Installations likely to increase as states move rapidly toward cleaner power — report

Source: Henry Gass, E&E reporter • Posted: Friday, August 23, 2013

U.S. investment in clean energy was down in 2012 after breaking records all through 2011, but rapidly declining installment costs mean deployments are likely to continue to rise, according to new analysis from Ernst & Young LLP, a multinational accounting firm.

The report ranked the renewable energy “attractiveness indices” for all 50 states, and those numbers remained similar — California and Texas continue to dominate the market, with Hawaii making the strongest jump last year through significant solar and wind gains.

But the broader national picture seems to be changing dramatically. Renewable energy accounted for a record 49 percent of added capacity in 2012, and deployment is expected to continue to rise as costs continue to fall. And while inconsistent policies from state to state have often hampered renewable energy development, technological improvements mean that if a state isn’t amenable to large-scale utility installations, it’s probably more hospitable to residential-scale distributed installations.

While the wattage of renewable energy installed rose in 2012, it was mostly in the same states that have been dominating the market for years. The resources the states exploited to supply this energy, however, changed significantly. California, which has traditionally ruled over the solar market, continues to do so, but the state is also making major strides in wind power deployment.

Mike Bernier, leader of Ernst & Young’s Tax Credit Investment Advisory Services practice and co-author of the report, said issues around availability and the state’s ability to connect wind power to the grid are being resolved. “People are planning on it being there,” Bernier said. “There’s a lot of grid construction underway, and projects are further along.”

California ranked as the fifth most attractive state in the long term for wind power. Texas was No. 1, but Bernier said he thinks that might also move in the opposite direction. While Texas has plenty of space to house vast swaths of wind farms, it has run into a generation problem: Texas weather. The problem is that when Texas is hottest — and thus when the wind turbines need to be spinning fastest — there’s no wind.

Instead, Bernier anticipates solar making a major push in Texas, since it would be a much more productive energy source during those sweltering peak consumption periods. “Solar matches extremely well for the load, in the fact that the days it’s hottest, solar power produces the most power,” Bernier said.

While Texas and California overhaul their renewable energy portfolios, Hawaii looks like it will increase its capacity for everything. While solar is already a prominent resource on the islands, the state is building up its wind capacity and also has significant existing potential for geothermal energy in its multiple dormant volcanoes.

“Power is very expensive” in Hawaii, Bernier said, given that much of it is petroleum-based at the moment. Renewables are becoming more popular. However, technological improvements are making installing them more cost-effective. “It’s something that’s taking off as technologies improve and people get more comfortable with them,” he added.

‘Drop dead’ dates drop

Bernier thinks recent changes to qualification standards for the popular production tax credit (PTC) and investment tax credit (ITC) could be even more significant than individual state activity for American’s renewable energy development, however. Prior to 2013, project developers had to have installations producing energy by the end of the calendar year in order to qualify for the tax credits.

This year, the Internal Revenue Service has redefined the eligibility for the tax credit so that projects have to have begin “physical work of a significant nature” or have already paid 5 percent or more of the total cost of the facility to be eligible for the tax credit under the “safe harbor” rule.

“Now, you don’t necessarily have that drop-dead date,” Bernier said. “You could conceivably have a project that could be placed in service a couple of years later,” after beginning construction. Bernier added that he has several clients with projects that are eligible for the PTC but will not finish construction until 2015.

Developers do have to maintain a continuous program of construction to remain eligible for the tax credit, and if project costs overrun the anticipated cost of a project, the original 5 percent will not satisfy the safe harbor rule.

Nevertheless, Bernier thinks the IRS alterations will fundamentally change the renewable energy landscape. “I think you’ll see larger installations and think you’ll see more installations going on at once,” he said. “I think we’ll see developers saying, ‘We can do four this year,’ when it would have been two and two.”

A sprawling but fragmented state market

Indeed, one major feature of the Ernst & Young report is its portrayal of the growth of large-scale utility renewable projects versus the expansion of local-scale distributed installations (ClimateWire, Aug. 12). While recent changes to the tax credit eligibility requirements may make large-scale installations easier to finance, Bernier still thinks distributed installations are going to expand.

Indeed, past state attractiveness indices didn’t even score residential energy installations, Bernier said. “I think it has long way to go to catch the utility side; you need a lot of houses to make up for a 300-megawatt wind farm in Arizona,” he said. “But it is a market we think will be growing for four or five years to come.”

The dual growth of utility- and residential-scale renewable energy products seems to expose just how fragmented the U.S. renewable energy market is, but Bernier thinks these two options could help make sure renewables make it to states that might have their own unique policies.

“The U.S. is both a very attractive market and a very dispersed market,” he said. “The best states for residential don’t necessarily overlap with best states for utility.”