Green Generation Feels the Squeeze
Will state budget shortfalls threaten tax credits and subsidies?
The use of tax credits, subsidies and renewable portfolio standards has made states governments great patrons of new environment-friendly energy technology development. Many credit the tripling of wind installations to 7,000 MW from their level in 2000 as a sign of the success of state renewable programs. Yet, state budgets are now under pressure because of the decline in tax collections and other fees associated with a dismal economy. Thus, uncertainty about continued state support could slow down growth in the next year.
Although there are federal programs, it is state actions that are getting the job done. Many experts say that states have been far more successful and have spent far more than the federal government.
Fortnightly reviews the current progress of the newest energy technologies, such as fuel cells, solar, and microturbines, to assess which technologies are ready for prime time and which are not.
Fuel Cells: Offering Sophisticated Power Service
Fuel cells are, in principle, technologically clever, environment-friendly, small in size, and modular. Yet, they are also generally more expensive than conventional technologies per unit of delivered energy and lack extensive field testing within households and businesses.
Nonetheless, they have experienced significant growth in the last two years in part because of their stunning cleanliness, reliability, and other properties. The number of fuel cell systems built and operated has increased in the last two years from about 1,300 to 3,800. The dominant type is the proton exchange membrane, which has captured about 70 percent of the market. It is a global market yet North America accounts for about 50 percent of the systems put in place.
The greatest growth has been for portable fuel cells, which range in output from 1 watt to 1.5 kilowatts. The number of these units has grown from about 300 to 1,700 units in the last two years. More than 600 portable fuel cell units of 1.2 kW size were built in 2002. By the end of 2002 one company, UTC Fuel Cells, had delivered more than 200 of its stationary 200-kW fuel cell systems (www.utcfuelcells.com). The large majority of these systems is in use throughout the United States. In addition, about nine MW of generating capacity from fuel cells were delivered in 2002. Fuel cells seem to be a rising trend.
Still, the possibility of a return to recession in 2003 could break the trend of the last two years as companies seek ways to cut costs.
Solar Collectors and Photovoltaics: Allowing Investors to Make Statements about Lifestyle
The industry standard for information on solar collectors and photovoltaic investment activity for 2002 is not yet available from the Energy Information Administration. But year 2001 data released in November 2002 is impressive. Shipments of photovoltaic cells and modules, which produce power directly, increased in 2001 nearly 80 percent to 36.3 peak megawatts-a break from a 10-year history of modest growth. Domestic solar thermal collectors, which can substitute for standard electric space and water heating units, increased 34 percent in 2001 to 11.2 million square feet and had a value of $32.4 million. Total value (domestic shipments plus exports) rose 13 percent to $305 million.
Investment in solar collectors and photovoltaics for the home and small businesses is at least as much about environmental awareness, lifestyle, quality of life and advances in the technology of building as it is about the cost of non-solar energy. Thus, the first-ever Solar Decathlon (SD) in October 2002 on the Mall in Washington, D.C., attracted an enormous crowd.
Fourteen colleges from across the United States and Puerto Rico competed at the SD by showing off the solar technology employed within houses they constructed on the mall. The equipment and building technologies used supported all the power, heat and cooling needs of the households, with enough power left over to power electric vehicles used to move around and beyond the site.
Most schools were represented by more than a dozen students who interacted with the public, explaining the features of the home and the equipment. Several emphasized that most everything used to support solar energy service could be obtained off the shelf.
Solar demonstrations such as the SD and supporting material offered on Web sites and at Home Depots, low interest rates and high natural gas prices are expected to contribute to increased investments in solar technologies in 2002.
Distributed Microturbines Offer Significant Opportunities for Utilities
The ordering of micro-turbines and micro-cogenerators in 2002 was negatively influenced by corporate restructuring taking place in the wholesale part of the natural gas and power business, and by the expectation that wholesale natural gas prices will stay high relative to wholesale power prices over the next several years. Yet, distributed microturbines offer utilities and other retailers important opportunities to defer expenditures on major expansion of generation capacity and supporting infrastructure. This equipment allows companies to scale capacity upward in steps as uncertainties in additional loads get reduced. The greater the uncertainty associated with the timing and amount of additional loads and the price of power and price of the generation fuel used to generate the power, the greater the value associated with distributed technologies.
Uncertainty warns against supporting major expansions in generation capacity. The uncertainty and the ability or option to defer major expenditures by utilities can be translated into a dollar value calculation by using real option approaches to investment valuation rather than the computationally convenient net present value (NPV) approach. NPV calculations usually assume the uncertainty away and are unrealistic for that reason. The real world is represented by calculating real option value associated with the uncertainty involving the value of additional investments. Yet, real option calculations aren't used much even though important commissions have required utilities to consider and prepare requests for proposals for distributed generation as part of the utility planning process.
The problem is that the real option approach requires the estimation of statistics and models that are much more complicated than an NPV calculation. This is particularly important in light of Enron, because models that managers and the investment community did not understand were used to generate fictitious value. Until management, regulators, and investors and sources of investment funds are made aware of the value of this newer approach to investment valuation and are comfortable with it, distributed generators will be ignored even when they are the economic investment. Unfortunately, real option calculations are often most appropriate for computing value for several of the other alternatives considered here.
Future Prospects for Alternatives to Conventional Generation
Although a reduction in spark spreads in the last year has dampened investment interest in distributed generation, the rise in the level of natural gas prices, both wholesale and retail, has increased the level of interest in solar technologies and in wind. Price matters. Yet future prospects for these technologies as well as fuel cells will be much influenced by other factors as well:
- Improvements in methods for determining the value of assets such as distributed generators;
- Information programs, taxes and subsidies at the state level;
- Continued sharing of knowledge of solar building and equipment technology by builders and candidate building owners;
- Labeling and tracking the green power commodity and technology; and
- Assigning initial green-power property rights to utilities.
In addition, over the next year it is expected that there will be an increase in the public awareness of the relationship between domestic security risks and conventional generation. Of course, this will influence the prospects for investment activity in alternatives.
Articles of Reference on Distributed Generation
- Wind Turbines and the Importance of State Programs
- Jeff Price, "The Production Tax Credit: Getting More Credit Than It's Due," , page 38-41.
- Solar Thermal and Solar Photovoltaic
- U.S. Department of Energy, "Solar Decathlon 2002 - Energy We Can Live With" DOE/GO-102002-1580, September 2002.
- Energy Information Administration, U.S. Department of Energy, "Renewable Energy Annual 2001 with Preliminary Data for 2001," Nov. 22, 2002.
- Fuel Cells Survey
- Mark Cropper and David Jollie, "Fuel Cell Systems: A Survey of Worldwide Activity," Nov. 14, 2002, Fuel Cell Today,
- Carl J. Levesque, "How Soon Is Now?," , November 1, 2001, page 18-28.
- Real Option Value and Distributed Generation
- Jonathan A. Lesser and Charles D. Feinstein, "Distributed Generation: Hype vs. Hope," , June 1, 2002, page 20-28.
- John C. Hull, fifth edition, Options, Futures, and Other Derivatives, Upper Saddle River New Jersey: Prentice Hall, 2003, "Real Options," page 660-677.
- New York Public Service Commission, "Opinion and Order Approving Pilot Programs for Use of Distributed Generation in the Utility Distribution Planning Process," Opinion No. 01-5, Oct. 26, 2001.
- Green Power Labeling and Technology Tracking Issues
- Andrew Greene, "What Color Is Your Electricity?" Public Utilities Fortnightly, July 1, 2002, page 14-21.
- Green Power and Property Rights
- Paul N. Belval and Mary F. Rossitti, "The Green Controversy" , Nov. 1, 2002, page 34-40.
- Overview of Cost Estimates for Alternative Technologies and Carbon Dioxide Savings and Other Important Issues
- Henry R. Linden, "Bridging the Carbon : Fossil Fuel Use", Public Utilities Fortnightly, Nov. 15, 2002, page 32-41.
- Technology Change
- John Herbert, Clean, Cheap Heat, The Development of Residential Markets for Natural Gas in the United States. New York, Praeger, 1992.
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Will state budget shortfalls threaten tax credits and subsidies?