Taxpayers, Ratepayers Will Fund California Solar Plants

Driven by the Obama administration's vision of clean power and energy independence, the rush to build large-scale solar plants across the Southwest has created an investors' dream in the desert.
by | September 25, 2012
 

Driven by the Obama administration's vision of clean power and energy independence, the rush to build large-scale solar plants across the Southwest has created an investors' dream in the desert.

Taxpayers have poured tens of billions of dollars into solar projects - some of which will have all their construction and development costs financed by the government by the time they start producing power.

Banks, insurers and utility companies have jumped in, taking advantage of complex state and federal tax incentives to reap outsized returns. Among the solar prospectors in the Mojave Desert are investor Warren Buffett's Berkshire Hathaway Inc., General Electric, JPMorgan Chase & Co., Morgan Stanley and technology giant Google Inc.

The cost for decades to come will also be borne by ratepayers. Confidential agreements between solar developers and utilities lock in power prices two to four times the cost of conventional electricity. The power generated by the mega-plants will be among the most expensive renewable energy in the country.

That high-priced power will compose an increasing share of California's electricity following Gov. Jerry Brown's signing last year of legislation requiring that renewable sources provide 33 percent of the state's power by 2020.

Stanford University economist Frank Wolak, an expert in the California electricity market, said the state's renewable energy strategy could boost electricity rates 10 percent to 20 percent, depending on a number of factors. Potentially, consumers' bills could go up by 50 percent.

"It is easily in the billions of dollars," he said.

Government and solar officials say the subsidies are no different from long-standing federal support for the oil, gas and nuclear industries. They say generous incentives are necessary to incubate the fledgling renewables industry.

"We are driving clean energy projects that would otherwise not have gotten built at a commercial scale with innovative technology," said Daniel Poneman, deputy secretary of the U.S. Department of Energy.

Energy Department officials say solar energy prices will fall as the industry matures, and the cost of power from future conventional plants will be higher.

Critics, however, say that despite the righteous goal of combating climate change, solar entrepreneurs are getting too much government money.

"What's happening in California is a tragedy, on every front," said Bill Powers, a San Diego-based electrical engineer and power plant consultant to government, nonprofits and developers. "It's a huge waste of money. ... I see a lot of this as just an old-fashioned rip-off."

The lure of outsized profits has set off a solar frenzy in California, with dozens of projects planned from Barstow to Blythe, from Inyo County's high desert to the Sand Hills in Imperial County.

The spark has been the renewable energy program begun by former President George W. Bush and expanded under President Barack Obama.

The incentives allow solar developers to reap annual returns on their investments of 8 percent to 12 percent, as much as tripling their money in a decade. In some cases the returns could go as high as 17 percent, according to Lee J. Peterson, an Atlanta-based tax attorney at the Reznick Group.

"Banks and Wall Street are trying to outdo one another with green commitments," said Michel Di Capua, a renewable power analyst with Bloomberg New Energy Finance. "It looks good from an environmental perspective. But it is also very profitable."

To make such projects economically attractive for developers, the government created a mix of federal loan guarantees, grants and tax incentives  and threw in the cheap use of millions of acres of public land for power plants.

Taken together, the incentives can provide solar companies with more than half a project's costs in cash, with the remainder covered by the federally guaranteed loans.

The cash grants, approved as part of the 2009 economic stimulus package, provided renewable-energy developers 30 percent of the cost of a project once it is finished. More than $13 billion has been distributed. The grants are no longer offered. They have been replaced by a tax credit of equal value.

The most complex piece is a tax policy that allowed companies to deduct in one year the entire cost of a project from their taxable income. The program was changed this year, requiring the cost be deducted over five years.

The low-interest, government-guaranteed loans - more than $16 billion for renewable energy projects so far - pay up to 80 percent of a project's construction costs.

"If this were a modern-day fairy tale _ and in many respects it is _ solar developers would be saying, 'Mirror, mirror on the ground, look at all the money I found!' " said one county official, who did not want to be identified because of pending negotiations with a solar developer.

One of the biggest solar projects in the world is now rising in the California desert just off Interstate 15 near the Nevada border. The $2.2 billion Ivanpah Solar Electric Generating System is being built by Oakland, Calif.-based BrightSource Energy Inc. on 3,500 acres of public land.

Spread across a dry lake bed will be 173,500 mirrors, each the size of a garage door. Eventually 6 square miles will be covered with three fields of gleaming mirrors, each aimed at a 459-foot tower.

The sun's power will be focused on a boiler in each tower, heating water to 1,000 degrees to create steam to drive turbines. When completed, the plant is expected to produce 370 megawatts, enough to power about 140,000 homes.

Joe Desmond, a senior vice president at BrightSource, said the tower design allows Ivanpah to produce more electricity during high-demand periods later in the day compared to other technologies, such as photovoltaic panels. Still, the Ivanpah design has never been proven on a large scale.

The Ivanpah plant was made possible by government-backed loans at low rates - 4 percent to 4.2 percent. BrightSource and its corporate investors will receive about $600 million in federal grants once the plant starts producing.

The project's investors, which include New Jersey-based NRG Energy Inc. and Google, also will be able to share a federal tax reduction of an estimated $600 million to $700 million over five years under the government's tax break.

Even renewable-energy advocates, such as the San Francisco Bay Area-based Climate Policy Initiative, acknowledge that the nation's first forays into utility-scale solar plants will be expensive.

The group estimates that 43 cents of every dollar of energy produced by the Ivanpah facility will be paid for by taxpayers. BrightSource Chief Executive John Woolard said the company isn't looking for "persistent large subsidies" but isn't ready to operate without them. "You want to diminish them over time, but you don't want to fall off a cliff," Woolard said.

The developers and investors will continue making money on the project thanks to a long-term power agreement with Southern California Edison and Pacific Gas & Electric Co.

The California Public Utilities Commission, or PUC, which approves all rate agreements, won't disclose the rate for Ivanpah or any solar plant because it is considered a trade secret.

But outside experts, including Wolak, the Stanford economist, estimate that Ivanpah power is priced at $90 to $130 per megawatt hour - three to four times the cost of electricity in the state last year.

BrightSource declined to specify the price but said it was in line with the PUC's recommended renewable rate of $129 per megawatt hour.

The PUC has approved virtually every long-term contract for renewable energy that has come before it, driven in part by the state's renewable energy goals. The commission has greenlighted all but two of 184 green-energy proposals since 2002, including a plan by Pacific Gas & Electric to buy solar power generated in outer space.

The state Division of Ratepayer Advocates, whose purpose is to represent consumers, concluded in a report last year that the power contracts the PUC has been approving have put consumers on the hook for $6 billion in excess costs.

"What the commission's practice has been is not to consider the cost of renewable power but to approve every renewable project that came before them," said Joe Como, acting director of the division. "We really spent too much money. It's frustrating as hell."

A PUC member broke the secrecy about rates at a public meeting last November. Michael Florio, a longtime consumer advocate appointed to the commission last year, revealed that the price of energy from the Abengoa Mojave Solar Project near Barstow would cost ratepayers at least $1.25 billion more over 25 years.

Even by the inflated standards of current power purchase agreements, the Abengoa contract stands out - about $200 per megawatt hour, said Powers, the San Diego-based power consultant.

"We have plenty of time to obtain less expensive, readily available renewable energy from other sources," Florio said.

PUC staff presented the commissioners with two options: Either pull the plug on Abengoa or renegotiate the contract with more favorable terms for ratepayers.

But commission President Michael Peevey, a former president of Edison International and Southern California Edison, pressed for approving the contract, arguing that changing the terms could jeopardize the project's federal loan. "While it is true Mojave Solar is more expensive, this project has positive attributes not reflected on a price-by-price comparison," Peevey said.

Among the benefits cited by Peevey and his colleagues were the 800 construction jobs and 60 permanent jobs that would come with the solar plant.

Peevey's resolution passed by a 4-1 margin.

Although they will pay higher rates for solar power, California's utilities are poised for huge rewards by building thousands of miles of transmission lines to far-flung solar sites.

The state allows big power companies to bill ratepayers for every dollar they plow into building transmission lines, at a guaranteed annual rate of 11 percent for 40 years.

Powers estimated the cost of new transmission lines to reach remote solar and wind power plants could exceed $15 billion statewide in the next decade. Upgrading existing transmission lines would add billions more, he said.

The transmission upgrades and new lines for the Ivanpah project carry a price tag of $400 million.

"The utilities are thinking, 'How could we morph this thing into a ... infrastructure boondoggle for our company?' " Powers said. "This is the answer - remote solar projects."

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