United States of cleantech: Can the US lead the world?

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Congress may be divided on climate & energy law, but recent low-carbon advances in America could have major implications for the global economy.

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In spite of a very divided US Congress, huge investments were made to transform the American economy during 2011. The benefits of improved energy security, stronger trade balances, technology and industry leadership, not to ignore the associated environmental gains, are increasingly evident. Following on from our review of new Chinese and German developments (refer here and here), we see it as timely to also review recent advances in the American low-carbon economy. Many are world leading and their implications for the global economy in the next few decades should not be underestimated.

Figures from Bloomberg New Energy Finance recently reported that the US was considered to have the highest level of investment in clean energy in the world during 2011. Bloomberg estimates that the investment level was $US55.9 billion, a 33 per cent year-on-year increase to overtake the incumbent #1, China! By comparison, China moved to #2 at $US47.4 billion, a growth of just +1 per cent year-on-year.

US Government Initiatives

The Obama administration has made a concerted effort to improve American energy security, reduce dependence on foreign oil, stimulate the US economy and encourage the RD&D (research, development and deployment) of renewable energy technologies. In doing so, the US has, by any reasonable measure, made progress in the task of addressing climate change. Several key initiatives that the Administration has deployed and are worthy of understanding in some detail include:

1. The “1705 DOE loan guarantee program” – which gives a Department of Energy (DOE) endorsement allowing a firm to secure a long-term loan guaranteed by the DOE. Importantly, the loan can be raised to help fund construction, whereas most long-term loans are commercially available only post commissioning of a particular plant. The 1705 program leverages both the endorsement of the DOE, but just as importantly, relies on the credit rating of the Federal government, allowing very commercial rates to be locked in for 10-20 years.

2. ITC Cash grants – Renewable energy projects approved by the US Treasury during the period 2009-2011, and which have construction commencing before 1 October 2012, have been eligible for a cash grant equal to up to 30% of the total project cost (under section 1603 of the ARRA, otherwise known as the Recovery Act). To-date, US$10.4bn in grants have been awarded on projects worth US$35bn. The later amount covers projects across all renewable technologies, that is wind, thin-film solar, solar modules, solar thermal, geothermal heat pumps, shallow geothermal, CHP, landfill gas, biomass and small hydro (refer here).

3. Mandatory renewable energy targets (RET) – while there is no Federal US RET target, 29 US States have set their own targets. The most demanding of these is in California, where there is a requirement to produce 33% renewable energy by 2020. This is followed by Nevada at 25 per cent by 2025 and Hawaii at 40 per cent by 2030 (refer here). These mandatory RETs mean that in the main renewable projects in America have been able to find electric utilities willing to sign power purchase agreements (PPA) over the life of a project, which are typically 20-25 years in duration (by comparison, Australian renewable projects are lucky to get a 15 year PPA).

4. PURPA – The Public Utility Regulatory Policies Act, passed in 1978, mandates that electric utilities must interconnect with renewable power production facilities. This is similar to Germany, although there is no equivalent in Australia.

5. Production Tax Credit (PTC) – The PTC is a corporate tax credit which credits 2.2c per kWh for electricity produced by wind power. The PTC was extended by the American Recovery and Reinvestment Act of 2009, but is due to expire at the end of 2012.

6. Electric Vehicles (EV) – A target of 1 million EV by 2015 (refer here).

7. Passenger vehicle emission standards – On November 16, 2011, the Environmental Protection Agency (EPA) issued the National Program of harmonised greenhouse gas and fuel economy standards applying to passenger vehicle model years 2017 through 2025. Delivered under the Energy Independence and Security Act (EISA), this sets what is otherwise known as the CAFE standard (refer here).

As is common in Australia, the US Congress has been very effective in undermining President Obama’s initiatives, much to enthusiasm of the fossil fuel industry.

Headwind – low gas prices driving lower electricity prices

A major headwind to renewable energy deployment in the US that emerged over 2010-2011 was the development of huge shale gas reserves, made possible by the US government’s Clean Air Act exemption of gas fracking. The increased availability of shale gas has seen a dramatic fall in US domestic natural gas prices, dropping from an average of $US7-8/MMBtu over 2007-2009 to average $US4.38 in 2010 and then 10 per cent lower again at $US4.04 in 2011 (to quote Henry Hub pricing). 2012 year-to-date gas prices have averaged US$2.60, 40 per cent below 2011 levels.

With a significant amount of US electricity swing capacity tied to natural gas, a significant decline in operating costs has reduced overall electricity prices in America. Average CY2011 PJM wholesale prices for electricity were $US48.31/MWh, -5 per cent yoy vs $US50.85 in 2010. The PJM wholesale price year to date in 2012 is $US35-40/MWh (-25 per cent v 2011 levels). Interestingly, US electricity retail prices are forecast to rise slightly over 2012, despite the rapid decline in wholesale prices (Australia has seen a similar divergence i.e. rising retail electricity prices even as wholesale prices hit record lows).

With this background, it is appropriate to review developments in several renewable energy subsectors in the US, some of which provide significant promise for a global deployment later this decades.

Vehicle Emission Standards – Significant Improvements

A key success attributed to President Obama in November 2011 was the EPA’s announcement that 90 per cent of the US automotive industry firmly supported President Obama’s call for a major lift in emissions standards for passenger vehicles over the next decade. These new Corporate Average Fuel Economy (CAFE) standards to apply for models released between 2017 and 2025. The standards require that auto makers boost average fuel economy to 35.5 miles per gallon (mpg) by 2016 and to 54.5 mpg by 2025. This energy efficiency boost of over 100 per cent by 2025 relative to 2011 levels and equates to an average 5 per cent annual efficiency gain. This regulation provides long-term regulatory clarity, and represents a major national goal, particularly in the context that US CAFE standards have made almost zero progress over the last two decades. The EPA estimates these standards will reduce oil demand by 4 billion barrels and reduce greenhouse gas emissions by 2 billion metric tonnes over the life of the models impacted.

The EPA directive also provides a strong incentive for the auto companies to accelerate the development of US electric vehicles, plug-in hybrid electric vehicles, fuel cell vehicles and hybrid trucks.

They also move the US closer to the world leading standards that have been established and regularly enhanced in Europe. In 2013 the latest Euro IV regulations come into force, which mandate further material reductions in NOx emissions for passenger vehicles, driving a boom in demand for catalytic converters.

Electric Vehicles – 1 million by 2015

In President Obama’s Febuary 2011 State of the Union address, an aggressive target of 1 million EV on the road by 2015 was set. China has set a similar target in its 12th Five Year plan. Why this target? Obama’s aim is clear: “dramatically reducing dependence on oil and ensuring America leads in the growing electric vehicle manufacturing industry.” He continued: “Leading vehicle manufacturers already have plans for cumulative US production capacity of 1.2 million EV by 2015… to accelerate America’s leadership in EV deployment, including improvements to existing consumer tax credits, programs to help cities prepare for growing demand for EVs and strong support for R&D.”

To this end, the DOE provided $US2.4 billion under the stimulus plan of 2009 to support 48 advanced battery and electric drive projects. A123 Systems received a $249 million grant to help fund a greenfields lithium-ion automotive battery plant in Michigan, Johnson Controls received $299m for another lithium-ion battery plant (also in Michigan) and SAFT SA of France won a US$100m for another lithium-ion battery plant focused on non-automotive applications. All of these plants are now operational and helping to drive the cost of lithium-ion batteries down. In a 2011 forecast, Johnson Controls estimated a 65 per cent reduction per unit of battery storage by 2025 would be delivered through technology enhancements and economies of scale, accelerated by ‘learning by doing’.

Solar Capacity – 4-5GW of installs in 2012?

From a virtually standing start, the US made considerable progress in commercialising solar energy. Installation activity was considerable at the smaller scale segment, delivering distributed energy for residential, industrial and commercial applications. Additionally, a significant number of large-scale centralised solar utility projects have received regulatory approvals, signed power purchase agreements (“PPA”) and commenced construction.

The US installed over 2.0GW of solar in 2011, representing 100 per cent growth over the 2010 installation rate of 1.0GW, which itself was 100 per cent growth over 0.5GW in 2009. By the end of 2011, the cumulative installed solar base in the US reached 5.2GW and in doing so overtook Japan to become the third largest in the world (behind Germany at 25GW and Italy at 12GW). We expect US installations to again double in 2012 to over 4GW.

Why this current annual doubling in installation rates since 2009?

1. The installed cost of solar has halved in the last two years, driven by economies of scale, technology enhancements and learning by doing;

2. The Department of Energy loan guarantee program has underwritten project funding;

3. The lifting in 2011 of the mandatory renewable energy obligation in California to 33 per cent by 2020 (California and Arizona have the highest solar radiation levels in North America, 50-100 per cent higher than the US average, halving solars’ levelised cost of energy vs US averages);

4. US electricity utilities have been very actively moving to fulfill their renewable energy obligations by signing long-term PPAs (averaging 20 years, well above the 10-15 years seen in Australia);

5. The ITC cash grant equal to 30 per cent of a project’s value have underpinned first of a kind utility-scale projects;

6. The US Bureau of Land Management (BLM) has been very supportive in providing project developers access to government land, accelerated project approvals and working with environmental groups and developers to provide solutions to issues raised by local communities e.g. threats to endangered species; and not the least,

7. PURPA requires the relevant grid transmission operators to provide grid access.

The U.S. government has sponsored a wide variety of solar technologies for utility-sized solar projects, recognising that a breadth of alternatives is needed to solve this energy security issue on a sustained basis. The US DOE has underwritten the commissioning of 10-15 solar projects over 2010-2015, each of which are larger than any other solar project currently operating anywhere in the world.

The US is well down the path of building several of the world’s largest solar module projects, including the 250 MW California Valley Solar Ranch being built by SunPower Corp. (now majority owned by Total of France), with a 20 year PPA from Pacific Gas & Electric Co (PG&E). The Mesquite Solar project is a photovoltaic solar power plant being built in Arlington, Arizona, and is owned by Sempra Generation. Phase 1 will have a nameplate capacity of 150MW using 800,000 solar panels from Suntech Power, costing $US600 million. Construction began in 2011, with completion due in 2013, and is projected to generate more than 350GWh of electricity annually. Sempra signed a 20-year PPA with PG&E.

Additionally, First Solar has a number of world leading thin-film solar projects under construction, including two that are of 500MW peak capacity each; Desert Sunlight and Topaz Solar farm are both located in California. In December 2011 Warren Buffett’s Mid American Energy Holdings spent a rumoured $US1.8 billion acquiring the Topaz project. Topaz qualified for the 30 per cent ITC cash grant, but failed to get all approvals in place in time to gain a DOE loan funding. However, funding by Mid American should solve this! Topaz has a 25 year PPA signed with PG&E Co (a key Californian electricity utility), underwriting the revenues for the entire life of the project. Southern California Edison Co. will purchase for 20 years the output from First Solar’s 250MW Silver State South project in Nevada. It’s scheduled to begin producing electricity in May 2017.

The 370MW Ivanpah Solar Power Facility (Brightsource), located in California’s Mojave Desert, is the world’s largest solar concentrating solar power (CSP) plant currently under construction, due for completion in stages from 2015 to 2017. The Solana Generating Station is a 280MW solar power plant under construction near Phoenix, Arizona. The Mojave Solar Park is a 280MW solar thermal power facility in California, due for completion in 2014.

To illustrate the quantum leap in scale of solar utility projects, one of the largest solar plants in the world opened in 2009 was the 53MW Lieberose solar farm in Germany. In 2010 the 81MW Sarnia Photovoltaic Power Plant in Canada was commissioned. By 2011 the 150MW Andasol project in Spain became one of the largest plants then operating. As discussed above, America is already building a number of 150-500MW projects. But in January 2012 GCL Poly Energy of China announced what is likely to be the world’s first 1.0 GW solar project at Datong City, Shanxi Province, while in December 2011 China Wind Power likewise announced a 1GW solar project in Jiayuguan.

Onshore Wind Farms – 8 GW in 2012?

The total capacity of US onshore wind farms operating by the end of 2011 was 47GW, 60 per cent more than in Germany and second in the world behind China at 60GW. To put this into a local context, this is 2000 per cent greater than the 2,224MW of wind farms currently operational in Australia.

The Global Wind Energy Council reports total American onshore wind farm additions in 2011 were 6.8GW, in line with the US’s last three years average. However, the volatility of installation activity is extreme, with US installs of 10GW in 2009 halving to 5GW in 2010 then rising 60 per cent year-on-year in 2011 (refer here).

Industry participants fear a “boom” will occur in 2012 as developers seek to lock in project completions before the PTC expires at the end of 2012. Nextera Energy (the largest wind farm owner in North America) and Vestas (the world’s #1 wind turbine manufacturer) have both recently warned that if Congress refuses to extend the PTC, it will inevitably see another bust in 2013. Wind installations of some 8 GW are forecast for 2012.

Offshore Wind Farms – Progress is slow

Offshore wind farms are currently being planned for the East Coast of America. However, progress is slow, reflecting impact of the oversupply of gas pushing electricity prices lower and the very high current cost of offshore wind farms pre-commercial deployment. We don’t expect major progress in offshore wind in America in the next few years. The UK, Germany, China and Korea will lead in offshore wind – and America will follow.

Energy from Waste

One area of significant potential is the US Energy from Waste (EfW) market. Currently depressed due to the very low wholesale electricity prices, there is in our view a huge market opportunity in the US. EfW accounts for only 7 per cent of US waste disposal, significantly below Germany at 32 per cent and Denmark, which is a world leader at 51 per cent.

In Hawaii, base load electricity is generated from imported oil, rather than gas. Hawaii will commission a $US300m world-leading EfW facility in mid-2012. This facility, under a build-own-operate contract with Covanta Holding, will generate 6 per cent of Hawaii’s electricity.

Geothermal – Progress is slow

While “deep” geothermal (wells drilled to a depth of 3-5km) has proven very problematic in the Australian market over 2010-2011, “shallow” geothermal (wells to a depth of only 1-2 km) as exist in California and Nevada are more mainstream and are of a lower risk. US listed firm Ormat Technologies is the world leader in shallow geothermal, with a long history of profitable operations delivering base load electricity from 500MW of geothermal power plants.

During 2011 Ormat secured US$350m to finance three new Nevada geothermal projects with a capacity of 60MW in stage I, potentially rising to 113MW in stage 2. The “1705 DOE loan guarantee program” gave a DOE endorsement that allowed Ormat to secure a 20 year construction loan (the actual loan was provided by John Hancock Life Insurance, with the DOE as guarantor) for 80 per cent of the total project costs at a fixed rate of 4.7 per cent pa. US geothermal projects approved by the US Treasury in 2009-2011 have also been eligible for a ITC cash grant equal to 30 per cent of the total project cost (under section 1603 of the ARRA, otherwise known as the Recovery Act).

While this expansion is promising, Ormat hit major operational problems with its $360 million, 50MW North Brawley plant in 2010 that have been to-date irresolvable. Two years after commissioning, the plant is still operating below EBITDA breakeven and at half its nameplate capacity. This major set back has dramatically curtailed Ormat’s plans to add some 100MW pa of new geothermal capacity. Shallow geothermal is an expensive, if clean, renewable energy source. But with no material reduction in capital costs in recent years, geothermal is largely reliant on an expected longer term rise in electricity prices in order to become more competitive relative to fossil fuels.

Tim Buckley is a Portfolio Manager at Arkx Investment Management

Arkx Investment Management focuses its investment approach on a portfolio of high conviction stocks in the listed global clean energy universe. It looks for proven performers with world leading technologies backed by strong balance sheets and priced on sensible valuation metrics. We have investments in some of the companies mentioned (Johnson Controls, SAFT, Covanta Holding, First Solar, GCL Poly Energy and Vestas).

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  1. Sean Gomez 7 years ago

    You might consider adding “..or can pig fly?” to the headline

  2. Andy @ Adam Capital 7 years ago

    Excellent article Tim, both succinct and in-depth. One piece you didn’t mention is the enormous potential of Solar Hot Water. Already widely used throughout Europe, Asia, and the Middle East, Solar Hot water has efficiencies of 75% or more, compared to PV efficiencies of 15 – 20%. It’s more cost-effective, and represents a $100 billion market in the US, where currently less than 2% of the market is taking advantage of solar energy to heat water. Apartment buildings, hotels, hospitals, university dorms, senior living centers, laundromats, spa’s, gyms, food processing facilities – there’s a long list of businesses that can lower one of their largest expenses with this proven technology. With significant incentives in many states, Adam Capital, Promise Energy and others are working to drive efficiencies of scale in this important market. This is a hot market and one to watch in 2012!

  3. Michael 7 years ago

    In a word – No
    Far too many vested interests trying to stop it from succeeding.

    Better to watch what happens in Germany.

  4. Merlin Wascom 7 years ago

    Thanks for the update on United States of cleantech: Can the US lead the world? – reneweconomy.com.au : Renew Economy – Merlin Wascom

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