$1B Edison Solar Deal Raises Competitive Issues

By Published On: April 4, 2008

Southern California Edison added almost a billion dollars to a $19 billion, five-year spending plan for infrastructure modernization. The additional money–outlined in a filing with the Securities and Exchange Commission April 1–is to cover the cost of the 250 MW of photovoltaic rooftops it plans to install on commercial buildings in the Inland Empire. Announced last week, the project is the largest utility-scale photovoltaic project to date and comes as a supplement to the utility’s original capital investment plan as presented to investors last month. While it will help California meet its renewable energy goals, the solar project’s high cost to ratepayers, risk, and possible tax implications for Edison are raising concerns. “I’m unsure about its financial and tax cost effectiveness,” said Bill Marcus, principal economist with JBS Energy. He and others worry that Edison is not overly concerned about the price tag because ratepayers will pay for it. “Every presentation Edison makes to its shareholders is about generating rate base. The most expensive capital investments are solar plants,” Marcus noted. Edison spokesperson Gil Alexander said that although it is the largest photovoltaic project in the world, “it is not huge relative to the utility’s procurement.” Edison chair John Bryson said March 27 that the plan’s large scale will drive down the cost of advanced photovoltaic projects by at least half, from $8,000/kW to $3,500/kW. Utility capital expenditures generate large returns for shareholders that grow each time regulators allow them to use customer funds to recoup new capital expenses and pay above market rate of returns on the investment. Edison expects the California Public Utilities Commission to sign off on nearly all of its proposed investments, which also include transmission upgrades and expansions, according to its 8K federal Securities & Exchange Commission filing. In a separate filing with the California Public Utilities Commission seeking approval for its photovoltaic rooftops project, Edison seeks full cost recovery plus a 10 percent contingency. Specifically, Edison is asking the regulators to allow ratepayers to pick up an additional $962.5 million for direct capital costs for the solar project from 2008-2014. Included in that amount is an annual rate of return of 9.75 percent beginning April 1, 2008, which would be collected next year. The cost effectiveness of the deal hinges partly on whether the utility can reap and pass on to ratepayers the benefits of solar energy tax credits. The federal tax credit is estimated by some in the solar industry to save at least 2 cents/ kWh. The state credit, which specifically exempts property holding solar systems from taxes, saves at least an additional 1 cent/kWh, which expires at the end of this year. According to the national Solar Energy Industries Association’s guide to the Federal Tax Incentives to Solar Energy, utilities are ineligible for the federal tax credit. U.S. tax law gives credits equal to 30 percent of qualifying project costs and installation for eligible systems. SEIA’s analysis concluded that commercial tax credits cannot be claimed for utility properties “that are regulated on a rate-of-return basis.” Edison may qualify for the state property tax exemption for its sites with solar systems. However, Randy Schultz, Edison senior projejct manager, said, “The solar photovoltaic project is not predicated upon any or either of the tax credits.” Another gripe about the Edison PV project announced by the governor and Edison officials March 27, which caught many by surprise, is that it was not competitively bid. “This is a huge project. Why didn’t it come through the [renewable procurement proposal] process,” asked Steven Kelly, Independent Power Producers policy analyst. He pointed to the long-term power procurement process developed and implemented by the CPUC, which he warns is increasingly being sidelined. Alexander pointed out that the deal represents only a small part of the utility’s 2,200 MW of renewable procurements. “I’m sure there are a lot of companies that would have liked the opportunity to plan and compete for the project,” Kelly added. Under a newly inked bilateral solar thermal deal between Pacific Gas & Electric and BrightSource, the solar developer will be able to reap both the federal and state tax credits. According to Joshua Bar-Lev, BrightSoource vice president of regulatory affairs, the tax credits represent “a lot of money,” roughly estimated at about 3 cents/kWh, which lowers project costs. PG&E signed five 25-year contracts with Bar-Lev’s company this week for up to 900 MW of solar thermal projects slated for the Mojave Desert. The PG&E-BrightSource Energy deal also was not part of the CPUC long-term competitive procurement process. But unlike the Edison agreement, PG&E will not build the solar unit, but buy the systems’ output. The northern California utility would not reveal the terms of the 25-year contracts, but each project will cost in the hundreds of millions of dollars. The first of the PG&E BrightSoource projects is for 100 MW, estimated to come on line in early 2012. Four subsequent 200 MW projects are also in the pipeline, with the first one expected to come online in 2013. The next project is projected to come on line a year later, followed by another 12 months down the road. The last project is estimated to be up and running at the end of 2015 or early 2016. BrightSource is made up of many of the same people who worked for the Israeli company Luz, which built 264 MW of solar thermal projects in the Mojave Desert in the 1980s.

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