Navigant Research Blog

Signposts Along California’s Distributed Generation Corridor

— March 24, 2015

Driving south on the Interstate 5 corridor from the Oregon border to the San Francisco Bay Area, you can see numerous renewable energy projects off I-5. These projects stand as modern signposts to the maturity of—and transition in—the U.S. clean tech industry. Five years ago, renewable installations were mostly limited to remote, utility-scale wind farms in Tehachapi and along the Altamont Pass. While utility-scale installations continue to grow, there is now also a strong focus on distributed generation: solar, wind, fuel cells, and generator sets located directly onsite or on the distribution grid.

The United States is expected to be a leading market for distributed generation, with more than 250 GW installed cumulatively between 2015 and 2023, according to Navigant Research’s report Global Distributed Energy Deployment Forecast. The sites discussed below are some of the most visible installations along the drive down to the Bay Area. They represent the focus on distributed generation today and in the years to come.

Signposts

As you drive through the city of Red Bluff, you see a 1-MW General Electric (GE) wind turbine installed at the Wal-mart distribution center. Wal-mart is the leading consumer of solar PV among U.S. retailers, with 105 MW of installed capacity, twice as much as the second-leading company, Kohl’s, with 51 MW. Big box retailers have installed more renewable energy than tech companies have and are a coveted prize for installers looking for big customers.

If you take the shortcut from I-5 to 505 South, toward San Francisco, it connects to 80 West in Fairfield/Vacaville, where a 1.1 MW solar PV installation at the North Bay Regional Water Treatment Plant is installed. With large energy consumption, water treatment facilities are costly for cities to operate, leading to attractive payback rates.

Renewa-Beer

When you drive further, the Budweiser plant catches your eye right off the freeway, with 3 MW of wind power located onsite. The plant also uses solar and bio-energy recovery systems. These systems combined produce approximately 30% of the plant’s power onsite. Belgium’s InBev may have offended the cultural sensibilities of some Americans when it acquired Anheuser Busch in 2008, but it used American turbines–GE 1.6-MW units.

One of the other noticeable aspects of the drive through California, particularly in Davis and Sacramento, is tract housing developments, where residential solar PV is increasingly prevalent. The residential solar PV market in California has nearly doubled in each of the last 3 years thanks to growth in the solar lease model.

California is expected to continue to lead the way in distributed generation, with systems increasingly utilizing energy storage. Though these storage systems won’t all be visible along the road, they will help more renewables capacity to come online, making the drive more scenic each year.

 

Spanish Wind Industry Faces Subsidy Cuts

— March 24, 2015

In early 2014, the Spanish government reformed the electricity market by discontinuing the feed-in tariff (FIT) program entirely for all wind plants going forward. The government has also attempted to lower purchase prices retroactively for production from existing wind plants, which essentially means that wind producers who built wind plants counting on tariff-subsidized prices for the next 20 years now abruptly face major revenue shortfalls. A direct result of Europe’s ongoing fiscal crisis in the wake of the 2008 crash, this move is widely considered the most damaging change to renewable incentives in any country globally, and it could result in a permanent wind market collapse across the European Union (EU).

For Spanish wind plant developers, such as Iberdrola or Acciona (ranked as the No. 1 and No. 5 wind operators globally in 2013, respectively), 2014 was a rough year. In its 2014 annual report, Iberdrola announced that it installed only 157.7 MW during 2014. To put that into perspective, the No. 2 company on the list of top 15 global wind operators, Longyuan Power Group in China, installed 1632.7 MW in 2014, and is now likely to surpass Iberdrola as the leading global wind operator. Acciona added 98 MW in 2014, but was forced to sell off 150 MW—thus ending up with less net wind capacity in 2014 than in 2013.

Cash Crunch

The FIT cancellation affected the cash flow of these Spanish companies, as well. Iberdrola’s 2014 profits took a major hit, falling by almost 10% compared to 2013, to hit €2.33 billion ($2.65 billion). In its 2014 annual report, Acciona asserted that, despite the regulatory setback, the company is profitable again and has managed to reduce its debt by €746 million to a still-heavy €5.2 billion ($5.64 billion).

Even if the companies survive this hit, the prospects for domestic development of wind energy in Spain are dire. Companies like Iberdrola and Acciona have the option to go abroad to markets in the United Kingdom, the United States, and Brazil to install wind energy; but for wind development in Spain, there is nothing attractive to investors about joining a market where regulation is uncertain and government support withering. In 2014, Spain installed just 28 MW of wind power, far below the 175 MW installed in 2013. The tariff cut has imperiled the future of clean energy in Spain, unless the government can bring back wind incentives and restart the market.

For a more detailed analysis of Spain’s wind market, as well as the broader global market for wind power, see Navigant Research’s forthcoming World Market Update.

 

Yieldcos for Renewable Energy: “Now Is the Time”

— March 8, 2015

Enel Green Power is forming a yieldco with its renewable assets in the United States, joining a trend that started about 2 years ago and accelerated in 2014.

The idea behind yieldcos is not new. It involves the creation of a company to buy and retain operational infrastructure projects and pass the majority of cash flows from those assets to investors in the form of dividends. Structurally, yieldcos are very similar to real estate investment trusts (REITs). They are also almost ideal for renewable energy projects such as wind farms.

A crucial aspect of yieldcos is that they are not exposed to development or construction risk—this is borne by either the parent company or a third-party developer. Yieldcos simply acquire infrastructure projects that are or have recently become operational. They fund the acquisitions by issuing shares (normally debt is only used at the project level), which they can do at a lower cost of capital (the return on the investment that shareholders want to invest in the company) than their parent companies or developers because they’re shielded from development and construction risks.

Squeezing Out Risk

Another key aspect of yieldcos is that their assets produce fairly predictable cash flows that can be paid to shareholders as dividends. That’s why renewable energy projects such as wind farms are perfectly suited for them. Wind farms and solar power projects are not significantly exposed to changes in the market. On the upstream side, they depend on free resources—wind and light—while on the downstream, they are protected by regulations (feed-in tariffs, long-term power purchase agreements, Renewable Portfolio Standards, and so on).

For developers, yieldcos offer a quick way to sell maturing assets and redeploy capital into early-stage developments that offer higher returns. From an investor point of view, yieldcos offer an investment option with very little risk—which is a testament to how far the investment community’s understanding of wind and solar technologies has come.

New Era or Fad?

The emergence of yieldcos has been driven by a strong initial public offering (IPO) market in the United States and Europe over the last few years, as well as the impact of quantitative easing (QE) policies around the world that resulted in lower interest rates and returns from conventional financial products (i.e., bonds and equities). As a result, the 6%–7% dividend yield of listed green infrastructure funds looks attractive to investors, compared to 4% interest rates on 10-year corporate bonds and even less for government paper.

Still, yieldcos might turn out to be a short-lived fad. As the economic recovery accelerates, and talk of interest rate hikes in the United States fills the financial media, investment vehicles like yieldcos could lose some of their appeal. So if you have solar or wind assets lying around, you may want to take some fashion advice from Enel’s CEO Francesco Starace (an Italian, after all): “Now is the time to do this.”

 

Vestas, Mitsubishi Settle on Offshore Turbine Design

— February 24, 2015

In 2014, Mitsubishi Heavy Industries (MHI) formed a joint venture with Vestas called MHI Vestas Offshore Wind. The strategy behind that joint venture is now substantially clearer. MHI’s decision to stop the commercialization of its 7 MW SeaAngel offshore wind turbine, to focus instead on the Vestas V164-8.0 MW turbine under MHI Vestas Offshore Wind, makes sense given Vestas’ expertise in the offshore market and the need to move forward without confusion or conflict between the two turbine platforms.

Technology-wise, the SeaAngel’s novel Digital Displacement Transmission Technology (DDT) looked like the more advanced drivetrain system. It employs a sophisticated series of hydraulic pumps, values, and motors to transfer the energy from the constantly varying rotor speed to a fixed speed generator, without the use of a gearbox. No other wind turbine employs a hydraulic drivetrain like this.

That novel technology, however, adds uncertainty to the construction and operation of offshore wind farms.

Risk Avoidance

The increased construction and turbine servicing costs and associated risks for offshore wind increase the rate of return that investors expect to up to 12% compared to an onshore wind farm’s 7% to 9% in developed markets. Once you add the risk of employing a completely new transmission technology system, you likely outweigh the benefits offered by the new drivetrain design. The joint venture with Vestas provides access to a similarly sized turbine based on a proven and more conventional, medium speed geared technology, eliminating the added risk.

Although Vestas’ turbine is also new in the market, the company’s offshore turbine reliability has dramatically improved since 2004, when it had to replace the transformers and generators in all 81 of its then new V80 machines at Horns Rev offshore wind farm. Much refinement and advancement specific to offshore has been achieved by Vestas and its peers.

No Confusion

It’s also important to send a clear signal to the market that the Vestas V164-8.0 turbine is the primary turbine offering of the joint venture, without a separate Mitsubishi-branded product offered outside or within the joint venture. Although the SeaAngel turbine will disappear as a stand-alone brand, testing of the hydraulic technology will continue.

Onshore testing of the full-size 7 MW turbine officially began on February at a test center in the United Kingdom for validation of the drivetrain design. A similar hydraulic-powered turbine may be installed later in 2015 in Japan on a floating platform,  depending on the results from the U.K. tests.

Ultimately, the aim of the effort is to focus on refinement and validation of the hydraulic drivetrain for possible future use under the MHI Vestas joint venture. The floating platform may, in coming years, become part of the joint venture’s offerings as well. For now, though, the V164-8.0 turbine using proven Vestas technology is marching out to sea, having recently landed its first order of 32 units for the 258 MW Burbo Bank Extension project on the west coast of the United Kingdom in the Irish Sea. Hiring has just begun to build the 80 meter turbine blades.

Roberto Labastida contributed to this post.

 

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