A Better Opportunity?
Many US wind companies are starting to look at developing solar projects in the United States at the same time that the more established US solar companies are more focused on opportunities outside the United States. Does this pattern make sense? Top executives from two US wind companies and two US solar companies talked about it at the Chadbourne global energy conference in San Diego in June. The following is an edited transcript. The panelists are Gabriel Alonso, CEO of Horizon Wind Energy, Carlos Domenech, president of SunEdison, Robert Hemphill, president of AES Solar Energy, and Paul Kaufman, executive vice president of enXco. The moderator is Noam Ayali with Chadbourne in Washington.
MR. AYALI: Gabriel Alonso, why start looking at solar projects? Why not stick to what you have already been doing, which is wind?
MR. ALONSO: The US wind industry had a record year last year in terms of installing new wind capacity, but none of that was driven by actual demand for electricity. Ten thousand megawatts of new wind capacity was installed in 2009, driven by the fact that many players like our company had 70% of the investment committed through frame agreements for wind turbines, and we had to make the choice of putting all that 70% in committed capital in the garage while piling up financing costs, or spending the remaining 30% and getting the 30% back from the government as a Treasury cash grant and have the 70% generating at least some revenue instead of costs.
That same situation remains right now. The demand is not there. The fundamentals of the industry are weak. Demand for electricity is down. Prices for electricity are down.
In such an environment, we are looking for a less mature market and a little bit less competition where there are still opportunities for growth and potentially attractive returns. Solar is an interesting market. We can leverage the in-house expertise we already have. Developing, building and running a solar power plant is not that different from a wind farm. We know how to develop projects, we know how to get the land and how to do the permitting, and we understand the energy markets.
MR. AYALI: Paul Kaufman, is enXco being drawn into the solar market for the same reason?
MR. KAUFMAN: It is. Our parent company in Europe has been focused on solar for a long time, so it is a natural progression for us. Solar is a more flexible medium, which makes it interesting. It can be put in different places and there are lots of different applications. I agree with Gabriel that the skills that a wind development company has appear to translate well into solar.
MR. AYALI: Shifting to the two solar companies, Carlos Domenech, why is a solar company like Sun Edison now looking for projects overseas? Where are the best opportunities — here in the United States or abroad?
MR. DOMENECH: SunEdison is part of a company called MEMC, which is a semiconductor company that develops silicon for the semiconductor business and wafering technology for the solar business. SunEdison is a development company. Our market has been in the US and the company remains US centered. We have been looking lately overseas because we see opportunities, especially in countries with feed-in tariffs. The overseas markets on which we are concentrating are markets where we think solar will be competitive with other forms of electricity without feed-in tariffs within three to five years. They are markets like Italy, Spain, North Africa and some other parts of the world where there is an abundance of sunlight.
MR. AYALI: You have a project in the Emirates. I don’t believe there is a feed-in tariff there. How does that project fit in the larger plan?
MR. DOMENECH: We are building the first rooftop project as part of the Masdar initiative. Electricity is heavily subsidized. The project is more of a strategic play in the region.
MR. AYALI: Bob Hemphill, what is the story at AES Solar? Is it looking for projects outside the US and, if so, why not the US market?
MR. HEMPHILL: When we started in the solar business two and a half years ago, the focus was entirely outside the United States. We were focused exclusively overseas because of the availability of generous feed-in tariffs. To date, probably 90% of our activity has been in European and other markets, including India. We now think that the US market may be becoming more attractive. Last year, the US built — these numbers may be unreliable — something like 570 megawatts of solar. Germany, where honestly there is no sun, built something like 2,500 to 3,000 megawatts that work something like four days a year as far as I can determine, but the Germans are willing to pay for it. We are already overseas, and we are only slowly and carefully coming back to the United States.
MR. AYALI: Which markets overseas remain most attractive?
MR. HEMPHILL: This may sound simple minded, but it is a better idea to build this stuff where there is sun — no one in Canada understands that either — so you look at the maps and go to the red places. [Laugher]
MR. AYALI: . . . and within those red places if you have to choose?
MR. HEMPHILL: It is Spain, Italy, the south of France, Greece, Bulgaria. It is Turkey; if it would ever pass a feed-in tariff, we would be there tomorrow. It is India, which has an interesting program, although you have to cope with the frustrations of trying to do business in India.
MR. AYALI: Both of you mentioned Spain as a good opportunity. Hasn’t Spain just cut its feed-in tariff and done so in a way that not only affects new projects, but also reduces payments on which existing projects were counting in order to secure their financing?
MR. DOMENECH: I am Spanish just like my compadre here, Gabriel, so I may be a little biased. We are looking for good long-term markets, markets that show potential even after any feed-in tariffs to jumpstart the business expire. Our model is distributed generation at its core, even though we are building a 70-megawatt plant currently in northern Italy. Distributed generation is a compelling business model in countries where the cost of energy is increasing. We follow the red zones and align the regulatory environment to deploy meaningfully.
Value in Diversification?
MR. AYALI: Gabriel Alonso, coming back to you, is part of the attraction of solar for a wind company that a diversified renewable power company is a more attractive story for the financial markets when go to raise capital?
MR. ALONSO: The answer may be yes in theory, but the practical reality is no. By entering solar, you have technology diversification. However, the technology does not come without risks.
The reality is we have no difficulty raising capital as a wind company. If you have a 500-megawatt wind project portfolio with projects in Poland, the UK and here in the US, with long-term offtake contracts with creditworthy utilities, then you will have access to both debt and equity. The problem is that right now it is very difficult to secure long-term contracts to sell electricity to utilities. It does not matter whether your portfolio is made up of wind, solar or biomass projects; if you do not have long-term offtake contracts, then it will be very difficult for you to access the debt and equity markets.
MR. AYALI: Paul Kaufman, do you agree that having long-term offtake contracts is more important than geographic and technological risk diversification?
MR. KAUFMAN: It is all about stability right now. Stability is absolutely critical. The market would be uncomfortable today with any company that has a large merchant exposure. Maybe in the longer term when the market recovers, diversification will again add value.
MR. AYALI: Bob Hemphill, AES has been focused primarily outside the United States from the start. Who is your competition in those places — local solar companies, large European utilities?
MR. HEMPHILL: The principal competition is EdF EN, the parent company of enXco, Paul Kaufman’s company. It is very good and quite committed to both the wind and solar markets.
There are some US players starting to move carefully into Europe. SunPower is an example. Then there are some local companies who play on a national scale within particular countries. For example, there are three or four solar companies that grew up in the solar market in Spain and that are starting to expand outside their national turf.
The thing that has always interested me, and for which I say a small prayer of thanksgiving every morning when I get up, is that the really big players are so far not present. There is no Iberdrola, no Enel, none of the Germans. Except for EdF EN, there isn’t any really large, well-capitalized solar-only player yet. I am sure that will change, sadly, but it is pretty neat at the moment.
MR. AYALI: You suggest that it is inevitable that the larger utilities like Iberdrola and Enel will step into the solar market. Why?
MR. HEMPHILL: A question about which each of us on this panel thinks about is whether it better to be a single-focus company if you want to extract the maximum value for your investors from the market place or to be slightly balanced. If you look at the most recent data, EdF EN is able to raise capital at a better multiple to earnings than the pure wind guys, but it could be that they just are better overall and execute better, or could it be they are smaller and, therefore, they haven’t gotten to that 7,000 to 10,000 megawatt plateau from which it is difficult to continue to grow at 20% a year because the miracle of compounding starts to work against you. I don’t think anybody knows yet.
MR. ALONSO: I think it is important to be a player with a balanced portfolio, but your balance does not come from diversifying your technology exposure. We are talking about regulatory exposure. It is important to be in different markets so that you can cope with the craziness of a government like the one in Spain. You also have to keep an eye on the different credit risks as you enter into long-term contracts. If you are building wind and solar projects in California, I don’t know how much your regulatory risk is being diversified, but your credit risk will be diversified if the offtakers are different.
For the bigger players like Iberdrola and EdP in our case, it is a matter of finding the best value for our shareholders and, right now, we at EDP look for long-term contracts. That is the reality of the market. Long-term certainty is what the investors are demanding currently, and if those long-term contracts are easier to get in solar, then that is where we apply our existing expertise as developers.
Agnostic About Technology?
MR. AYALI: Paul Kaufman, is your focus in solar primarily photovoltaic or concentrating solar projects?
MR. KAUFMAN: We are looking as a company at all the resources, but PV appears to have an edge. There is less technology risk, and it easier to deploy. We are interested in central station power plants.
MR. AYALI: Gabriel Alonso, you have stronger views on the benefits of PV versus CSP, I believe?
MR. ALONSO: No, we are developing solar projects, but we are technology agnostic. The reality of the US business is that you have to monetize both the electricity you are producing and the tax benefits you receive. You have to be guided on technology by the preferences of your two partners — the utility buying the electricity and the tax equity investors who are willing to take the tax subsidy. At the moment, PV looks like it has the lead. The prices for PV equipment are coming down fairly fast.
The competition between the two solar technologies reminds me of the wind market in the 1990’s. There was a debate between pitch and stall technology. Pitch was the more complex of the two. It was more expensive, but also more productive. Stall was simpler to operate and less productive, but cheaper in price and operational costs . In the end, the pitch technology applied by Vestas, Gamesa, Enercon, GE and others won the technology race. It won because you had a very attractive feed-in tariff in Europe, and the incremental megawatt hours you could generate with a more productive turbine justified the additional expense and spread the operational fixed costs over a larger number of megawatt hours.
We are seeing the opposite happening today in solar. The cheaper technology, the one that is easier to permit and deploy, is the one that is winning at this point in the race. We will see what happens ultimately. Utilities don’t appear to care which technology is used as long as the developer delivers the megawatts hours he has promised in the power contract. CSP has a problem with water; it needs a lot and water is not easy to find in sunny locations. CSP has failed so far at creating volume to bring down the cost. I think people went from five-megawatt prototypes to entering into 1,000-megawatt PPAs with utilities, and they thought that the market would be right there just because they have a contract. I don’t think that is happening.
MR. DOMENECH: The technology that wins is not necessarily the best technology; it is the best enabled technology. We are technology agnostic as well. We test multiple technologies, but one of the reasons we have put more emphasis on PV is we see a three- to five-year path to grid parity.
MR. AYALI: Bob Hemphill, is AES Solar also technology agnostic?
MR. HEMPHILL: I know the answer is supposed to be that we are technology agnostic. I am not technology agnostic. Solar thermal is a stupid technology. The ideal place for it would be a desert where there is plenty of water. It relies on too much engineered metal. It will never be cheaper than photovoltaic. I wouldn’t take a solar thermal plant if you gave it to me. [Laughter]
MR. AYALI: That is pretty clear.
MR. DOMENECH: But would you put PV in Germany? [Laughter]
MR. HEMPHILL: No. I wouldn’t do that either. [Laughter]
MR. AYALI: Let’s spend a little more time on comparing the US and overseas opportunities for solar developers. PPA economics — are they more favorable overseas than in the United States?
MR. HEMPHILL: They are far better in Europe. It is pretty simple. Europe is not a demand-and-supply market. The tariffs are set ahead of time, and the miracle of competition has driven down the cost of photovoltaic installation much faster than the tariffs in Europe have come down. The US remains interesting, but that is principally because of the generosity of the federal tax credit and the five-year MACRS depreciation.
MR. ALONSO: When we look at investing in a wind farm or a solar project in Spain, Italy or Germany, versus doing a project in the US, it is not the same. In the US, you have a contract with a utility to supply power for 20 years whose rates will be approved by the state public utilities commission, and the rates will be passed through to consumers. There is a tax subsidy that you convert into cash in the first years of the project rather than rely on a feed-in tariff that will run for the full 20 years of the project life.
What the experience today in Spain is teaching is that your risk of not realizing the full deal may be lower in the US with a long-term offtake contract than in countries with feed-in tariffs because, at the end of the day, when countries like Spain are facing a severe downgrade in their credit ratings, they prefer to default on the incentives for wind and solar developers than on their own debts as a country. End consumers are more reliable on the long term.
So I think we prefer a long-term power contract in the US, even at a slightly lower return. I lived in Germany and, as Bob Hemphill mentioned, it is sunny four days a year and the four days that it is sunny, there is not much demand for air conditioning because people are outside enjoying the day.
The fundamentals of the solar business are in question in places like Germany. How long will the country be willing to pay more for solar than other forms of electricity? The business will survive only if the cost of equipment comes down quickly as it did with wind.
MR. HEMPHILL: There are other factors that affect your decision-making about where to invest. Public policy support explains why there is so much solar investment in New Jersey, which is only slightly sunnier than Germany, and in Ontario, which has a very active solar development market, and we are participating there as well. In Europe, there has been a lot of investment in solar, and a lot of expertise is centered in the balance-of-system contractors. You try to translate that to the United States and there isn’t the same concentration of experience. The reduction in balance-of-system costs in Europe is a reflection of that. Europe has spent a lot of time and energy on balance of system, and the US is not quite there yet.
MR. AYALI: I am still trying to get into some granular notions of the comparative opportunities. How would you compare construction costs in overseas markets to the United States?
MR. DOMENECH: The Germans have worked up the learning curve and know how to do things well. There are labor-related costs that plague them, but our experience has been that there are a number of very sophisticated European companies that are really great because they have lots of experience, and now they can deploy very quickly.
We have the capacity today to install 600 kilowatts of capacity a day, which is relatively meaningful for PV solar. In the US, we had to do our construction in house because we couldn’t find independent contractors experienced enough to do it well, but in the last couple of years, we have been working closely with a few to push them up the learning curve, and we are pleased with what we are seeing. The same thing is true in Canada.
The knowledge and experience base is still better in Europe, but the US is catching up. I think the US will eventually pass Europe because of competitiveness and the way the US deploys resources. Construction costs in India are perhaps the cheapest we have seen. We do not have a lot of experience in China. We are building a plant there, but we are not getting the same quality that we see in other countries.
MR. HEMPHILL: It is an interesting question, and it is a conundrum for the industry. When you look at the cost, look at what you are paying for panels versus balance of system, and it is about half and half. Your balance of system is some holes in the ground, some posts, a bit of cable and some inverters, and you are paying, in utility terms, somewhere between $1,200 to $2,000 a kilowatt for what is essentially an electric fence. I can build a combined-cycle gas plant for under $1,000 a kilowatt, so there is no reason on God’s green earth why what is basically a support structure should cost me more than $1,000 a kilowatt.
The cost has come down dramatically, but there is enormous room for it to come down more. I am confident that — who knows how many — a thousand panel manufacturers or 150, depending on which list you read, will bring the price of panels by beating each other up and I don’t have to worry about that, but the balance of system needs specific effort on the part of developers to make it much less expensive than it is.
MR. DOMENECH: When you have multiple form factors with different panel types, it is really hard to achieve scale and to have the harmonics rightly aligned to where the utilities really need. That’s where the technology becomes important. For us, we are literally going to cut in half our cost from what it was two years ago just by having a systems roadmap that is aligned with a technology roadmap. We do it by working with vendors to get panel form factors that make sense for us versus what they think makes sense and to focus on elevating the quality. I mean, 600 kilowatts a day doesn’t happen just because you hire more installers. It happens because you align technology.
MR. AYALI: We have just a few minutes for audience questions.
AUDIENCE MEMBER: Mac Irvin from SunPower. Question for Mr. Hemphill. How does political risk factor into your market entry decisions? How do you measure your progress and how do you decide to leave?
MR. HEMPHILL: Fortunately, not everywhere we are is drowning in political risk, although several places are.
What is most useful is if we have people already on the ground who understand the country and we already have other facilities there. For example, when the Bulgarians passed a generous feed-in tariff, we already had a 650-megawatt thermal power plant about 80% complete and we had a 150-megawatt wind plant in construction. It enabled us probably to save the six months that it might take another company to establish operations. We already had an office. Our team there already knew which lawyers were good and which ones were not. It already knew which auditors to use. It already had relationships, and we could piggyback on the existing relationships with the national utility.
The opposite can also be true. Ukraine passed a generous feed-in tariff. We have businesses in Ukraine. I called up our guys in Ukraine, and they said, do not come here. This place sucks. [Laughter]
MR. AYALI: Not to put too fine a point on it.
MR. HEMPHILL: They give you some guidance. [Laughter]
MR. MARTIN: Of the wind companies, Horizon and enXco in that order, how much new capacity will you install this year in solar PV versus wind?
MR. ALONSO: Zero solar PV in 2011, and zero solar PV in 2012. We are right now building our pipeline. As long as the US Treasury is only offering cash grants under the economic stimulus measures on wind farms through 2012, we are focusing our efforts 100% on wind. If we do some solar, and we have a couple of opportunities, it will be small. We are more on a walk-before-you-run approach to solar. We will start small before we do a much larger, utility-scale project.
MR. KAUFMAN: We are very active up in Canada and expect to have 30 to 40 megawatts of solar in service by the end of this year. Our activities in the US are on a smaller scale, but we do a lot of distributed generation and have started to do some transactions where we develop for others.
MR. MARTIN: A final question for the two solar companies: How much does utility-scale PV cost per installed megawatt? With wind it’s about $2 to $2.2 million on average per megawatt.
MR. DOMENECH: I’ll let him go first.
MR. MARTIN: Okay, Bob Hemphill?
MR. HEMPHILL: It’s more. [Laughter]
MR. MARTIN: Carlos Domenech, can you add to that?
MR. DOMENECH: I concur. [Laughter]