IEEFA U.S.: A bankruptcy exception that proves the solar success rule
In the rush among rival pharmaceutical companies to create an antidote to the COVID-19 virus, one, or some, will probably succeed. Many won’t.
That’s how competition works—why there’s Netflix now and not Blockbuster, the iPhone and not the Blackberry, Amazon and not Sears.
It happens in any industry—renewable energy included—innovation leading to more innovation, one evolving business model beating out another, the moving train of change rolling on, regardless.
A bankruptcy filing the other day by Tonopah Solar Energy (TSE) is a good example.
TSE was created in 2008 at what seems in hindsight the distant dawn of the age of potentially profitable utility-scale solar power, when sunlight was beginning to be seen as a commercially viable source of electricity.
The federal government, alongside investors, put money—lots of money—into TSE, a subsidiary of a company called SolarReserve, which isn’t in business anymore either.
The cheapest forms of generation today are wind and photovoltaic solar.
The electricity-generation future, as pitched by SolarReserve executives, was going to be built more and more around solar, specifically around “solar power towers.” SolarReserve’s flagship project, Crescent Dunes, was put up near a town called Tonopah in the sunny desert of south-central Nevada. It was done on a $737 million loan guarantee from the U.S. Department of Energy (DOE) and the strength of a 2009 power purchase agreement (PPA) with NV Energy, the main electric company in the state.
Crescent Dunes was a difficult project built on a difficult model and didn’t get up and running until 2015. It was constructed around a circular array of 10,347 mirrors that concentrated sunlight into one elevated white-hot focal point that burned at 1,050 degrees Fahrenheit and turned salts into molten compounds that could be stored and used to generate steam to drive turbines that would feed electricity into the grid. Full stop.
It was complicated, in other words, and high maintenance, therefore, expensive.
SolarReserve was correct about the rise of solar, but it had picked the wrong delivery method. The fast-expanding utility-scale solar industry today is built around a different technology, photo-voltaic, or PV, arrays, which convert sunlight directly into electricity without the mirrors, the tower, the tanks and the turbines.
While the price of utility-scale PV varies deal by deal, most PPAs in the U.S. were for “less than $40MWh” during the second half of 2019, according to the National Renewable Energy Laboratory. By contrast, the Crescent Dunes PPA with NV Energy set a price of “greater than $135/MWh” that remained in place until NV terminated the agreement last year at $139/MWh.
NV Energy’s choice was completely rational. Crescent Dunes kept breaking down and its operation and maintenance costs were running at $173/MWh, according to data from S&L Global Market Intelligence.
Rival businesses helped replace old power-generation models with new ones.
A price of $135/MWh wasn’t out of line with the times over a decade ago, when utility-scale solar deals, depending on locale, were typically in the $150/MWh range and were being built as the high-cost ground floor of a new industry. Today, $135MWh is obviously not even remotely competitive, however, being on par with nuclear power, the costliest form of generation, and well above that of coal-fired power, which runs as high as $115/MWh, according to Lazard’s most recent annual Levelized Cost of Energy Analysis. The cheapest forms of generation today are wind ($28-$54 MWh), followed by PV solar ($32-$42MWh), followed by gas ($44-$68MWh).
UNDER THE PROPOSED BANKRUPTCY SETTLEMENT, THE FEDERAL GOVERNMENT WILL RECOUP $200 MILLION OF THE $425 MILLION IT IS OWED, so in one sense the project was a taxpayer loss.
In a larger sense, it wasn’t, because it came at a time when the utility-scale solar industry was still young, and the DOE—as per its mission to spur innovation—was helping seed the future.
The loan program in question, the Energy Futures Initiative, was created in 2005 and has since distributed over $30 billion to all sorts of projects that have included renewable ones as well as many in the flagging nuclear and fossil-fuel industries.
One measure of the program’s success is its default rate of 2.2%, which is about what default rates have been in recent years on residential property, farmland, and credit card debt but pales in comparison to, say, Small Business Administration loan-default rates, which routinely exceed 10%.
Another is the rise of a robust American renewable energy industry driven by competition that has fostered innovation. Data support on this point comes over and over again annually from the Energy Information Administration, which calculated this past January that the 11 gigawatts (GW) of generation slated to close permanently this year will be made up primarily of coal plant decommissionings (51%), gas plant shutdowns (33%) and nuclear-reactor closures (14%).
Almost 80% of all new power generation in 2020—32GW—will come from wind and (photovoltaic) solar.
Karl Cates is an IEEFA analyst.
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