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Renewables target - the new California Gold Rush?

UNITED STATES: When Governor Jerry Brown of California signed into law Senate Bill X1-2, on April 12, 2011, he could well have given the US wind sector a welcome boost. The Bill increases the amount of renewable energy that must be purchased by California's investor-owned and municipal utilities to 33% by 2020.

The previous law set forth a 20% standard, but applied only to investor-owned utilities, which serve about 75% of California's 38 million people. The new legislation extends to both investor-owned and municipal utilities.

The 33% renewable portfolio standard (RPS) target is projected to require approximately 100TWh of annual generation from renewables by 2020, based on current electricity demand. Assuming a 32% capacity factor for renewable sources, the California utilities will need to add over 23GW of additional renewable capacity over the next nine years. This estimate of required additional capacity is likely to grow above that amount if California's population continues to increase and electricity demand continues to grow.

The California legislation comes at a critical time for the US renewable energy industry. The combination of the recession that the US has experienced over the past two-and-a-half years, plus the relatively low price of natural gas in the US, has caused power prices in many areas of the US to fall below the cost of wind or solar generation. This has caused many utilities to decline to purchase power from wind projects and, as a result, there was only 5,317 MW of new installed capacity in 2010, a drop of nearly 50% from 2009.

California, which has been trying for several years to reduce its reliance on carbon-based fuels for electricity generation, has been one of the bright spots during this period of low power prices. California power prices are generally higher than those experienced in the rest of the country. Under the previous 20% RPS in California, renewable power prices were among the highest in the country. This has promoted development within the state as well as in surrounding states that export power to California.

To comply with the new legislation, most of these new megawatts of capacity will probably need to be built within the state of California. At least 75% of the total renewable generation will need to come from bundled transactions delivered to California transmission operators within the state. The reason is obvious. If California residents are going to be paying slightly higher utility rates in order to support renewable energy development, California wants to keep the jobs in-state. As a result, wind projects under development in California have become more valuable.

However, while California has ample wind and solar resources, California is a diverse and beautiful state with some of the most stringent environmental protection laws in the country. Thus, developers will be challenged to find enough sites with the appropriate resources that do not pose environmental problems - such as endangering the state's fauna.

The result is likely to be twofold. First, those projects in California that can get built will provide their owners a higher price for power than in other areas of the country. Second, in the event that California does not have enough developable sites to satisfy the 33% requirement, the limit of 25% from out-of-state renewable power will need to be revisited.

Given that energy prices are down across the rest of the country, the 33% California RPS is certain to give the US wind industry a much-needed shot in the arm.

Edward Zaelke is a project finance partner with the law firm of Chadbourne & Parke LLP and is managing partner of Chadbourne & Parke's Los Angeles office

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