IN-DEPTH: Credit to the policy makers

May 13, 2009

The combination of tax credits and renewable portfolio standard is expected to boost the status of the CSP industry.

By CSP Today staff writer

The past few months have witnessed crucial developments in the CSP sector in the US.

Inclusion of the investment tax credit (ITC) extension in the bailout package and the widespread impact of the credit crisis in the first quarter have paved the way for a major shift in the approach of various stakeholders.

With tax equity slashed, utilities and IPPs are now expected to be in an advantageous position compared with the emerging group of CSP start-ups and developers. The lifting of restrictions on investor-owned utilities from using the ITC is expected to result in more CSP projects getting financed and built. They are expected to turn to CSP through both power purchase agreements and direct ownership to meet their RPS mandates.

On the other hand, CSP start-ups have had to reassess their plans and accordingly opted for major restructuring. In fact, for a company like Ausra, it has been a roller-coaster ride.

In February, Ausra projected itself as a technology and equipment supplier rather than an independent power developer and owner. This resulted in some personnel leaving the company, internal reassignments and the hiring of new individuals. And a couple of months later, Ausra again was in the news for the right reasons. In April, it announced a $25.5 million equity funding to support its global expansion for existing power generation and industrial process steam applications.

Still, many companies are encountering problems accessing sufficient credit.

“The CSP industry is at a crucial point,” said Michael Bernier of t ax c redit i nvestment a dvisory s ervices at Ernst & Young.

Significantly, Bernier feels the relative success of the first couple of projects will go a long way to determining how successful the industry is going to be in the long term.

“Once the industry has a couple of successful projects up and running, it will be easier for everyone to understand what it will take to develop a project, what the key pressure points are etc,” said Bernier.

Tax adjustment

The decision to allow public utilities to take advantage of the ITC should help more CSP facilities to come online. It should also help the companies that have the intellectual property surrounding the equipment used in these developments.

At the same time, according to Bernier, this may leave a number of CSP developers with a business plan that is very unlike, and a lot less attractive than, their current business models.

In the area of public utilities, the issue really is the normalisation of the ITC which is required under the tax code for regulated public utilities. To date, this issue has prevented regulated utilities from becoming owner operators. The regulated utilities have been unable to convince the regulators that solar electricity is an option that should be part of their energy generation mix (due to the fact that it is more expensive than coal and natural gas options). Under normalisation, the ITC is not counted as the upfront benefit but instead the benefit is amortised over the useful life.

Benefiting from ITC

Bernier cites an example to explain the same: assume that a regulated utility is looking to buy a $100 solar system. The utility would put the $100 system into rate base. If the utility has an 8% return requirement and assumes that the system has a 30-year useful life, the utility would be allowed to sell the electricity at a rate that would allow them to generate $10 of revenue ($8 for their required return plus $3 for the depreciation, less $1 for normalised ITC). The $10 number has proven to be too high for regulators to swallow. One potential solution would be to allow the public utilities to put the same system into rate base at $70 ($100 less the $30 ITC). This would lower the required return to $7.7 ($5.6 for their required return plus $2.1 for the depreciation). This would allow for a 23% decrease in the cost of power to the end consumer.

Some expect normalisation to be discussed as part of a national RPS.

“If I was a CSP developer, this is one issue that I would be following closely. It is an under-the-radar issue that can be a game changer for the industry,” said Bernier.

Policy pitfalls

Policy options – be they for feed-in tariffs or government mandates and targets, such as renewable energy portfolio requirements or tax credits – can influence or alter the plan when it comes to developing, constructing, owning and operating any CSP project.

In theory, all these can be very beneficial for CSP developers. However, if implemented incorrectly they could also be very harmful to the industry.

For example, consider the potential impact of a National RFP.

On the one hand, it could create demand for CSP projects and allow developers to achieve above-market prices for electricity. That obviously would be great for the industry. On the other hand, what if the RFP drives utilities to decide that they want to own and operate the asset so that they can include it in rate base? If utilities stop offering PPAs and only offer turnkey contracts, it could threaten the long-term viability of a number of CSP developers.

So such policies need to be carefully crafted.

“It is crucial to ensure that whatever policy options are implemented, they are designed in a way that they are eventually beneficial to CSP,” said Bernier.

National RPS

President Obama has made national RPS a cornerstone of his energy strategy – advocating that 25% of the nation’s electricity be generated from renewable sources by 2025. This is roughly equal to the goal set by the European Union for its member nations and is consistent with resolutions adopted by the US Congress in 2007.

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IN-DEPTH: Credit to the policy makers