The Future of Utility-Scale Renewable Energy in California

Marcie Edwards (Anaheim Public Utilities, Director): Gentlemen thank, you all very much. I’d like to start with a question that we hear quite a bit from a variety of people across the spectrum in the renewable industry. And that is—we all hear the cry for regulatory certainty. In particular we hear it from the investment side. But do you think that regulatory ambiguity constitutes the most significant challenge? If it does I’d like to hear why, and if you think that other things take precedence we’d be interested in hearing that as well. I’d like to start with Commissioner Peevey.

Michael Peevey (CPUC): Well first thing, there is no such thing as absolute certainty in life except for death, and I used to think taxes until along came the Tea Party. (We’ve got to have a little levity here in the afternoon to keep you awake). But no, in California I think we have a reasonably high degree of certainty to our regulation. There are aspects that are not perfect in that regard. But we wouldn’t have 80,000 megawatts of all kinds of generation from renewables proposed and wanting to be in the Cal-ISO queue if there were regulatory uncertainty and if it loomed that large for investors. I will readily concede that there is some, particularly on the renewal of certain kinds of programs. But I will let the two people to my right speak, since they are the developers themselves.

Stephen Mullennix (US Renewables Group): I would just add that uncertainty of any kind is what you are trying to price as an investor. There are some regulatory uncertainties. The one that is the hot talk right now is the implementation of the 33 percent RPS. There are a lot of questions there: will enforcement be stringent enough that the utilities will play along the way  intended, etc.? I’m sure everyone in this room is very aware of those.

What’s interesting is that you have political uncertainties sitting at the top, if you will, that then permutates through regulatory uncertainty. On the other side of the scale you have economic uncertainties, and you have—in some ways it’s a very good uncertainty—but you have prices for a lot of these technologies plummeting, which is fantastic, but how far is it going to go? How do you price today for a project that will be implemented in two years?

So you have economic uncertainties overlaying the political and regulatory uncertainties. The combination of all of those, I can tell you as an investor, is proving pretty daunting. What that means is that it all gets reflected in the cost of capital. When you have a high cost of capital but you are selling into a very competitive commodity market you must really thread the needle to get a project financed today. That’s not necessarily a bad thing, but it’s a challenge for developers, it’s a challenge for financiers, and it’s a challenge up and down the value chain.

Guy Blanchard (Amonix): Development is fraught with risk. Getting into the last few years, if you knew what we were getting into going in, you might have chosen not to even do it. For a project to come together and work it’s got to have a technology that works. Thankfully, we can help there.

You need reasonably priced capital that is available when the project is scheduled to start building, and then take out financing for it to stay in place. You need permitting, you need interconnection, and you need a functioning power market with PPAs or auctions that work. The last three things that I mentioned are all regulatory and legislative issues that people at this table have to deal with every day.    

Is uncertainty created around regulatory reform? Absolutely it is, and fortunately it’s both a problem and an opportunity. It’s an opportunity to do things right and an opportunity to put together markets that work and help California achieve its RPS goals. So here in the coming year we’re going to have the RPS that’s been resolved and is put in place. Nobody knows yet how the implementation of the 33 percent will be put in place and will come together. That will be very important to everyone involved in this industry here in California.

More down in the weeds, the agencies here deal with issues that are important to us all the time, working through interconnecting issues like Rule 21, which is being worked on right now. Coming to a timely resolution of all of the risks that developers face is absolutely mandatory for a successful project.

Tim Olson (CEC): There are a couple factors that we have to change. What are the factors that influence the licensing and permitting? Before the last year and a half we were issuing the energy-efficient licenses for thermal power plants that had historically been natural gas and one cycle with 25-acre footprints located in urban areas. The issues we looked at were water impacts or local land use. In the last year and a half, 10 solar projects have been approved, all solar thermal. The footprints of these projects are 4,000 to 7,000 acres and the impacts are different. So in one sense we are kind of shifting in mid-stream to look at things that historically we didn’t have to look at. That’s one factor.

For the other projects that are not thermal, i.e. solar PV, or wind projects, their permitting process is a presently a local government process. The ability of counties to do that process varies from location to location. So there are definitely some issues to work with, and there are some challenges regarding the shift in the nature of the projects that we’re permitting.

Michael Peevey: I just wanted to add something to what was just said. In 2010, the last year of the Schwarzenegger administration, I think it’s fair to say that there was a tremendous push on the energy commission to approve just about every single solar thermal project that was before it for permitting. And the commission did so. That’s the reality.

So is that regulatory uncertainty? If I was a developer I’d be quite pleased with that. The California Public Utilities Commission has permitted, and not without a lot of controversy in certain instances, every major transmission line that has come before us: whether it’s the line from San Diego to Arizona—the Southwest Power Link that if it had been in operation last week we probably wouldn’t have had that major power failure—whether it’s the Tehachapi Line, aspects of which are very, very controversial, which brings wind power from the area north of Los Angeles, and whether it’s the Ivanpah transmission line and several smaller transmission projects as well. We approved every single one. So is that regulatory uncertainty? I don’t think so.

I think the state has created an environment at the permitting agencies where you can fund projects and develop them. I do think that financing is a tremendous challenge. There are other challenges too, but I do think that financing is the greatest one, and as the two speakers to my right have said, it’s difficult to do. But you always expect developers to bitch and moan about the quality of government. Sometimes it’s appropriate and sometimes it isn’t.

We don’t have a uniformly bad government in California. I think it would be a stretch to say that it’s uniformly good. But it certainly has been, in this area, trying very hard over the last several years. We closed out the last decade ending in 2010 with a goal of 20 percent renewables. We didn’t quite make it, but Edison came in at 19.7 percent. So that’s pretty damn high. PG&E was more like 17 percent and San Diego was a little lower than that. Those are the three big IOUs. None of the municipal utilities came anywhere close to this, although they claim they did, particularly the Los Angeles Department of Water and Power. Except for SMUD. Marcy can speak for Anaheim, but I believe that only SMUD came close. Those numbers that I just rattled off do not include the California Solar Initiative, where we’ve installed 600 or 700 megawatts now of rooftop solar on commercial, government, and residential buildings all over the state. So this state is moving in that direction.

The big choice now is how much of this is going to be central station solar, which Marcy just asked us about, versus distributed generation, rooftop solar, and stuff closer to your home, your business, and your neighborhood, in the future. Governor Brown has said that he wants to see 12,000 megawatts of distributed generation by the end of the decade. That is a significant challenge, although we do have programs underway to try to help to meet that goal, which I think is achievable but will require a Herculean effort to achieve.

Marcie Edwards (Anaheim Public Utilities): There seems to be a general agreement among some members of the panel that the regulatory agencies are often pitched as the stumbling block or what caused the process to slow down and become more complex. I would argue that frequently it is the more subjective interpretation of the benefits, burdens and costs associated with the individual projects that creates that greater focus.

There is a tremendous amount of internal re-prioritization that the regulatory agencies have to deal with. I think Mike’s point that there are a number of projects in the queue stands, however, as new evidence of the fact that the process does indeed work and it is becoming more and more refined every day.

Speaking of another question on the role of the regulatory agencies as a group, given the rapid onset of old technological obsolescence of the various renewable technologies as well as the complexities of all of the agencies involved, not just the host utilities but the people owning the technology, those funding it, those who have other parallel or contradictory interests in all of this, how is the true lead agency defined or clarified when you are talking about the strategic evaluation of renewable portfolios? Does the market need to work with the PUC and CEC and the legislative platform and the ISO all at one time? Or is there some sort of process or some single group to which they can look in order to try to streamline and to clarify their way through?

Mike, what are your thoughts?

Michael Peevey: This whole area has many, many players and institutions involved in addition to investors. At the state level we have goals, and the Energy Commission and the Public Utilities Commission work pretty carefully and closely together in achieving those goals. We have something that we call an Energy Action Plan that articulates the state’s views and sets forth energy efficiency as our first priority, and renewables as our second priority, and transmission and distributed generation, and so forth. But we also have the legislature very much in this mix, and I’ll come back to them in a second. So is the California Air Resources Board, because now we have a goal of reducing our greenhouse gas emissions as law in California. This is something that was not achievable at the federal level.

We have it by law in the state of California that by 2050, 39 years from now, greenhouse gas emissions have to be 80 percent lower than they were in 1990. That’s a Herculean task. Is it achievable? I don’t think anybody in this room can tell you for sure if it is right now. But that is the policy goal that we have set. All of this produces things like, ultimately, a cap and trade program for the state of California, which we are slated to do in 2013. So we have this multiplicity of goals.

If I was a member of the investment community trying to sort through all of this, it would be a difficult challenge, and I would probably concentrate on one or two agencies like the PUC and the Energy Commission.

I said I’d get back to the legislature. The legislature just recessed for this year on Friday night. Technically it was 2am on Saturday morning. It refused to continue the public goods charge, which is now on everybody’s utility bill, to invest in things like energy research and climate change, and the governor was unable to work out an accommodation to get two more votes in the State Senate. On the other hand the legislature did extend the self-generation incentive program, which is a stimulus program for technologies such as fuel cells and all. So all of these things go into this mix of public policy and regulatory certainty or uncertainty, and they become a rather jumbled and complicated mixture, quite frankly.

Mullennix: To add a different perspective, I think you just heard that it’s incredibly complex.

Now, on one hand, as an investment management firm such as ourselves, we look at that complexity and say, “Ok, we can understand that complexity, and thereby we can create opportunity for ourselves to manage investor money to put forth in this space because we can understand it and other people aren’t going to take the time to do that.” So in one respect, that’s good.

However, we in turn have to raise money from limited partners. Those limited partners are state pension plans—large company pension plans, both in the U.S. and abroad. They are allocating their funds on behalf of their pensioners, or whomever they are benefiting, based on a huge set of options. They could buy gold, they could buy treasuries, they could buy this, they could buy that, or they could invest in a very specialized niche called renewable energy. The heavier the complexity burden gets, the less likely those folks are to say, “You know what? That’s a safe place for my money. I can really see some growth there.” And that really jams up the whole system.

And, frankly, just as Michael said, in order to get your project through you have to manage all of those resources. That’s kind of what you do as a VP of Development. This is what developers do. But when the outside perspective is, “Wow, there really isn’t a framework. There really isn’t a path,” capital goes somewhere else. That’s just a reality that I think we are kind of living with.

So the more there is clarity on the implementation of the 33 percent, when you go see the PGC fail that says something to the people who are allocating their money. So these complexities are real and they do have an impact.

Guy Blanchard: California is such a big market that everyone wants to be in it. But I’ll add to the agencies that haven’t been brought up.

We deal with and our customers deal with, in addition to all of those agencies previously mentioned, the Department of Fish and Game, the FAA, the BLM, the U.S. Forest Service, and the various city and county agencies. All of these different stakeholders to the process have the ability to slow things down, to say no, to clog things up. You have to go through all of these. It’s just the cost of doing business in California. If this were a niche state, I’d probably have a tough time getting renewable developers to come here. This is the big, big market in the west. So I think it’s right that it probably reflects itself in growing costs of capital, and that is because of the additional time it takes for projects to get permitted and get through the process here in California. In neighboring states our developers have managed to start projects from a twinkle in the eye to having equipment going into the ground in under a year. In California it can takes years, half a decade or more to get a project from conception to actual installation. I think that focusing on ways that that amount of time can be brought down and focusing on increasing certainty all throughout the process would benefit the renewable industry in California.

Tim Olson: I agree with President Peevey’s comment that there is a need for multiple agencies just because of the complexity. Cal ISO is another player in this, and the range of things that require oversight are risk security, meeting the 33 percent goal, affordability of electricity, the environmental review of projects, and the location and grid connection of the project.

Utility scale renewables tend to be in remote spots, as I’ve noted before. Some of those areas are federal land that in the past had not been part of any California planning or certification process but are now compelled to be part of that. Our work there is to form this federal, state, and in many cases local and regional plan. The so-called Desert Renewable Energy Conservation plan is meant to be an overall programmatic environmental review, identifying where you can build projects and where you shouldn’t. That’s intended to provide some certainty and to avoid extended environmental reviews and potential lawsuits.

Marcie Edwards: We’re in vehement agreement that it’s a very complex process, and everyone is arguably doing the best they can. The problem becomes affecting some sense of balance. To that end, it serves a broader good to support the actions of the regulatory agencies because it gives them enough of a power base to drive towards certainty, as opposed to taking steps into a level of ambiguity that causes the process to take longer.