This article originally appear in North American Clean Energy magazine.
The potential for the concentrated solar power (CSP) industry to generate electricity has been discussed for years, but the ability to deliver on that potential has never been as good as it is today. The International Energy Agency reported in May 2010 that CSP could provide 11.3% of global electricity by 2050. Meanwhile, the market for CSP plants is expected to grow by 20% annually over the next decade, reaching an estimated installed capacity of more than 20 gigawatts by 2020. States like California and nations like Australia, India, and South Africa are establishing bold renewable energy goals that can only be met with significant input from CSP technologies. Clearly, there is a vast global market for CSP.
However, the industry is at a turning point. Many large projects have been announced and power purchase agreements (PPAs) have been signed, yet there have been numerous delays and cancellations, and difficulties in obtaining project financing are creating roadblocks. The key to capitalizing on the market opportunity lies in the ability to get projects financed, and that requires CSP companies to deliver on price and performance promises. Essentially, from a lender’s perspective, the key questions are: “How reliable is the technology?”; “Does the price provide a good return?”; and, “Who is guaranteeing delivery and performance?”
How reliable is the technology?
Demonstrating the reliability of CSP technology is essential. Actual operating plants with historical performance data are the best proof point. Certifications by credible and independent entities are essential to reinforce the claims made by technology players. For example, AREVA Solar has used its Kimberlina plant to demonstrate the reliability of its Compact Linear Fresnel Reflector (CLFR) technology, resulting in the company becoming the first solar steam boiler manufacturer to receive the “S” Stamp Certification from the American Society of Mechanical Engineers. Getting this kind of third-party certification would have been impossible without having a field installation producing electricity daily. Other CSP firms like eSolar and BrightSource have also built demonstration plants to prove their technology.
A prudent approach to reducing risk is to build progressively larger plants so magnifying their scale is not as daunting. The success of these relatively smaller projects reassures traditionally risk-averse utilities that a technology is ready to provide reliable service in today’s market. For example, the successful implementation of solar steam augmentation at the Liddell Power Station in Australia gave the Australian government enough confidence in the technology to commit funding toward a 44 MW booster project at the coal-fired Kogan Creek Power Station. Proving reliability greatly increases the chance that such projects will be funded.
Does the price provide a good return?
Numerous large projects have been announced in the past several years, but they haven’t always come to fruition. Many projects secure PPAs at prices that make the returns on the project marginal, so any unforeseen cost increases make the project unviable. This industry problem is what Greentech Media Research analyst Brett Prior pointed to in his recent posting, “A signed PPA isn’t enough. Why? Economics.”
Prior states: “Many of these PPAs have prices that won’t allow for a reasonable return for the equity investor (8% to 9% unlevered, or 13% to 16% levered) and, as such, they likely won’t be able to attract the funds required to build the project.”
Companies need to be realistic about their pricing outlook and build in contingencies for cost and schedule overruns. PPAs are important, but success as an industry will be measured by an ability to provide high-performance installations at a competitive price. Put simply, can we deliver?
The answer: yes. We’ve seen the photovoltaic sector lower costs as technologies have advanced and the supply chain has been streamlined. The same trend is expected in CSP as more plants get built and large industrial players bring their supply chain and scale efficiencies to these projects. This will allow firms to provide market-competitive pricing with assured returns for the investor.
Who is guaranteeing delivery and performance?
Unsteady financial markets and uncertain tax policies have led to a situation where many projects, even when they get private financing, are structured in such a manner that the room for error and the chances for a safe return are both slim. To put this in perspective, since 2002 slightly more than 50% of renewable projects have either been delayed or cancelled, according to the California Public Utilities Commission. After ‘transmission,’ ‘financing’ was cited as the top barrier to development.
Since there are market and technology risks that could jeopardize returns, CSP companies need to be able to offer customers credible schedule and performance guarantees. Because many CSP companies are start-ups, they do not have the strong balance sheet needed to provide credible guarantees that would enable them to secure project financing.
That is why some CSP companies are seeking to pair their technology with the financial backing of large, industrial players. In March, AREVA purchased the CSP start-up Ausra to form AREVA Solar. Similarly, Siemens purchased Israel’s Solel in October 2009, and Alstom recently announced a minority stake in BrightSource. The financial backing of these major players is needed to signal to power customers that CSP projects can provide safe returns on an investment.
In the end, credibility based on execution and financial strength will likely be the critical factor for success in the industry. As project financing shakes out, it’s anticipate the market will be dominated by a few strong players that can successfully answer investors’ make-or-break questions.
Jayesh Goyal is the VP of North American Sales for Mountain View, California-based AREVA Solar, Inc.
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