New federal policies have opened the gates to utility investments in renewable generating plants. Some states, however, still make it difficult for utilities to put such assets into the rate base...
Before You Build It: Think Green
The complex financial analysis that has driven renewable energy investment has become the standard for assessing all potential electric generation investments.
Any utility, generation company, or developer must consider numerous factors before investing in new electric generation capacity in the U.S. market. In addition to the traditional financial analysis of capital costs and operational expenditures, other important factors materially can affect the development cost and financial viability of a new generation facility. Three of these financial considerations—tax incentives, renewable portfolio standards, and the creation of renewable energy credits 1 and carbon 2 constraints—have been examined in conjunction with renewable-energy projects. No longer is that the case; the convergence of these economic considerations will affect the value proposition significantly for every potential generation investment made in the United States.
The economic case for renewable generation historically has been driven primarily, if not solely, by the tax incentives available for renewable-energy projects. Because the markets and technologies for many renewable generation sources were still relatively immature and were so dependent upon tax incentives for their financial viability, renewable sourced generation and the ancillary financial issues simply were not contemplated in the financial analysis of large-scale traditional generation investments. There were, of course, countless other factors in addition to the complexities of the financial analysis, which affected the relative value of renewable-generation projects. Issues such as much higher capital investment for each installed kilowatt of capacity, new infrastructure requirements, and rate-based regulatory hurdles, which all could have added significant costs to a renewable energy project, must still be accounted for in the financial analysis of these projects, but the relative impact of these costs will not necessarily be a controlling factor.
That investment in electric generation would reach this crossroads where all generation investments are analyzed in a similar manner should not come as a surprise. Each of the policies supporting the tax, renewable portfolio standards, and carbon-based financial drivers was designed, at least in part, to force precisely this result—for renewable generation to be competitive with traditional generation sources. Additionally, despite the higher costs, economic complexity, and uncertainty of renewable-generation projects, there has been a rapid maturation of the technology and the economics supporting the technologies (and this rapid technical and economic maturation actually has been influenced largely by the effect of these incentives). While the impact of these policies widely was expected, it appears to have surprised many in the industry how quickly this transformation occurred in the absence of a coordinated and overarching plan for managing these disparate programs.