Renewable energy, regulatory framework among energy hearing topics

By Bill Mooney, journalist for http://www.politickernj.com/ a NJ State House news bureau
August 24th, 2011 - 2:41pm

TRENTON – The importance of renewable energy programs, energy efficiency, and infrastructure location were among the topics at today’s hearing into Gov. Chris Christie’s proposed Energy Master Plan.

The final planned hearing – actually a continuation of an earlier hearing – featured a schedule of more than two dozen registered witnesses supporting, criticizing and analyzing aspects of the governor’s draft energy master plan.

Martin Kushler, a senior fellow with the Washington, D.C.-based American Council for an Energy Efficient Economy, raised a cautionary flag regarding the plan’s proposal to move from a societal benefits/certificates philosophy to a self-sustaining revolving loan fund.

He warned that their national research has shown that such loan programs are plagued by low participation, benefit a “niche’’ customer, and “decimate’’ energy efficiency.

“The cleanest kilowatt hour is one you never have to generate,’’ he told the BPU committee, and said he fears this draft plan will cost New Jersey energy efficiency rather than promote it.

Steve Morgan, CEO of N.J.-based solar-power developer American Clean Energy, said a good solar-energy policy with a sound renewable energy certificates program “has the ability to take the operational grid to the next level of reliability.’’

But for the recession, New Jersey’s already solid solar energy achievements would have advanced even further, he said, adding he is concerned the governor’s plan does not understand the importance of a solar energy set-aside program.

He said a critical issue concerns where critical energy infrastructures, such as power plants, will be located, and he urged some state agency be given authority over siting issues and the power to override local control. Zoning boards can be overridden, he said, but it is a costly and contentious process rarely invoked.

“Market forces won’t work until siting concerns are met,’’ he said.

Bruce Burcat, executive director of wind-energy supporter the Mid-Atlantic Renewable Energy Coalition, said the plan fails to consider the potential benefits of regional onshore wind energy.

And Chris Tomasini, vice president for business development at Ice Energy, said their company, which deals in the field of energy storage to improve grid load factors and enhance the value and efficiency of intermittent sources such as wind and solar, would like to shift manufacturing into New Jersey from New York.

He said their company sees some fertile ground in New Jersey for expanding and helping to relieve congestion and would like to see a regulatory framework put in place.

Commentary to State Leadership on Latest Energy Master Plan

August 1, 2011



Comments of American Clean Energy, LLC
Re: The New Jersey Energy Master Plan Draft 2011
Written and presented by Stephen E. Morgan

We commend the Christie Administration and the Board of Public Utilities for taking up the timely review and amendment of the New Jersey Energy Master Plan.  As the plan itself points out in several ways, we are at a critical cross road for energy supply security, cost effectiveness and reliability.  Much has changed in the economic landscape since the original plan was published in 2008 including significant reductions in both electric energy consumption and demand.  We are pleased to note that the Administration and the Board recognize that these short term reductions will not be permanent and in fact, once economic recovery begins we should expect a return to pre-recession trends made all the more serious by a looming generation capacity shortage that will attend that recovery.

American Clean Energy, LLC is a New Jersey based solar PV developer. We are focused on the development of net-metered solar projects for commercial, industrial and public sector customers.  We are in this business because we believe that Solar Distributed Generation represents one of the most viable forms of distributed generation which, when integrated with the interconnected grid, and eventually coupled with widely distributed energy storage technologies has the ability to take the operation of the grid to the next level of reliability and make it viable for the coming century.

Our belief is founded on over three decades of experience in the construction, maintenance and operation of the electric T&D infrastructure in this country and state.  The electrification of this country which has occurred over the last century has largely been responsible for fueling our economic growth.  In fact, according to US EIA data, the average Real price of electricity at the end of 2010 was the same as it was in 1960—for 50 years our electric energy prices have been indexed to GDP growth!

The promise of distributed generation technologies is not the replacement of the large scale interconnected T&D system in this country rather the enhancement of its performance.  Once energy storage technologies mature and are coupled with widely dispersed forms of alternative energy production, it is our belief that consumers will in fact see improved reliability, cost effective and secure sources of energy well into the future.  Distributed generation technologies are necessary but not sufficient to bring us to the next level of performance.  Nor is it likely that widely dispersed renewable energy generation will supplant or replace central station generation that relies on fossil and nuclear fuel cycles anytime soon.  However, as we move forward into this next century of electric energy production and transportation, there are real issues regarding security, cost, siting and societal benefits that favor the adoption of widely dispersed renewable generation.

American Clean Energy has a number of comments which are offered in the spirit of strengthening the Energy Master Plan.  We appreciate the opportunity to make those comments and have input into the process.  We have keyed our comments to the draft EMP goal to which they pertain.  Wherever possible, we have cited sources of data or analysis that we believe helps support our position on a particular item or point.

EMP Goal 1:  Drive down the cost of energy for all customers – New Jersey’s energy prices are among the highest in the nation. For New Jersey’s economy to grow energy costs must be comparable to costs throughout the region; ideally these costs should be much closer to U.S. averages.  

The implications of this statement are that NJ has the highest cost of energy in the US and as a result it is not competitive. Here are the facts.  According to US EIA data, at the end of 2009 the aggregate average retail price of energy in NJ was 14.52 cents per kWh ranking no 7 in the US.  New York ranked no.3 at 15.52 c/kWh and PA was 18th at 9.60 c/kWh.  But this does not tell the whole story.  Pennsylvania has just finally removed the retail caps that they placed upon the EDCs following deregulation in the late 90’s.  For over a decade, Pennsylvania maintained artificially low prices through regulatory initiatives.  Despite an avowed desire to let markets regulate energy prices, Pennsylvania intervened to prevent the market price from rising after they required the vertical disaggregation of the utilities in the state.  The expiration of these caps has come at a time when the wholesale power market price of energy in PJM has crashed as a result of the economic recession.  Once that recession is over and economic activity rebounds, we will experience a capacity shortage that surely will drive wholesale prices higher.  The question then will be what regulatory strategies will Pennsylvania have at its disposal?

Chart 1

In the case of NJ pricing, there was a clear decrease in pricing for all classes of customers as a result of the passage and enactment of EDECA.  That price decrease sustained prices below historic levels for most of the decade.  As a matter of fact, as measured in 2009 dollars-the dashed lines in the chart below- our prices for commercial customers did not increase above the prior level until 2007.  A similar trend exists for the other classes of customers.  That those prices increased is an artifact of the underlying cost of energy production.  The increase in BGS auction supply in 2006 through 2008 as a direct function of market price increases has been largely responsible for those increases and those energy price increases are more attributable to congestion and capacity constraints in our zone.

That trend has reversed during the recession as excess capacity in the generation market exists in PJM, indeed much of the country.   This needs to be seen as proof that markets work not the contrary.  We can’t aspire to open markets when it drives prices down and then close them as market forces drive them up.  We need to take a longer view of the problem.  It is not my aim to defend the deregulation of the generation market but now that it is deregulated, it will work as it is designed to.  When all of the tinkering and artificial controls are removed, prices will settle where needed to assure that new capacity will be built as older units are retired and load grows.  In that scenario, eastern PA should look a lot more like NJ in terms of energy pricing and that artificially imposed disparity will remove any incentive to move across the river.

Chart 2

This data simply does not support the thesis that the state and its consumers are at a significant disadvantage to the rest of the region simply due to energy prices.  But for the artificial cap on rates in PA, the price disparity would not exist and NY pricing always has been significantly higher than NJ for all classes except Industrial customers.  Industrial customers as a total portion of load share are less than 11% and Industrial rates, as typical, are well below both commercial and residential rates in New Jersey.

No one would dispute that consumers desire lower prices in all commodity purchases, including energy.  However, this relentless pursuit of low energy prices has led to a perverse outcome.  Comparing the typical residential consumer in New Jersey to those in Pennsylvania and New York demonstrates the case.  The average consumption in kWh in PA is 21% higher than the consumption in New Jersey and not coincidentally, the rate per kWh in PA is 18%below that in New Jersey.  For New York residents, the opposite is the case.  They pay 19 % more per kWh and use 17% less on average. A look at International energy Agency data shows the similar consumption vs. price trends when comparing the US as a whole to Western European countries.  As an economy, the US average electricity rate is about 1/3 to ½ that of Western European nations and our consumption per capita is two to three times higher.  This is not a coincidence. There is a direct correlation between price and consumption.  In the US and in NJ we use more because it is relatively cheap.  And, considering the US EIA data, in real prices it has been getting cheaper for most of the last two decades.

This is not an argument to increase price or to argue against the state’s aspiration.  Rather it is simply a reminder that some of our goals are in direct competition with each other.  We cannot expect to both reduce price and voluntarily reduce demand and consumption.  Anyone who believes otherwise is ill informed at best.  Unconstrained energy consumption and peak demand are the significant drivers of capacity expansion expenditures and the related ongoing O&M expense associated with the facilities built.  Whether we are talking Generation, Transmission or Distribution, increases in consumption and demand must necessarily result in increased cost of energy and delivery.  To think otherwise is to ignore the obvious facts.

Setting a goal to artificially reduce costs does not further any of the state’s other EMP goals and in fact it works against them.  For example, lowering price, or alternatively holding it below the true costs results in increased energy consumption and demand that drives the need for increased G,T and D investments. Likewise, it holds off the adoption of alternative sources of energy and should be seen as a direct subsidy of traditional energy.   Conversely, increasing the efficient use of the energy consumed accomplishes the same amount of work without requiring any incremental increase in CapEx.or  O&M.

Rather than setting a goal to lower the price of electric energy, the EMP should strive to seek a balance that stabilizes the price of energy and returns to a point where energy pricing is indexed to real growth.  In that way we offer the opportunity for new technology and processes to develop in competition with the tried and true solutions while providing energy and delivery services at pricing customers can afford without incenting the perversity of overconsumption due to artificially low prices.

EMP Goal 2:  Promote a diverse portfolio of new, clean, in-State generation – Developing efficient in-State generation while leveraging New Jersey’s infrastructure will lessen dependence on imported oil, protect the State’s environment, help grow the State’s economy, and lower energy rates. Energy diversity is essential. Concentrating New Jersey’s energy future on any one form of energy is ill-advised. Picking “winners” and “losers” should not be the State of New Jersey’s job, but formulating incentives to foster the entry of both conventional and renewable technologies is required when market based incentives are insufficient 

We agree that the broadest possible energy and fuel mix will be essential to our energy security and reliability going forward.  We also agree that the State should not be in the business to pick winners or losers.  The passage of EDECA was intended to put all traditional sources of generation directly under market control. That this market has not yet delivered the pricing signals and certainty necessary to entice investors to build new fossil fired units is a complex problem to be solved.  It is clear however that part of that uncertainty is due to environmental regulations proposed or in the offing at the Federal level. Additionally, a partial reason for high marginal cost of electricity generation is the reliance on older less efficient units and gas fired generation that runs for only a few hours per year to satisfy the peak demand.  Finally, the Transmission congestion that affects the NJ region is exacerbated by our native peak demands as well as through flows to other states.

New Jersey ratepayers have experience paying for non-optimal generation solutions.  For years they have been paying artificially high Non-Utility Generation (NUG) charges that were mandated under PURPA.  We have deregulated the traditional energy generation business and determined to let the market forces work to set price and fix capacity.  The market is not doing so for a reason-or a series of reasons.  We would be best served by working to resolve those underlying problems and letting the PJM capacity market determine the solution.

Just as history with NUG contracts should guide us, our previous experience with Natural Gas supplies in the 70’s, 80’s and 90’s should temper our belief in an abundant and cheap supply of natural gas well into the future.  Perhaps, there will be an ample supply of cheap gas but we should not bank on it.  The country experienced gas shutoffs and moratoriums on new connections in the 70’s catching everyone by surprise.  In the 80’s and 90’s it became the fuel of choice when the electric generation capacity was in short supply amid speculation that there would be long term access to stable and cheap supplies.  Those expectations in every case were not realized as the price of Natural gas virtually double or tripled in a matter of months.

We need to understand that the state and the nation no longer control access to the world’s fossil fuel resources.  Natural Gas is a natural substitute for coal and oil and as the developing nations’ appetites drive those commodities up the price of natural gas will follow.  Barring some federal proscription on coal, and natural gas exports, having those commodities in great supply in our backyard is no assurance of access to that supply at a low cost in the future.

This is not to say that we should not enjoy the benefits of new generation high efficiency combined cycle combustion turbine generation.  It is simply a reminder that the future proves very difficult to predict and at least three of the last four decades we have seen those hopes dashed by different market realities.

If the market is willing to develop these sources of generation then it should be driven, at least regionally by the PJM capacity rules.

On the other hand, the issues regarding siting of critical infrastructure facilities necessary to relieve congestion in the New Jersey Zone are well within the ability of the state to manage.  Rather than focus attention on what facilities need to be built, we should focus on streamlining the siting approval process itself.  While the BPU has the authority to over-rule local zoning and planning bodies it proves to be a lengthy, contentious and costly proposition.  We believe that the State should overhaul this process by creating a State level approval authority which replaces local zoning and planning authorities for critical Generation, Transmission and Distribution infrastructure projects. Following the Administration’s successful lead in the area of economic development, the state should convene a body composed of the heads of the major environmental and developmental authorities already in place such as Pinelands and Highlands Commissions, EPA and chaired by the BPU that alone is vested with the decision making authority for the siting and permitting of these facilities.

With regard to the siting of renewable energy facilities, particularly solar distributed generation on a net metered basis there is opportunity to help speed up that process as well.  The determination that solar is an inherently beneficial use has certainly helped eliminate some of the bottle necks and local opposition.  However, as the market starts to experience more penetration, we should expect more local opposition to projects that can stifle deployment or at least impede it.  There is an opportunity to standardize the planning, zoning and permitting process across the state and remove personal biases and prejudices from the approval process for all alternative energy projects.

EMP Goal 3:  Reward energy efficiency and energy conservation and reduce peak demand – The best way to lower individual energy bills and collective energy rates is to use less energy. Reducing energy costs through conservation, energy efficiency, and demand response programs lowers the cost of doing business in the State, enhances economic development, and advances the State’s environmental goals. 

We agree that insufficient attention has been paid to energy efficiency in the state and the nation as a whole.  The problem here is not the rate of growth in consumption since that rate has been modest since the oil embargos of the 70’s-less than 2% Compound Annual Growth Rate according to US EIA data.  The CAGR in consumption in NJ has likewise been restrained and in fact since the recession has fallen back to 2000 levels as shown in chart 3 below.  The problem is that it is simply wasted energy and that waste is a burden transferred to consumers around the world not just New Jersey and it has ramifications well beyond just price and reliability of supply.

Chart 3

The correlation between price and consumption has been discussed above and will not be repeated here other than to say it is a real issue demanding real attention.

We have decades of attempts and failures in this state and others to incent people to conserve energy.  There are more straightforward solutions than creating an energy efficiency utility that do not involve draconian rate changes but that do tie high consumption and demand to prices that make alternative choices economically attractive.

Apart from price of energy, there are other factors that drive the inefficient use of energy.  First, a typical building in the US has an economic life of 75 years on average.  The building developers, both residential and commercial, have a vested interest in keeping their investment costs low.  We all know that energy efficiency is most economically built into the structure from the outset.  They are much harder and more expensive to retrofit into a building after the fact.  Building codes must require new or major retrofit construction to bring the building envelope up to Energy Star ratings or better.  By making the code changes non-by passable, there will not be disparity created in the market and that should satisfy builder and developer concerns as to fair market competition for their buildings.  While it seems impractical to solve this problem retroactively, we can start now to ensure the problem does not continue to propagate into the future.

In the case of industrial, commercial and residential equipment, appliances and machinery,  the focus of purchasers is typically on first cost not life-cycle cost.  This trend is as difficult to overcome in the business place as it is in the home where capital expenditures are rarely viewed in terms of their effect on ongoing cost of operating the equipment or if they are, the short term need to conserve capital today outweighs the incremental future O&M impacts.  The solution to this problem is not to incent the purchase of higher efficiency equipment through direct grants or rebates.  Rather the solution is to cause the price of low efficiency appliances or equipment to rise through an energy efficiency tax levied on their manufacturer/distributor.  Assuming the baseline to be Energy Star rating, the market will eventually bring us more quickly to that level for all future purchases and do so in a way that does not waste resources incenting people to do what they already intend to do in their purchasing decision.  The consumer still will have freedom to select from an open market but the choice on a first cost basis will be more directly comparable and should lead to election of the more efficient appliance or piece of equipment.

Demand Reduction is a much thornier problem from an operational point of view.  Since the capacity has to be in place before the peak demand exists, there are tremendously uneconomic decisions being made every day in the Generation, Transmission and Distribution businesses around this country.  Contrasted to energy consumption that has grown for the last 35 years at less than 2%, peak demand has grown three to four times as fast.  At a 7% CAGR we need to double the G,T, and D infrastructure every 10 years or witness major adverse impacts on system reliability. 

 Enormous capital expenditure is made to build delivery capacity that is used very few hours of the year.  The kW in capacity that is built is paid for by the kWh delivered over those hours.  The simple fact is that those facilities are really never paid for but they must be placed in service before they are ever required.  The current approach has been to pay consumers to curtail demand with limited success.  As the economic recession has amply shown us, cost avoidance is a much stronger motivator for consumer behavior than we are led to believe.  However, as we can also see in comparing Chart 3 with chart 4, though total energy throughput has continued to fall from the peak in 2006, Peak demand is on the rebound.  In fact, a recent PJM announcement indicates that the total system peak demand surpassed the all-time record of 2006 this past week. Fewer kWh’s are being expected to pay for increasing peak kW.

There are ways to set rates that do not disadvantage smaller, poorer consumers using nominal amounts of energy with reasonable demands while causing larger consumers of energy or those with higher demands to modify their consumption behaviors. Those methods do not require complicated metering initiatives, don’t require an energy efficiency utility and don’t require us to reward an inefficient building or process with incentive payments to curtail energy or demand.

We believe that many of these structural issues can best be addressed by focusing on the following areas:

Improve building codes for new or major retrofits to bring the building up to Energy Star requirements

• Replace appliance rebates with efficiency tax levied on appliances and equipment with energy efficiency ratings below Energy Star baseline level
• Adjust utility tariffs to ensure that large commercial and industrial customers pay an appropriate penalty for Power Factor correction required by the utility.  Phase in a requirement for high usage/high demand customers to achieve a minimum power factor of 98%.
• Implement increasing tail block pricing structures for high consumption/demand customers that create a real incentive for consumers to alter consumption patterns similar to the JCP&L pilot that was begun but abandoned in 2008.

Chart 4

EMP Goal 4: Capitalize on emerging technologies for transportation and power production – New Jersey should continue to encourage the creation and expansion of clean energy solutions, while taking full advantage of New Jersey’s vast energy and intellectual infrastructure to support these technologies.   

We are pleased that the Administration and the Board continue to support the need to develop clean energy solutions.  Given that transportation fuels account for between 40 and 60% of the total energy consumed-depending on which source you look at-there is obviously an opportunity to achieve environmental and societal aspirations through the transformation of the transportation infrastructure.

There are a number of Federal and market driven initiatives underway that are likely to result in more electrification of the transportation sector.  Obviously the Board needs to carefully follow these trends and ensure that major market shifts don’t result in increased demand on the electrical system beyond the economic capacity to carry it.  There may be an opportunity to increase the economic utilization of the T&D system by shifting EV charging to off peak times of the day and week.  This area needs careful monitoring to ensure that an otherwise beneficial change in the market place doesn’t drive unintended costs and consequences in the interconnected electrical system.

EMP Goal 5:  Maintain support for the renewable energy portfolio standard of 22.5% of energy from renewable sources by 2021– New Jersey remains committed to meeting the legislated targets for renewable energy production. To achieve these targets, New Jersey must utilize flexible and cost-effective mechanisms that exploit the State’s indigenous renewable resources.  

We are pleased that the Administration and the Board continue to support the Renewable Energy Portfolio Standard as an essential ingredient to the future of a safe, reliable and reasonably priced energy source that also accomplishes the state’s economic development, environmental and energy security aspirations.  We also agree that all policy decisions need to be well grounded in the cost and benefits as well as have a good understanding of likely consequences-both intended and not intended.

However, the suggestion that the cost of the SREC program is too rich or that non-participants are unfairly subsidizing participants is patently wrong.  The solar set aside under SEAFCA amounts to a little over 2,500 GWh of energy to be supplied by solar by the year 2020.  That translates into a requirement to have installed, and operational by the end of 2020 of about 2.2GW of solar capacity.  To date about 330 MW have been installed.  That amounts to only 13% of the requirement and really only about half of that amount was installed under the SREC program.  We have only 9 years left to achieve the solar generation target for 2020.  If the program were too rich, we would be much further along that development curve. 

As to the argument that the SREC market has closely followed the SACP declination schedule, we can only point out the obvious.  The value of the SREC was and is intended to be a function of demand and supply.  As long as the solar development lagged (precisely because the program was not rich enough to incent developers to develop or investors to invest) the market drove the price toward the ceiling.  This is exactly what one would expect.  As recent events have demonstrated, SREC prices fall dramatically when there is an oversupply of SRECs expected.  Now that it seems the energy year 2012 will more than fill the required quota, prices have plunged to about 30 to 40% of the previous spot market price.  Again, clear objective proof that this market-based incentive can and does work.  As I suspect we will shortly see, now that SREC prices have crashed, a number of marginal projects that were predicated upon long term high SREC prices will be delayed or not built.  That may result in the requirements for 2012 not being fully met leading to a dramatic pop-up in SREC prices. We should expect the value of SRECs to be volatile going forward and to oscillate up and down around some trend line below the SACP declination schedule.

The EMP draft does address the one existing flaw in this design in the extension of the SACP declination schedule.  The uncertainty around what that schedule would look like should now become settled.  Although the jury is still out as to whether or not there will be sufficient investor interest in developing the total solar generation required at the stepped down level, at least that uncertainty has been resolved and now we can work on finding ways to attract necessary capital to viable projects.

I want to address one other point that seems to drive a belief that solar energy generation is too expensive to be a viable form of energy production.  The comparison that is most often made is the cost per Watt of installed capacity as between solar generation and fossil generation.  I see it from a totally different perspective, largely from my utility operational and engineering experiences.   The true value of distributed generation, in this case solar DG, is not its ability to offset fossil generation.  Rather it is the ability to rapidly deploy a widely distributed generation asset that provides energy to host consumers while simultaneously reducing the cost of G,T and D components for all other consumers.

Everyone clearly understands that the solar generation profile closely mirrors the peak load demand profile since most of our peak demand is air conditioning load driven and the peak solar insolence leads peak electrical load by about 2 hours each day.  But apart from displacing high marginal cost generation (largely gas fired as noted in the EMP) solar DG has the ability to provide immediate benefits in the form of loss reduction, voltage regulation, VAR support and improved reliability.  While I believe from my operating experience that these are significant, they are hard to quantify and to my knowledge no one has done the work necessary to attempt that quantification since it is very much a function of the circuit topology and the electrical load as well as DG penetration.  Whatever these benefits are, they are not trivial and they inure to all consumers even those non-participating consumers.

An even larger potential benefit can be derived from solar DG.  As was mentioned previously, utilities build delivery capacity to serve peak demand for a few hours of the year.  From my experience, the top 10% of the demand exists for only about 1% of the total hours of the year.  That means that the capital investment made to support those 80 hours per year are sitting idle for the other 8,680 hours of the year.  In fact the load factor for the EDC’s in New Jersey ranges from a low of 44% to a high of 54% when comparing peak to minimum demand by utility.  It only improves to at best 60% if we look at the numbers prior to the recession.

No other business would make a capital investment in equipment that was idle 40 to 50% of the time.  To date though the electric utility industry has had no choice but to make that investment or face the totally undesirable position of watching the system cascade into blackout. Distributed generation, particularly solar distributed generation, promises to allow us to eventually increase that load factor by avoiding future high capital investments to serve just a few hours of peak demand per year.  If that benefit can be realized, it flows directly to every consumer whether they participate in solar DG or not.

Likewise, the elimination of the need to generate some portion of the energy during peak periods of time when typically high marginal cost units are running should have an overall positive impact on reducing BGS prices benefitting all consumers.

Part of the problem here is that we are doing an apples to oranges comparison between generation sources.  We need to understand the value to the interconnected T&D system that solar DG represents and do a more equitable comparison.  As chart 5 indicates, New Jersey’s electric utilities have about $21 B in Plant In Service.  The replacement cost for those facilities if built today is several times higher than the original cost.  The depreciated book cost is just under $15 B and growing.

I cannot credibly  argue how much of that investment is required to serve only peak load hours but again, relying on my utility experience I can say that I believe it is significantly more than the 10% represented by the peak.  More importantly what this chart points out is the perpetual nature of this investment and one that necessarily grows over time.  We do not have a onetime capital expenditure in utility plant in service that can be compared to a onetime capital expense for a solar DG investment.  Rather we have investments in perpetuity compared to (essentially) a onetime investment in solar.  Of course this is the magic value of regulatory compact that has allowed the industry to build the machine that has fueled our economy while keeping prices artificially low for consumers. 

Chart 5

Chart 6 shows the cost of those investments versus the peak demand being satisfied.  The aggregate cost is just under $1,100 per kW of load to make sure the system keeps on working even under heavy peak conditions.  With solar prices coming in around $3.50 to $4.50/Watt solar is thought to be 3 to 4 times the equivalent of the utility T&D investment.  That is only part of the story however.  T&D capacity exists only to deliver kWh not kW and any investment in those facilities to prepare for and satisfy peak demand is an investment that sits idle for 99% of the year.

Chart 6

Chart 7

In an attempt to put these two investments on a more comparable basis let’s try a thought experiment by comparing the traditional T&D solution as a onetime cost compared to the equivalent solar onetime cost.  Obviously, that is not the way the regulatory framework treats these costs but it does allow us to rate these dissimilar investments directly.

Assume that the highest 10% of the peak delivers 20% of the annual energy for this scenario.  The 2010 system peak was about 20 GW. Ten percent of that peak is about 2 GW. Using the historical T&D investment requirement of $1,100 per kW for that 2 GW translates into a total cost of $2.2 B to deliver 20% of the 66 M MWh delivered last year.  That means the traditional investment would cost about 16.6 cents per kilowatt hour delivered during that peak period of time.  Obviously this calculation is a function of how much energy is actually delivered during that 1% of hours that the 10% peak exists.  There is insufficient public information for me to determine it precisely but we know anecdotally that consumer bills typically increase and an assumption that 20% of the energy delivered during that period would translate into a bill roughly 2.5 times the nominal bill and that seems to be a conservative high assumption.  Anything less would make the equivalent price just that much higher.

The solar RPS requirement for 2020 is 2.5 GWH which requires about 2.2 GW to generate.  Subtracting out the 330 MW already in place and we are amazing close to the 2 GW peak so let’s assume we’re building 2 GW of solar DG.  That solar DG can be built for between 3.5 and 4.50 per watt today and prices are declining steadily but we’ll use the higher number to be conservative.  Construction of 2 GW of solar at $4.50/W requires an investment of $9 B.  Most people look at this and conclude that the solar is therefore 4 times more expensive than traditional solutions.

What is forgotten in that conclusion is that the solar solution is not just a delivery vehicle like the T&D system; it is a generator of electric energy. That 2 GW of solar DG reduces the peak on the system by displacing the kWh that would otherwise flow through at peak creating the potential of $2.2B in avoided T&D costs as well as $ 792 M in the avoidance of the energy that does not have to be provided into the system to satisfy that peak. Finally, the annual energy produced by the solar DG provides direct savings to the host of between 5 c per kWh for a PPA customer to the fully loaded cost of 14.5 c per kWh for those who own their own system.  That translates into an additional value of between $ 115 M and $ 333 M.

A total of between $ 3.1 B to $ 3.3 B in value is created by solving the problem in this manner. That value ultimately finds its way into the pockets of all consumers to varying degrees. Of course the solar solution has a societal cost in the form of SRECs that have to be covered.

The 2 GW of solar DG will generate 2,300,000 SRECs per year until that program runs its course.  At current market prices of $250/SREC we’d expect to pay $575 M which would represent just under a penny per kWh -0.9 cents actually that would be paid for by the remaining kWh delivered through the T&D system, resulting in a net benefit to consumers of $2.5 B.

So, which investment really makes the most sense?  The traditional T&D solution will continue to increase the book value of Utility Plant In Service-a cost that ultimately borne by rate payers.  It is a delivery capacity solution only and it sits idle in economic terms for 99% of the year and has an equivalent cost per kWh delivered of almost 17 cents.  The solar investment works every  hour the sun shines.  It solves the peak dilemma while delivering value every day on average 5 hours per day for a onetime investment and costs the equivalent of 13 cents per kWh delivered.

Now, to be fair there are issues not factored into the discussion.  For example what happens due to intermittency caused by clouds on a peak load day?  Some of this value is lost but provided the generation is widely dispersed the issue becomes minimal since it will not all go off- line simultaneously.  Is 2 GW enough to make an impact that will provide sufficient penetration to allow the load factor to increase by eliminating utility capex investments in the future?  I am not certain and I believe more work is required here but the point is the promise exists; we simply need to figure out how to tap into it.

Solar Distributed Generation can provide the following benefits to all consumers:

• Improve reliability during peak load periods 
• Improved voltage regulation on heavily loaded circuits
• Improved VAR control on heavily loaded circuits 
• Reduce future capital investments in utility plant in service necessary to serve only peak demand 
• Improve the economic efficiency of the T&D infrastructure investments on non-peak load days
• Reduce future energy costs by avoiding or delaying Generation capital expenditures 
• Establish the necessary conditions to enable widely deployed energy storage once that technology matures further enhancing the benefits listed above 

These benefits are derived while the host customer saves money on energy, reduces their carbon foot print and helps the nation secure its energy independence. So quite to the contrary of the bias expressed by the Energy Master Plan, sufficient potential benefits are available to all consumers and the state that we need to continue pursuing this option in an aggressive way.

We again want to commend the Christie Administration and the Board of Public Utilities for taking up the timely review and amendment of the New Jersey Energy Master Plan and for soliciting input from the stakeholders.  Questions or inquiries regarding our comments can be addressed to:

Stephen E. Morgan
CEO, American Clean Energy, LLC
250 Pehle Ave, Plaza 2 - Suite 200
Saddle Brook, NJ 07663
Steve@AmCleanEnergy.com
www.AmCleanEnergy.com
www.SolarTrackingTree.com

Steve is Quoted in Newsweek Article in December Issue

A Bright Day For Energy


Even before their midterm debacle, Democrats couldn’t pass an energy-climate bill worth the name. Prospects for legislation to free the country from dependence on petro-dictators—and put it on a path to a renewable energy-based economy—would seem, therefore, about as likely as John Boehner introducing a $700 billion stimulus bill. So why are renewable-energy advocates smiling?

Because a Republican wave swept the heartland. This region—Texas, Oklahoma, and on up to the Dakotas—is to wind power what Nebraska is to corn. The investment tax credit for building wind and other renewable installations expires Dec. 31. Once it does, those projects will come to a halt, and thousands of people who are employed in building them will be out of work. Those workers, of course, are the constituents of newly elected officials, the companies behind the projects are crucial economic engines in the districts and states of those legislators, and both are going to give their reps an earful if the projects don’t resume.

So goes the thinking of experts like Michael Eckhart, president of the American Council on Renewable Energy. “There are enough Republicans in big wind-power states that they’ll feel a direct economic impact” if those projects don’t continue, he says. His other cause of optimism: a perfect partisan storm. With the GOP’s big majority in the House, any legislation it moves will be received by the Senate as a Republican bill, giving the GOP minority there an incentive to vote in favor. Democrats have traditionally supported renewables—and might be eager enough to pass legislation, even if they have to hold their collective noses for GOP-favored add-ons like funding for (oxymoronic) clean coal.

An added incentive: energy prices took a hit in the recession but are starting to rise, says Steve Morgan, former CEO and chairman of Jersey Central Power & Light, who is now CEO of American Clean Energy, a solar company. So the economics of renewables will improve. That, not climate change, will drive support in 2011. Joe Romm of the Center for American Progress counts 35 of the next Congress’s 46 GOP senators as having publicly questioned the science of global warming (as have 11 of 13 freshmen); so do 125 of the 240 Republicans elected to the House. Freedom from the petro-dictators may yet happen, just when we least expect it.

Steve is Quoted in NJ.COM (Star Ledger) Article

N.J. To Shift Priorities From Solar To Gas

TRENTON — The state will move away from subsidizing residential solar projects to emphasize commercial installations and encourage the construction of more gas power plants in a revised energy master plan that will be released in the next month, according to two sources who have been briefed on the plan.

The state also plans to turn the Societal Benefits Charge, a fee on every utility bill currently that is used for solar project grants and rebates, into a loan program, according to the sources, who requested anonymity because they are not authorized to speak publicly about the changes.

The new 10-year master plan will not directly address new nuclear power plants, according to sources.

In response to the closure of Oyster Creek nuclear power plant, the Board of Public Utilities has been working behind the scenes to revise the energy master plan. The previous plan was developed under former Gov. Jon Corzine.

The release of a new draft has been delayed for months, but the BPU has set a series of public hearings to begin at the end of March. A BPU spokesman declined to comment.
Gov. Chris Christie’s office is expected to release the new energy master plan before those hearings begin on March 29. His office declined to comment.

The new energy plan will include an increased focus on gas power plants, a move that began last week when Christie signed legislation that will subsidize the construction of up to four new facilities.

Jeff Tittel, director of the New Jersey Sierra Club, voiced concern about the possibility of moving away from wind and solar and toward gas power plants.

“What we’re going to see happen is New Jersey going from one of the greenest energy master plans in the country into one that’s going to be subsidizing fossil fuels,” Tittel said. “This is going to be a quantum shift away from green jobs and energy.”

Gas power plants aren’t the optimum solution but are an improvement over dirtier alternatives like coal plants, said David Pringle, political director of the New Jersey Environmental Federation.

“We think we can get, by 2050, to a carbon-free, nuclear-free New Jersey, and that’s our long-term goal, but we can’t do that overnight,” Pringle said.

Currently, the state uses the utility bill fee to provide grants for energy efficiency projects, including the installation of solar panels, improving the power grid and other efficiency efforts like weatherization. Instead of providing grants and rebates, that fund will be turned into a loan program that must be repaid, according to sources.

Tittel sees the change as the equivalent of killing the program. “No one is going to take the loans,” Tittel said. “The grants and rebates have worked. For most consumers, they’ll be paying more sitting in colder houses.”

State Sen. Bob Smith (D-Middlesex), who chairs the environment and energy committee, said the fund isn’t being used for its original intent but should remain to help energy programs.

“I understand we’re in a financial crisis,” Smith said. “This law was passed in order to encourage energy efficiency. We’re flimflamming our taxpayers and ratepayers.”
The move to a loan program will facilitate the shift to more commercial solar projects, sources with knowledge of the new master plan said.

Stephen Morgan, CEO of American Clean Energy, a solar project developer, said it makes sense to concentrate on commercial projects because they produce “the most bang for the buck.”

“I can certainly understand that when the state is under duress it’s going to find ways to do things more efficiently,” Morgan said. “It probably makes sense to get away from a direct grant program.”

Staff writer Chris Megerian contributed to this report.

ACORE Editorial: Renewable Energy-A Critical Piece of the Puzzle

RE-Vision Op-Ed: Renewable Energy-A Critical Piece of the Puzzle

By Stephen E. Morgan, CEO of American Clean Energy
Recently I was attempting to help my 6-year old assemble a puzzle. I suggested that he start with pieces that have smooth edges and work from the outside, in. As usual, he ignored me and promptly began force-fitting pieces into places where they were not going to fit without the help of a sharp instrument.

Our society takes a similar approach when it tackles complicated problems like the energy puzzle facing the nation. We start with our minds made up as to what the completed picture should look like and we coax and argue the pieces of the puzzle into place--usually with the same outcome as my son who, after repeated failed attempts to get a meaningful picture, gives up in frustration with a partially solved puzzle.

What we need is a Comprehensive Energy Policy. That effort starts with a thorough review of the issues related to production, transportation and use of all available energy resources, identifying and where possible, quantifying the problems attendant to each. It proceeds with fact based discussion of all possible solutions, examining their effects and likely outcomes--finding the edges that fit together. It culminates in a coherent picture, one in which all parts fit together without the benefit of having parts lopped off or worse discarded because they don’t fit with our pre-conceived notion of what the end state should look like. I submit this is exactly what our political, policy and business leaders need to do to craft a coherent energy policy for this nation.

Much of the recent debate regarding a national energy policy has focused on what we call it, not what it does for us. Is it a National, Renewable or Clean Energy Policy? Much of the discussion is focused upon which market segments should be winners and which losers. We are not in a position to be picking winners or losers. We do not yet fully understand what the final picture can and should look like.

The current energy mix has evolved over a very long period of time and admittedly not always rationally. However, significant economic value exists in the energy production and delivery infrastructure built over the last two centuries that, as a practical matter is not going to be stranded or discarded without significant legal, economic and societal damage. From an engineering and operational standpoint we couldn’t replace it all overnight anyway. Arguing stridently to do so, regardless of motivation, will not help us solve this puzzle it will simply delay solution or worse cause us to give up in frustration as we have several times since the oil embargo in 1973.

Would we build the energy infrastructure we currently have if we started with a clean sheet of paper? Perhaps not, but that is not relevant to the debate. We are starting with the puzzle already partially assembled. Our job is to finish assembling that puzzle in a way that solves current problems and attempts to anticipate and avoid future problems. This task requires us to take a fundamentally different approach focused on long term viability, security and sustainability of the energy mix that is the very foundation of our standard of living.

A viable Comprehensive Energy Policy need not be prescriptive, should not pick winners or losers or prefer one form of energy over another. It should however rest firmly on a base of scientific facts and an understanding of economic and societal costs and benefits. It can and should be informed by debate and input from every sector. In short, it should be the process whereby we architect the energy production and transport vision that takes us through this next century.

If we will create this process, regardless of what we call it, I am confident that we can solve the complicated energy puzzle that confronts the world, not just our economy. I am also confident that when the pieces of that puzzle get assembled we will find that renewable energy and energy efficiency turn out to be the critical pieces we are looking for!

Solar Energy "Alert" from Frank Cannone of Gibbons P.C.

CORPORATE & FINANCE ALERT
	A Message from the Chair - September 28, 2010 Welcome to Gibbons Inaugural "Solar Energy Alert." We are entering a new era as solar energy in the United States becomes an economically viable alternative to fossil fuels. Significant opportunities for the deployment of distributed photovoltaic systems in the United States are increasing almost daily. In New Jersey, our Renewable Portfolio Standard (RPS) is one of the most aggressive in the United States. As a result, New Jersey currently ranks second in the nation behind California with solar capacity of about 150 megawatts. The current RPS requires that the NJ suppliers of electricity procure at least 2,518 gigawatt hours by 2021, and 5,316 GWH by 2026, which spells very significant growth from now well past 2020. Yet, funding for energy projects, particularly solar and other renewable energy projects, is complex and difficult. It is for this reason that the Gibbons Corporate Department founded in late 2009 our Renewable Energy Finance Practice. Gibbons leverages our many years of financing experience and a broad array of relationships in business, equity, commercial banking, investment banking, and government to help our clients structure, finance, and close these complicated transactions. In our ongoing effort to bring value to clients, friends, and others interested in current events in solar energy in New Jersey and the surrounding area of Pennsylvania and New York, we have introduced our first "Solar Energy Alert" with five articles of interest. In fact, as the articles show, much has been going on in the short time since our Solar Energy Conference just last month. The first article analyzes the critical issues under the U.S. Treasury "Grants in Lieu of Tax Credits" requirement to "begin construction" before January 1, 2011. The second article covers recent alternative energy developments in New York, New Jersey and Pennsylvania. The third article discusses the U.S. Environmental Protection Agency's (EPA's) innovative program to site renewable energy projects on contaminated land and mine sites (former Superfund sites, landfills, brownfields, abandoned mine lands, former industrial sites, and certain governmental installations). In the fourth article, you can read about pending New Jersey legislation affecting solar energy projects, in particular several bills aimed at the creation of new solar energy projects in the Garden State. As you read these articles, and ponder developing your own projects or working on projects of others, Gibbons is privileged to have the opportunity to provide you with this information on solar energy in New Jersey, Pennsylvania, and New York. We recognize that we are living through historic times with respect to the industry. Solar energy is still in its infancy and its outlook will be heavily influenced by external factors, especially public policy and the state of the economy. Frank T. Cannone, Esq., Chair, Corporate Department ALERTS Treasury Grants in Lieu of Tax Credits: Beginning Construction Before January 1, 2011 By: Peter J. Ulrich, Esq., Director, Corporate Department and Steven H. Sholk, Esq., Director, Corporate Department Section 48 of the Internal Revenue Code provides taxpayers with a federal income tax credit equal to thirty percent of certain property placed in service during a taxable year, including qualified fuel cell property, qualified small wind energy property, and certain solar energy property. Importantly, Section 16039(a) of the American Recovery and Reinvestment Act of 2009 permits taxpayers to apply to the Treasury Department for a cash grant ("Treasury Grants") in lieu of certain energy investment tax credits or tax credits, including those for most solar energy projects. This article analyzes the critical issues for taxpayers applying for Treasury Grants.  Click here to view the full article Recent Alternative Energy Developments in New York, New Jersey and Pennsylvania By: Lawrence Cohen, Esq., Director, Corporate Department The importance of emerging green technologies, especially in a financial climate that finds all levels of government struggling to create jobs and promote private sector growth, warrants keeping abreast of the laws and regulations that impact these industries. This article provides a summary of recent laws and regulations in New York, New Jersey, and Pennsylvania that impact alternative energy markets in these states.  Click here to view the full article U.S. Environmental Protection Agency Program to Develop Solar Energy on Contaminated Lands By: Thomas More Griffin, Esq., Director, Corporate Department Renewable energy (wind, solar and biomass) comprises only two percent of the electricity supply of the United States. By 2030 U.S. electricity production will need to increase by nearly thirty percent to meet demand. Production of renewable energy will increase seventy percent or more by 2030. The U.S. Environmental Protection Agency ("EPA") has a program to site renewable energy projects on contaminated land and mine sites, such as Superfund sites, landfills, brownfields, abandoned mine lands, former industrial sites and certain governmental installations (collectively the "Available Sites"). Notably, investment funds that specialize in investing in renewable energy may find lucrative opportunities in the EPA's and states' efforts to open up and facilitate the use of Available Sites to renewable energy generation. Click here to view the full article What’s In The Pipeline? Pending New Jersey Legislation Affecting Solar Energy Projects By: Frank T. Cannone, Esq., Chair, Corporate Department, James J. Petrucci, Esq., Director, Corporate Department and Vito N. Ciraco, Esq., Associate, Corporate Department Several bills pending in the New Jersey legislature for the 2010-2011 session would create mandates and financial incentives for the creation and development of new solar energy projects in New Jersey, which demonstrates the Garden State's continued commitment to renewable energy developments. This article provides a synopsis of the most significant proposed legislation. Click here to view the full article Antitrust Agencies Release Revised Merger Guidelines By: Anthony A. Dean, Esq., Counsel, Business & Commercial Litigation Department On August 19, 2010, the United States Department of Justice and the Federal Trade Commission issued revised Horizontal Merger Guidelines, a set of internal rules that govern the evaluation of a proposed merger by these two agencies. Although the Guidelines have been revised several times, the latest revision is the most extensive since 1984. Our final article focuses on the important enhancements in the 2010 Guidelines as compared to the former version.  Click here to view the full article This communication provides general information and is not intended to provide legal advice. Should you require legal advice, you should seek the assistance of counsel. Copyright © 1997-2010 Gibbons P.C. All rights reserved. ATTORNEY ADVERTISING. Prior results do not guarantee a similar outcome.   Follow Gibbons P.C. on Twitter

Solar Energy For New Jersey Businesses

After spending 32 years in the traditional electric utility business interfacing with customers large and small, I have come to conclude that American consumers generally hold a view that energy prices are too high. This view, fueled by decades of consumer activism and regulatory treatment is predicated upon a skewed perhaps narcissistic view of the world and the operation of energy markets. The facts suggest otherwise! According to the US Energy Information Agency (US EIA), the REAL price of delivered electric energy at the end of 2007 was the same as it was in 1960.

As figure 1 suggests, the price in real terms for electricity in the United States has been indexed to GDP growth since at least 1960’s. True, there have been years where the trend was disrupted by supply/demand imbalance or major policy initiatives but in general the trend is very clear. What is true for electricity, not surprisingly, is generally true with all forms of energy and I would assert that it is because all traditional energy forms are indexed to oil. Again at a fine enough granularity, it is possible to see divergence in these prices for short periods of time but over the long haul, the trend is clear and can be seen in the US EIA data base covering that period.

Figure 1

What this means, as a practical matter, is that energy prices have been kept artificially low, albeit stable, over a very long time. This relative stability in energy prices has been the engine which has driven our economic prosperity during that period of time. This has been achieved through economies of scale and scope in the industry sectors and in the consumer sector through dramatic improvements in productivity –i.e. Energy Intensity. In the 50’s and 60’s for example the vertically integrated electric utilities took advantage of materials technology improvements to increase voltage levels for generation, transmission and distribution equipment. Generating plant designers took similar advantage of the capability to run hotter boilers at higher pressures to get more energy conversion per unit of coal input.

Over decades, regulators and policy makers relied on the ability to keep consumer prices low by taking advantage of these improvements. Our economy flourished as industrial processes were mechanized and electrified. All the while though we were creating unintended consequences that we now need to confront. The US accounts for 25% of the world-wide consumption of energy—to support 6% of the world’s population. Many have suggested that situation is not sustainable in the long run as other economies seek to expand and grow and improve the quality of life for their citizens.

We have built an economy that relies on cheap energy to fuel its expansion. I, along with many others believe those days are numbered and this presentation will attempt to explain what is coming and how we might deal with it. Consumers in the mass market have come to expect and indeed demand access to cheap energy. Industrial and large commercial consumers led the charge across the country over three decades to deregulate natural gas and electricity in the misguided reliance on cheaper energy as the solution to their problems.

Looming ahead of us in terms of traditional energy pricing and availability is what can best be described as a train wreck---In A Tunnel!

I would argue that the first train has already entered the tunnel and we are incapable of stopping it. That train is the rapid growth in energy demand by the remainder of the non-OECD nations (Organization for Economic Cooperation and Development-i.e. US, Canada and Western European nations). According to the International Energy Agency (IEA) “World Energy Report 2009” released at the end of last year, total consumption of non-OECD nations will increase by 93% by 2030. Most startling is the consumption growth in China and India which are expected to increase Ten Fold during the next 20 years. That might not seem so startling without a benchmark of comparison. China has just recently surpassed the US in terms of total energy consumption and its per capita consumption is still less than 1/3 that of the US. Do the math. If China and the US collectively account for 1/2 of the world’s energy consumption and China and India are growing by ten-fold between now and 2030, someone has got to lose ground or significant sources of new production must be found.

This same IEA report declares that Oil consumption world- wide will require 105M barrels/day (b/d) of production-up from today’s 85M b/d. Again we might be tempted to exclaim that is only a modest 23% increase from today’s levels. But here is the tunnel where the wreck will occur—75M b/d, of that production and consumption will have to come from new, currently undeveloped sources of production. Do we really believe that we can replace over 90% of the world’s oil production capacity and grow it another 25% in the next 20 years? Admittedly, I am only an electrical engineer, not a petroleum geologist but I am betting that scenario is highly unlikely if only because we live on a finite piece of real estate where it took millions of years to create those fossil oil reservoirs we are currently tapping-and have been for less than 100 years.

As the emerging economies of the world compete for increasingly scarce fossil fuels, you don’t have to be an economist to predict significant increases in prices and potential availability problems. I would expect that reliance on oil to put upward pressure on the price of all fossil fuels. As competition for ever more scarce oil causes people to shift to alternatives like natural gas and coal they too will feel significant price pressure and any supply disruption in any of those fuels is likely to manifest in scarcity of supply for the other substitutes as well. Finally, to the extent that these fuels are used in electricity generation, expect those issues to be reflected in the price-and perhaps even availability for at least some hours of the year- of electric energy.

That brings us to the “domestic” train in our metaphorical train wreck. Our current economic recession has resulted in what appears to be an Oversupply situation. Prices have become soft, even fallen in electricity, natural gas, coal and oil markets domestically. Focusing on the electricity market specifically, a reduction between 30 and 35% in consumption in 2009 is directly attributable to the recession. We first saw the impact in the spring of 2008 at a time when consumption generally should have been picking up, it was actually falling. As we now know, by the fall of that year it was clear we were in a full-blown recession that continues today.

This falloff in consumption by the way has not been matched with a similar reduction in instantaneous demand. Driven by sustained hot weather this season, many delivery systems haves seen peak summer loads that match or exceed their all-time system peaks. Since those peaks exist for only about 100 hours each year, we might get lulled into a sense that all is well. I assure you, as any utility engineer or operator will tell you, the instant demand outstrips supply, the interconnected electrical system will automatically shed load and shutdown to protect itself from catastrophic equipment overloads. These actions occur in milliseconds-far faster than any human intervention can control. The only way to assure that it does not occur is to always have an available reserve capable of picking up the next instantaneous change in the system. Until we have viable electrical energy storage technology available to perform that task we rely on the inertial capability of all the generators that are on and producing energy at the time the event occurs. If they are all loaded to their maximum capability, we are only one light switch away from a blackout.

The reduction in economic activity and falling energy consumption has led to an excess of electrical generating capacity and falling electricity prices. This trend would appear to contradict the picture painted by the IEA report. What has happened in recessions/economic slumps past is that the “excess capacity” quickly turns into under capacity as the economy turns around. This can be understood in the context of consumption growth. Normal electrical consumption growth shown in figure 2 has been less than 2% CAGR for decades. But when economic recovery does occur consumption will not grow as it originally did, it will step back. Certainly not 100% but a significant 60-75% step back in a relatively short period of time will occur if history is any predictor of future. This occurs because office space that was vacant may become only partially occupied but will require most of the HVAC and lighting of the previously fully occupied building. An assembly process totally shutdown right now might resume production for only one shift 5 days per week but the equipment will all be on for those hours of use.

Figure 2

Couple the step- back in energy consumption with the loss of capacity that is occurring and it is not a stretch to understand that a very real under capacity scenario can emerge fairly rapidly with an economic recovery. The loss of capacity is happening all around us and for well understood, if not noticed reasons. A casual search of the industry media covering just 2010 announcements of plant closures revealed a total of 36 units producing nearly 7,000 MW of electrical energy slated for closure or already mothballed in the region east of the Mississippi.

First and foremost, older units heat rates and electric energy production costs prevent the units from clearing their costs in this soft market causing operators to shut them down and/or mothball them. This is a trend we will continue to see according to the Forbes Magazine article titled Why Small Coal-Fired Plants Are Going Away” by Jonathan Fahey, July 1, 2010. If those older units go into cold shutdown or mothballed status very long-more than a few months-it is highly unlikely that they will ever restart even after a rebound in the economy requires more electricity production because of the practical limitations imposed by periods of disuse and potential for new requirements once restarted.

This situation is being exacerbated by the lack of new construction of base load generating plants. In fact, according to the National Energy Technology Lab Report “Tracking New Coal Fired Power Plants” released in January 2010, 34% of all announced coal plants have been cancelled or deferred. Recognize that these are assets that take a long time to permit, site, construct and place into operation. So, even if the picture cleared up tomorrow and decisions were made to begin the process, we are a decade at least away from significant new base load generating assets. Given the cloudy picture regarding potential carbon legislation it is highly doubtful that the picture is going to clear up anytime soon.

Finally, for those units still in operation but sneaking up on their design life there are other forces at work to reduce capacity and life. The US EPA, under the current Clean Air Act 1977 authority began several years ago to challenge the upgrading and life extension work that has been at the heart of keeping old units economically viable many times for decades past their initial 40-50 year design life. Those few plants that did upgrade have, either voluntarily or under consent decrees, agreed to install new environmental controls. Those additions consume a portion of the unit output thus decreasing available capacity and of course making energy produced more expensive from those units. For the remainder of the plants across the country, owners are holding off doing life extension or upgrades that might trigger New Source Review (NSR) requirements. That will ultimately result in those units not being available for another 30 to 40 years of operation. As they eventually come out of the market-due to economic factors described above, that capacity hole created by the dearth of new power production capacity will only get deeper.

By the way, this trend has not gone unnoticed by some in the Independent Power Production (IPP) segment of the industry. Since July, two major consolidations involving three major companies have been announced. GDF-Suez has announced a planned acquisition of International Power which will make it the largest IPP in the world-nearly double the size of its next competitor AES. The Blackstone Group just weeks later announced the acquisition of all of the generation assets of Dynergy and a simultaneous sell off of the gas fired generation to NRG. The announcements summed up the situation very clearly: the assets were tremendously undervalued in today’s market conditions, but are expected to return handsomely on the investment once the economy turns around. I’m betting with the folks making the $5B bets that they are right and history will repeat itself!

The cumulative effect of these decisions made or delayed will be that electric energy prices will cease the declines experienced during this recession and will begin to rapidly increase. Of course, the biggest unanswered question is -at what rate will energy prices increase. I cannot predict the future with any more clarity than anyone else but I would point to history in New Jersey to give us a clue as to the likely magnitude.

Figure 3

Figure 3 shows three scenarios of electricity prices for the future. The lowest- blue curve- assumes no carbon cost ever and a price growth of 2.5%. This growth scenario is only provided for relative comparison since it is unlikely that future growth will be below the historic CPI trend of 3%. The red curve assumes the historic CPI at 3% and a carbon cost at only the voluntary $20/t equivalent price kicking in after the next presidential election cycle.

The Green curve demonstrates the historical cost of energy in New Jersey since 1990. Notice that in 2000, as a result of the deregulation of power production in NJ, there was an artificial reduction in price of about 10%. Also notice that the price for 2010 was held at the 2009 level to reflect both the BGS auction price decline and the time averaging impacts for this year. Since deregulation, and including the effects of that decrease, we have experienced a +6% CAGR in price over the decade. Obviously, if we only looked at the last 5 years that growth rate would have been higher. We used the time averaged rate for purposes of conservancy and added a Carbon cost at the voluntary level in 2016, but I for one will be surprised if future prices grow this slowly for all of the reason enumerated before.

The ancient Chinese Proverb declares, “prediction, especially with regard to the future, is very difficult” but the weight of momentous forces both internally as well as external to the US suggest that the real growth rate may substantially exceed the rate experienced over the last decade in New Jersey. My thesis is simple. The forces on the market over the several years that led to double digit increases in electricity rates in NJ will all be exacerbated by the forces I have described above. If there was sufficient market justification pre-recession to sustain those price growth rates then it is likely that we can expect at least that much from the confluence of forces that will lead to shortages in capacity as we begin to emerge from the recession and consumption steps back to some level below the pre-recession levels. Couple that with some level of carbon cost flow though and I expect all of us to be in for a significant and long term increase in electric energy pricing and a possibility, at least for peak hours of the year, scarcity of supply.

Some have argued that we have been through this cycle before and we can and will solve it the same way-with gas fired combustion turbines. They are after all easily deployable and natural gas is cheap. To that faction I would just note that even the Federal Energy Regulatory Commission (FERC) predicts natural gas prices forward are not going to stay at the current low of $4/MMBTU. FERC predicts a 36% price increase this year and 50% by next year. That projection does not include the effects of likely regulation of the Hydro-fracing processing that proponents say will give us ready supply of gas. Nor does the projection include the impact on gas prices that inevitably occur when we burn gas for electricity production in large quantities such as we experienced in the early to mid1990’s.

There are those who would point to offshore wind generation as the cure. Even its proponents admit that there is a 7 year siting and construction period in the most optimistic view. For those that think the next generation nuclear unit will be the savior, I would just point to the fact that the projected costs are quoted to be on the order of 15 to 20 Billion dollars for a single 1,000 MW unit. That is a number for a single power plant that is larger than the market cap for most power plant owners. It is unlikely, even if someone figures out a way to fund it, that the first unit will be designed, approved and constructed in the next 15 years considering the experiences with the last of the first generation units that went online in the 90’s.

So, we are left with a quandary. Our economy has grown in the past at the expense of, and some would say upon the backs of, the underdeveloped world economies. There is no way, short of seizing resources from others and quashing those emerging economies’ growth aspirations that we can effectively stop that train from entering the tunnel. It would appear that we are going to be hard pressed to stop the domestic energy train from entering the tunnel.

There is good news though. We have the capacity to stop our train and eventually, at least over the longer term, to return to a period of relatively cheap energy. The solution lies in the achievement of the New Jersey Renewable Portfolio Standard (RPS). The RPS requires 22 ½% of the electric energy consumed in NJ by 2020 to come from renewable sources of energy production. A minimum of 2 ½ points must be from solar generation. Solar Photovoltaic generation is time tested and effective as a source of environmentally sustainable energy production. The difficulty in implementation relates not to the technology but to the financial construct necessary to incent the construction of this solution.

One of the perversities of the situation we now find ourselves in as a result of artificially cheap traditional energy sources is that it holds off the adoption of alternatives in the market place. The only way we have to overcome this difficulty is through policy initiatives at the State and Federal levels. Currently we rely on a 30% Federal Investment Tax Credit (currently payable as a cash grant expiring at the end of the year) coupled with accelerated depreciation (5 year MACRS) credits and New Jersey’s pseudo market based Solar Renewable Energy Certificate (SRECs) requirements. The financial construct requires the owner of the solar PV array to be in a position to take advantage of tax credits in order to amortize the cost of the installation and to be in the SREC trading business-activities that won’t work for everybody.

That problem will eventually be resolved as traditional energy prices soar and alternatives continue to gain from scale and scope economies. In fact, figure 3 shows that, at least on a Levelized Cost of Energy (LCOE) basis-that is the average cost over the life time of the solar array, we can expect solar PV to be equivalent to traditional electricity production within the next 3 to 5 years. Beyond that point, fueled by the predicted price increases in traditional electricity production, I would expect solar PV and in fact all alternatives to stop their current price declines. Once price parity is achieved, there will be no rationale for prices to decline further until energy consumption growth and supply are balanced.

There will a window of opportunity over the next several years for companies to adopt solar PV as a viable long term price hedge against the future increases in traditional electrical energy prices. As demand ramps up, driven by further declines in solar prices and increases in traditional energy prices, that window will begin to partially close simply driven by supply and demand realities. For those with capital to invest and a tax bill to offset, a turnkey installation on their roof or grounds might fill the bill. In exchange for their investment dollars, they keep the tax credits (or grant), depreciation credits, SRECs generated, and of course get the benefit of all kilowatt-hours generated as a direct offset to their electricity bills.

Those with limited capital or desiring to keep their capital working in their core business can obtain the benefits from a third party developer such as American Clean Energy through a Power Purchase Agreement (PPA). In exchange for an easement for the term-usually 15 to 20 years, the host gets paid usually in the form of reductions in electricity pricing for energy produced by the array. The PPA provider uses the tax credits and SRECs and electricity sales to the host to amortize the cost of the investment and earn a return for the investor(s).

Both approaches can and do work in New Jersey. Anyone interested in the topic can find more information on-line at the Office of Clean Energy www.cleanenergy.com , the NJ Board of Public Utilities at www.state.nj.us/bpu or from any of the companies represented at this conference.

REFERENCES

1. United States Energy Information Agency (US EIA) –www.eia.doe.gov/emeu/steo/pub/special/pdf/2010_sp_02.pdf
2. International Energy Agency (IEA)- World Energy Outlook 2009 www.iea.org/speech/2009/birol_moscow.pdf
3. US Federal Energy Regulatory Commission (FERC)- NYMEX Natural Gas Forward Price Curve www.ferc.gov/market-oversight/mkt-gas/trading/ngas-tr-fwd-pr.pdf
4. National Energy Technology Lab- “Tracking New Coal-Fired Power Plants, Jan 8 2010” www.netl.doe.gov/coal/refshelf/ncp.pdf
5. US Environmental Protection Agency (US EPA) -Reconsideration of Interpretation of Regulations that Determine Pollutants Covered by Clean Air Act Permitting Programs www.epa.gov/air/nsr/documents/psd_memo_recon_fs_032910.pdf
6. United States Energy Information Agency (US EIA) –www.eia.doe.gov/fuelelectric.html
7. Forbes Magazine – Why Small Coal-Fired Plants Are Going Away, Jonathan Fahey, July Issue 7/1/2010

Letter to President Barack Obama regarding bill to eliminate Renewable Project Tax Grants/Credits

                                                                                                                                March 8, 2010

Hon Charles Schumer, Senator New York                                            

Hon Robert Casey, Senator Pennsylvania

Hon Sherrod Brown, Senator Ohio

Hon Jon Tester, Senator Montana

Re: Proposals to Amend Section 1603Tax Grants/Credits for Renewable Energy Projects

Gentlemen:

First let me say that I am not at all in the practice of writing to members of Congress regarding my personal or professional position on any matter.  I believe however that this is a matter of extreme urgency and the timing of your recent proposal could not come at a worse time for the renewable energy sector of our economy.

I am the CEO of a New Jersey based renewable products and Services Company focused primarily on solar Photo Voltaic developments in New Jersey.  Prior to launching this business, I spent over three decades in the electric utility industry in various engineering, operational and executive management positions.  I chose to go into the renewable energy business not to supplant my former industry but to build upon its successes and to resolve the longstanding problems that we face in this country and indeed the world.

I listened in shock to your press conference last week announcing your opposition to the use of these incentives for renewable energy projects in the United States unless the materials are manufactured in this country.  I must confess that I originally considered this press conference to be just another one of those made-for-media Washington events intended to get air time.  I could not imagine that any knowledgeable staff or member of Congress would take this proposal seriously.

I readily acknowledge that I am politically naïve and might not have the whole picture.  But the part of the picture I do have stands in stark opposition to your underlying thesis that American Tax payers are somehow funding the development of jobs overseas at the expense of local American jobs.  This thesis is seriously flawed and taken to legislative action will impede the use of Section 1603 funds intended to stimulate the renewable energy sector.  In short it will result in the destruction of a nascent industry and kill the one bright spot in the current economic landscape.

I wonder what fact base you have relied upon in developing your position?  Let’s examine briefly a few of the facts not discussed in your press conference.

1.       Manufacturing jobs are being created overseas at taxpayer expense:  It is true that much of the manufacturing capabilities in this country have moved offshore.  This is a reality that has occurred over the last several decades.  I saw it Senators Brown and Casey when I lived in Ohio where I witnessed  American  mineworkers, autoworkers and steelworkers drive their wages and benefits cost out of sight while their productivity and skills declined and lazy managements  took the short view and shipped jobs first out of state and eventually overseas to reduce labor costs.  Tax and other governmental policies, such as those in place in my adopted state New Jersey further aggravated the situation and resulted in a mass exodus of manufacturing capabilities and created a disincentive for people to develop new local bases of manufacturing.

Your proposal will not resolve the underlying issues that drove manufacturing off our shores.  Let’s assume for the sake of argument that someone had a large amount of capital that they wanted to invest in manufacturing capacity in the US-as unlikely as that is.  Where will the technology and processes employed come from?  They will necessarily have to license that technology from companies operating in those other countries.  If that new source of manufacturing gets to the point of actually making and selling products, those license fees and royalties will still flow overseas to the owners of that technology.  Presumably they will invest those returns where they do the most good for the owners of the capital, do you imagine that will be to create even more manufacturing in the US? 

2.        The Buy American requirement will create US jobs:  Again assume our hypothetical capital infusion results in quickly deployed manufacturing capacity.  It is reasonable to assume it will be no greater than the total capacity required to compete for the limited stimulus backed projects in the US since it will be at a cost disadvantage to other producers around the world.  Those higher cost goods now hypothetically manufactured in the US will not have a broad market around the world.  The more likely reality is  that we will see the demise of the infant renewable market place just as we did in 1980 and that means that tens of thousands of green jobs that can only be created in this country will disappear.

As emotional as the issue of jobs is, the largest benefits to be derived from the growth of this segment of the economy are the reduction of waste, increase in economic efficiency and improved energy security of the US and the world.  The US economy benefits from the growth of this segment in several critical ways that your proposal will undermine.  First, the source of much of the world’s capacity to purify the raw materials and grow silicon wafers used in the manufacture of solar PV modules is based upon technology owned and machinery designed and built in the United States.  That technology has benefitted from the world-wide growth of solar PV deployments.  You didn’t seem to notice when US companies were creating American jobs at the expense of all those other “foreign” economies but your proposal will surely have an adverse impact on those US positions going forward not to mention failing to move us forward to the energy independence that is vital to our strategic interest going forward. 

3.       The ITC stimulus is intended to revive the American Economy:  While some will fail to acknowledge this fact it remains that we are just one part of the world-wide economy.  The successes in reversing the economic downturn in this country are linked to the revival of all of this country’s trading partners—the world!  The average American consumer uses four to six times more energy per capita than the rest of the world, including other OECD Nations.  We pay as little as one third to one eighth what those other consumers pay per kilowatt-hour for electrical energy.  In other words, we are energy pigs and we have enjoyed ready access to cheap energy for a long time.  Who exactly do you imagine has borne the brunt of that burden if not those other nations and their people?  Either all boats will rise together or most assuredly our economic recovery will fail.  There is simply no reason those other economies will continue to support our aggregious waste of the planet’s limited resources, nor should they.

The strength and viability of the renewable energy segment of this economy has absolutely nothing to do with technology or where products are manufactured.  It has everything to do with financial certainty.  The most significant benefit of the Section 1603 ITC grant is that it gave financial certainty to renewable projects that attracted additional capital necessary to make the projects financially viable.  There are other ways to accomplish the same end but it will take policy and regulatory initiatives to accomplish that.  The reason that Germany, a location with the same solar insolence as New Jersey, has 41% of the world’s installed solar capacity relates to the cost of energy in that country. Post-oil embargo many countries intentionally increased the price of energy in all forms.  This resulted in greater economic and energy consumption efficiency but most importantly it helped to close the gap between traditional sources of production and emerging alternatives.  As mentioned before, the US did not take that course of action. Look at the USEIA available information and you will see that the average real price of electric energy delivered at the end of 2007 was the same as it was in 1960!  So while other countries were closing the price gap we were widening it.  To close that gap today would take an 80 to 300% increase in the price of electricity. I do not know any regulator or politician with the stamina to withstand the onslaught from disaffected consumers if we tried to accomplish this today.  Maryland and others tried and largely failed in the last several years to increase energy prices.

So where does that leave us?  We’ve been there and done that in the early 1980’s and if we follow your proposal we will end up there again.  We will watch as the rest of the world deploys renewable energy resources and drive their productivity up, their costs down and we witness our economy and standard of living fall to unprecedented lows.

I could continue with other examples of why this policy initiative is flawed.  It is my sincere hope that your combined staffs will do some real fact based discovery before proceeding on a course that is likely to extinguish the one bright spot in our economic recovery.  Much has been said in the last several years regarding short term focus and quick fixes.  These are times that require a steady hand and strong leadership.  Examine the facts before proceeding and I am confident you will conclude that the viability of this nascent renewable energy industry will be undermined by your proposal.

I am sure that you are hearing from many other points of view regarding your proposal but I do hope that you will instruct your staffs to reach out, dig in and research the likely consequences-intended and unintended-before proceeding to author legislation or lobby the administration to destroy a critical component of the financial certainty necessary to bring renewable energy projects to life in this country.

                                                                                        Sincerely,

                                                                                        Stephen E. Morgan

Copies:

Hon Harry Reid, Senate Majority Leader

Hon Max Baucus, Senate Finance Committee Chair

Hon Nancy Pelosi, Speaker of the House of Representatives

NJ Congressional Delegation

Secretary of the Treasury, Timothy Geithner

President, Barack Obama