What renewable projects would you purchase electricity from?

Renewables (and particularly geothermal) are becoming a more popular talking point amongst utilities and governments these days. Just this week, America’s Geothermal Energy Association said it will tell utilities at an upcoming conference that geothermal power could create $22.5 billion in economic output in the state of Nevada alone.

Others in the southwest U.S. are taking notice of this trend. The Western Governors’ Association (WGA) has been working for some time on its “Renewable Energy Transmission Roadmap”. A study report aimed at helping renewable project developers in the western U.S. permit their power stations, and get them hooked up and producing power.

One of the major deliverables from the report is a list of factors utilities look at when deciding whether to purchase power from a renewable project.

As long-time geothermal investors know, power purchase agreements (PPAs) from utilities are a crucial component of any new project. Under a PPA, a utility agrees to buy a certain amount of power from a project for a certain number of years at a set price.

PPAs are a linchpin part of project development. Often, banks require a PPA before they will debt finance the construction of a power plant. Without an agreement, the facility may never get built.

So it’s crucial to know what utilities look for when deciding who to sign PPAs with.

The recent WGA report suggests a handful of factors. Some are obvious, like power price and the use of proven technology.

But others are more subtle. And may make or break projects over the coming years.

One of the most interesting criteria is developer experience. WGA notes that utilities will likely give PPA priority to groups that have a demonstrated track record in project finance, engineering procurement and facility operation.

This of course makes sense. The last thing a utility wants is to spend time and money on assessing and issuing a PPA, only to see the project die on the operating table due to poor construction or operation.

The implications are intriguing. Groups with a long history of building power plants have a distinct advantage over upstart management teams. By holding greater sway with utilities, experienced groups may be able to get preferred access to PPAs. And thus get projects completed faster and cheaper.

This is one more reason for consolidation in the geothermal space. The value of experience could present an arbitrage, with projects worth more (on a risk-adjusted basis) in the hands of larger companies who have a greater likelihood of getting the job done.

If this advantage does become apparent, large firms will start buying these projects from smaller groups that have done the legwork to assemble the land, complete the exploration and prove technical feasibility. A win-win for all.

Here’s to economies of scale,
Dave Forest
dforest@piercepoints.com
Copyright 2009 Resource Publishers Inc.

Note:
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