Archive for the 'Business' Category
Public Policy, Subsidies, and Renewable Energy
The past few years have seen some rather dramatic events unfold in the area of public policy and subsidies with respect to renewable energy projects. It would be difficult to underestimate the impact of these policies and the resulting guarantees that really enable renewable projects to be developed. Ideally, renewable energy projects would be economically viable without such legislative intervention, but we’re not quite there yet.
In our view, the government could best serve the people, the interest of the nation, and renewable project developers by doing a few, simple things:
- Shift focus from fossil fuel generation to renewable generation. Slash funding and subsidies to nothing for fossil fuel generators. In reality, these industries are mature and do not need the government support to maintain profitable operation, and encouragement of continued development of new fossil powered projects is counter productive for energy security and greenhouse gas issues.
- Establish a long-term (10-15 year) production tax credit for renewable projects. When it expires, do not renew the credit. This longevity enables investors to take on renewable projects with reduced risk, reducing costs all along the financial supply chain. The fact that PTCs will likely expire in December of this year increases risk making project financing significantly more difficult to secure and more expensive. This fundamentally changes the economics of projects for the worse. The PTC however, should not be permanent. It’s a catalyzing measure to increase investment in the near-term in renewable projects.
- Provide loan guarantees. Particularly in the present credit crunch, it’s difficult to get project financing. Having the government as a co-signer reduces risk for lenders and cost for developers. To their credit, there is a program with $38.5B in loan guarantees out there, but more than half is earmarked for nuclear and fossil fuel projects, which misses the point of having the guarantees.
- Give regulatory preference and increase velocity of government interaction on renewable projects. Be it a lease from the BLM, and environmental impact review from the EPA, a power plant application to FERC, these projects need to be expedited. The long development times kill developers making it difficult to get a project in place and producing. The average renewable project takes 4 years to go from concept to commercial operations.
- Get out of the way. Once the pieces above are in place, simply let the industry move forward. Additional oversight and overhead are not particularly useful or necessary.
Until and unless a simple, coherent, and consistent energy policy exists that prefers renewable generation projects, we’re simply on a status quo course of action. As a new administration is selected and sworn in, we’ll see if that person has the vision and will to lead the nation to an outcome of energy independence and security.
Euro Utility Renewable Map
Attribution: GreenTech Media
GreenTech Media put together a really nice visual representation of the European Utilities Renewable Portfolios and development pipelines indicating the country and types of renewables in the portfolio. It’s really nice work and helpful. We need to do one of these for the US as well.
Things that stick out, the overall European nameplate capacity of renewables is 86.6GW at a cost of 26.4B EUR and the total development pipeline is 102.1GW. That’s showing just how far ahead Europe is in considering and solving this problem. It also shows the room the US industry has to grow, we’re just scratching the surface of what’s possible.
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Polaris Reports: Inside the Numbers
Photo Credit: Polaris Geothermal
Polaris Geothermal recently reported full results for the year 2007. A detailed press release about the earnings is available here. The high points: The company got a full year of production from the Phase I of its plant in San Jacinto-Tizate, Nicaragua at around 7MWe of average output, the drilling program continued to grow Phase I to its planned 34MW target, and the full 72MW of production appears to be on track for the 2010 timeframe.
The low lights involved a question about the validity of the concession from the Nicaraguan government which was resolved and accelerating losses, the net loss rate for the company increased nearly $2M to $6.7M on the year. Shareholder concerns about Polaris have to revolve around project finance where additional dilution and access to debt financing will present distinct challenges going forward.
Rather than making this a straight financial story, one of the things that struck us about this release was the transparency of the operational aspect of the SJC plant. We applaud Polaris for disclosing this information and believe since it is there, at least at this plant on this project, we can see some of the real cost and benefit of geothermal plant operations.
In 2007 the SJC plant produced 64,778 MWh of power accounting for $3.9M in power sales and $0.7M in carbon credit sales for a grand total of $4.6M of revenue for the project. Plant operations expenses totaled $2.2M yielding a gross margin of $2.4M for the project at an average output of 7.37MW per month. Hidden in these numbers are outages of over a week in June which cost the company approximately 1,000 MWh of sales.
We can reverse engineer that the company is being compensated $10.80 per MWh for carbon credits and $60.20 per MWh for power sales against operations cost of $34 per MWh. As the project grows to 34MW and finally tops out at its planned 72MW, these numbers should improve as the plant operations costs won’t scale in a linear fashion relative to output due to economies of scale (after all, the operations infrastructure is in place now, operations cost will increase but the slope should be pretty flat.)
NCPA, an operator at the Geysers, sees operations costs of about $19 per MWh at 132MW of output. It seems reasonable to believe that Polaris could achieve that level of efficiency over time, but even if the SJC project split the difference and only improved to $26.50/MWh, there would still be interesting impacts on the bottom line.
If nothing changes except capacity and output, at a 34MW and present availability and capacity factor, the company would bring in $13.2M in power sales and $2.4M in carbon credits balanced against $7.5M in plant operations producing a pre-tax, pre-corporate expense run rate net of $8.1M. If the company was able to hit the $26.50/MWh operational improvement, that would result in a $1.7M increase to $9.8M.
At 72MW and current operational levels and assumptions, the project is a real money machine producing $28M in power sales and $5M in carbon credits against operational expense of $15.8M. With numbers this attractive, why isn’t everyone building geothermal plants? The answer lies in the development expense. Effectively, the lifetime cost of production is incurred upfront and then amortized over the lifetime of the project. Therein lies the rub, the development cost per MW of output is in the $3.2M range presently meaning to reach 72MW Polaris will likely have spent $230M developing the plant.
It’s always nice to see real numbers, thank you for disclosing Polaris and we wish you well as you build your SJC project out to scale.
Ormat Revenue Up, Net Down
Geothermal and waste heat harvest equipment maker and electricity generator Ormat issued a short earnings preview this morning stating that revenue was up year over year from $72M to $73M. Net profit however dropped from $87M to $47M; however, the prior comparison period had a one-time capital gain of $47M reported. Excluding this gain, profit increased from $40M to $47M year over year.
Polaris Raises $27M
Polaris Geothermal, who recently announced a successful well test on their Nicaraguan concession, has recently announced a debt funding round of $27M in exchange for 27,000 units. A unit will consist of $1,000 in 9.5% senior debt, 667 warrants, and 75 penalty rights. The debt is due in 18 months time and will be paid quarterly in arrears. Jacob & Company, the underwriters of the deal, stand to benefit $1.89M for their fee and an option to acquire 7% of the offering.
The proceeds from this funding round will be used to retire $8.3M in debt due and the balance will be used for general corporate purposes according to the company. This debt round comes on the heels of a prior $32M private placement completed in July, 2007.
