The CSP Summit was held this past week in San Francisco. Many of the leading companies in the space were present, and the following represents some of the highlights. (Editor's note: CSP stands for 'concentrated solar power,' which generally means solar thermal power plants. Concentration is coming to photovoltaics, so the acronym may not last forever, but enjoy it while you can.)
The Problem with Power Purchase Agreements (PPAs)
While more than 50 utility-scale solar PPAs have been signed with major utilities (SCE, PG&E, APS, SDG&E), fewer than five have been financed so far.
For a list of projects in California, here is the CPUC's table of current RPS projects.
Because this market has only a few buyers (the utilities), but many sellers (the developers) -- it displays many of the characteristics of an oligopsony, which is a form of imperfect competition. Todd Glass, a partner at Wilson Sonsini, and an expert on PPAs, sees similarities with the tobacco industry, where many tobacco growers sell to just three major cigarette makers (with over 90% market share). In the case of tobacco, the three cigarette makers use their leverage to:
- Push down pricing
- Demand precise specifications from the tobacco growers (e.g., delivery dates)
- Push the risks of overproduction and crop losses onto the growers
A similar set of outcomes can be seen in the solar PPAs signed with utilities, where prices are low, delivery dates need to be met, and many of the risks have been pushed onto the developer. This is due in part to the entry of Chinese PV manufacturers, which are driving PPA contract prices down significantly.
The end result: un-financeable PPAs. Many of these PPAs have prices that won't allow for a reasonable return for the equity investor (8%-9% unlevered, or 13%-16% levered), and as such, they likely won't be able to attract the funds required to build the project.
The utilities seem to be ok with this. Presumably, they are not expecting RPS penalties when they don't meet their RPS goals because they will claim that they signed the PPAs and it was the developers' failure to finance the project and deny any responsibility. Attorney Glass, a legal expert on PPAs, mentioned that in almost all cases, the developers need to pay a fee (project development security) if the project doesn't go through. And it is doubtful that the CPUC will see that the utilities created the un-financeable PPAs in the first place.
So what are the advantages of PV vs. CSP? While CSP has the ability to offer storage, utilities are not currently willing to pay more for plants with storage, so CSP projects need to offer PPA rates that are competitive with the PV options.
The situation for the developers could be thought of as a type of game theory known as the Prisoner's Dilemma.
Each developers wants to sign PPAs at higher prices, but out of fear that another developer will "cheat" and bid a low price on an RFP, they end up bidding a low price, too. The end result is PPAs with prices that are too low for the economics to work, which will result in cancelled projects. And that is an undesirable outcome for developers, for the CSP system manufacturers, for EPC firms -- and for the environment.
Who Has the Money?
With the flurry of PPA signings over the last few years, there are many more CSP projects looking for tax equity and debt funding than there is financing available. With about 9 GW of CSP projects in the pipeline (with signed PPAs), at $3.50 per installed watt, that would require ~$30B in funding. Assuming the ITC cash grant covers 30% ($9B), and the rest is financed 50% debt to 50% equity, the CSP developers will need to raise $10B in debt and another $10B in equity. According to investment bankers, available financing is probably closer to $1 to $2 billion, which means that the vast majority of projects will be left scrambling.
Investment bankers at the conference suggested that the likely outcome would be that only the highest quality CSP projects would get the funding required, and that the rest would need either to wait it out or to try to receive funds from the Department of Energy Loan Guarantee program. And the Loan Guarantee process is no easy option -- it took nearly two and a half years for BrightSource to receive a conditional commitment.
And now for the key question of the conference: will the 30% ITC cash grant be extended?
No one knows for sure, but many participants thought it was very likely to be extended.
Cutting the Thermal Solar Project Cost
All CSP technologies will need to reduce their capital costs if they want remain competitive with other renewable energy options (First Solar in particular). Several presenters discussed ways for developers to reduce the amount of capital required.
Cooling: Schlumberger Water Services proposed wet-cooling as an option to keep capital costs down. But this may be a difficult option in areas where permitting agencies want to keep water usage to a minimum.
Frames: 25% of the total solar field cost is the frame. Hydro Aluminum Extrusion proposed the use of aluminum instead of steel for the trough frames. However, the firm conceded that one disadvantage of aluminum is that many engineers and designers are less familiar with it.
Reflectors: The use of films instead of glass was discussed as a potential way to reduce costs. The main concerns with films are durability and the bankability of a "new" component in a CSP project.