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FUEL FROM THE SKY: SOLAR POWER’S POTENTIAL FOR WESTERN ENERGY SUPPLY Commission required utilities to buy energy from so-called “qualifying facilities” (QF) under the fed- eral Public Utilities Regulatory Policy Act (PURPA) at high fixed prices under long-term standard offer contracts. Between 1984 and 1991, first under private agreements and then with the help of the attractive standard offer long-term power purchase agreements plus federal and state tax incentives, LUZ erected the nine parabolic trough solar power plants in the Mojave Desert. To build these plants, $1.3 billion was raised—initially from private risk capital investors and next, with increasing confidence in the maturity of the technology, from institutional investors. The first step occurred in 1983 when LUZ negotiated a 30-year contract with SCE to sell elec- tricity from the first two plants—a 13.8-MW facility followed by a 30-MW plant. Subsequently, the standard offer 30-year power purchase agreements that were in place for the third to seventh units had fixed energy payments for the first 10 years and energy payments based on the avoid- ed fuel cost of the electric utility for the remaining 20 years, which were initially linked to the price of fuel oil and later to natural gas. For the eight and ninth plants, the initial 10-year period of fixed energy payments was eliminated. However, the standard offer capacity payments were fixed for 30 years for the third through ninth plants. Given the expected high oil and gas prices in the early 1980s, the forecast revenue stream was very good. However, several developments changed the economic environment that LUZ encountered by the time the seventh unit was completed.9 First, additional new QF capacity with increasingly bet- ter heat rates had entered the market and thus lowered the avoided cost to utilities. Secondly, when oil and gas prices rapidly fell in the middle of the 1980s and remained at a low level, non- fixed energy payments dropped. Both effects significantly reduced the revenues projected for potential owners. These and other market factors translated to a higher return on investment being demanded by investors. Up through the seventh plant, the capacity was artificially limited to 30 MW by FERC rules, but this limitation was then lifted, allowing much larger 80-MW plants. Other technical changes by LUZ, while beneficial, increased the perceived risk to investors, again raising the bar on the required return on investment. In 1985, the investment tax credit legislation expired, requiring year-to-year extensions to maintain this important incentive. During this time, LUZ also encoun- tered difficulties with union labor issues, with premium payments to suppliers due to the tight schedules, high internal financing costs, and pressure from investors to offer even more attrac- tive returns. Despite these barriers, LUZ continued its development with two 80-MW units. Late approval to construct from the California Energy Commission, an early end date on the tax subsidy, and problems with construction management led to significant construction cost overruns by the completion of the ninth unit. While LUZ still achieved the construction of the plant, the company was financially weakened. 92PDF Image | Solar Fuel From The Sky
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