The United States' energy play
California, the national drama, and renewable power

by Scott Sklar
(Published Renewable Energy World/March-April 2001)

The American proverb that 'California leads the country' may not be true. The year 2000 had petroleum prices, globally, reaching 10-year highs, and natural gas pipelines in the US were strained to their capacity. Increases in petroleum prices were not surprising. With Asia and Russia pulling themselves out of their economic doldrums, Iraq still embargoes, and automobile efficiency in the Unites States on a backslide through robust consumer purchases of sport utility vehicles (SUVs), no expert thought that supply would keep up with demand. But spiraling natural gas prices caught everyone off guard. Natural gas was seen as the low-cost fuel for electric power and even transportation fleet vehicles in the United States; it was also seen as the most convenient excuse for national policymakers to be less enthused about renewable energy. But pipeline constraints have changed that view for the next decade.

Additionally, with state governments deregulating their electric utilities over the last few yours, there has been an unprecedented drop, nationally, in building new power plants or upgrading power distribution lines from sub-stations to end-use consumers. This, of course, makes sense since no one was sure which company would be in control of those aspects of the deregulated or re-regulated) power companies or their subsidiaries. On top of this, the independent utilities (known as IOUs) precipitously made radical cuts to their energy conservation or demand-side management programmes. Utilities such as California's Pacific Gas and Electric (PG&E) had over 400 employees comprising one of the world's leading technical and implementation entities for energy efficiency - PG&E now has a handful of employees dedicated to this activity.

So with the American economy booming over the last few years, electricity infrastructure deteriorating through under-investment, and deregulation slowing power plant building, California has been the first state to be struck in an energy bind. But other parts of the United States, from Illinois to New York's Long Island, are far from immune, and have been experiencing significantly higher electricity prices and brownouts as well. And the western states are bracing themselves for even more problems, not only because Californian is sucking every free megawatt available, but also because water levels are at historic lows, making low-cost hydropower less available in the region.

Now California - which would be one of the top ten economies in the world if considered as a stand-alone country - is getting a full taste of this complex energy situation. While electricity rates in California have increased between 30% and 150%, there are many places in the state that have had no rate increases at all, predominantly municipal utilities which were not subject to deregulation. Another surprising fact has been that several public utilities - which are electric utilities that are owned by their city governments - selected non-conventional energy approaches.

California and renewables
Even before electricity deregulation, California was a leader in renewable energy sources. It is far from the image painted in a recent New York Times story, which focused on some old ex-hippies using solar energy. In fact, California leads in capacity of geothermal use (over 1500 MW), wind energy (over 3000 MS), biomass-electricity (over 800 MW), concentrating solar-electric (over 350 MW) and photovoltaics and solar water heating (over 200 MW).

For instance, residents of Redding, California are insulated from spikes in California utility costs, because Redding owns and operates its own electricity department. According to a recent press announcement, Redding residents Edward and Nina Goehring are satisfied customers. The Goehrings use electricity to cook their food and heat their home, water and spa, and, in the summer, to run their air conditioning. But while most Californians face electric rate increases, Redding residents enjoy below average electric bills, and they look forward to rate cuts.

Redding has 80,000 people and generates most of it 's own power with three city-owned gas turbine generators, a steam plant, and a small hydroelectric power plant. Redding buys more power from other suppliers at below market rates under long-term contracts which total more electricity than town needs. By selling this surplus power on the wholesale market, Redding earned US$18 million profit.

The town first got into power business nearly 80 years ago, says Redding Utility Managing Director, Jim Feider, to control its own destiny. Redding plans to break ground soon for yet another generator, which is expected to come on-line within a year and a half. When it does, says Feider, residents should see their- already low- rates drop another 20%.
Sacramento also owns its own electric utility and they unveiled a solar pioneer programme over five years ago. Residents can chose to have either solar water heating systems or solar electric systems (photovoltaics) installed on their roofs. Over 500 residents have these systems which offset a major part of their energy costs.

The Sacramento utility (known as SMUD) has been able to cut demand for increased electricity use by aggressive use of consumer education programs for consumers and businesses to install energy conservation measures and the largest solar programme in the United States. (See articles on SMUD in Rew Sept-Oct and Nov-Dec 2000).

The City of Los Angeles also has its own utility (LAPWD) and they have been insulated from the electricity increases experienced by the rest of the state. Seeking to encourage wider use of alternative energy, Los Angeles has begun offering rebates to customers who install solar power systems in their homes or businesses.

The rebate programme, which began quietly in October, was unveiled publicly in February at the Department of Water and power headquarters. Ratepayers may get back up to 60% of the cost of a solar power system, which can total about $16,000 for the average home. The State of California is following suit with its own additional rebate programme. The California Energy Commission expects to make up to three awards on this solicitation for a total of $18 million to be spent over three years. Applicants must be energy service providers, municipal utilities, or other power distribution entities in the state of California. Proposals must include at least three renewable energy resources. This last offering represents more than $75 million that the State of California has offered to invest in renewable energy utilization.

As a result of rolling power outages and a new wave of State support, Shea Homes, one of the largest California home builders, announced their intention to build 200 homes with both solar water-heating and solar electricity incorporated into the building. This 'no choice' solar option has made other builders hesitant. But San Diego, where the Shea development is to be sited, is experiencing the highest electricity prices in California as well as the highest share of brownouts.

Long Island Power Authority (LIPA), outside of New York City, is currently offering a $3-per-watt rebate check to LIPA customers with a maximum limit of $15,000 (approximately 30% of the installation costs). They are also offering a 6% interest rate on financing a system. New York State is also offering a 25% tax credit towards total costs of installing photovoltaics with a $3750 limit. Additionally, in February, New York State's;s Energy Research & Development Administration(NYSERDA) announced the availability of a $12.4 million consumer subsidy programme to reduce summer, mid-day electricity demand using energy efficiency and photovoltaics available on a first-come-first-served basis. Projects within the Consolidated Edison service territory (within New York City proper) will get 15 cents per kilowatt-hour if installed by 1 May 2001 and 7.5 center per kilowatt-hour if before 15 June, 2001. For projects outside of New York City, the subsidy is 5 cents per kilowatt-hour and 2.5 cents per kilowatt-hour respectively.

The State of Illinois represents another approach to clean energy. As a result of a deregulation deal, a $250 million Clean Energy Fund was established. In 2000, the first tranche of these funds was invested in a photovoltaics micro-manufacturing project - 2 MW per year capacity - on a downtown Chicago brownfield The State of Illinois and the City of Chicago are the main procurers for the output of the manufacturing plant for the first three years. The brownfield, a former industrial site where on-site pollution has been stabilized, also provides several buildings, one of which will be used as the PV manufacturing site employing 48 people. The Fund announced in February another funding solicitation to entice a solar water-heating manufacturer into Chicago. The captive customer will be the Chicago Housing Authority, and there are other potential government users.

No new gas, no cheap power in sight
Low electricity prices will no longer be part of the US power landscape. The energy strategy in Washington, DC, is based entirely on drilling for oil supplies, even through this fuel makes a very small contribution to US electricity generation. Drilling in Alaska or the outer shelf will not only fail to bring into the market any new oil in this decade, it will also fail to bring in new natural gas before the next decade. Even if it could, the natural gas pipelines are - as widely reported in the press - already filled to capacity. A few older pipelines have also been out of commission - for instance, one pipeline running through New Mexico exploded recently, putting three out of use. Several new multi-billion dollar natural gas pipelines from Canada are being financed, but exact timelines have not been set even for beginning construction, and they are unlikely to be completed within the next few years. As a result, many states are attempting to build a new energy portfolio.

New energy portfolios
Several other states have established clean energy trust funds to implement energy efficiency, and renewable and alternative energy technologies in their states, again, as a result of deregulation exercises. The states of Connecticut, Massachusetts, New Jersey and Pennsylvania, in addition to California, Illinois, and New York as already mentioned, have reasonably large programmes, in excess of $50 million each. All the states have their own rules, goals and timetables. It's too early to tell whether these funds will actually enable the renewable energy industry to be sustainable or just 'opiate' the public on giveaways. At the other end of the spectrum some funds are trying to act as traditional banks, with clean energy advocates questioning how that will actually catalyze the market, as seems unlikely. But most state trust fund managers and their board members are honestly seeking to leverage their programmes and build on the successes, not the mistakes, of the past.

In addition, several states have passed other incentives beyond the Trust Funds. The State of Maryland passed a broad set of energy efficiency and renewable energy tax credits last year, including a new residential solar energy credit. The states of Arizona and Texas also passed, last year, renewable energy portfolio standards, which in Texas have led to hundreds of megawatts of new wind projects coming on-line and in Arizona to several new solar projects, now in the solicitation phase.

Net-metering
Thirty states over the last two years have passed net-metering laws to promote photovoltaics and other distributed energy resources such as wind, micro-hydropower, fuel cells, modular biomass and others, depending on the state. Basically, net-metering incorporates the same regulatory basis that confronted the deregulation of the telephone industry in the United States more than 10 years ago. Firstly, a national technical interconnection standard is required. Secondly, a simpleuser-friendly contract is established. Thirdly, explicitly for 'plug-and-play' distributed power generation, there is a credit for excess electricity generation which is accounted for on a yearly basis. This usually means the electric meter is allowed to run backwards, in many cases providing for a credit at the retail rate. Size limitations vary in each state, but most fall under 25 kW.

States which have passed net-metering laws are: Arizona, California, Colorado, Connecticut, Delaware, Idaho, Illinois, Indiana, Iowa, Maine, Maryland, Massachusetts, Minnesota, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Virginia, Washington, and Wisconsin. Another ten states should be added to this list before the end of 2002.

International markets
This domestic activity is in contrast to international markets, which have been the lifeblood of the renewable energy industries. In fact, a majority of sales by the US industry have been on overseas markets. This is true for photovoltaics and biomass power, where over 65% of sales of goods and services are exported, as well as geothermal, solar thermal and wind, where over 50% of sales are exports.

A time of growth
We have seen impressive growth in 2000 in the renewable energy field in the United States, and it should continue to grow in 2001. Calpine has driven its geothermal business to impressive heights. The major wind manufacturers, including Enron and Mitsubishi among others, are bidding on projects for under 5 cents per kilowatt-hour, and, in some cases, under 4 cents. Furthermore, manufacturers of smaller wind turbines, such as Bergey Windpower and SouthWest Windpower, are growing at double-digit rates. Duke Solar has entered into the concentrating solar business for electric power, as well as absorption cooling and water heating for commercial buildings, and Spencer Management has won some important overseas bids for trough-to-electric plants. STM Power has announced that it intends to build the new manufacturing plant for its solar/biomass/natural gas-driven 25 kW engines. New photovoltaics manufacturing plants have been announced by Baekert-ECD (MI), Evergreen (MA), Siemens Solar (CA) and Spire (IL), and expansions by ASE Americas, AstroPower and BP Solar - resulting in another doubling of US capacity in the next few years.

Consolidation in the industry is a good sign, with Xantrex and Trace converging and adding Statpower and Heart Inverters to the family in 2000. Such moves should attract significantly more investment in balance-of-systems. Powerlight and Ascension Technologies, representing the largest integration companies based in the US, have been exceedingly skillful broadening the existing market. Trend-setters such as Shea and Pulte Homes, Durst (with their skyscraper at 4 Times Square), and the federal government, are creating an expanding market base from 2000 to 2001 and beyond. All consumer indicators are looking exceedingly optimistic. Add to all of this more than 30 very large projects comprising green energy housing and mixed-use developers and developers of eco-industrial parks, and there seem to be some very good signs of market health among the renewable energy industries.

What is hard to appreciate from the slim corporate review above is the breadth of new companies with emerging, market-ready technologies. There is also the depth of hybridization between different renewable energy technologies and conventional energy resources, all having advanced controls and interface. Assuming the politicians do not distort the US energy marketplace again to favor only the traditional energy technologies, the evolving energy marketplace is becoming a very dynamic one.

In fact three interactive national energy systems will co-exist synergistically over the next two decades:

• traditional, but more efficient, central station electric generators with cutting-edge transmission technologies
• intermediate generators (mostly natural gas) with contributions from larger renewable energy plants such as wind farms, geothermal, biomass and concentrated solar power (and hybrids of all of the above)
• distributed energy generation at the site of the end-user, composed of photovoltaics, advanced battery, fuel cells, small wind, modular biopower and micro-hydropower, and diesel with advanced controls, smart interface and dynamic interconnection with the electric grid.

Another trend is the growth of energy service companies (EXCOs). They not only provide traditional energy-efficiency retrofits and management service, but work to incorporate higher value efficiency along with distributed renewable energy technologies. This is just beginning to make an impact on the market. Another year of rolling brownouts will catapult this industry into the mainstream, as a prime integrator of efficiency and renewable energy in commercial and industrial buildings and facilities.

But still the politics of energy destabilizes markets. The United States is one of the few industrialized countries that subsidizes its mature technologies in mature markets to the tune of billions of dollars of tax brakes, sprinkling this with hundreds of millions of research dollars and other giveaway programmes. The new Bush Administration appears wedded to the old approach at present. States that have deregulated have transferred billions of dollars to traditional energy companies (in the form of 'stranded assets' payments compensating for the loss in value of old generation plants) in the hope that they can 'buy' their way out of deregulation. The main drawbacks to the changing market are the outdated notions of most politicians. Yet the market can compensate even for this obstacle, as it has demonstrated in the communications, computing and internet industries. Distributed energy technologies have too firm a market foothold to stumble now, and are attracting high levels of new investment. So there is no way for the market to revert to its former state.

This February the Royal Dutch/Shell Group publicly announced, in a statement by its President, Jeroen van der Veer, its estimate that 50% percent of industrialized countries' energy needs could be met by natural gas and renewables by 2020. Clearly, the market is starting to send out signals and the technologies are ready. Now, all we need is the political will.

Gasoline at 25 cents per gallon, and television ads about nuclear power being too cheap to meter, have gone the way of typewriters and princess telephones. Those days of energy innocence are gone forever. As market forces begin to desubsidize energy and allow consumers the right to choose, renewable energy technologies and 'high value' energy efficiency have a robust market future.

Scott Sklar is President of The Stella Group, Ltd., 733 15th Street, NW, Suite 700, Washington, D.C. 20005, e-mail: solarsklar@aol.com, (202) 347-2214, FAX (202) 347-2215.