural Gas, Volatility, Natural Gas Volatility, Electricity Price

Apple Leads the Way as Green Bonds Set to Grow in 2016

Posted by Van Hilderbrand on 3/4/16 3:04 PM

Co-author Morgan M. Gerard

Green_Bonds.jpgGreen bonds are fixed-income debt instruments earmarked for environmental or climate change initiatives. As companies undertake more “green” initiatives, including investing in renewable energy generation, the green bond market has grown rapidly. According to Climate Bonds Initiative, in 2015 there were $41.8 billion green bonds outstanding—a dramatic increase from the $2.6 billion in bonds in 2012. In the United States, municipalities and utilities entered the market first through new green offerings; however, it has long been predicted that private corporations with sustainability and other climate change reduction goals would soon flood the market.

Last month, technology giant Apple Inc. entered the environmental financing arena and filed a nine-tranche debt offering, including the Fruit’s first ever green bond. The seven-year bond’s profits will be reserved to develop the company’s green buildings infrastructure and fuel sustainability improvements along its entire supply chain, as well as to increase investment in renewable energy. According to Reuters, Apple’s first bond issuance was $1.5 billion and became the largest green bond to be issued by a U.S. corporation.

Although Green Bonds have Many Benefits, They also have Drawbacks

As more corporations jump into green bond issuances, accounting firm KPMG notes that the financing tool has both benefits and drawbacks. On the benefits side, green bonds “can give issuers access to a broader range of investors,” and “attract new investors focused on environmental, social and governance (ESG) performance.” Additionally, investors may be more comfortable with the green bond model since with these ‘use of proceeds bonds,’ repayment is tied to the issuer, not the project. Therefore, issuers are able to raise capital for riskier projects, while investors are better secured against non-performance. Yet, reporting and transparency are keys to validating the green credentials of the bonds; investors need to know that their bond holdings are financing green endeavors. Thus, KPMG notes that drawbacks of the bonds include the need for more tedious accounting for projects to ensure their “greenness” and the associated additional verification costs.

The Climate Bond Initiative reports that the accounting mechanisms have improved over time and are becoming more standardized and transparent. For instance, the Climate Bond Standard V2 was launched in December 2015, along with the development of sector specific standards on water, geothermal, bioenergy, low carbon transport and low carbon buildings projects. Another key development was the update of the Green Bond Principles to include more emphases on reporting and assurance. These initiatives will work to grow the market by helping companies and investors alike become more comfortable with this financing instrument.

Apple is Changing the Distributed Generation Landscape

Apple’s offering and increased green bond transparency standards will change the landscape as more large energy consumers opt to own or purchase distributed generation rather than to accept what the regulated utility has to offer. Other technology giants are moving to reduce their carbon footprint and increase their energy security as well, particularly in the data center sector. Thus, Apple’s green bond issuance may be a harbinger of things to come as companies turn to green bonds and other innovative financing mechanism to reach their sustainability goals and to fund their investment in distributed renewable energy generation.

Topics: Green Bonds, Renewable Energy, Green Energy, Distributed Generaton, Renewable Energy 2016, Apple

Solar Storm- Net Metering in Nevada

Posted by Joshua L. Sturtevant on 1/29/16 2:13 PM

Co-author Morgan M. Gerard

Battles over net energy metering (NEM) policy are currently raging nationwide, and are only expected to intensify in the face of the recent investment tax credit (ITC) extension. NEM, a state statute-Solar_Storm_.jpgbased policy incentive that allows small generators of electricity to sell their excess generation into the grid typically subject to an overall cap, has been a great contributor to the proliferation of residential rooftop solar. It has also stimulated commercial and industrial-sized facilities in some locations, particularly those jurisdictions that allow for the slightly more complicated ‘virtual’ net metering approach. 

However, as solar has gained greater market penetration, utilities have increasingly pushed back against NEM. As with many issues, the arguments on both sides of the NEM debate are complicated. Opponents, typically utilities, claim that NEM policies shifts pro rata grid costs from solar customers onto the rest of their rate-paying base. They also argue that the rates being paid to the small producers are too high. NEM advocates, on the other hand, claim that these arguments are overblown, and are merely smokescreens promoted by utilities more worried about embedded monopoly powers than pro-rata grid costs.

Even in jurisdictions where support for the practice remains, such as New York and Massachusetts, debates are occurring over the value of solar, grid cost sharing and caps, suggesting that the net metering of today may not look like the net metering of tomorrow. In other places, proponents are undermining net metering policies by using a ‘death by one thousand cuts’ approach, where benefits are chipped away to the extent that policies are rendered functionally moot.

Perhaps nowhere has this latter approach more prevalent in recent times than in Nevada where clashes have occurred at the legislative level, in front of the Nevada Public Utilities Commission (NPUC), and have more recently spilled over to the courts.  After the NPUC surprisingly voted to enact changes which would essentially render the current NEM regime unviable, residential solar customers filed a class-action law suit on January 12 against their utility alleging, among other things, that NV Energy is seeking to monopolize energy production by crippling the solar market. They also allege that rising rates have caused net metering customers to experience a 40% cost-hike. 

How did the debate over NEM in Nevada get to this point?

Nevada has been one of the fastest growing solar markets in the country in recent years, particularly in the residential space. Rapid growth allowed the state to reach its 3 percent solar net metering cap in August of last year, leading the NPUC to extend payments under the old program until the end of 2015 to buy time to evaluate next steps. However in December, the NPUC voted to cut net metering payments by half while simultaneously raising the fixed fees for solar customers to around 40% by 2020. Additionally, the NPUC is applying these changes retroactively, which distinguishes actions in Nevada from those in other states that have altered their net metering, and means these new prices will apply not only to new solar customers, but to existing customers as well. 

This decision was met with significant backlash by local solar companies, customers and advocates and even gained the attention of the three major Democratic candidates for the 2016 presidential election. As a result of the decision and a general lack of support for solar, three major solar companies have decided to pull back significantly from Nevada. For example, Vivint suspended its plans to expand into Nevada right after the August cap was reached, but continues to release statements condemning Nevada’s continued actions as a barrier to it ever deciding to reenter the state. SolarCity announced on January 6, 2016 that it was ceasing operations in Nevada, thus eliminating more than 550 jobs and closing its newly minted training center.

Sunrun has also declared its exit from Nevada citing the actions of Nevada politicians, the NPUC and NV Energy. Additionally, on December 24, 2015, the Nevada Bureau of Consumer Protection filed a petition with the NPUC, explaining that the new ruling “is not consistent with the Governor's stated objectives of SB374 or the governor's initiatives and focus to increase jobs and employment for Nevada residents. Now, solar customers have joined the fight by filing the class-action suit with similar allegations against the NV Energy.

Potential Ripple Effects

In the wake of the extension of the ITC, many believe that debates in the solar space will take on a distinctly local flavor in the years to come. In the absence of an extension, it was likely that solar projects would have had difficulty attracting low cost capital.  However, with federal incentives secured, many believe that solar in general, and the residential market in particular, are set to explode over the next few years.  Although the credit extension will likely positively impact solar development, it has also made battle lines clear and has provided ammunition for opponents of rooftop solar who will now strategically pick at other incentives, arguing that the extension has rendered them unnecessary. Nevada provides a good, early example of this.

It is also true that as more distributed solar comes online, grid management policies will need to be reexamined to ensure both fairness and continuity of service. Recent battles at state utilities commissions have resulted in favorable outcomes for proponents of solar. However, if the NPUC ruling is a sign of the times, it is possible that it could be a bumpy road ahead, particularly in states nearing their NEM cap. 

Topics: Distributed Energy, Solar Energy, ITC, Net Metering, Net Energy Metering, Investment Tax Credit, NEM, DG, Distributed Generaton, rooftop Solar, Rooftop PV, NPUC, Solar Rooftop, Solar Roof, Nevada, NV Energy, Net Metering Battle, Nevada Public Utilities Commission

New York City Examines Issues Facing Rooftop Solar

Posted by Morgan Gerard on 1/20/16 11:39 AM

Kramer_Testimony.jpgThe New York City Council is considering a breakthrough bill to mandate installation of solar power systems on all municipal buildings.  The Big Apple in many ways has already taken the initiative and adopted policies to promote cleaner air and combat the local greenhouse gas emissions that contribute to climate change. To this end, the de Blasio administration has articulated the goal of reducing greenhouse gas emissions by 80 percent by 2050.  Merrill L. Kramer recently testified at a hearing on the bill where he applauded the Council’s initiative, but also discussed the private market challenges facing roof-top solar that may hinder the Mayor in achieving his carbon reduction goals.  Particularly, Mr. Kramer identified delays and bottlenecks at the Department of Buildings (DOB) and New York City Fire Department (FDNY) for obtaining permit approvals, and the lack of a "one-stop shop" decision-making authority to identify problems and implement processes for streamlining permitting.  Mr. Kramer highlighted the manual review process for solar permit applications as the single largest obstacle to deploying roof-top generation, causing delays for projects already on a tight timeline. The State of New York offers city residents a property tax abatement for the value of their panels, which expires at the end of the year. 

Mr. Kramer offered three recommendations: that new regulations be adopted to "Permit the Use of Full Professional Self-Certification for All Solar Rooftop Installations," that the FDNY implement "E-Filing and Other Automated Procedures" to streamline the variance process, and that "an ad hoc Solar Task Force composed of empowered representatives of the Administration" be established together with solar installers, homeowners, and other stakeholders to improve processes and programs to expedite solar deployment and lower the cost of installations. Mr. Kramer concluded by saying he and the solar community are "encouraged by the Administration’s commitment to eliminating obstacles to the use of solar power in the City. These steps will have the effect of allowing more and more New York City residents to convert to solar power, reducing the costs and burdens on the City, increasing employment, improving the air, and making the Mayor’s solar initiative a success."

Merrill L. Kramer's video testimony can be found here.

The full text of Merrill L. Kramer’s testimony before the New York City Council can be found here.

Topics: Distributed Energy, Solar Energy, New York City, DG, DER, Distributed Generaton, New York City Solar, New York Solar, rooftop Solar, Rooftop PV, new york city rooftop solar

California’s Net Metering Rates Preserved, but Debate over the Value of Solar is Ongoing

Posted by Joshua L. Sturtevant on 12/16/15 1:17 PM

Co-author Morgan M. Gerard

Utilities_NEM.jpgMany of the polices that helped enable the proliferation of rooftop solar installations in California, specifically net metering at the retail rate of electricity, have been preserved by the state’s Public Utilities Commission (CPUC), at least for the time being.  Although net metering has come under fire in recent years, the Commission in a proposed decision issued this past Tuesday, sided with the solar industry despite utility claims that rooftop generators are overcompensated for their electricity, and do not share in covering the maintaining costs of the grid.   

The Cases For and Against Net Metering

Net metering in California allows solar generators to sell excess generation back into the grid at the retail rate of electricity.  This mechanism sounds simple in theory; however, grid management in an age of distributed generation (DG) is becoming increasingly complicated. Hundreds of megawatts of solar electricity are produced in California during sunny hours when residents are not at home that flow through to the grid. This output suddenly and dramatically drops off  during periods of cloud cover and in the evening peak hours when traditional plants are needed to prevent the interruption of power.

Additionally, utilities argue, not without merit in some cases, that they are purchasing electricity at a dollar rate greater than what it would take them to generate an equivalent amount of electrons.  Moreover, electrons are only part of the story as utilities still need to provide solar customers with standby power and voltage support to turn on their appliances and open their garage doors. 

On the other hand, the rooftop solar industry is still in its relative infancy and installation can be expensive to homeowners. Net metering provides a mechanism to help manage the costs. In 2013, as more rooftop solar entered the system, California passed state law AB 327, which mandated that utilities evaluate the costs and benefits of DG to the grid, including the future of the net metering program. This summer, the utilities submitted to the CPUC Distributed Resource Plans (DRP) that proposed mechanisms that make the deployment of DG cost effective and beneficial to the grid. However, this grid evaluation opened the door to a contentious dispute over net metering, with many solar proponents advocating that net metering is a fair form of compensation, and that any attempt to adjust its rate is an attack on the new industry.

The CPUC sided with the solar industry in its decision, and declined to impose new demand charges, grid access charges, installed capacity fees, standby fees or fixed similar fees to net metering customers. Despite a big win, there are some new considerations for solar, including the CPUC’s proposal to include a one time connection fee and non-by passable charges used to subsidize low-income and efficiency programs.

Time of Use Pricing on the Horizon

The next battle appears to be time-of-use (TOU) pricing, where customers are charged real time for the price of electricity. Under this framework, the solar energy generated during off-peak hours would be priced significantly lower than the energy produced by utilities during peak hours.  TOU, in theory, is simply supply and demand economics—when the demand for electricity is great, the price is higher. However, TOU may lack price transparency as solar customers may not readily understand tariffs and the value of their over generation.

Rooftop Solar Battlegrounds and Considerations

Battles like those taking place in California are taking place in commissions across the country as the grid modernizes. It is unclear what the future holds for net metering, as many predict additional challenges to come. Even in states where net metering is not currently empowered and states have not initiated “grid-of-the-future” proceedings, the value of DG and its effects on the grid will be a continuous debate going forward. Although the battles over net metering may be just the growing pains for a maturing solar industry, the potential for an ITC extension, decreasing costs, federal mandates like the Clean Power plan and current and future state programs will likely ensure the attractiveness of solar going forward. 

Topics: Energy Policy, Distributed Energy, Solar Energy, Renewable Energy, Net Metering, Net Energy Metering, California Public Utilities Commission, NEM, CPUC, DG, Time of Use Pricing, TOU, Distributed Generaton, Distributed Resource Plans, DRP

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