ContentsCover

SeriesPage

TitlePage

Copyright

Dedication

Acknowledgments

Introduction

Chapter1:AnOverviewofRenewablePowerIt'sAllAboutNaturalGasControlofCO2EmissionsIsNotCurrentlyPossibleRealityofDemand-SideManagementSummary

Chapter2:AnOverviewofRenewablePowerRegulatedUtilitiesEvaluatingaPowerPlantFinancingaPowerPlantHedgeProvidersOpportunitieswithDistressedRenewablesSummary

Chapter3:TheChallengesofRenewablePowerProjects

TaxIssuesSpecialExemptionsSummary

Chapter4:RiskAssessmentforPowerProjectsProjectRiskAssessmentandRiskMitigationsPrecompletionRisks/MitigantsPostcompletionRisks/MitigantsSummary

Chapter5:ExploitingProfitabilityofDistressedandAbandonedMunicipalPowerPlants

Waste-FuelProjectsHaveKeyFinancialAdvantagesforInvestorsDutiesofProfessionalsinaMunicipalPowerPlantTheProfessionalFeasibilityStudyEngineerDisclosuresofRisksintheBondOfferingMaterialsCalculationofDebtServiceCoverageInvestmentOpportunitiesatTroubledMunicipalPowerPlantsSummary

Chapter6:EnergyStorageCheapEnergyStorage—TheMostVitalGameChangerintheWorldOpeningtheMarketforHistoricEnergyStorageFinancingCategoriesofEnergyStorageTechnologiesU.S.RegionalMulti-EnergyStorageCollaborationsFlywheelTechnologyEnergyStorageHastheLowestCycle-

Life-CostSummary

Chapter7:ShaleNaturalGasandItsEffectonRenewablePower

FrackingNewAttitudesinNaturalGasCostofProductionSummary

Chapter8:SolarPVandSolarThermalPowerPlantsTheEconomicsofSolarPowerFinancingTechniquesTheTechnologySummary

Chapter9:WindPowerPlantsProjectsOverviewWindProjectEconomicsWindProjectPowerContractingWindEnergyPredictionSummary

Chapter10:ElectricPowerTransmissionOverviewGridInput,Losses,andExitHigh-VoltageDirectCurrentControllingtheComponentsoftheTransmissionSystemElectricityMarketReform:CostsandMerchantTransmissionArrangements

AdditionalConcernsSummary

Chapter11:NaturalGasPowerPlantsGasTurbineEnginesBenefitsofGasTurbineEnginesGasTurbinesandCO2GasTurbineOperationsSummary

Chapter12:Coal-FiredPowerPlantsCoal'sHighOutputCapacityLifeofaCoalPlantExtendingCoalPlantOperationsCoalTechnologiesSummary

Chapter13:BiomassEnergyandBiomassPowerPlantsWoodWasteEconomicsofBiomassSummary

Chapter14:NuclearPowerEnergyPlantsGlobalImpactofJapan'sThreeNuclearPlantMeltdownsComparativeCostsofEnergyKeytotheEIACostEstimatesNuclearPowerPlants’50YearsofElectricityGloballyRequiredUp-FrontPaymentforNuclearWasteDisposalbeforeaNewPlant'sApprovalAsiaWillLeadtheNextShifttoNuclearPowerPlant

DevelopmentChina'sNewNuclearReprocessingIsaVastExpansionofAtomicFuelSummary:NuclearPowerFacesaCapitalCostandOngoingLocalApprovalChallenge

Chapter15:HydropowerPlantsAUniqueRenewableTechnologyHydropowerandRECsHydropowerEconomicsSummary

Chapter16:GeothermalPowerPlantsSteamTechnologyGeothermalProjectCostsHydrothermalPowerSystemsGround-SourceHeatPumpsStandingColumnWellsEnhancedGeothermalSystemsDirectUseofGeothermalEnergySummary

Chapter17:EnergyEfficiencyandSmartGridDemand-SideManagementAdvancedMeterInfrastructureIncreasingEnergyNeedsSummary

ConclusionWhereDoWeStandTodayinTermsofRenewableEnergy?

AppendixA

AppendixB:DTC'sCoalvs.NatgasDisplacementModelMethodology,January6,2009

DTC'sCoal/NatgasDisplacementModelMethodologyHowMuchNatgasIsNeededtoDisplaceCoal?

AbouttheAuthors

Index

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Copyright©2012byTomFogartyandRobertLamb.Allrightsreserved.PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.

PublishedsimultaneouslyinCanada.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedinanyformorbyanymeans,electronic,mechanical,photocopying,recording,scanning,orotherwise,exceptaspermittedunderSection107or108

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thatappearsinprintmaynotbeavailableinelectronicbooks.FormoreinformationaboutWileyproducts,visitourwebsiteatwww.wiley.com.

LibraryofCongressCataloging-in-PublicationData:Fogarty,Tom,1963—Investingintherenewablepowermarket:howtoprofitfromenergy

transformation/

TomFogartyandRobertLamb.p.cm.—(Wileyfinance;614)

ncludesbibliographicalreferencesandindex.ISBN978-0-470-87826-2(cloth);ISBN978-1-118-22102-0(ebk);ISBN978-1-

118-23478-5(ebk);ISBN978-1-118-25936-8(ebk)1.Renewableenergyresources–UnitedStates–Finance.2.Investments–UnitedStates.

I.Lamb,Robert,1941-II.Title.TJ807.9.U6F642012333.79'40681—dc23

2011043312

ToYayoiandAtticus

AcknowledgmentsTomwouldliketothankhiswifeYayoi,whoencouragedhimtowriteabookaboutthechallengesofrenewableandfossilenergyprojectdevelopment.Tom's

thinkingabouttheenergybusinesshasbeeninfluencedbyanumberofpeoplehehas

workedwith.ThisincludesRoyCuny,LarryGrundmann,RichardGrosdidier,Phil

BurkhardtandSethArnold.HewasfortunatetolearnaboutdistressedandentrepreneurialinvestingfromArtRosenbloom,MaryJaneBoland,EdAltman,RoySmith,andAllan

BrownatNYUStern.BobandTomtrulyappreciatealloftheeffortsincreatingandorganizingthis

bookfromDebraEnglander,JenniferMacDonald,andDonnaMartoneofWiley.Their work was always professional and they were instrumental in reviewingconcepts.

T.FandR.L.

Introduction

This book was written to help investors, energy practitioners, and studentsunderstandthelimitsofrenewablepower.Itisintendedtohelpthereaderlearnhow to evaluate renewable power investments by reviewing the technical andeconomic issues for fossil power as well as wind, solar, thermal, and otherrenewablepowertechnologies.Together, we bring both an academic and a practitioner perspective to this

book.Tomisanenergyexecutiveatamajorinternationalenergycorporation.Hewasafinancial-managementandenergyconsultantandaformerexecutiveMBAstudent of Professor Bob Lamb. Bob has published books and chapters onenergy, finance, and strategicmanagement. He has been debt adviser to NewYork PowerAuthority, theU.S. government, various states, public authorities,and corporations. Bob has also served as expert witness in litigations andarbitrations. Tom and Bob have jointly collaborated on a number of energyprojects.Bothofus,inourworkandexperience,werefrustratedthattherewasnotatextavailabletosoberlyevaluaterenewablepowerinvestmentsintoday'scomplexenergyenvironment.Theglobalenergymarketshaveneverbeensocomplexandfastchanging.The

UnitedStateshasrecentlydiscoveredverylargeamountsofshalegasembeddedinsolidrockformationsextendingfromNewYorktoTexasandCalifornia.Thatshale gas is extractable via new technologies. There is a concern that thisplentiful and currently cheap natural gas could make the United Statescomplacent about its energy future. The development and use of hydraulicfracturing hasmade shale gas an energy game changer. This new natural gassupplymakestheoveralleconomicsdifficultforrenewableenergiesandforcoalandnuclearpowerplants.Infact,thesolarcompanySolyndrafiledforbankruptcyattheendofAugust

2011despitehaving receiveda2009cashgrantof$535million from theU.S.Treasury. Beacon Power, a manufacturer of flywheel based energy storagesystems also filed for bankruptcy on October 31, 2011. The extensive U.S.naturalgaspipelineandstorageinfrastructurehavemadeshalegasanimmediateplayerintheenergymarketplace.Othercountriesarealsodiscoveringshalegassuppliesbutmightnothavetheinfrastructuretodistributeittoendusers.Evenmoreimportant, thesenational,political,andsocialconflictshavebeen

takingplacesimultaneouslywiththerapidpaceofseveralmajornewtechnologychangesandbroad,intenseglobalramp-upsofvarioustypesofunconventionalenergy,gas,shalegas, tarsandsextraction,innovationsatultra-deephorizontalwells.Oil andgasdrilling innovations in semi-submersibles andarcticdrillingplatforms.ThemajorJapaneseearthquake, tsunami,and theFukushimaDaiichinuclear

power plant “meltdown,” along with Germany's decision to close its nuclearreactors, are deeply impacting the worldwide nuclear power industry. In theUnitedStates,theIndianPointnuclearpowerplantoperatinglicenseextensionisbeingchallengedbyvariousNewYorkstateagencies.TheirconcernisthatthefacilityistooclosetoNewYorkCity.Thisbookismeanttobeacurrent,realisticanalysisofthevariouschangesin

thedevelopmentofrenewableenergytechnologiesandhowthese technologiescompare to fossil energy production, energy storage technologies, and energytransmissionanddemand-sidemanagement.Oneofthemostimportantpointsofthis book is to stress the essential need for multiple types of energy pluscoordinationmechanismsacrossbothnationsandcontinents.Countriescontinuetotakeanapproachofeitherallcoalorallnuclearand,morerecently,allnaturalgas.Wewillneedallenergysourcesinthefuture.World scientists now appear to be in agreement that global warming is not

solelyinevidenceinthemeltingofthepolaricecapsbutis inevidenceintheradical changes in global weather conditions. Little progress has been madedespitemore thanadecadeof intense internationalconferencesandpledgesofglobalsupportforconcertedeffortstofinallycopewiththerisksandverycleardangers of global climate changes. They are concerned about record wintersnowstorms,recordspringrains, recordflooding,recorddroughtsandfamines,andtheescalationofrecordnumberofglobalearthquakes.Another vital energy and health challenge is that there exists no available

technologytoeconomicallyremoveandsequesterCO2atscale.Thispointneverseemstobemadeduringdiscussionsofclimatechange.Duetomajorbudgetdeficits,theUnitedStatesandEuropehavenowbeenor

willbeforcedtodrasticallycutbackmajorexpendituresontheir“variousgreenenergyinitiatives.”TheU.S.“1603cashgrantforrenewablepowerplants”willfinishat theendof2011and isunlikely tobeextendedin thecurrentpoliticalenvironment.U.S. states continue to be unrealistic on the size of their renewable energy

portfolio standards.Somehavegone so far as to counton renewable facilitiesthatwould be built in other states. China is currentlywilling to subsidize theproductionofsolarpowerplanttechnology.ThiswillforcetheUnitedStatestocontinue to be an innovator and to look at China as a partner and not acompetitor.Economic downturns in Spain forced the government to cancel direct

government subsidies plus energy grants for solar panels and wind farms.Eliminating energy feed-in tariffs would leavemanymajor energy companieswithlosses.Itraisesimportantquestionsaboutwhethermostnewgreenenergyprograms generally will be a victim of the long-term U.S. and Europeanrecessioneconomies.Let'sstartwithChapter1,whereweprovidethereaderwiththefundamentals

ofevaluatingrenewablepower.

Chapter1

AnOverviewofRenewablePower

TheWalrusand theCarpenterwerewalkingcloseathand;Theywept likeanything to seeSuchquantitiesof sand:“If thiswereonly clearedaway,”Theysaid,“itwouldbegrand!”“IfsevenmaidswithsevenmopsSweptitforhalfayear.Doyousuppose,”the Walrus said, “That they could get it clear?” “I doubt it,” said theCarpenter,Andshedabittertear.

—fromThroughtheLookingGlass,LewisCarrollWind, solar, and geothermal renewable power technologies face a number oftechnological challenges. A typical wind power project has yearly availabilityonlyinthelow30percentrangeandatypicalsolarphotovoltaicprojecthasanavailability of approximately 16 percent. For further clarification, a 100–megawatt (mW) wind project could produce only 262,800 megawatt hours(mWh)inoneyear(e.g.,100mW×365days/yr×24hours/day×30percent=262,800mWh).Solar thermal projects have a higher availability but aremoreexpensive,haveregulatorypermittingchallenges,andaretypicallynotlocatedinliquidpowertradingmarkets.Electricity, unlike other commodities, can't be stored,which leads to a large

amountofvolatilityinelectricityprices.Itisimportanttorememberthatcurrentbattery technology is only capable of storing electricity for up to four hours.Switchingtheworld'senergysupplytorenewablepowerisnotlikestartingthenextGoogle.Itisnotacaseofplacingfiveorsixsmartboysandgirlsinaroomandaskingthemtothinkupthenextcleanenergytechnology.Olderfacilitiesareendowedwithascarcityvalueduetothedifficultyofobtainingairpermitsfornewfossilpowerplants.Theseareanumberoftheissuesthatmakeitdifficultfor renewable power plants to be competitive with traditional fossil powerplants.The economic profile of a typical wind and solar power project is a small

amount of earnings before interest, taxes, depreciation, and amortization(EBITDA),taxcredits,andaccelerateddepreciation.OnlyEBITDAcanbeusedto pay down debt, and overestimating kilowatt hours (kWh) produced or

underestimatingmaintenanceexpensecan lead toadebtdefault.Since there iscurrentlyno inexpensive,high-capacitybattery technology, it isnotpossible toruntheelectricgridwithwindandsolarpowerona24/7basis.Forthenextfewyears, the economics for these types of projects will work when constructedprojects can be purchased on a distressed basis for cents on the dollar. AnOctober 16, 2009, Forbes article stated that the U.S. Energy InformationAdministrationestimates thatakilowatthourofelectricityfromaphotovoltaic(PV)solarplantenteringservicein2016willcost40cents/kWhin2009dollars.The article further stated that this is three to five times the projected cost ofelectricitygeneratedfromnaturalgas,coal,oruranium.1

Other than battery technology, the onlyway to firm up the power producedfromthesefacilitiesistousegasturbineengines.Onestudyunderdevelopmentwillshowthatagasturbineenginethatprovidesbackuptoawindpowerplantactuallyproducedmorecarbondioxide(CO2)emissionsthanacoal-firedpowerplant.Agasturbineenginewouldalsorequirealocalsupplyofnaturalgasandpipeline transportation, which might not be available. Improvements in gasturbineenginedesignmightalsoberequiredtomeetbothquick-startandalow-emission profile. There is also a shortage of electric transmission in locationswherethereispotentialforwindpowerprojects.

It'sAllAboutNaturalGasA key challenge is that prices for renewable power in the United States arepriced off of natural gas, which is currently at historic lows. Recent largeunconventionalnaturalgasfindsthroughouttheUnitedStatesshouldcontinuetosupportnaturalgaspricesbelow$7permillionBritishThermalUnits(MMBtu).TheEnergy InformationAdministration estimates that theUnited States has

approximately 1,770 trillion cubic feet (Tcf) of technically recoverable gas,including 238Tcf of proven reserves. The PotentialGasCommittee estimatestotalU.S.gasresourcesat2,074Tcf.Itisestimatedthattechnicallyrecoverableunconventionalgas includingshaleaccountsfornearly two-thirdsofAmericanonshoregasresources.Atthecurrentproductionrates,“thecurrentrecoverableresourceestimateprovidesenoughnaturalgastosupplytheUnitedStatesforthenext90years.”2In1996,itwasestimatedthattheBarnettShalecontainedonly3Tcfof reserves.Asa resultofanupgrade in technology, itwasestimated in2006thatitnowcontains39Tcf.Thenaturalgaswasalwaysthere;itwasjust

notpossible toget to itwitholder technology.At the timeof thiswriting, thisnew supply of natural gas has resulted in natural gas prices in the $4/MMBtuprice range.This is a largedrop from$13.57/MMBtu in the summerof2008.Theeconomics fornaturalgas storageprojects still appear toworksince therehasbeenweeklyandseasonalmovementinprice.Thisunconventionalnaturalgassupplysituationhasresultedinthereturnon

equity for renewable power plants to be actually lower than the return frompurchasinga secured loan in someexistingnaturalgas–firedpowerproducers.That an equity security in the bottom of the capital structure of a yet-to-be-constructed power plant could require a lower return than a first lien securedloaninanoperatinggas-firedpowerplantdoesn'tmakesense.Thissituationissimilar to the real estate crisis, whereby real estate market mortgage loanswritten prior to 2007 were priced at levels that didn't reflect their risk andultimatelydefaulted.Thissituationmeansthatintheshorttermitmakessensetobetagainstrenewablesasopposedtodevelopingorinvestinginnewprojects.Bycomparison,renewablepowerproducersinEuropearecurrentlypaidaveryhighfixed price for power under the national government's feed-in tariff program.Thissituationisalsounsustainable.AMay20,2010,Bloombergarticleentitled“GreekCrisisandEuro'sDropSnareClean-EnergyStocks”stated:

. . .The aid to renewable energy, paid by consumers through their powerbills, is being slashed by governments aiming to curb their own budgetdeficitsandtocutenergycostsforbusinessesandconsumers....3

ControlofCO2EmissionsIsNotCurrentlyPossible

Anotherchallengethatrenewablepowerfacesisthatthereiscurrentlynoproventechnology to remove CO2 emissions from existing power plants. This is acriticalfactthatmakesitdifficulttoswitchfromtraditionalfossilpowerplantstorenewablepowerplantsandhashelped tomake itdifficult foracarboncapandtradeortaxtopass.Carbonemissionsnotonlyhavetoberemovedfromthe

stack of a power plant but also have to be sequestered or buried deepunderground.This task requiresa largeamountofenergyandacorrespondingincreaseinproductioncost.Thekeypollutantsthatexistingfossilpowerplants(e.g., coal and natural gas) emit include sulfur dioxide (SO2), nitrogen oxide(NOx) and particulates (in the case of coal power plants). With currenttechnology, it is relatively easy to control these pollutants. In order to controlSO2,ascrubberisused;inthecaseofNOx,selectivecatalyticreduction(SCR)isused;andforparticulate,anelectrostaticparticipatorisused.CO2scrubbersarecurrentlybeing testedby theFrenchtechnologycompany

Alstomat theelectricutilityAmericanElectricPower.TheCO2cost resultingfromtheproposedcongressionalcap-and-tradeprogramisbasedonmostlyfreeor low-cost allowances. As a result, it will be cheaper to use allowances asopposed to purchasing an unproven, expensive emission control technology.ThereisastrongpossibilitythatCongresswillnotpassCO2legislation,andthistaskwillfalltotheEnvironmentalProtectionAgency(EPA).TheEPAwillthenuse its New Source Performance Standard (NSPS) to determine the bestavailable control technology (BACT) for CO2. Since there is no “available”technologytocontrolCO2,theEPAwouldhaveadifficulttimeregulatingCO2.With pollutants such as oxides of nitrogen, a power plant can either buyallowancesorinstallaprovencontroltechnology.Thiswillnothelptheoveralleconomicsforrenewablepowerprojects.The EPA will have a difficult time attempting to regulate CO2 under its

existing BACT program. In past BACT rulings, if a technology was notcommercially available or too expensive for pollutants such asNOx, a powerplantwouldnotberequiredtoincludethistechnologyinitsdesign.Thisisalsotrue for operating power plants that fall under reasonably available controltechnology (RACT).Alstomhas stated ina recentFinancialTimesarticle thattheirCO2controltechnologyforcoal-firedpowerplantswillnotbereadyuntil2015. It is quite possible that even this date is too optimistic, and a generatorcouldclaimthatthistechnologyisstillnotcommerciallyavailable.4

CogenerationasaCO2ControlTechnologyTheexistingBACTandRACTregulationwillalsonotallowtheEPAtoforcegenerators to change their fuel supply or their initial technology selection in

ordertoreduceCO2emission.Asaresult,acoal-firedpowerplantcouldnotberequired to cofire biomass. In new air permits, the generator proposes its fuelsupply.Ifageneratorwantstochangeitsfuelsupply,ithastomodifyitsexistingpermitandconductadditionalairmodelingstudies.IfCO2controltechnologywerecommerciallyavailableandcost,forexample,

$100/ton per ton of CO2 removed, the EPA could mandate that this wasBACT/RACT.GeneratorscouldthenmakeacostargumentunlesstheEPAruledthat CO2 fell under lowest achievable emission reduction (LAER). UnderLAER, generators can't argue that a particular technology is too expensive toinstall. Under both LAER and BACT/RACT, a technology still has to becommercially available. In order to accomplish this, the EPA would have toarguethateachregionoftheUnitedStatesisnonattainmentorexceedsfederalstandardsforCO2emissions.ThiswouldbedifficultfortheEPAtodosinceithas already ruled thatCO2 emissions are a global problemandnot a regionalone.To regulateCO2 emissions, the fastest approach continues to be cap andtradeorcarbontaxregulation.In the short term, combined heat and power (CHP) or cogeneration power

projectswillprovideabridgetoreducingCO2emissions.CHPpowerplantsarelocated at the site of an industrial steam or process heat user or at a districtheating/cooling systemandprovide theability toworkone fuel twice.ACHPpower plant would allow an industrial factory to run its existing boilers onstandbysinceitwouldproducebothsteamandpower.CHPtypicallyallowsanindustrialfactorytoproducepoweratalowercostthanitcanbuyfromthegridandtoproduceheatatalowercostthanfromitsexistingboilers.AccordingtotheEPA,atypicalCHPpowerplantcanhaveanoverallcycleefficiencyof75percent,whileconventionalgenerationhasonlya49percentoverallefficiency.CHPcanalsobeasourceofelectricpowerinacongestedareawhereitmight

nototherwisebepossibletositeatraditionalpowerplant.DependingonthesizeoftheCHPplantandtheamountofsteamsold,thiscanresultinadropinnotonlyCO2emissionbutalsoNOx,SO2,CO,andothercriteriaairpollutants.AtypicalCHPpowerplantemploysefficientgasturbineenginetechnology,whichislowerinemissionoutputthanthelocalpowerplants.ThestatesofNewYorkandNewJerseyhaverealizedhowCHPcancutairemissionsandprovidepowerincriticaland/ortransmission-constrainedlocations.Asaresult,theyhavebeenproviding financial incentives for the development ofCHP power plants.One

NewJerseyregulatorrecentlystatedthatCHPprojectsshouldbesupportedsincesolarpowerisonly16percentavailableandisveryexpensive.

RealityofDemand-SideManagementUtilities are currently implementing a number of smart grid and energyefficiency or demand-side management programs. These programs includeencouraging industrial consumers to shift load to off-peak times and installingsmartmeters,which provide real-time power pricing and communicationwiththecentralofficeofanelectricutility.Programsof this typecouldhelpreducetheneedtobuildnewpowerplantsand/orreducetheoperationofexistingpowerplants.Peakingpowerplantswouldbemostaffectedbyanincreaseofdemand-sidemanagement.Peakingpowerplantsarethehighestemittersofairpollution,sothiswouldresultinasubsequentreductioninCO2andotherairpollutants.The concern is that future demand-side management reduction could be

overestimated since industrial customers might not reduce their load when itaffects their own customer's requirements. An example would be a hotel notturningdowntheairconditioningonahotdaywhenpowersuppliesaretightsoas not to upset its guests. Some residents might not be able to live in anapartmentbuildingthatturnsitscommon-arealightingoffwhennotinuseduetoreligiouscustoms.Sincemostresidentialcustomerspayanaveragepriceforpower and are not currently exposed to real-time electricity pricing, their billsunder a real-time pricing program could actually increase in the future.Consumers would not be willing to have their high-energy-consumingtelevisions turned off during their favorite program in order to reduce load.Certainindustrialcustomershaveanumberofdifferentoptionstoshift loadtooff-peaktimes.Residentialcustomerscanrunthedishwasheranddothelaundryonlyintheevening.Apartmentbuildingshaveconvertedclothesdryersfromelectrictonaturalgas.

Thishelpstoincreasenaturalgasloadduringalow-gas-consumptionperiodinthesummerandtoreduceelectricpowerloadduringahigh-consumptionperiodin the summer. Natural gas dryers have a higher initial cost and are moreefficient than electric dryers. This initial cost can be offset by a grant to theapartment building by the local natural gas and electric utility, which bothbenefit.However,thiswillnotresultinamaterialamountofreductioninload.This situation has made it difficult for smart metering and energy efficiency

programstobeapprovedbypublicservicecommissions.Duetolegacyliabilityissueswithexistingpowermeters,thereisalargecosttoswitchtosmartmeters.Inmost cases, regulated utilitieswould bear this cost and be required to raiseratestoaccomplishthis.Unlike large coal, nuclear, and natural gas power projects, wind and solar

powerprojectswillnotcreatealargeamountof“greencollar”jobs.Photovoltaicsolar projects that are under development are typically only in the 1-to 2-mWsizerangeandhaveaverysmallpermanentstaff.Thisstaffingissueisalsotrueforwind turbinepowerplants.Even the requirement toweatherizeand relampexistingbuildingswillnotcreatealargenumberofpermanentfull-timejobs.

SummaryRenewablepowerplantscompeteinaworldofoperatingfossilpowerplantsandcurrently inexpensive natural gas.Despitemany governments financial grants,subsidies, and tax incentives, a large number of alternative energy companieshave failed over the past 30 years. In the short term, investment opportunitieswith renewable power will be with financial and operation restructurings oftroubled or bankrupt power plants. Longer term, competitively priced batterystorage will have to be developed, along with a very high price for CO2emissions, in order to support the growth of renewable power. In any event,powerinvestorswillwanttocontinuetomonitorinvestinginrenewablepowerinordertoavoidthemistakethattheoldAT&Tmadebycontinuingtofocusonlong distance fixed-line telephone business and ignoring themobile telephonemarket.Chapter2describeshowtoaccomplishthistask.

Notes

1.DuncanGreenberg,“SeeingtheLight,”Forbes,October19,2009.2.JohnD.PodestaandTimothyE.Wirth,NaturalGas:ABridgeFuelforthe21stCentury(Washington,DC:CenterforAmericanProgress,August10,2009).3.BenSillsandMarkScott,“GreekCrisisandEuro'sDropSnareClean-EnergyStocks,”Bloomberg,May20,2010.4.AnnaFifield,“UncertaintyoverEmissionTargetsHindersInvestment,”

FinancialTimes,October24,2009.

Chapter2

AnalyzingPowerProjectEconomics

Ifyougiveamanafish,youfeedhimforaday.Ifyouteachamantofish,youfeedhimforalifetime.

—ChineseproverbRegardless of the technology used by a particular power plant, the overalleconomics have to exceed its risk-adjusted cost of capital. As previouslymentioned, investorsmustalsoconsiderrelativevalueandtheirposition in thecapitalstructureofaparticularinvestment.

RegulatedUtilitiesFossil or renewable power projects can be owned by an independent powerproducer(IPP)orplacedinratebasebyaregulatedutility.Regulatedutilitiesaregrantedaserviceterritory,wheretheyareallowedtoearnareturnongeneration,transmission,anddistributioninvestmentandmaintenance.Generationreferstothe actual production of electricity; transmission, the movement of electricityfrom thepowerplantover transmission lines to theenduser; anddistribution,final delivery to the end user. In some markets, regulated utilities have beenforcedtosellofftheirgenerationandnotallowedtobuildanynewpowerplants.In this typeofmarket, the regulatedutilitycanearna returnonlyonnewandexistingtransmissionanddistribution.The concept for regulated utilities is that if the utility spends $1 on fuel or

operationsandmaintenance,theutilityrecovers$1inrates.Atypicalutilityhasaregulatedcapitalstructure that is50percentdebt,45percentequity,andfivepercent preferred stock.Assuming that the debt had a cost of six percent, theequity10.5percent,andthepreferredstock11.5percent,theutilitywouldhavean after-tax cost of capital of 7.10 percent, based on a 40 percent combinedfederalandstatetaxrate.Aformerbossusedtosaytomethataregulatedutilitygoesoutofbusinesseachyear!Whathemeantbythisisthattheregulatedratebaseofaregulatedutilityisreducedeachyearbydepreciation,andutilitieshaveanincentivetobuildnewpowerplantsormakeothertypesofinvestmentsthat

can go into the rate base.With a regulated rate base, some of the issueswithvariabilityinpowerproductionofrenewablepowergoaway.Thisisduetothefactthatwitharegulatedratebase,operatingcostsareapass-throughandthereis a regulated return on capital no matter how many hours the power plantoperates.However,theissueofgridstabilityandreliabilitydoesn'tgoaway.We have heard, from a recent conversation with an airline employee, that

airlinefirmshavetraditionallynotearnedabovetheircostofcapital.Inthepast,airlinesgotaroundthisissuebyhavingaregulatedratebasewithaguaranteedreturn.Thisapproachcouldworkforrenewablepowerplantsaslongaspublicservice commissioners did not place limits on overall capital and or operatingcost.Aregulatedutilityisalsorequiredtoshowthattheyhaveaneedforfuturecapacity.Thebestwaytounderstandtheconceptofcostofcapitalistoconsidertakingacashadvanceonacreditcardat,say,an18percentinterestrateandtheninvestingthiscashinasavingsaccountpaying3percent.Thistransactionresultsin a loss of 15 percent. Of course, this type of capital structure and businessmodelisnotsustainable.More recently, regulated utilities have been given an incentive by their

regulatorstoearnareturnforsellinglesspower.Anexampleofthiscouldoccurifautilityinstalledacontroltolimittheoutputofacentralairconditionerinahomeonahotsummerday.Ifenoughofthesedeviceswereinstalled,theutilitycould reduce the output or turn off one ormore power plants. Since each airconditionerwouldrunforfewerhours,theutilitywouldproducelessmegawatthours of electricity. Under a traditional rate-making process, a project of thistypewouldresultinalossofrevenuefortheutility.Inadditiontoareductioninairemissions,thisapproachcouldalsoavoidtheinstallationofnewpowerplantsinthefuture.Thisdemandsideasopposedtosupplyside(e.g.,additionofanewpowerplant)approachresultsinareductioninoverallpowerconsumption.The simple revenue requirement for a typical gas turbine combined-cycle

(GTCC) power plant assuming a 50 percent debt, 45 percent equity, and fivepercentpreferredstockcapitalstructuretypicalofaregulatedutilityisshowninTable2.1.

Table2.1GasTurbineCombined-Cycle(GTCC)RevenueRequirement.

Theanalysisisbasedonanallincapitalcost/enterprisevalueof$530,000,000or$1,000/kWfora530-mWpowerplant.Thisprojectistypicalofcurrentandfuturepowerprojects thatwillbeaddedto theU.S.powergrid.Actualprojectcosts can vary greatly and will depend on local conditions and the level ofliquidated damages. Fixed operating and maintenance cost mostly covers theplantstaffingcost.Variableoperatingandmaintenancecoversbothmaintenanceandchemicalcosts.Theplantisassumedtooperate60percentoftheyearandproduces 2,785,680mWh (530mWh/hour × 8,760 hours/year × 60 percent =2,785,680mWh).Theprice fornaturalgas includesboth thenaturalgas itselfandpipelinetransportationtotheplant.Thepreceding7-day-a-week,24-hour-a-daytotalcostorrevenuerequirement

of$68.44wouldbecomparedwithforwardpricingquotesfromBloombergand

brokerstoassessoverallprojecteconomics.Inordertodeterminethelong-termvalueof apowerplant, forwardcalendarprices areused.The typical calendarprice is basedon a5-day-a-week, 16-hour-a-day schedule.For the entire year,thisisatotalof4,160hours,whichisbasedon5days/week×16hours/day×52weeks/year.Thisisdefinedas5×16oranon-peakpriceduringdaytimehours,whichtheplantwouldobtainfor47.49percentoftheyear.Thison-peaktimeistheperiodwhenthereisthelargestrequirementofpower,andasaresultpowerismostvaluable.Duringtheremaining52.51percentoftheyear(or1to47.49percent) the plant would receive the off-peak price for power. Note that theBloombergservicehaspowerpricingforanumberofthemajorU.S.electricandnaturalgastradinghubs.The pricing information available through Bloomberg helps an investor

determine if his plant will dispatch or operate in the forward market and hisfutureearningsbeforeinterest,taxes,depreciation,andamortization(EBITDA).Bloombergalsohasoff-peakpricing,whichcanbeusedtocalculatea7×24oraround-the-clock(ATC)powerprice.Themarketforcapacityisnotasliquid,isregion/independent system operator (ISO) specific, and is not quoted byBloomberg.Acapacitypaymentcanbeconsideredaninsurancepayment.Inthecaseofapeakingpowerplant,theremaybeonlyafewtimesayearwhenitisneeded to operate.The capacity payment ismeant to cover the return to debt,equity, and fixed operating andmaintenance cost for this plantwhen it is notoperating. Somemarkets are quoting capacity prices for only three years andothersonlybysummerandwinterseason.Thislackofpricediscoverytendstodiscourage the building of new power plants since it can take two years todevelop and obtain unappealable air permits and another two years to fullyconstructandstartupanaturalgascombined-cyclepowerplant.Asaresult,apowerprojectdeveloperwouldnotknowwhathisprice forcapacitywouldbeafter hehad started final developmentof hisproject andwouldnot be able toobtain long-term, low-cost,nonrecourseproject financedebt.Atcurrentpowerprices, an investorwithout a rate base can't justify building a new combined-cyclepowerplant.

EvaluatingaPowerPlantWhenevaluatingapowerplant,animportantfirststepistocalculateitsvariablecost. The variable cost for a fossil-based power plant includes its fuel andvariable operating maintenance cost. Fuel cost is priced in $/MMBtu and is

translated into an energy cost priced in $/mWhor $/kWhbymultiplying heatratebygascost.HeatrateisspecifiedinBtu/kWh,andthelowerthenumber,themore efficient thepowerplant is.A typical natural gas combined-cyclepowerplant will have a heat rate of 7,200 Btu/kWh, while a simple-cycle gas plantwouldhaveaheatrateof10,000Btu/kWhto11,000Btu/kWh,andacoalplantwouldhaveaheat rate from8,800Btu/kWhto13,000Btu/kWhdependingonheat rate and coal quality. Variable operating andmaintenance costs typicallyincludechemicals,consumables,andcostsrelatedtohoursofplantoperation.Atypical500-mWnaturalgas–firedpowerplantwithaheatrateof7,200Btu/kWhwouldhaveavariablecostasfollows: 7,200 Btu/kWh × $4.10/MMBtu × 1 MMBtu/1,000,000 Btu × 1,000kWh/mWh=$29.52/mWh Variable operations and maintenance (O&M) would be $2.83/mWh (2010dollars)Totalnaturalgasplantvariablecost=$32.35/mWhThevariablecostofpowerof$32.35/mWhistheadditionofthefuelcostof

$29.52/mWh, and the variable O&M cost of $2.83/mWh. The precedingcalculation is a simple analysis that doesn't include the cost of any emissionallowances that will be required. If the forward price for power were only$20/mWh,itwouldnotmakesensetodispatchthepowerplant,sinceitwouldnot cover its variable costs. However, if the forward price for power were$50/mWh,itwouldmakesensetodispatchthepowerplant,sinceitwouldmakea $17.65/mWh ($50/mWh – $32.35/mWh) contribution to fixed O&M costs,returntodebt,andreturntoequity.Asacomparison,a typical500-mWcoalplantwouldhaveaheat rate in the

rangeof10,000Btu/kWhandwouldhaveavariablecostasfollows: 10,000 Btu/kWh × $2.50/MMBtu × 1 MMBtu/1,000,000 Btu × 1,000kWh/mWh=$25.00/mWhVariableO&Mwouldbe$5/mWh(2010dollars)Totalcoalplantvariablecost=$30.00/mWhApowerplantisactuallyaspreadoptionsincethesellingpriceforpowerhas

toexceedthevariableO&Mandfuelcost.Apowerplantcanbeexpressedasaspreadoptionbythefollowingequation:

To forecast how frequently a natural gas power plantwould operate using aspread option model, it is necessary to determine the individual volatility for

bothelectricandnaturalgas.Volatilitycanbefoundbyusinghistoricalprices,generalized autoregressive conditional heteroskedasticity (GARCH), principalcomponentsanalysis,andcalculatedfromat-the-moneyoptions.Thecorrelationbetweenelectricityandnaturalgascanbefoundfromhistoricaldata.AMonteCarlosimulationisthenruntogenerateaseriesofrandomnumbers,whicharebasedon thevolatilityandcorrelationof electricityandnaturalgaspreviouslycalculated.Theserandomnumbersare thenused tocalculate futurepowerandnatural gas prices and power plant dispatch. The use of a single value forcorrelation between electricity and natural gas fails to take into account anumber of factors that affect the price of power. This analysis can be furtherexpanded by including or estimating weather, load, jump diffusion, meanreversion,andpricefloors.EachofthesevariableswouldresultinachangingofthecorrelationassumptionsandrequireadditionalMonteCarlosimulations.Evaluatingthefuturepriceanddemandorvolumeriskforapowerplantisa

verychallengingexercise.Aspreviouslymentioned, therehavebeenanumberof recent black swan events (a black swan event refers to an unpredictableoccurrence) such as a large supply of shale gas reducing power prices, anunanticipated economic downturn, and the future potential of demand-sidemanagement(DSM)toreduceoveralldemandforpower.Eventhougheventsofthis typeused tobe thoughtofasa low-probabilityoccurrence, theycanwipeouttheequityandsomeorallofthedebtofaprojectandresultinbankruptcy.These types of issues can cause models to produce results that could greatlyoverstatethefuturepriceofpower.Ifalenderhassizedtheamountofdebttobeprovided to a particular project based on this type of electric power priceforecast, the project could default unless the sponsor was willing to injectadditionalcashequityintothecompany.Havingbeenburnedinthepastbythisissue, lenders are concerned about lending large amounts of debt to powerprojectsbasedonapowerpriceforecastedbyamodel.Thevariablecostofapowerplantisequivalenttothestrikepriceofanoption.

InmostU.S. powermarkets, a gas-fired combined-cycle power plant sets themarginalpriceofpowerandasaresultisanat-the-moneyoption.Becauseacoalplant typically has a higher heat rate and a lower cost of fuel, it has a lowervariablecostofpowerthananaturalgasplantandisconsideredanin-the-moneyoption.A simple-cyclepowerplant has ahigh cost of powerdue to its higherheatrateandisconsideredanout-of-the-moneyoption.Volatilitybringsout-of-the-moneyoptions into themoney.Thevolatility for powerpricing is reducedwhenthereisanoversupplyofgeneratingfacilitiesand/ornaturalgassupply.In

thisscenario,apowerplantwillbeforcedtorelyonitscapacitypayment.Asaresult,asimple-cyclepowerplantmayexperiencemorehoursofoperationthanwouldbeexpectedduetoaspikeintemperatureortheforcedoutageofanearbypowerplant.Thesimpleanalysisofcalculating thestrikepriceandcomparingthistotheforwardcurveisreferredtoasanintrinsicvaluation.Sincethefuturepriceforpowerisdeterminedbyanumberofdifferentvariables,theactualpricefor power could be higher or lower. This type of analysis is referred to as anextrinsicvaluation.Thisextrinsicorrealoptionapproachtovaluingapowerplantisthesameway

thatonethinksaboutacalloptiononastock.IfthestockofMicrosoftistradingat$50pershareandIhaveacalloptionwithastrikepriceof$100,thisgivesmetherightbutnottheobligationtobuythestockat$100.SinceIcanpurchasethestockatonly$50, thecalloptionisworthless.Thevalueof thecalloptionwilldependon the lengthof its contract life. If thecalloptionhasa five-yearlife, there is a probability that the price of a share ofMicrosoft could exceed$100 per share and the call option would come into the money. Unlike calloptions,whichare relatively inexpensiveandveryquickandeasy topurchase,thecosttodevelop,permit,andfinanceapowerplantisveryexpensiveandtimeconsuming.Sinceapowerplantcanhaveanoperatinglifethatexceeds30years,itscalloptionvaluecanbeverylarge.Whenevaluatingapowerplant, it iscritical to reviewitsairpermit tomake

sure that it will be allowed to dispatch when it is called upon. This task isaccomplishedbyreviewingallof theairemissionsproducedby theplantonalbs/hourbasisandconvertingtoatons/yearbasisbymultiplying24hours/dayby365days/yearor8,760hours/year.Thecalculatedtons/yearforeachpollutantiscomparedtotheactualtons/yearlimitintheairpermit.Thisexercisewillshowifaparticularpowercouldbeconstrainedonitsabilitytooperateduetoitsairpermit.Agas-firedcombined-cyclepowerplantmightonlybeabletooperateinsimple-cyclemodeoronoil fora limitednumberofhours.Sinceanumberofregions in theUnitedStates are nonattainment (e.g., exceed federal standards)for certain air pollutants, older vintage air permits are very valuable. There isalsoapossibilitythatapowerplantwithanexistingairpermitwouldbegivencarbon dioxide (CO2) allowances under a future cap-and-trade program asopposedtohavingtopurchasethem.

FinancingaPowerPlant

Whendetermininghowtofinanceaparticularpowerplant,IPPswillconsideramerchant saleapproachasopposed toa fullorpartial saleofpower toa thirdparty. As in other industries, the forward sale of a power plant's electricityproductionata fixedprice fora fixedperiodof time isknownashedging.Byfully contracting the entire output of a power plant, it is possible to achievelevels of debt of 80 percent or higher depending on the yearly debt coverageratio. In a project financing, the debt coverage ratio is calculated byEBITDA/principal and interest payment. A power trader would feel that adeveloperhadgivenupallofhisupsidebytakingthisapproach.Histhinkingisthattherewillbefuturespikesinthepriceofpowerandtheprojectwillnotbeabletocapturethisspikesinceithascontractedallofitsoutputforwardwithathirdparty.Thetrader ismissingthepoint thatdebt ischeaperthanequityandthat as the project approaches a 100 percent debt capital structure, its internalrate of return is undefined. This type of fully hedged offtake structure alsoallowssmallerdeveloperswithoutabalancesheettofinancetheirprojects.SincerenewablepowerprojectsgeneratelessEBITDAthanafossilpowerplant,debtisatlowerlevels.Another way to think about this capital structure is that power project

developerswereabletofinancetheirprojectswithalargeamountofdebtsincethey had signed a long-termpower purchase agreement (PPA)with an above-investment-grade-ratedelectricutility.Thislong-termPPAprovidedlenderswiththecreditsupportnecessarytoprovidemaximumamountsofnonrecoursedebt.Utilities are concerned that these PPAswill be treated as imputed debt by theratingagenciesandthattheywouldbedowngradedinthefuture.Utilitiesarenotable to earn a return on rate base if they purchase power from an IPP. ThesePPAsaretreatedasapass-throughcost.Renewablepowerprojectscreatealargenumberoftaxbenefits,whichcanbe

sold to a tax investor under a partnership flip structure.These benefits canbelookedasasourceofequitycapitalfundingforanentrepreneurialorcorporaterenewablepowerprojectdeveloperwithoutataxappetite,providedcourtesyoftheU.S.Treasury.Partof thecapitalrequiredforarenewablepowerproject isfundedbyprojectfinancedebt,anotherpartbytaxequity,andtheremainderbyactualcashequity.Aflipstructureallowsforadisproportionateallocationofthecashand taxbenefitsproducedbya renewablepowerplant.Cash includes theEBITDA produced by the power plant, and tax benefits include depreciation,production taxcredits, anddebt interestdeductions.Developers typicallydon'thavealargetaxappetiteand,asaresult,areallocatedsomeofthecashbenefits

andasmallnumberofthetaxbenefitsuntilthetimewhenthetaxinvestorhitshishurdlerateandormostofthetaxbenefitsareusedup.Atthispoint,a“flip”would occur and the cash and tax benefits would be reallocated between thedeveloperandthetaxinvestor.The simplestway to determine the value of a power plant is by obtaining a

fixed price swap for the power it produces. This results in giving away anyupside in the price for power in order to get downside protection. Anotherapproachistopurchaseputoptions,whichbecomemorevaluableasthepriceofelectricity drops. The downside of this approach is the big up-front cost. Acombinationofputsandcallscanalsobesoldandpurchasedinordertocreateacashlesscollar.Finally,aseriesofputoptionswithdifferentstrikescanbesoldand purchased to create a put spread.Because the natural gasmarket ismoreliquid and has longer-dated pricing than the electricity market, forwards andoptionsonnaturalgasaresometimesusedtohedgepowerplants.Along-datednaturalgascurvecanbeusedtoestimatethepriceforpowerlongpastthefive-year time frame that is typically quoted.Basis risk, alongwith the correlationbetweennaturalgasandelectricity,hastobeconsideredinthiscase.

HedgeProvidersSomeIPPswillfinancetheirprojectsbasedonaheatratecalloptionortollingagreement.A tollingagreement requiresaproject tooperateat thepleasureofthehedgeprovider.Itcanalsobelookedatasrentingouttheuseofthepowerplant. Under some tolling agreement, the project receives a fixed paymentwhetherornotitdispatches,andfuelandoperatingexpensesareapass-throughcosttotheofftaker.Inthistypeofcontract,itisimportantthatthepowerplantprovideanaccurateestimateofitsheatrate.Iftoolowanestimateisprovided,thentheplantwillnotfullycover itsfuelcostanditwillbecalled todispatchmorethanifithadprovidedanaccurateheatrate.Aslongasanofftakecontractis of sufficient length, credit quality lenders will provide high levels ofnonrecoursedebt toaproject. If thehedgeprovider isan investmentbank, thecreditgroupofthebankmayalsoparticipateinprovidingleveragetotheproject.Individual power plants are frequently not located at liquid trading hubs or

nodes.Asa result,apowerplantmighthave to incur thecost/basis risk togetpowerfromaparticularlocationtoanodeatwhichthehedgeprovideriswillingtopurchasethepower.Thiscanalsobetheissueforthesupplyofnaturalgastotheproject.Theprojectwouldhavetopaythetransportationcosttogetnatural

gastothepowerplant.PowerplantsalsohavearamprateandarequirementforstartingnaturalgasandO&Mastheplantcomesuptofullload.Iftheramprateis slower than competingpower plants, this could reduce the overall liquidity,marketability,andoptionalityof thepowerplant.Thehedgeproviderwillalsobe interested inhowmuchaparticularpowerplantcan turndownitsheat rateand emission levels at different operating points before it has to be fully shutdown.Startandoperatingcostscanbereducediftheprojectcancontinuetobeoperatedatlowloadsandisthenabletoquicklyreachfullloadagainratherthanfromacoldstart.Apowerplanttypicallyhasaminimumshutdowntimeofsixhours before it can be restarted. Hedges that are provided from nonregulatedentitiesaretypicallyamaximumoffiveyearsinlength.Thisisduetothefactthatthehedgeprovideritselfhastohedgeitspositions,andpowermarketsarenotliquidbeyondafive-yearperiod.Inanysortofhedgingarrangement,itisimportanttokeepinmindthecostof

hedgingandthecounterpartyrisk.Thecollateraldemandedcanbeintheformoflettersofcreditorcash,andtherecanbeobligationstosupplypowerevenifthepowerplantisnotoperating.Asthepriceofpowerincreases,itbecomesmoreimportantthataparticularpowerplantcontinuetooperate.Thisrequireslargerand larger amounts of collateral to be posted. This could create a liquiditysituationandresultinadefaultforahighlyleveredpowerplant.Recently,powertraders have been willing to take a first-or second-lien position pari passu toexistingfirst-orsecond-liendebtproviders.Thisreducestheamountofanycashcollateral or letter of credit required and introduces intercreditor issues withotherlienlenders.Thechallengeforapowertraderisthathedoesn'tknowwhathisexposurewillbeoverthelifeofthehedge.However,asecuredlenderknowsfrom the beginning his exposure to a particular power plant. Power tradersdeterminetheirriskbycalculatingloantovalue,extremepricescenarios,andadefaultscenario.Hedgeprovidersalsoconsideraconceptofright-wayrisk.Thisisbasedonthe

conceptthatasthepriceforpowerrises,theassetthatproducesthatpowerwillgoupaswell.However, anoperating failureat aparticularpowerplant couldrequire an IPP to obtain replacement power at a high cost. In order to reduceright-way risks, hedge providers don't want a power plant to hedge all of itspower output. If a power plant files for bankruptcy, the nondebtor hedgeprovider falls under a safe harbor and, as a result, is not governed by generalbankruptcy rulesandcan immediately terminate thehedgecontract. IPPshaveremarkedthatinsomecasesitissoexpensivetohedgeaparticularprojectthatit

mightbebetter to leaveaparticularprojectunhedged.IPPsmustalsoconsiderthe optimum sizing for a particular project. If a project is too large, it couldactually reduce system constraints to a point that the future price received forpower would be lower than expected. Future diseconomies of scale could bedeterminedbytransmissionconstraintsorfuelsupplyissuesforabiomasspowerplant.Thepricethatcanbepaidforpowertoaprojectwilldependonanumberof

issues.One issue is theability to interconnect toa substation that servesmorethanonepowermarket.FloridaPowerandLight(FPL)tookthisapproachonitsSunoco refinery cogeneration project. The project's energy is sold to the PJMpowermarket,while its capacity is sold to theNewYork IndependentSystemOperator (NYISO). In this case, theNYISOplaces ahighervalueon capacitythanPJM,andtheproject'slocationallowsittotakeadvantageofthissituation.AsaresultoftheNYISOrules,LongIslandPowerAuthority(LIPA,anelectricutility thatservesLongIsland,NewYork)agreed toa long-termcapacitysale,whichallowedFPLtoincreasetheamountofleverageinitscapitalstructure.Iftheproject isarenewablepowerproject, itsrenewableenergycreditsmightbemorevaluable in onemarket than another.Older projects thatwere developedbefore certain power markets were created might not have been able to takeadvantageofthisopportunityinthepast.IfaprojectisattheendofitsoriginalPPAorisdistressed,thisisawaytoincreaseitsvalue.

OpportunitieswithDistressedRenewablesRenewable power projects purchased at distressed prices have long-termviabilityduetofutureelectricloadgrowth,futurecarbonandotherairemissionstax/cap-and-tradeprograms,andfutureincreasesinthedemandfornaturalgas.Projects of this type have been under competitive pressure for theaforementioned reasons that should prove to be temporary factors. Theinvestment opportunity during this period of reduced power demand and lownaturalgaspricesistopurchasegood-qualitydistressedrenewableenergyassetssincethereturnswilleventuallybejustifiedwhenthiscyclereverses.Private equity funds typically can't use the taxbenefits createdbywind and

solar power projects.This is due to the fact that their limited partners are nottaxpayers. Most private equity energy-focused funds don't have theturnaround/operatingskillset,distresseddebtanalysis,legal,andtradingskillsettoacquiredistressedpowerprojects.Theyarerestrictedbytheirfunddocuments

toinvestingonlyinhealthypowerplants.Theirlimitedpartnerswouldalsofeelthat distressed renewable investments are a style drift and would ruin theircorrelationswithexistingalternativeclassandtraditional investments.There iscurrently no private equity/control distressed fund that is solely focused ondistressedrenewableandnaturalgas–firedpowerplants.Mutualfundsandsomehedgefundshavedailyredemptions.This typeofshort-termlockupwouldnotworkforarenewableorfossilpowerinvestments.The investment, regulatory, technical, tax, operating, and restructuring

challenges involvedwith distressed renewablesmakes this type of investmentchallenging forgeneralist fundswith limited lockupperiods.Theopportunitieswould be controlling ownership stakes in distressed wind, low-impact hydro,geothermal, biomass, solar, natural gas–fired power plants, and late-stagestressed development projects. The concept is to buy distressed assets at asubstantial discount to par/replacement cost. These assets will then berestructuredandrefinanced.Investmentopportunitieswouldbesourcedfromthefollowing:Purchasingdistressedrenewablepowerprojectfinance loansfrombanksandinsurancecompanies.Purchasingrenewablepowerproject finance loansfrombanks thatgooutofbusiness,exitpowerproject financing,orare forcedby their regulator toselltheirdistressedloans. Purchase underperforming corporate orphans or corporate divestitures/carve-outs.Europeanprojectsthatbecomedistressedasaresultofareductionofthefeed-intariffaftercommercialoperations. Locating future investment opportunities early by correcting existing ratingagencyratingsdownwardbasedonextensiveenergy,credit,andrestructuringexperience. Acquiring late-stage development smaller renewable power projects withstrongstandardofferpricing.Acquiringlate-stagedevelopmentrenewablepowerprojectsfromunderfundedandunderresourceddevelopersandprivateequityfunds.Purchasingdistressednaturalgasmidstreamandstorageopportunities.PurchasingpowerplantassetsfromongoingChapter11casesina363(b)sale.Providingdebtor-in-possessionfinancinginordertogainultimatecontrolofapowerproject.

Acquiringandrepoweringstressedoperatingwindpowerprojectsinordertorestart the production tax credit and five-year modified accelerated costrecoverysystem(MACRS)depreciation.RestructuringoperatingrenewablepowerprojectswithuneconomicPPAsandcapitalstructureseitherinoroutofbankruptcycourt. Acquiring the fulcrum debt security of stressed, distressed, and bankruptnatural gas–fired and renewable power plants in order to ultimately own therestructuredcompany.The first-and second-lien bank loans of natural gas–fired power plants are

widelytradedsincetheyareusuallyover$300million(par)insize.Thedebtforatypicalrenewablepowerprojecttendstobesmallerinsizeand,asaresult,isnotwidelytraded.Theentiredebtissueforarenewablepowerprojectmayalsobeheldbyaninsurancecompany.Itmightbepossibletohaveadebtholderofanexisting renewable power project roll its existing debt into the new capitalstructureofarestructuredentity.Thefundobjectivewillbetoacquiretheentirefulcrumsecurityorenoughofthefulcrumsecuritytodeterminethependencyofthe restructuring/Chapter 11 case. A blocking position is achieved by owningonethirdinamountofthefulcrumsecurityortwothirdsinamounttocontrol.Ifitisnotpossibletoobtainasufficientamounttocontroltherestructuring,thenthefundcouldenjoythereturnfromanincreaseinthepriceofthedebtitowns.Thecontrolissuemaybesolvedonwindpowerprojectsbythefactthattheir

loans are typically controlled by a relatively small number of project financebanks and don't trade. The thesis would be to approach the agent bank on adistressedwindpowerprojectandconvincethebankgrouptorollthedebtintoanew capital structure along with a possible new equity contribution. Thissituationcouldoccurwhenawindprojecthadselectedtheproductiontaxcredit(PTC) option and overestimated wind production and underestimatedmaintenance, resulting in a large drop in EBITDA. Thiswould require a newcapital structureand technical fixes. It isnotuncommononsmaller renewableprojectswheretheentirefulcrumsecurityiscontrolledbyoneparty.Itmaybenecessarytofindthird-partytax-basedinvestorsinordertomonetize

any PTCs, investment tax credits (ITCs), and five-year MACRS depreciationthatareproducedbyrenewablepowerprojects.Mostlimitedpartnersinprivateequity funds are not taxpayers and, as a result, can't use the tax benefits of arenewablepowerplant.Iftheseinvestorsaresubjecttothealternativeminimumtax,thiswilllimitthevaluethattheycanplaceonanytaxbenefits.Untiltheendof2010,investorswereallowedtoconverttheITCtoacashgrant.Ifthisisnot

extended,investorswithoutataxappetitewillhaveadditionaltaxmonetizationchallenges. The investor would leverage third-party distressed trading, powerandenergytrading,andprojectfinancelending.

SummaryUnderstanding the energy businessmeans knowing how a power plant can befinancedandhedged.Understandingthebasicsoffossilpowerplanteconomicsfor both regulated and independent power generators, revenue requirementcalculations,hedging, and tradinghelp investors evaluatewhether a renewablepowerprojectcanbedevelopedandfinanced.Chapter 3 further develops these concepts by reviewing tax issues for

renewablepowerplants.

Chapter3

TheChallengesofRenewablePowerProjects

Buyerswanttobuyassetsandsellerswanttosellstock.—ArthurRosenbloom,seniorconsultanttoCRA

TaxIssuesTaxissuesarealwaysanimportantpartofanyenergytransaction.Sophisticated,smart investors like Carl Icahn andWarren Buffett have always used the taxcode to theiradvantage.Privateequity investorswantanassetdeal thatallowsthemtowriteupthevalueoftheentitybeingpurchased.Theseinvestorsshouldalsousesomeleverageinordertofurtherincreasethetaxshield.Inthiscase,thetaxcodeisusedtoenhancetheoveralldealeconomicsasopposedtobeingthereason fordoing thedeal.Renewablepowerprojects areessentially tax-drivendeals that depend on either the monetization or use of tax attributes.Unfortunately,usingtheseattributescanbeachallenge.Wind projects produce a small amount of earnings before interest, taxes,

depreciation,andamortization (EBITDA);a largeamountofdepreciation;andeitheranannualproductiontaxcreditoranup-frontinvestmenttaxcredit.Thisreduces theamountof leverage thata lendercanprovide towindprojectsandresults in a large number of tax benefits that can't be used by most projectdevelopers. Renewable projects depend on individual states for renewableenergy credits and the federal government for tax credits and accelerateddepreciation.Asoftheendof2011,theabilitytoconverttheexistinginvestmenttax credit to a 1603 cash grant is currently scheduled to expire. Due to thecurrent budget deficit and upcoming presidential election, it is highly unlikelythat thisprogramwillbeextended.Thiscashgrant isequal to30percentofaproject'sinvestmentcost.

PassiveLoss

Most developers of wind projects are not able to use all of the tax attributesproducedbyarenewablepowerplant.Asaresult, third-partytaxinvestorsarerequired.Unlikedebt financing, it isnot just thecostof taxequity sincemostdevelopers can't use the tax benefits that a renewable project produces. Debtinvestorswillrequireahigheryieldfortheirdebtiftheyarelocatedataholdingcompany and the tax equity is located at an operating company. Lenderswillview this structural subordination to the tax equity as an additional risk thatwouldcausealowerrecoveryinabankruptcy.Asaresult,debtfinancingfortheprojectwillbemoreexpensive.Iftheunderlyingpriceforpowerishighenough,adevelopercanusethetax

code as his equity and can obtain project finance debt. The challenge forrenewablepowerprojectsisthattheydon'tcreateenoughEBITDAtobeabletotake a large amount of debt. Before the financial crisis, renewable developersoftenpartneredwithlargecompaniesthatcouldusethetaxattributesproducedby renewablepowerplants.This typeof investor is referred toasa taxequityinvestor.Thecostofcapitalforarenewablepowerprojectismadeupofthecostofprojectfinancedebt,taxequity,andinvestorequity.Asaresultofareductionof tax equity investors, the required discount rate for tax equity investors hasbeendecreasing.Thishasresultedinanoverallincreaseinthecostofcapitalforrenewable power projects.With the extension of the cash grant, this issue hasbeenputoffintothefuture.Mostwealthyandevencorporateinvestorsdon'thavetherequiredtaxappetite

and/orcorporatestructuretousethesebenefitseffectively.Bywayofexample,a50-mW wind project that had elected the production tax credit (PTC) wouldproduce$2,759,400intaxcreditsinthefirstyearofoperation.Thisisbasedon50-mW×$21/mWh×8,760hrs/year×30percentavailability.Asa result, anindividualorcorporationwouldhavetohaveayearlyminimumtaxableincomeof$2,759,400.Thelimitedpartnersinprivateequityfundsarenottaxpayers,andtheyarenotabletouseeithertheinvestmenttaxcredit(ITC)orthePTC.Privateequityinvestorshavebeenpushingforthecashgrantprogramtobeextendedinordertoavoidthisissue.It is only widely held (as defined by the IRS) C corporations that can use

passiveincome.InternalRevenueCode(IRC)Section469limitsthedeductionofpassive activity loss (PAL)by individuals, closelyheldCcorporations, andothertaxpayers(butnotbywidelyheldCcorporations).Unlikeindividualsandother taxpayers,acloselyheldCcorporation isallowed tooffsetPALsagainstactiveincomefromthesametaxyear.Portfolioincomeisnot treatedasactive

incomeoraspassiveincome.Therulingallowstheoffsetofdifferentcategoriesof incomeandlosses(portfolio incomeandactive losses)fromdifferentyears,even though the taxpayerwascloselyheld in someof thoseyears.Under IRCSection 469, a closely heldC corporation is aC corporation that, at any timeduringthelasthalfofthetaxyear,hasmorethan50percentinvalueofitsstockowned,directlyorindirectly,bynotmorethanfiveindividuals.A large number of investments in renewable power projects can place a C

corporation intoanalternativeminimum tax (AMT)position.AMTrules limitthenumberofdeductions that a corporationcan take. In this situation, the taxbenefits that a renewable power project produces can't be fully used by a Ccorporation.AcorporationthatisnotinAMTcanaffordtopayahigherpriceforthe tax benefits produced by a renewable power project.AMT issues are alsotemporarily solved at the time of this writing by the cash grant for the ITC.Bankers have been known to say that in order to preserve their valuable taxattributes,theyarecarefulwhichrenewablepowerdealstheyinvestin.

SpecialExemptionsVariousinvestors/developershavetriedtoworkaroundthepassivelossissue,at-risk restrictions, and publicly traded partnership rules in order to target retailinvestors.Unlikewindandsolar,theoilandgasandlow-incomehousingsectorshavespecialexemptions.

MasterLimitedPartnershipsOilandgasdevelopersareallowedtosetuppubliclytradedlimitedpartnershipscalled master limited partnerships (MLPs). TheseMLPs are restricted on theamount of nonqualifying income they can earn. Only a certain amount ofearnings in anMLPcanbe fromelectric power plants.AnMLP is a very taxefficient structure, andmost companieswould become anMLP if they could.Unlike renewable power projects, oil and gas projects generate amuch largeramountofEBITDA,whichallowstheprojectitselftoutilizethetaxbenefits.Inthecurrentmarket,renewablepowerprojectshavebeenelectingtheITCas

a cash grant and carrying forward the five-year modified accelerated costrecovery system (MACRS) depreciation. Since renewable power projectsgenerateonlyasmallamountofcash,theyarenotabletousethedepreciationscheduleinthecurrentandhavetocarryitforward.Thiscreatesanetoperating

loss (NOL).Developershave found that it isnotworth thecostor the time tobringinaninvestortopurchasethisNOL.Ifadeveloperfilesaconsolidatedtaxreturn, he might be able to use this NOL on the cash generated from otherprojectsinhisportfolio.Winddeveloperswithout taxappetitehavebeenselecting thecashgrantand

carrying forward theNOLs from the five-yearMACRS depreciation and debtinterest deductions to future years. Assuming the cash grant is not extended,winddevelopersmayhavetobringinthird-partyinvestorsasgeneralpartnersinorderforthesefirmstobeabletofullyusethetaxbenefits.Theseinvestorswillhave to get comfortable with the risk of the wind project and, unlike limitedpartners, theoreticallyareexposedtoallof theobligationsofaparticularwindproject. If some sort of project disaster occurs, this general partner could beliable for damage awards. Both limited and general partner investors need tohaveaverylargetaxappetite.

LeveragedLeaseStructureAnother approach is to use a leveraged lease structure. A leveraged leaseinvolvesadebtprovidersuchasaninsurancecompanyortraditionalbanklenderandanequityinvestorwithataxappetite.Itallowsfortheuseofallofthetaxattributesandcanprovide100percentfinancing.ThisapproachisnowpossibleforwindpowerprojectssinceanITCelectionisnowpossible,asopposedtoaPTC.PTCscan't pass througha leveraged lease. In thepast, only solarpowerprojectscouldconsiderusingaleveragedleasestructurebecausetheyqualifiedfortheITC.Inatypicalleveragedlease,thedevelopersellstheprojectassettoatrustthat

isheldbytheownertrustee.Thistrustisestablishedforthebenefitofthelessoror owner trustee.The owner trustee is usually a financial institutional such asGE,JPMorgan,orevenalocalbank.Itcanalsobeacorporationwithalargetaxappetite.Theownertrusteethenleasestheprojectassetsbacktothedeveloper.Thedevelopergrantsa security interest/mortgage inallof its rights relating totheproject(includingthetransmissionlines,contractrights,andrevenuesunderthe project contracts) to the owner trustee to secure the obligations of thedeveloperunderthelease.Theownertrusteethenissuesnotesorborrowsdebtandgrantsaback-to-backsecurityinterestintheprojectassetstotheloantrusteefor thebenefitof thedebtprovider. In someolderpowerpurchaseagreements(PPAs), the purchasing utility may have been granted a second lien on the

project'sassetstosecuretheobligationsofthedevelopertotheutilityunderthePPA.If the project becomes distressed, the trust would file for bankruptcy. The

cooperationoftheownertrusteewouldberequiredsinceitwouldbethedebtorin this case. Since most renewable projects are relatively small in size, theapproachwould be to file a prearranged bankruptcy. The sponsor of the planwould agree to redeem and refinance any outstanding debt, depending on theagreed-uponvaluation.Theindentureandleasewouldbeterminated.Aspartofthebankruptcyplan,allofthecontractstowhichtheownertrusteeisapartythatare no longer desiredwould be terminated and any liens on the project assetswouldbewipedout.Theutilitycouldobject tothis if it felt that theenterprisevalueofthecompanybrokepastthelieninfrontofitsclaimagainsttheestate.Theowner trustee through the trust is the taxowner. In thepriorbankruptcy

situation,theownertrusteewouldbetreatedassellingitsownershipinterestfortheunpaidbalanceoftheoutstandingdebt.Thiswouldresultinataxablegaintotheownertrusteeequaltotheamountofdebtlessitstaxbasisintheprojectassetitowns.Thecalculationwouldbetheamountofdebtmultipliedbyanassumedcombined federal, state, and local rate of 40 percent. This assumes that theownertrusteecouldnotoffsetsuchincomeinwholeorinpartwithNOLsand/orcapitallosses.Thiswouldnotbeanabsolutecosttotheownertrusteebecauseitwouldhavehadtopaythattaxovertheremainderofthedebttermifnodefaulthad occurred. This situation results in phantom income for the owner trustee.The tax disadvantage to the owner trustee would be the present value ofacceleratingthephantomincomeontransferofitsinterest.The challengewith leveraged leases is that they are expensive, complicated,

anddifficult toarrange. Ifa leveraged leaseprojectbecomesdistressed, italsorequires an extensive effort to restructure. The lessor can also be exposed todepreciationrecaptureifitisterminatedearly.Thiscomplexitycanmakeforaninteresting distressed investment opportunity. In most bankruptcy cases, thelessorwouldbethedebtorandwouldcontrolthependencyofthecase.

“PartnershipFlip”TransactionsThedownsideofdoingasale-leasebackversusapartnershipflipisthatitcostsmore for the developer to get the project back. After the lease ends, thedevelopercancontinueusingtheprojectonlybypurchasingitfromtheinvestor.There isalsoadifferent riskallocation in leasescompared topartnershipflips.

Thedevelopermayberequiredtogivetheinvestorabroaderindemnityagainstlossoftaxbenefitsinalease.Numerous wind projects have used a partnership structure to allocate tax

benefits.“Partnershipflip”transactionsareawayofbarteringthetaxsubsidiestoaninstitutionalequity investor,whocanusetheminexchangeforcapital tobuildtheirprojects.Apartnershipstructureallowsforadisproportionatesplitofthecashandincomeaccountsbetweenthedeveloperandthetaxequityinvestor.It is hard to do a partnership flip transaction with just depreciation. Thedepreciation can be carried forward for up to 20 years and used when thedeveloperhasincomeagainstwhichtooffsetit.Alternatively,adevelopermightenterintoataxequitytransactiontotrytoconvertthedepreciationintocash.Eachpartnerhasa“capitalaccount”and“outsidebasis”thatarelimitsonits

abilitytoabsorbtaxbenefits.Hence,thecashgranthastendedtobethrownintothepartnershipalso.The taxequity investoressentiallybridges thecashgrant.Partnershipstructuresarebrokendownfurther intopretaxafter-taxpartnershipstructures(PAPS)—partnershipfliptransactionsinwhichthetaxequityinvestorpays the fullpurchaseprice tobuy into thedealup front—asopposed toovertimeina“pay-go”structure(G-PAPS—aPAPSdealwithacashgrant).Atypicalpartnershipstructurewouldhavethedevelopercontribute1percent

of the equity and the strategic tax equity investor contribute 99percent of theequity.If theprojectelectedthePTC,theywouldalsobesplit1percenttothedeveloperand99percenttothetaxequityinvestor.Distributablecashwouldbeinitiallysplit1percenttothedeveloperand95percenttothestrategictaxequityuntil its hurdle rate was hit. At this point, the distribution would flip to 95percent to thedeveloperand5percent to the strategic taxequity investor.Taxbenefits/liabilitieswouldalsobeinitiallysplit1percenttothedeveloperand99percenttothetaxequityinvestoruntilitshurdleratewashit.Atthispoint,thedistributionwouldalsoflip to95percent to thedeveloperand5percent to thestrategictaxequityinvestor.

NewMarketTaxCreditsDevelopers have also been considering the use of new market tax credits(NMTCs).NMTCs are intended to promote private investment in low-incomeneighborhoodsbyprovidinganinvestmenttaxcreditequalto39percentspreadoveraperiodofsevenyears.This39percent isbrokendowninto5percent ineach of the first three years and 6 percent in each of the last four. There is a

minimuminvestmentperiodforNMTCsofsevenyears.

SummaryRenewable projects produce only a small amount of EBITDA—they aredependent on leveraging the tax code. The economics of renewable powerprojectsarebased largelyon the taxcredits theyproduce.Foranentrepreneur,theyareherequity;foracorporationwithataxappetite,akeypartofitsreturnfrom investing in renewable power projects. Investing competitively inrenewablepowerprojectsisdifficultforCcorporationsinAMTorwithnotaxappetite.Marketsbasedontaxcreditsandinvestortaxappetitecanhaveboom-bustcycles,whichcanprovideinterestingdistressedinvestmentopportunities.InChapter4,wediscussassessingtheriskofpowerprojects.

Chapter4

RiskAssessmentforPowerProjects

Weneedmorecivilengineers,lessfinancialengineers.—LarrySummers,directoroftheWhiteHouse

NationalEconomicCouncilforPresidentObamaBothfossilandrenewablepowerprojectsareverycomplexandcapitalintensiveand require a large amount of time to analyze and understand. In addition,renewableprojectsinvolvetheaddedcomplexityofnumeroustaxattributesandthefrequentneedforoutsidetaxequityinvestors.Unlikesomeotherinvestments,theyrequirenumerouspermitsandapprovals,

which can take years and a large amount of risk capital to obtain. Projectdevelopmentinternalandexternalexpensescanincreaseveryquicklyandmustbeconstantlymanaged.Internalexpensesinvolvethelaborandbenefitcostforthedeveloper'sorproject sponsor'sownemployees,andexternalcosts includeattorneys, lender's engineers, owner's engineer, environmental engineers, andmarketconsultants.Investors inpowerprojectshave toconsiderboth theirownfinancialcostof

capitalandopportunitycostwhentheyreviewpotentialdeals.Thisisbasedonthefactthattheycouldbedevelopingordiligencingotherprojectswhentheyarefocusing on a particular deal.A simple “make versus buy” analysis can oftenhelpinvestorsevaluatepotentialinvestmentsandpotentialreturns.Whetherapowerprojectisbasedonfossilorrenewabletechnologyandhowit

ultimately will be financed, it is critical to develop a project-specific riskassessmentandmitigationanalysis.Ananalysisofthistypewouldbecreatedinaddition to a financial model and a development budget and schedule.Development dollars are risky, expensive dollars, and considering these issuesduringinitialduediligencecansaveaninvestoralotoffutureheartache.

ProjectRiskAssessmentandRiskMitigationsThe following risk assessment shows the key risks and mitigants for therestructuringofanoperatingdistressedhydropowerplant.Thehydroprojecthas

a long-term power purchase agreement (PPA) that no longer supports itsoutstandingdebt.ThePPAiscurrentlypricedatalargediscounttoavoidedcost.Theproject is located at an electric substation that potentially allows it to sellpower to twoseparate independent systemoperators (ISOs).TheexistingPPAcan be rejected in a prepackaged Chapter 11 reorganization, and the sale ofpowercouldberecontractedwithanotherentity.Sincethehydroprojectisrelativelysmall,itisimportanttouseaprepackaged

asopposedtoa“freefall”Chapter11.Itishardforsmallerfirmstobearthecostofa traditionalChapter11proceeding.Theoverallhydro financial structure iscomplex since it involves a first lien loan, leveraged lease, and a second lien,which was granted to the power purchaser. Table 4.1 shows an analysisdevelopedbytheprojectsponsor'smanagement teamtohelpthinkthroughthekeyissues.Theanalysisincludesbothtechnicalandfinancialissues.

Table4.1AnalysisofKeyIssues.

Risk PrimaryRiskBearer

Mitigants

Market/Offtakefactors

Projectcompany

TheexistingPPAwiththeelectricutilitywillberejectedbyforeclosingonthefirstlienandapossibleprepackagedbankruptcy.Duetotheproject'suniquepowertransmissionlocation,powercanbesoldtotwodifferentISOs.

Futureprojectoperationsandrestructuringstaffing

Projectcompany,O&Mcompany

Thereisanexistingplantmanageratthesitewhohasworkedontheprojectsincethestartofoperations.Athird-partyoperatorcanalsobehired.

Projectoperatingpermitandlow-impacthydrocertification

Projectcompany,lenders

TheprojectFederalEnergyRegulatoryCommissionlicensedoesn'texpireuntil6/28/2037andcanberelicensedafterthisdate.WehavereceivedapreliminaryopinionfromtheLowImpactHydroInstitutethattheprojectwouldqualifyasalow-impacthydroproject.ThiswouldbeoneoftheconditionsrequiredtopotentiallyobtainClass1renewableenergycredits.

Electricutilitymaycontestthattheproject'senterprisevaluebreaksatthefirstlien

Projectcompany

Wecouldnegotiatewiththeelectricutilitytoresolvethisissuethroughminimalpaymentor,ifunsuccessfulcollectonthefirstlienloaninabankruptcyfiling.

ProjectmWhproduction

Projectcompany,lenders

Downsideproductionsensitivityof140,000mWh,whichisc.17percentlessthanthelowestannualproductionoverthepast10years,resultsinanunleveredinternalrateofreturnof8.2percentunderourfuturenaturalgaspriceassumption.Projecthasachievedamediannetcashflowofapproximately65percentoverthepastsixyears.Capacitywillbebidconservativelyandenergyonanas-availablebasis.

PrecompletionRisks/Mitigants

Beforeapowerprojectisfinancedorevenstartsoperationithastocompleteanumberofkey tasks.Oneof these tasks is theacquisitionofallair,waterandlocalapprovals.Thisexpenseistypicallycarriedbythedeveloperandcaneasilyrunintomillionsofdollarsjustbeforefinancialclose.Inordertoachievesomeformofnonrecoursefinancing,itisnecessaryforallofthesepermitstobeoutofanyappealperiod.Thisisduetothefactthatlenderswillconsiderpermittingtobeequityandnotdebtrisk.Potentialprojectrisks,andproposedmitigants,arefurtherdiscussedinTable

4.2.Althoughdevelopersandprojectsponsorswillseektodeveloptheprojectinaconservative,comprehensivemannerwithattentiontodetails,everyeconomicundertakinginvolvesrisksthatmaynotbequantifiableordiscernableatspecificpointsintime.

Table4.2PossibleConstructionPeriodRisks.

Risk PrimaryRiskBearer Mitigants

Approvalsandpermits

Projectcompany;engineering,procurement,andconstruction(EPC)contractor(forcertainpermitsonly)

Theprojectcompanywillobtainallmajorcentralgovernmentandprovincialapprovalswithallappealperiodsexpiredpriortofinancialcloseandfunding.TheprojectwillbedesignedtoexceedWorldBankstandards.

Costoverruns

EPCcontractor,projectcompany

Fixedpriceturnkeyconstructionagreement,theprojectcompanywillhaveapprovalrightsoverallchangeorderswith,undercertaincircumstances,theconsentofthelenders;aconstructioncontingencyandlikelysponsorcostoverrunsupport

Technology EPCcontractor Onlyproventechnologywillbeemployed;theturnkeyconstructionagreementwillincludecertainwarranties;equipmentsupplierswillprovidecertainwarranties.

Constructiondelays EPCcontractor

Turnkeyconstructionagreementcontainsliquidateddamagesfordelayinstart-up,incentivesforearlycompletion,insuranceforforcemajeureevents,constructioncontingency,andlikelysponsorcostoverrunsupport.

Transmissionlinedelays EPCcontractor

Datecertainobligationpertheturnkeyconstructionagreement,minimalupgraderequired,projectsiteallwithintherefinerysite;constructioncontingencyandlikelysponsorcostoverrunsupport.

Projectperformance(perperformancetest)

EPCcontractorTurnkeyconstructionagreementspecifications,turnkeyconstructionagreementliquidateddamagesforefficiencyandoutputshortfalls;bonusincentivesforprojectperformanceinexcessofturnkeyconstructionagreementspecifications.

Landuserights Projectcompany Theprojectcompanywillnegotiateasiteleasewithrefinerypriortofinancial

closing.Alloftherealpropertyrequirediswithinthecontrolofrefinery.

Interestrates. Projectcompany

Theproject'sfinalcapitalcost,uponwhichtheelectricitytariffwillbebased,willreflecttheactualinterestduringconstruction(IDC),fixedrateloans,asavailable,willbeutilized;interestratehedges,ifappropriateandavailablemaybeutilized;theconstructioncontingencyandsponsorcostoverrunsupportcanbeutilizedtocoverhigher-than-projectedIDC.

Insurance-

relatedclaims

Projectcompany,EPCcontractor

Comprehensiveall-riskinsuranceprogramwillbeputinpriortofinancialclose.

PenaltypaymentsandterminationunderthePPA

EPCcontractor,projectcompany,lenders

ReliefwilllikelybeallowedunderthePPAforforcemajeureeventsandgovernmentalactionorinaction.ThePPAwilllikelyallowtheprojectcompanytopaypenaltiesinlieuoftermination.Datecertaincompletionturnkeyconstructionagreement.

Forcemajeure

Powerpurchasers,projectcompanyandlenders

Forcemajeuredeclarationswillbeprovidedforintheprojectcontracts;delayandall-riskinsurancewillbepurchased;theconstructioncontingencyandsponsorcostoverrunsupportcanbeutilizedtocoverthecostofforcemajeureevents.

Table4.2summarizes thepossiblerisksperceivedby theprojectcompanytobe developed in Southeast Asia during the construction period. This projectinvolves the development, permitting, financing, and construction of both acirculating fluidizedbed (CFB)boiler and the upgradeof an existing refinery.The refineryupgradewill alsoproduce the fuel supply for theCFB.TheCFBboilerwill also sell steam and some of its electric power to the refinery. Theremainingpowerwillbesoldtothelocalelectricutilityunderalong-termPPA.

PostcompletionRisks/MitigantsAfter construction of the CFB project is completed, it enters the operationsphase.Investorswilltypicallyevaluatetheeconomicsofaprojectovera20-yearperiod.Theprojectcanhaveanoperatinglifethatcangreatlyexceedthistimeperiod. The key concerns at this point include project performance underexisting contracts, availability, capacity factor, and overall plant performance.Thesemetricshelpdeterminetheproject'sabilitytogeneratecash,whichallowsittopaybackitsdebtandequityinvestors.Thefuelsupplyanditsfuturepricingfor a fossil plant or the future wind production forecast for a wind plant arecritical.Forexample,awindprojectcandefaultonitsloanifitoverstatesfuturewind production and understates maintenance cost. Table 4.3 summarizespossibleriskstotheprojectduringitsoperationalphase.

Table4.3PossibleOperationalRiskPhaseRisks.

Risk PrimaryRiskBearer

Mitigants

Equipmentdefects

EPCcontractor,projectcompany Turnkeyconstructionagreementwarranties;equipmentvendorwarranties.

Projectavailability

Projectcompany,O&M

ExperiencedO&Mcompany;independentengineeropinesonprojectedavailability;O&Mcompanybonus/penaltybasedonperformance;proventechnologywithoperating

company history;fuelsupplycontractbonus/penaltystructure.

Plantefficiency(heatrate)

Projectcompany,O&Mcompany

ExperiencedO&Mcompany;independentengineeropinesonheatrateprojections;O&Mcompanybonus/penaltybasedonperformance;proventechnologywithoperatinghistory.

Operationsandmaintenancecosts

Projectcompany,O&Mcompany

ExperiencedO&Mcompany;proventechnologywithoperatinghistoryprovideswellfoundedbasisforestimatedO&Mcosts;O&Mcompanybonus/penaltybasedonperformance;maintenanceprogramsandyearlyoperatingbudgets.

Regulatoryrisk(powersector)

Projectcompany,lenders

Long-termtakeorpaycontractnegotiateddirectlywithpowerpurchaser;powerpurchaserpaymentobligationsareabsoluteandunconditional;existingthird-partycontractsarelikelytoberespectedinaderegulatedpowersector;deregulationnotlikelytochangestatusofpowerpurchaserwithinitsserviceterritory;therefineryPPAwillbeunaffectedbyderegulation;projectcompany'spowerpricewillbecompetitivewithotherresourceoptions.

Fuelprice

Refineryasfuelsupplier,thepowerpurchaseagreementallowsforfuelcostpass-through

Pricingformulawillbeagreedtowithintheprojecteconomicconstraints;up-frontprepaymentforthefuelisapossibility.

Fuelsupply Refineryasfuelsupplier

Long-termfuelsupplycontract;projecthasfirstprioritytopetroleumcoke;atleasta30-daystockpilereserve;anindependentengineerwillopineontheprojectedannualpetroleumcokeproduction.

Electricitydemand(competitivepowerrates)

PowerofftakersLong-termtakeorpaycontractswithpowerpurchaserandrefinery,provendemandbybothofftakers;powermarketstudywillverifythatthepowerpricewillbecompetitiveinthefuture.

Creditstatusofpowerpurchaserandrefinery

Projectcompany

Bothpowerpurchaserandrefineryareestablished,respectedandcreditworthycorporations;creditstandingacknowledgedbythefinancialcommunity.

Transmissioninterruptions

Powerpurchaser,projectcompany

Powerdeliveriestorefinerydonotrequiretransmission;powerpurchasertotakedeliveryofelectricityatthehighsideofthestep-uptransformerontheprojectsite;openaccesstransmissioninthePhilippines.

Inflation Powerofftakers PPAsprovideforoperatingandenergypaymentstoadjustannuallywithbothPhilippineandU.S.inflationasappropriate.

Foreignexchangerates Powerofftakers PaymentsperthePPAstocoveroffshoreobligationswillbepaidinpesosbut

denominatedinU.S.dollarsonthepaymentdate.

Foreignexchangeavailabilityandtransferability

Projectcompany

Centralbankapprovalstoconvertpesostodollarswillbeobtained.However,delaysinconversionmayoccur.RepatriationofinvestmentreturnsonthepartofforeigninvestorsispermittedunderPhilippinelaw.

Interestrates PowerofftakersInterestcostsarecoveredinthepowerpurchaserPPAbythecapacityandfixedoperatingpayments;interestrateswillbefixed,wherepossible;interestratehedgeswillbeutilized,ifavailableandappropriate.

Availabilityofinsurance

Projectcompany

Insuranceadviserwillopineregardingtheproject'sinsurancerequirementspriortofinancialclose.

Environmentalmatters

Projectcompany,powerofftakers

ProjectdesignedtoexceedbothWorldBankandPhilippinestandards;PPApricingisadjustedforchangesinlaw;projectdesignwillbeflexibleenoughtoallowforinstallationofadditionalemissioncontrolequipmentifrequired;refinerytoprovideenvironmentalindemnityforpreexistingsiteconditions.

Changeinlaw Powerofftakers PPAstructuresprovidefortariffadjustmentstoreflectincreasedcostsarisingfromchangesinlaw.

Forcemajeure Powerofftakers,projectcompany

UnderthePPA,aforcemajeureeventwillnotexcusepowerpurchaserandrefineryfrommakingfirmpaymentsasreducedbyanyinsuranceproceedsreceived.Insurancecoveragewillalsobeinplacefornaturaldisasterforcemajeureevents.

Powerpurchaserfranchiseexpiration

Powerpurchaser,projectcompany

Powerpurchaserexpectsthefranchisewillberenewed,ifnotrenewed,PowerpurchaserremainsobligatedtomakefirmpaymentsunderthePPA.ThecapitalmarketsacceptedthisriskintheQuezonproject.Projectwouldstillbeabletoprovideelectricityatacompetitivepricetoanewpurchaser.

Integrationwiththerefinery;dependenceonrefinery

Refinery,projectcompany

TheobligationofrefineryunderthePPA,steamandfuelsupplyagreementsareabsolute,unconditional,andlongterm;theintegrationoftheprojectwiththerefinerywillenhancethecompetitivepositionoftherefinery;refinerywilltakeanequitypositionintheproject;projectrevenueriskisdiversifiedviathePPA.

Annulmentofoilindustryderegulationlaw

Refinery,projectcompany

TheobligationsoftherefineryunderthePPA,steamandfuelsupplyagreementsareabsolute,unconditional,andlongterm;itisanticipatedthattheoilderegulationlawwillbereinstatedwithmodifications.

SummaryForeitherfossilorrenewablepowerprojects,understandingandmanagingriskduringdevelopment,construction,andoperationiscritical.Theriskassessmentsin this chapter (overall, precompletion, and postcompletion) show how risk isreviewedandmanagedfrominitialduediligenceallthewaythroughthelifeofaproject.Itiscriticaltostopduediligenceordevelopmentonunfeasibleprojectsasquicklyaspossibleinordertoreducebothactualandopportunitycosts.Thistypeofanalysisisrequiredforbothrenewableandfossilpowerplants,andtheseissues and techniques will continue to be referred to. Recognizing risk, riskbearer, and risk mitigants are important steps in the multistep process ofinvestinginbothproposedandexistingfossilandrenewablepowerassets.Chapter 5 discusses opportunities with municipal bond–financed power

projects.

Chapter5

ExploitingProfitabilityofDistressedandAbandonedMunicipalPowerPlants

“Allgooddealsarebehindus”isamyth.—ScottUnger,founderandmanagingdirector,EnerTechCapital

Becauseof thepast threeyearsofdeepU.S.andEuropeaneconomicbusinessrecessions, huge job losses, and financial declines, as well as lack ofconstructionandbusinesssales,theU.S.FederalReserveBoard,whichsetskeyinterest rates, recently recommitted itself publicly to the entire nation, statingthat itwouldmaintainAmerica'scurrentlyvery low interest ratesoncorporateloans, consumer loans, and investment loans for at least the next year andprobablylonger.ThesecurrentlowratesofinterestduetothecontinuingU.S.recessionprovide

significant opportunities for investors across the entire United States to takeadvantageofdistressedmunicipalpowerplantsatpotentiallybargainrates.TheU.S.FederalReserveBoard'sdesiretokeepinterestrateslowtoenabletheU.S.jobs market and housing markets to recover from their deep decline has ledmanyfinancialfundsandinvestorstobeabletosalvagetroubledorpreviouslyabandonedorpreviouslynonfinancedmunicipalwaste-to-energypowerplantsatprofitablerates.Inaddition,newfavorableenvironmentallegislationandenergylegislationat

the federal, state, and municipal levels has made it possible to finance orrefinance municipal waste-to-energy projects in ways that were not possiblebefore. This is due to the fact that “waste-fuel power plants” can qualify foreither municipal bond debt or the investment tax credit (ITC)/accelerated taxdepreciation. Because municipal bond interest rates are too low, theITC/accelerated tax depreciation is selected by most investors or funds todaysinceitiscurrentlyamuchmorevaluablefinancialbenefittothem.

Waste-FuelProjectsHaveKeyFinancialAdvantagesforInvestors

Waste-fuelpowerplantscanbeeithermunicipallyorprivatelyowned.Thestate,city, county, region, public authority, public-private consortium, or a purelyprivatecompanycanbe the initial instigatorof theproposal for thewaste-fuelpowerplantortheultimateowneroftheplant.Becauseawaste-to-energypowerplant can be large and expensive, itmust be funded to a very large extent byeither municipal bonds or a mixture of private and public bonds. It can bebacked partly by corporate guarantees, government guarantees, governmentgrants, state, federal funds, or a consortium of multiple municipalities,government,ormunicipalloansinadditiontoprivateinvestorsorcorporations.Traditionally,apublicpowerauthority,whetherstate,city,regional,orfederalinscope,wastheprimarydeveloperofpowerplantsinmanyregionsoftheUnitedStates.Recently,therehasbeenawiderspectrumofmerchant-ownedor-fundedwaste-to-energy power plants and a rapid rise worldwide in the use of wastewood,wastecoal,orotherwasteproductleftoversfromfactories.In this chapter,we explain specific roles and responsibilities of thedifferent

participants involved in planning, financing, designing, constructing, andmanagingawaste-to-energypowerplantoverits30-yearlife.

DutiesofProfessionalsinaMunicipalPowerPlant

Thekeydeveloper(orinvestor)ownerofaprivatepowerplantusuallyhashadextensive experience on various types of power projects or for a municipalpower authority.Alternatively, hemayhaveworkedas an assistant to amajordeveloper on one or more previous projects. The reason that this previousprofessionalexperienceissoimportantinaprivatecogenerationprojectis thatthere are somany layers of regulation involved in planning, constructing, andcompletionofacogenerationpowerplantthatmanyentrepreneurswithnopriorexperience would be unable to navigate the maze of legal and regulatorypermissionsanddeadlines,timeschedules,andapprovalprocessestobeabletosecure funding for the entire project in advance, without having usually anextensivetrackrecordofexperiencethatbanks,funds,andgovernmentapprovalagencieswillexpectandlookfor.

Second,municipalbond–backedpowerplants take two to fiveyears toplan,permit,finance,construct,andmanage.Thisisalongtimeformostinvestorstolearnon the jobfor thefirst time.Therefore,otherdevelopersorconsortiacanusually operate on a fast track to capture that start-up investor's cogenerationprojectoutfromunderthem.Thatiswhyitiscommontoseeteamsformedtodevelopnotsimplyoneprojectonitsown,buttwotofourprojectsatatime,sothatwhiledelaysorroadblocksareoccurringinoneproject,certainmembersofthedevelopmentteam,ortheengineeringteamorthefinancingteam,cankeepbusyonpartsofanotherpowerprojectsothedelaysarenotsimplydeadtimeortotallywasted.Theinvestmentbankerorunderwriterisoneofthemostactivemembersofthe

waste-to-energy plant planning team.That is because they usually have raisedmultiple financings for a variety of projects in the past, along with othermembers of their firm. Although a waste-to-energy plant is a sophisticatedengineering project with all kinds of professional detailed experts involved,ultimately,itistheabilitytoactuallyfinancetheprojectinatimelyfashionthatseparates the winners from the losers. Many municipal bond–backed powerplants can cost at least $200million. Theymay easily hit cost overruns for awholevarietyofreasonsofconstructiondelayor legal,regulatorydelays.Thiscanextend the total construction timeof theproject andcanderail theprojectaltogether. So many moving pieces in these complex and expensive projectsmustbeable tobe timedtocometogetherona tightschedule, thecoalitionofpartnersandfinanciersmaynotbeabletoholdtogetherlongenoughtosucceedinfinallycompletingthisoriginalcomplexproject.Someplayersdropoutofthedeal, and finding replacements in bad economic environments can proveexcruciatinglydifficult.That iswhyformerly troubledorabandonedmunicipalpowerplantprojectsareavailabletodayforfinancing.Energy power plant investment bank underwriting teams often are not only

experienced inworkingwith thevarietyofspecificstates,energydepartments,environmental protection departments, municipalities, finance directors,treasurers,municipalbondlegalcounsel,underwriter'scounsel,issuer'scounsel,andvariousmunicipalities’financialadvisers,butalsowitharangeofbanktrustdepartments, who will usually hold the majority of the proceeds of the bondissueuntilmoniesareneededfortheactualconstructionofthewaste-to-energypower plant. Because brand newwaste-to-energy power plants are often longterm to plan, to finance, and to construct and are considered complicated tofinance, they have often been sold via a negotiated deal between the bond

underwriter and the leadmanager of a specific investment bank, known to bespecializedincomplexbondfinancings,insteadofbeingbid-outatacompetitiveauction,thewayplainvanillamunicipalbondsforgeneralobligationtax-backedbondsandnoteswouldusuallybesold.Privatenegotiatedagreementmeansthatoften the profit or “spread” earned by the investment bank on these morecomplexdealsisgreaterthanonpublic-auctionedmunicipalbonds.In the past, inmany bond underwritings, the lead syndicatemanager of the

groupof investmentbanksparticipatinginmanagingthebondsalewouldseektheextrajobof“biddingoutthebondescrow”tosupposedlymakesurethatthebestpricewasobtainedby thebond issuerormunicipality from thebanks forinvestingandmanagingthosebondfundproceedsforyearsuntilthefundswereneeded for actually constructing the power plant. Since then, ethical and legalproblemswere found in systemic collusions between various investment banklead underwriters, financial advisers, and the commercial banks’ insurancecompanies or financial firms aboutwhowouldwin the right to hold the bondfundescrowsby ensuring extraprofits to thewinningescrowagent insteadofmaximizing the earningson the escrowdirectly for themunicipality. Industry-widelawsuitsandnewregulationhavesettledthisproblem.

TheProfessionalFeasibilityStudyEngineerThere is no universal format for independent engineering feasibility studiesbecause,typically,feasibilitystudiesareadaptedtotheparticulartypeoffacilitythat is being built (for hospitals, housing, public power, etc.).1 Factors thatimpact study design include legal and regulatory requirements, geographiclocation,sourceoffuelorwaste,regionaldemographics,orthetotalnumberanddistribution of the total number of people in the geographic region. There arealsoimportantfinancialbudgetaryconstraintsonhowmuchthecommunitycanpay for the power plant versus lowest feasible total dollar cost to plan, build,test, and maintain the required size and necessary amount of electric powerneededtobeproducedbythepowerplanteachmonthandeachyearinordertopayoffthetotalbonddebtborrowedtobuildandsustainthepowerplantforitsuseful life. It is typical in the waste-to-energy electric power industry for aprivatedeveloperormunicipalitytodiscusstheparticularfocusandscopeoftheindependentengineeringfeasibilitystudywiththeengineeringfirmemployedtoconductthestudy.

Theindependentengineerconductsasensitivityanalysistoevaluatetheabilityof the project to provide adequate debt service coverage in the event of areductioninspotmarkettippingfeesorotherincreaseinfuelcost.Theresultsofthisanalysisaredisclosedinthebondofferingmaterials.Inaddition,investmentbanker practice is to provide potential investors in the bondswith CD-ROMscontaining the spreadsheet data underlying the sensitivity analyses so thatprospectivebondpurchaserscantestanyassumptionsmadeinthebondofferingmaterialsthattheywish.Each timeanationally famous, long-term leading engineering firmperforms

an“engineeringfeasibilitystudy,”itsprofessionalreputationisontheline.Thegoal is to follow appropriate procedures for the conduct of an independentengineering feasibility study that is “inconsistent with recklessness.”“Recklessness” is a breach of “The Legal Standard requiring a high level ofHighDutyofCare”thatfinancialandengineeringprofessionalsmustmeetinthequalityoftheirwork.2

Theinvestmentbankreviewstheindependentengineeringfeasibilitystudytohave a reasonable basis to believe that the project is viable and therepresentationsinthebondofferingmaterialsareaccurate.Theinvestmentbankmustactinaccordancewithindustrystandardsinmakingconsideredjudgmentswithrespecttotheseissues.Therecanbenothingrecklessabouttheinvestmentbank'sconsiderationofandreviewswithrespecttotheworkoftheindependentengineer,thepartnership,andothersontheproject.

DisclosuresofRisksintheBondOfferingMaterials

In accordance with industry standards, the bond offering documents typicallyprovide toprospective investors thematerial risks involved in investing in thebonds.Forexample,thefollowingisanexampleofatypicaldisclaimeronthecoveroftheofficialstatementforawaste-to-energybondoffering:

PURCHASEOFTHEBONDS INVOLVESASIGNIFICANTDEGREEOFRISK. INVESTORSSHOULDREADTHISENTIRELIMITEDOFFERINGMEMORANDUM [LOM] TO OBTAIN INFORMATION ESSENTIAL FOR

MAKINGANINFORMEDINVESTMENTDECISION.[See“RiskFactors”MEMORANDUMTOOBTAIN INFORMATIONESSENTIAL TOMAKINGAN INFORMED INVESTMENT DECISION. SEE “RISK FACTORS”BEGINNINGONPAGE___FORADISCUSSIONOFCERTAINFACTORSTHATSHOULDBECONSIDEREDINEVALUATINGANINVESTMENTINTHEBONDS.]

Inaccordancewithindustrystandards,thequalifiedsophisticatedinstitutionalinvestorswhopurchasedthebondsareexpectedtoconducttheirownevaluationof thebonds, andparticularly the risks.Theofferingdocuments for thebondsweremoreextensive than is thenormformunicipalbondswithrespect to riskdisclosure,andtheyspelledoutalargenumberofspecificrisks.Someofferingstatementsforgeneralobligationmunicipalbondsbackedbytaxeshaveminimalrisk disclosure. Other offering statements for municipal revenue bonds oftenhave a limited list of standard risk disclosures. A typical Limited OfferingMemorandum[LOM]foramunicipalbondofferinglistsover20pagesof“riskfactors.” This review would have made it clear that the bonds were“unenhanced,”notrated,notinsured,notguaranteed,norbackedbybanklettersof credit or state, city, or municipal taxes. They were, therefore, significantlyriskier than municipal securities with a federal, state, or municipal or aninsurance company's guaranty or letter of credit features or with total backupcreditsupport.The many categories of risks disclosed in the bond offering documents

included risks relating to “ProjectRisk;LimitedRecourse,” “LimitedAssets,”“ConstructionRisk,”“SolidWasteMarketConditionsandNon-AuthorityWasteRequirements,” “Governmental Regulation and Approvals; Loss of Permits;EnvironmentalMatters,”“OperatingRisk,”“RelianceontheAuthorityandtheMember Cities,” “Constitutionality ofWaste Supply Agreements and RelatedAgreements,” “Reliance on Power Purchase Agreement,” “Qualifying FacilityStatus,”“Third-PartyContractRisk,”“RisksofCostsofOperationRisingFasterthanRevenues,”“RisksRelating toStateGrant,”“RelianceonProjectionsandUnderlying Assumptions,” “Factors Limiting Enforcement of Rights;RealizationofCollateralandEnforcementofJudgments,”“Cross-Default fromService Agreement to Project Site Lease,” “Metal Recovery Revenues,”“AdequacyofInsurance,”“LossofFederalTaxExemption,”“AdditionalBonds;

Financing Risks,” “Potential Change of Control of Partnership,” “ComputerModifications,”“AbsenceofMarketforBonds,”and“NoCreditRating.”Qualified sophisticated investors are willing to incur the levels of risk

associated with and purchase “unenhanced” municipal bonds because of thesignificantly higher yields that the private energy companies or corporatepartnerships who develop these projects will offer. Here is the standarddisclaimer:

Although they may offer higher current yields than do higher-ratedsecurities, low-rated and unrated securities generally involve greatervolatilityofpriceandriskofprincipalandincome,includingthepossibilityofdefaultby,orbankruptcyof,theissuersofthesecurities.

Municipal securities such as these bonds are marketed and sold only to“qualifiedsophisticatedinstitutionalinvestors”becausesuchinvestorshavetheexperience and resources to understand, evaluate, and manage the significantrisks that are involved. The bonds can be sold in a “private placement” toqualified sophisticated institutional investors who qualified as “ApprovedInstitutional Investor[s]” with “at least $100million in securities,” “QualifiedInstitutionalInvestorsintheUnitedStatesunderRulel44Astandards.”3

In accordance with industry standards for underwriters of municipal bonds,investment bankers appropriately consider market conditions for waste-fuelprojects.

Typically,aninvestorviewedbyanissuerorunderwriterashavingsufficientresources, market knowledge and experience to understand and bear therisksinvolvedinaparticularinvestment.“Qualified Institutional Buyer” (QIB): An entity to whom a security

otherwiserequiredtoberegisteredundertheSecuritiesActof1933maybesold without such registration under SEC Rule 1 44A. In general, a QIBmust own and invest on a discretionary basis at least $100 million insecurities and must be an insurance company, investment company,

employeebenefitplan,trustfund,businessdevelopmentcompany,501(c)(3)organization, corporation (other thanabankwithnetworth less than$25million),partnership,businesstrustorinvestmentadviser.4

Thebondofferingmaterialsdisclosemarketconditionsandcompetitioninthemarket and the risks these factors posed. The bond offering documents willdisclosewhetheraprojectisafunctioningplantand,ifnot,whenitwillbecomeoperational.Thebondofferingmaterialswillalsoprovideextensiveinformationontheproject'sfuelstory.Manymunicipalsolidwasteandpowerprojectsaredevelopedfromthestart

aspubliclyfinancedfacilitieswithbackstopguaranteesfromastate,city,county,or other public revenue authority. In other cases, private corporate developersoftenputtheirowncapitalupforseveralyearstodevelopanewplantandguideit through the regulatory and political approval processes and technologicaldevelopment stages until it is ready to beunderwrittenby an investment bankandsoldonlytoqualifiedsophisticatedinstitutionalinvestors.Privatecorporatemunicipalfinancingprojectsveryoftenencounterdifficulties

inqualifyingfortaxexemptionunderfederal,stateorlocaltaxregulations,thusmakingoperationmoreexpensiveintheearliestyearsoftheproject.Stateshave“caplimits”forso-called“privatepurposebonds”that,inadditiontomeetingawidely acknowledged public need, also have financial benefits for privatedevelopmentcompanies.Projectsthathaveamixedpublicandprivatepurpose,such as privately developed and operated sewers andwaste disposal facilities,powerplants,hospitals,andlow-incomehousing,aresubjecttosuchcaplimits.Inanunenhancedmunicipalfinancing,suchasthistypeofproject,aleveraged

debt payment structure involving interest-only payments in early years and adelayed bond principal amortization schedule is not unusual. In fact, it isrelatively common. For example, the Colver waste coal power plant was anunenhancedmunicipal financingwith this typeofdebtpayment structure.TheKennedy International Airport cogeneration facility and the Stony BrookUniversity cogeneration facility provide additional examples of municipalfinancinginvolvinga“backloadeddebtpaymentstructure.”Eachhasaninterest-only debt payment schedule in early years and amortizes principal overmorethan20years.5

Privatecorporatemunicipalfinancingprojectsveryoftenencounterdifficulties

inqualifyingfortaxexemptionunderfederal,state,orlocaltaxregulations,thusmakingoperationmoreexpensiveintheearliestyearsoftheproject.Stateshave“caplimits”forso-called“privatepurposebonds”that,inadditiontomeetingawidely acknowledged public need, also have financial benefits for privatedevelopmentcompanies.Projectsthathaveamixedpublicandprivatepurpose,such as privately developed and operated sewers andwaste disposal facilities,powerplants,hospitalsandlow-incomehousing,aresubjecttosuchcaplimits.Aprivatecorporatemunicipalfinancingprojectmaybestructuredasaleveragedlease,somewhatlikecarloansthathaveinterest-onlypaymentsinthefirstyearortwobeforeloanprincipalstarts tobeamortized.Financialbackersofwaste-to-energy or power plants bonds have permitted private plant developers tocustomize debt payment structureswith interest-only debt service in the earlyyears and amortization of the principal payments starting after three or fouryears. This type of debt payment structure provides the private owner ordeveloperwithmorecashwithwhichtopayhigh-leveragedleasechargesintheearlyyearsoftheproject,whenthefinancialviabilityofnewprojectsismostatrisk. For example, the FosterWheeler Passaic, Inc.waste-to-energy facility inCamden,NewJersey,wasfinancedbybondswiththistypeofbackloadeddebtpaymentstructure.6

In accordancewith standards applicable tomunicipal underwriters, the bondoffering materials disclose the debt payment structure. Institutional investorswho purchased the bondswere expected to have their professionals (financialadvisers, accountants, lawyers, etc.) evaluate the basic features of the bonds.Anyprofessional reviewing thebondsshouldhavenoted that thefirstyearsofdebt service were payments primarily of interest and that the bond offeringmaterials contemplated the use of the debt service reserve to fund principalrepaymentsattheendofthedebtpaymentschedule.Theprimarilyinterestdebtpaymentsinthefirstyearsmightalsoalertbuyersthattheprojectrequiredacashcushionintheearlyyears.Prospectivepurchaserswhowereconcernedaboutthefully disclosed debt payment structure of the bonds could have demandedmodificationstothatstructureordeclinedtopurchasethebonds.Demandsforspecificchangesinbondterms,yields,coupons,maturities,and

debtpaymentstructuresaresometimesmadebylargefinancialinstitutionslikeplaintiffs.Suchinstitutionalinvestorsarebyfarthelargestbuyersoftax-exemptbondsissuedtofinanceprojectsinconjunctionwithprivatecorporatedevelopersandaccordinglyareinastrongpositioniftheywishtonegotiatebondtermsor

walkaway.7Over 60 percent of the $80million bond issue for onewaste-to-energyprojectwaspurchasedbyoneofthelargestinstitutionalinvestorsinthemunicipalsecuritiesindustry.

CalculationofDebtServiceCoverageProjectedoperatingresultsandtheresultingestimatesofdebtservicecoveragewere calculated using a calendar year, beginning January 1 and endingDecember31, toshowtheproject'sprojected incomeduring thatcalendaryearanditsprojectedcashneedsforalloperatingexpensesanddebtservice.The presentation of debt service on a calendar-year basis is one standard

practice in the industry.8 It is useful topresent the information in thismannerbecauseitshowshowmuchmoneytheprojectmustaccruefordebtservicethatisdueduringaparticularyearinthecourseofitsoperationsforthatyear.Debtservice can also be presented on the so-called bond-year basis. This is also astandard practice in the industry.9 Differences are explained by timingdifferencesbetweenthebond-yearandcalendar-yearformsofpresentation.In the municipal securities industry, the term independent engineer or

independent feasibility studyengineer refers to a separate entity, notownedorcontrolledbytheproject'sdeveloperorunderwriter,thatisqualifiedtodeliveranopinionastotheengineeringfeasibilityofaprojectfacility.10Thefirmsthatarequalifiedtoserveinthiscapacitytypicallyemployprofessionalswithsubstantialengineering training and experience in evaluating solid waste facilities andpowerplants.Aqualifiedsophisticatedbondpurchaserwouldbeawareofandunderstand this concept of independence, which is commonly used in themunicipalsecuritiesindustry.The underwriter must act in conformity with prevailing industry standards.

This includesmarketing the bonds only to qualified sophisticated institutionalinvestors.Theunderwritermusthaveareasonablebasistobelievethatthebondofferingmaterialsandotherinformationavailabletoprospectivepurchasersaresufficienttoenableaninvestortoundertakeareasonableinvestmentanalysisofthebonds.Thebondofferingmaterialsmustdisclosethemarketconditionsformunicipalsolid waste, including the risks associatedwith potential fluctuations in fuelcosts.

Thedebtpaymentstructuremustbeproperlyconstructed,andthecalculationsof debt service coverage included in the bond offering materials were noterroneous.Theindependentengineer'sindependenceisnotsubjecttochallengeunderthestandardsofthemunicipalsecuritiesindustry.The duties and responsibilities of underwriters exist in accordance with

customs,practices, andstandardsofcareprevailing in themunicipal securitiesbusiness for the protection of investors. Underwriters generally perform “duediligence,” essentially a reviewof relevant facts in order to have a reasonablebasis to believe that key representations contained in municipal securitiesoffering documents are reasonably accurate and complete and contain nomisrepresentationsoromissionsofmaterial facts thatwouldmake theofferingdocumentsmisleading.11

The nature and scope of the due diligence performed by an underwriter aredependent on particular characteristics of the offering. Due diligence is anaffirmativedefensetoaclaimunderSection11oftheSecuritiesActof1933forregistered offerings, and underwriters generally follow the same practices andprotocolsforunregisteredofferingssuchaslimitedprivatelyplacedofferingsofmunicipalbonds.12

Forinstance,seethefollowingSECreleasetext:

MunicipalUnderwriterResponsibilitiesIn theCommission'sview, the reasonablenessofabelief in theaccuracy

andcompletenessof the key representations in the final scopeof theworkperformedincludesuchmattersaswhetherthebondsaregeneralobligationbondsorrevenuebonds;thenatureofrevenuesourcesusedforrepayment;andthepurposeofthefinancing.Forexample,ifthefacilitybeingfinancedisamajorcityairport,theduediligencewouldbevastlydifferentthaniftheprojectbeing financed isnewbuses forasmall town. In termsofabsolutenumbers, most municipal underwritings are for small issuers in relativelysmall amounts, but in dollar volume most of the $2.4 trillion municipalmarket involves largebond issues (tensorhundredsofmillionsofdollars)forstates,citiesandmajorrevenueauthorities.Thetasksthatmunicipalunderwritersperformalsovarydependingupon

whetherthebondsarebeingmarketedwidelytothepublic,or,converselyas

here, are being sold though private placement to qualified sophisticatedinstitutionalinvestors.Inthelattercase,qualifiedsophisticatedinstitutionalbondinvestorsareexpectedtoperformtheirownprofessionalduediligencebefore buying bonds. The underwriter brings together a working team ofappropriateprofessionals toresearch,evaluate,andcontribute informationnecessary to understand the project and its financing and to have areasonable basis to believe that the bond offering documents makeappropriatedisclosurestoprospectivesophisticatedinvestors.The underwriter considers the professional expertise of the participants,

meetsfrequentlywiththeworkinggrouptoreview,evaluateanddescribethematerial facts concerning the project. The underwriter asks the projectdevelopers to explain their assumptions, estimates, projections andspecifications for the facility. Additionally, the underwriter reviews andquestions the engineering firm charged with producing an engineeringfeasibility study of the project that will be bound together with the bondofferingdocumentstobesenttopotentialpurchasers.Theunderwriteralsoascertains, with the assistance of counsel, that legal and regulatoryrequirements have been met, that the project is in compliance withapplicable laws,andthat thenecessarycontractsandotherdocumentationarelegallysufficient.Inacase like this, thevariousstepsundertakeninadvanceofmarketing

thebondstoqualifiedsophisticatedpotentialinvestorsallshareacommonpurpose—to permit the underwriter to have a reasonable basis to believethat such investors have available appropriate information to undertaketheir own reasonable investment decision as to whether to purchase thebonds.Officialstatement,andtheextentofareviewoftheissuer'ssituationnecessary to arrive at this belief will depend upon all the circumstances.Because of the varying types of municipal debt and extent of disclosurepractices, the Commission is not attempting to delineate specificinvestigativerequirementsinthisrelease.13

The investment bank's commitments committee has to review and finallyapprove the firm's underwriting and sale of the bonds. This was a rigorousreview process by the top managers of the investment bank.Municipal bondsales managers and others at the investment bank participate in the private

placementsaleofthebondstoqualifiedsophisticatedinstitutionalinvestors.Theinvestmentbankperforms its roleasunderwriter inconformitywithprevailingindustry standards for anunderwriterof aprivatelydevelopedwaste-to-energyplant to be financed by municipal bonds sold only to qualified sophisticatedinstitutionalinvestors.It is expressly stated in the “Notice to Investors” in a Limited Offering

Memorandum:

No representation or warranty, express or implied, is made by theUnderwriters as to the accuracy or completeness of the informationcontainedinthis[LOM],andnothingcontainedinthis[LOM]is,orshallberelied upon as, a promise or representation by theUnderwriters as to thepastorthefuture.

InvestmentOpportunitiesatTroubledMunicipalPowerPlants

Forthenextonetotwoyears,today'slowratesofinterestduetothecontinuingU.S. recession should continue to provide various opportunities for investorsacrosstheentireUnitedStatestotakeadvantageofdistressedmunicipalpowerplants at potentially bargain rates. TheU.S. FederalReserveBoard's desire tokeep interest rates low to enable theU.S. jobsmarket andhousingmarkets torecoverfromtheirdeepdecline,hasledtomanyfinancialfundsandinvestorstobe able to salvage troubled or previously non-financeablemunicipalwaste-to-energypowerplantsatprofitablerates.As we stressed at the outset of this chapter, new favorable environmental

legislationplusalsonewenergy legislationat the federal, state, andmunicipallevels hasmade it possible to finance or refinancemunicipal waste-to-energyprojectsinwaysthatwerenotpossiblebefore.Thisisduetothefactthat“waste-fuel power plants” can qualify for either municipal bond debt or theITC/accelerated tax depreciation. Municipal bond interest rates today are toolow,andthereforetheU.S.ITC/acceleratedtaxdepreciationisselectedbymostinvestors or funds today because it is currently a significantly more valuable

financialbenefit.Anyinvestors,partners,or investmentfundsthatare interestedinlookingup

any troubledwaste-to-energyplant for potential bargains can start bygoing tohttp://IssueVie. This is the most useful and comprehensive municipal bondmarketaccessinformationdatabaseintheentireUnitedStates.

SummaryMunicipalbond-backedpowerplantscanbeanareaforinvestmentopportunity.Some of the very best investment opportunities in the entire energy industrytoday are in purchasing at fire-sale prices many abandoned or distressedmunicipal bond waste-to-energy power plants in our very low interest ratemarket.Why?During the Great Depression of the 1930s, over 3,000municipalities in the

United States defaulted on their debt. However, in stark contrast to themanythousands of U.S. corporate bonds that became totally worthless, the vastmajorityofthedefaultedmunicipalbondsacrosstheUnitedStatescamebacktotheir fullparvalue.Thereasonwassimple:municipalbondspaidforessentialpublicservices,andas theeconomyrecovered, therewasmorethanenoughtopayback thepastbonddebtand, in fact, to issuebillionsmorenewmunicipalbondsfortheexpandingU.S.economy.The completion of today's abandoned or distressed waste-to-energy power

plantswillbeneededsoonbecausetheyfulfillessentialpublicservices.InChapter6,wediscussenergystorage.

Notes

1.RobertLambandStephenRappaport,MunicipalBondsBook(NewYork:McGraw-Hill,1986),86–87,156,251.2.LambandRappaport,MunicipalBondsBook,225–237.3.LambandRappaport,MunicipalBondsBook,276–294.4.See“SophisticatedInvestor,”GlossaryofMunicipalSecuritiesTerms,MunicipalSecuritiesRulemakingBoard,supranote2.TheMunicipalSecuritiesRulemakingBoard(MSRB)wasoriginallyestablishedbytheU.S.Congressin1975towriteinvestorprotectionrulesandregulationsofbroker-dealers,banks,andotherprofessionals.TheMSRBpublishesaglossaryof

officialdefinitionsofsignificanttermsusedinitspublicdocuments.“SophisticatedInvestor”isanimportantMSRBdefinitionbecauseonlysuchfinancialinstitutions’professionalsorverywealthyinvestorsarelegallypermittedtobesoldthese“nonpublicmunicipalsecurities”since“nonpublicsecurities”havepotentiallyhighlevelsofriskandfinancialcomplexity.5.StonyBrook:SUFFOLKCNTYNYINDLDEVAGYINDLDEVREVNISSEQUOGUECOGENPARTNERSFAC(NY)∗,December1,1998,http://emma.msrb.org/IssueView/IssueDetails.aspx?id=MS195470(accessedNovember12,2011);KennedyAirport:KIACPartnersCogenerationProject,December9,2010,http://emma.msrb.org/IssuerView/IssuerDetails.aspx?cusip=73358E(accessedNovember12,2011).6.PassaicCounty,NJ,PollutionControlFinancingAuthoritySolidWasteResourceRecoverRev.FosterWheeler,PassaicInc.PJ(NJ),December20,1990,http://emma.msrb.org/IssuerView/IssuerDetails.aspx?cusip=702760(accessedDecember9,2011).7.ExcerptfromLambexpertwitnessreportforamajormunicipalbondunderwriterinlitigationofnonpublicmunicipalissuanceofprivatebondstoinstitutionalpurchasersforamajorcity'sconstructionofanewreplacementwaste-to-energypowerplant.See,forexample,DeaneTr.at277–279;ThorntonTr.at67–72.8.LambandRappaport,MunicipalBondsBook,210,236.9.See“DebtService,”GlossaryofMunicipalSecuritiesTerms,MunicipalSecuritiesRulemakingBoard,supranote2.Annualdebtservicereferstothetotalprincipalandinterestpaidinacalendaryear,fiscalyear,orbondfiscalyear.10.LambandRappaport,MunicipalBondsBook,86–87.11.LambandRappaport,MunicipalBondsBook,226–227,242–243.SeealsoU.S.SecuritiesandExchangeCommission(SEC),MunicipalSecuritiesDisclosure,ReleaseNo.34-26100,53Fed.Reg.37778(September22,1988)(SECRelease),PartIII:“MunicipalUnderwriterResponsibilities.”12.See,generally,SEC,MunicipalSecuritiesDisclosure,ReleaseNo.34-26100,53Fed.Reg.37778(September28,1988)(SECRelease),PartIII:“MunicipalUnderwriterResponsibilities”;DavidS.Ruder,Chairman,SEC,AddressbeforetheInvestmentAssociationofNewYork,UnderwriterResponsibilitiesinMunicipalBondOfferingsafterWPPSS(Sept.22,1988),www.sec.gov/news/speech/1988/092288ruder.pdf;andGlossaryofMunicipal

SecuritiesTerms,MunicipalSecuritiesRulemakingBoard,availableatwww.msrb.org/msrb1/glossary/glossary_db.asp?sel=d.13.SEC,MunicipalSecuritiesDisclosure,ReleaseNo.34-26100,53Fed.Reg.37778(September28,1988)(SECRelease),PartIII:“MunicipalUnderwriterResponsibilities.”

Chapter6

EnergyStorage

Apennysavedisapennyearned.—BenjaminFranklin

Nuclear power plants, coal power plants, gas power plants, and hydroelectricpowerplantsallcanproduceenergysevendaysaweek,24hourseachday,and365 days each year. Such daily, weekly, monthly, and yearly consistency ofenergy production from a plant is the required contract financial payment orguaranteedincomestreamdemandedbymostinvestorsorbanklenders.Incontrast,solarpowerandwindpowerfarmsproducepoweronlywhenthe

sunshinesorwhenthewindblows.Theyusuallystandidlemostoftherestofthetime.Often,theymustspilloffextrapowerifitcannotimmediatelybeusedinproduction.Sciencedoesnot yet havegiant new technologically innovativefail-safe batteries necessary to store huge amounts of wind or solar powerovernight.Thus,bythemselves,solarandwindpowerusuallycannotbeusedfora financial loanguaranteecoveredby“liquidateddamages” fora seven-day-a-week,24-hour-a-daycontinuousstreamofenergynecessaryforthevastmajorityof investors or bank lenders.Onlywith another extra backup sourceof powerthat can kick in each and every day, exactly when needed, can the powercompanyensurecontinuouspowerdeliverytoindustrial,commercial,municipal,federal,orretailcustomers.Also,itisvitaltonotethateverysuch“auxiliarybackupenergysupplyplant”

fueledbygas,oil,orcoal,whichisneededtosuddenlyprovideelectricpowerinthepitchdark for a solarplant,or in thewindless air for awindenergy farm,usuallyismuchmoreexpensivetorunperhourthananynormalstandardpowerplantsthatarealwayson,runningsteadily.Inshort,therearehighextraexpensestostartandrampupasecondpowerplant,aswellasextracosts toshutdownthatauxiliarypowerplantatvarioustimesofthedayornightduetolight,dark,storms, or any and all required unpredictable times, or due to mechanical orelectric failure and for unpredictable lengths of each day or night, or inhurricanes,hail,tornadoes,earthquakes,floods,fires,heatwaves,orhighseas—conditionsthatmaylastdaysorweeks.

CheapEnergyStorage—TheMostVitalGameChangerintheWorld

Solar power and wind power will not decrease the world's dependence ontraditional oil, coal, gas, or other fossil fuels until energy storage techniquesbecome widely available and cost less. “The unique challenge of the energysector is that electricity is the only product that is consumedwithin the samemillisecondthatitisgeneratedanddelivered,”saidTerryBoston(CEOofPJM,the largest electric transmission grid in the United States) at PJM's annualconference. “Only by finding a way to store energy can the potential ofrenewableenergiesbefullyrealized.”1

Formany decades, the primarymeans of storing energywas calledpumpedstorage.Themethodofpumped storagewasverybasic anddatesbackbeforetheRomans. InEuropeand theUnitedStates,old-fashionedplumbingwasfedfrom a holding tank of water placed on the rooftops of many buildingsthroughout a city. Thewaterwas pumped up to the tank on the roof at nightwhenelectricpowercostleast.Later,thatwaterwasreleasedanddescendedbygravitythroughpipestobathroomsorkitchensineachapartment.Old-fashionedtoiletswereflushedbypullingachainonahighwatertank,whichreleasedthewaterbygravity.Pumped storage for cities or factories today is simply a giant versionof the

same gravity-fed system whereby millions of gallons of water in a lake orreservoir ispumpeduphill toamuchhigher lake, tank,or reservoirduring thenight,when the electric charges for pumping are the very lowest. That storedwater is later released to flow downhill to drive turbines, which then driveelectricgenerators.Oneofthenewestsolarenergystoragesystemsoperatesonanequallysimple

technology: the hot thermos bottle. For example, at solar power plants inNevada, California, Arizona, and Europe, two solar power corporations—AbengoaSolar, aSpanishutility, andSolarReserveLLC,ofCalifornia—havebothinnovatednewenergystoragedevicesusingpairsofhugetanksofboilingmolten salt, which continues to deliver 6 to 12 hours of extra electricity,respectively, for heating, lighting, cooking, computing or for air conditioning,afterthesunhassetandtheprimarysolarpowerplantshavegonedark.Thesepairsoftanksofmoltensaltareoften122feetindiameterandatleast

34 feet deep, which can hold and store 40 percent of the heat created by the

powerplantduringtheday.Thesegiant-sizedsolarplantsareveryexpensiveandusemanyhigh-intensity

mirrors tofocusthesun'sraysonaliquidcontainedintubesthatareheatedtovery high temperatures.The liquid is used to boilwater and create steam.Byusingasteam-turbinegenerator,electricityisproduced.Abengoa'sSolanaplantinArizonareceiveda$1.45billionloanguaranteeforthe250-megawatt(mW)plant, which will heat 70,000 homes, and it has signed a 30-year contractagreementtosellelectricitytoArizonaPublicServiceUtilityCompany.2

Electricity from solar plants is especially expensive today at a time whennaturalgaspriceshaveplunged,makingnaturalgas–generatedelectricitycheapbycomparison.Utilitiesthatareunderstatemandatestobuymorecleanpower,say solar or wind power, usually cannot justify the extra economic expenseunless a specialDepartmentofEnergy (DOE)government loan is provided tothe plant, as in Abengoa Solar and Solar Reserve. In the meantime, SolarReserve also has power sales agreements with NV Energy, Inc. and PG&ECorp.,andexpectstohavethetwoplantsinserviceby2014.Eachwillcost$650million to$750million.Becauseof thisgoldenpromiseofmolten salt energystorage, this “concentrated solar energy” sub-industry has received largeDOEfinancial grants, even in 2011 during the economic recession. Solar ReservereceivedaDOEconditionalloanguarantee$737millionfora110-mWplantinNevada, and Solar Trust of America received a $2.1 billion DOE loanguarantee.3

TheU.S.NationalRenewableLaboratory,partof theDOE,says,moltensaltstorageis“proventechnology.”Moltensalttanksretain94to96percentoftheheatforlaterusewhentheskyisdark.Thesemoltensalttanks’extendedenergystoragemaymakeitpossibleforpublicelectricutilitiesandalsoelectricalgridoperators to guarantee amounts of power on specific electric lines on specifictimeschedules.Governments,banksandinvestorsbackedthosefinancings.

OpeningtheMarketforHistoricEnergyStorageFinancing

November 10, 2011, was potentially a historic landmark day for U.S. energystorage.For the first time inhistory,bothRepublicanandDemocraticsenatorsproposedanewLawcalled“TheStorageTechnologyforRenewableandGreen

EnergyActof2011” (STORAGE).Thisproposed lawallows fora20percentinvestment tax credit up to $40 million to finance all energy storagetechnologies. If passed by Congress this is expected to jump start the entireenergy storage industry and has a truly enormous potential to increase thereliability,security,andefficiencyofthisnation'selectricgrid.Energystoragetechnologieshelpallformsofenergy,whetheritbenaturalgas,

coal,nuclear,solar,wind,orsomeothergreenenergytechnology,inordertorunmoresmoothly.Innovationsinenergystoragehavebeentestedontheelectricitytransmission grid and it has proven this tax credit can help all kinds ofdeveloperstosecureequityanddebtfinancingfortheirprojects.Energystorageistrulyacomplementarytechnologywhichcouldexpandand

significantly improve the performance of all forms of electric energy. Prior tothis proposed law,U.S. Federal InvestmentTaxCredits could only be used tofinanceenergythatwastobeimmediatelyusedonelectrictransmissionlinesofaparticulargrid.The chairman of the U.S. Federal Energy Regulatory Commission, John

Wellinghoff,hadstatedoverayearagothat“TheUnitedStatesmustendthisoldlawinordertoreducetheverysignificantriskstowindenergyandsolarenergy,which absolutely require storage capacity to cover the hours of the daywhen“The sun does not shine and the wind does not blow.” Less than two weeksbefore the Senate Storage Law was proposed, The U.S. Federal RegulatoryEnergyCommission (FERC) released its longanticipatedFinalOrderNo.755on frequency regulation compensation. The FERC determined that the currentfrequency regulation compensation practices of regional transmissionorganizations (RTOs) and independent system operators (ISOs), which do notaccount for the inherently greater amount of frequency regulation serviceprovided by faster-ramping energy resources, are unreasonable and undulydiscriminatory.TheFERC's proposedorder also opens up the possibility for aprofitable new market in energy storage. Managers of wholesale electricitysystems, such asRTOs and ISOs,must buy some power each day in order tomaintainthefrequencyoftheelectricityovertheirsystems.4

Regulatingfrequencybyaddingelectricitytotransmissionsystemsatspecifictimes andplaces canbe complex.Usually, the faster andmore accurately thatcurrentcanbeadded,themoreeffectivelyitcanrectifyfrequencyproblemsonthegrid.Frequencyproblemsunderminethestabilityofthegridandinextremesituationscanleadtoelectricitytransmissionsystemfailuresandblackouts.By

law, managers of the systems must purchase electricity fairly and withoutdiscriminationamongsellers.However,priortotheFERC'sneworderNo.755,mostRTOs and ISOs thought thismeant they had to pay the same amount ofmoney per kilowatt for electricity used for frequency regulation purposesregardlessofhowquicklyoraccuratelythesellerofthatelectricitywasabletosupply it to the grid. This practice shut energy storage technologies, such asadvanced batteries, out of the frequency regulationmarket.Although batteriescanaddelectricitytothegridmuchquickerandmoreaccuratelythannaturalgasproducers, the per kilowatt cost of battery power electricity is higher than bynaturalgaspeakergeneratorswhichtooklongertoberampedupandplacedonthegrid.Now electric transmission system managers must consider the quality and

speed of frequency regulation service in setting the prices. The FERC's newregulation puts electricity vendors who use energy storage systems into thefrequency regulation business, and helps ensure them a profit. The need forfrequencyregulationservicewillriseasvariable,renewableenergyisaddedtothegrid.Each100MWofwindenergyrequiresabout3to5MWofadditionalfrequencyregulation.Normalmarketforceswillalsoencouragetheadditionoflevel-cost renewable energy to the grid and expand the size of the frequencyregulationmarket. The big volume energy story of the next decade is widelyexpected to be the increasing use of natural gas for base load electricitygeneration. Ironically, this could be good news for wind and solar energybecause natural gas prices historically have been highly volatile.While shalenaturalgaspricestodayareverylow,naturalgaspriceswillprobablybevolatileinthefuture.Utilitieswillhedgeagainstthatvolatilitybyenteringintolongtermsupply contractswith renewable energy generators,whose fuel cost is usuallyfixed.The frequency regulationmarket is forecast tobecome large andhighlyprofitable.Itisonlybyfurtherdevelopingtheseinnovativeenergystoragetechnologies,

like molten salt tanks, that new wind power, solar power, and other greenenergies can be integrated into the existing electricity transmission systems.Because the electricity grids of both theUnitedStates andCanada, aswell asthoseofEurope,keepgrowingandbecomingmoreintegrated,itisessentialthatthese innovative energy storage technologies be developed, funded, andinstalled.John Wellinghoff was a keynote speaker at the 2010 EPRI-PJM Energy

StorageSummitwhereheforecastedthe“broadadoptionofstoragetechnologies

across the board, from flywheels and batteries for frequency regulation tocompressed air and pumped hydro for wholesale and retail markets. Theinnovation of inexpensive energy storage technologies must provide reliableavailabilityofenergyatall times,butmustalsobebetterbalanced in termsofcoststhroughouttheyear.”5

CategoriesofEnergyStorageTechnologiesEach of the different major types of energy storage technologies have verydifferent lengths of time that each one is truly able to store amounts ofelectricity.James McIntosh, director of renewable resources integration and grid

architecture at the California Independent [Electric Transmission] SystemsOperators(ISO),hasspelledoutinthefollowingparagraph,howmanyminutes,versus how many hours, versus how many days, each of the major types ofenergystoragetechnologiescanactuallystoreelectricity:

1.Supercapacitorsnormallyareonlyabletoeffectivelystoreelectricityforupto15minutes.2.Flywheels and Small Batteries can be effective for electricity storage fordurationsof15minutesuptoonehour.3.StrongerBatteriesandCompressedAirEnergyStoragecanbeeffectiveforelectricitystoragefordurationsofonehouruptofourhours.4.LargeBatteries,Pumped-HydroStorageandCompressedAirStoragecanbeeffectiveforstoringelectricityforfourhoursupto24hours.5. Finally, only Compressed Air Energy Storage held in giant caves orabandoned mines, or Pumped Hydro Energy from giant reservoirs can beeffectiveforstoringelectricityforseveraldays.6

PumpedHydroElectricityStorageInvariousnations, everynight,when thecostofelectricity is low,water frommany hundreds of low elevation reservoirs has been pumped uphill to muchhigherelevationreservoirs.Inthedaytimewhenthepriceofelectricityishigh,waterfromallofthehundredsofmuchhigherreservoirsisturnedoninorderto

flowbackdownhillinmanypipesthroughmanyturbinesspecificallyinordertopowerthemanyelectricitygeneratorsatthelowerelevationpowerstations.Underground pumped hydro storage facilities have been proposed as a new

method of extending pumped hydro storage to a wider variety of geologiclocations. A Canadian company, RiverBank Power, develops, constructs, andoperates run-of-river and pumped storage hydropower facilities in North andSouthAmerica.Withoffices located inPortland,Oregon;Logan,Utah;Rigby,Idaho;Toronto,Canada;andLima,Peru;Riverbankiswellpositionedtobecomea market leader of hydropower in North and South America. Riverbank'sdevelopment capacity of 1,100 MW of run-of-river and over 10,000 MW ofpumped storage hydropower projects represents the largest hydropowerdevelopmentpipelineintheworld[http://riverbankpower.com].“Pumpedhydroenergy”isbyfar,theworld'smostwidespreadformofenergy

storage.However,itisexpensivetoacquiretherealestatesites,andtherights,andobtainallthelegalpermitstodigtwoverylargereservoirsattwodifferentaltitudes and then construct, transport, install, connect and test all of thepumpingequipmentbetweenthetworeservoirstooperateeverynightandday.Also,itcantakeuptoadecadeinleadtimetodecide,plan,financeandfinallyto develop a pump storage facility from scratch and to ensure it is fullyoperational.Nevertheless,acrossAmerica,this“pumpedhydroelectricity”accountsfor2.5

percentoftotalenergygenerationintheUnitedStates.Asof2011,thiswastheworld'slargesttotalamountofelectricityenergystoragecapacity.

CompressedAirStorage“Compressed Air Storage” is the second potentially huge volume electricityenergy storage system in theUnited States and across the entireworld. Onceagain, at nightwhen electricity energy is cheapest, compressed air is pumpedintogiantcavesorabandonedmines,thensealedshutandstored.Atalatertime,when peak energy needs are greatest and its cost is highest, that storedcompressedairenergycanbeturnedonandusedtopowerafactoryorusedintheelectricitytransmissiongrid.Becausemanygiantcavesorabandonedminesinolderindustrialregionsare

empty and left vacant, they are much cheaper to convert to compressed airstorage than any other newly built container space. Also, on average,compressedairstoragefacilitiesonlytakethreeyearstobuildcomparedtosixto

tenyearsittakesforpumped-hydrostoragefacilitiestobebuilt,andcompressedairisratedatsignificantlylessperkilowatthour.There are caves and abandoned mines in many regions across America in

statesalongthePacificcoastfromWashingtontoSouthernCaliforniaandfromstatesalongtheCanadianborderdowntoNewMexico,TexastoNorthCarolina.Recently there has been a good deal of interest from states with large

underground chambers left from their earlier industrial centers, such asPennsylvania, Ohio, and the Great Lakes, as well as in areas in the RockyMountainswherehighwindvelocitymakesitpossibletostorewindenergy.AsummaryofCompressedAirEnergyStorageCAESbySimonPockleywas

posted on the Internet.7He spells out the basic science, history of key powerplantsandprovidesdiagramsofundergroundandabovegroundCAESsystems,plusphotographsofthetwomajorplantsintheworld.For over 30 years compressed air energy storage has been used in plants in

Huntorf,Germanyand inMacIntoshAlabama ingiant caveswhichhavebeensuccessful. In fact, the Alabama CAES improved upon the German Huntorfdesign by incorporating an air to air heat exchanger to preheat air from thecavernwithwasteheatfromtheturbines.Theplanthasfunctionedwithover95percentreliabilitydemonstratingtheviabilityofCAEStechnologyinsupplyingancillaryservices,loadfollowingandintermediatepowergeneration.TheMacIntosh110MWCAESsystemwasdeclaredcommercialonMay31,

1991.Thecaveis220feetindiameterand1000feetdeepforatotalvolumeof10millioncubicfeet.Atfullcharge,thecavernispressurizedto1100psianditisdischargeddownto650psi.Duringdischarge,340poundsofairflowsoutofthecaveeachsecondanditcandischargefor26hours.Compressedairfeedsa100MWgas-firedcombustion turbine. Incontrast toconventionalcombustionturbines, thisCAES-fed systemcan start in 15minutes insteadof 30minutes,usesonly30 to40percentof thenaturalgas,andoperatesefficientlydown tolowloads(about25percentoffullload).Today inAmerica, theU.S.Department of Energy has financially backed a

group ofmunicipal utilities in Iowa and in nearby states in developing a newenergyparktointegratea75to150megawattwindfarmwithCAEStechnology.ThisIowaprojectisexpectedtocost$200millionandoperateby2011withthecapacitytostore200megawattsofpower,enoughforseveraldays.

InnovativeStorageTechnologies

Alargenumberofinnovativecompaniesareexperimentingwithawidevarietyofnewcompoundstoexpandtherangeofnewenergystoragetechnologies.Forexample,acompanycalledESOplanstomanufacturezincairbatteryforlargescale stationary storage applications. Aquion Energy is to manufacture lowtemperature sodium carbon batteries for large scale stationary appliances.HighviewPower is tobuildCryogenicEnergyStoragePlantswhichuse liquidairastheenergystoragemedium.GEplanstomanufacturemoltensaltsodiumnickel chloride batteries for mobile and stationary electricity storage. SodiumsulferbatteriesmanufacturedbyNGKInsulatorsareconsideredtheonlymatureutility scale electrochemical storage device on the market. Yet, NatrionCorporation proposes to develop a new type of sodium sulfur (NaS) batterysuperiortoNGKInsulators'moltensaltversion.Zincbromineflowbatteriesforlarge scale stationary electricity storage are being developed. Zincwhich is acomponentofseveralinnovativeenergystoragefirms’compoundsistheworld'sfourth most common metal, so it is widely available if one of these energystoragefirmssucceedsglobally.

U.S.RegionalMulti-EnergyStorageCollaborations

“NewYorkStateexpectsverysignificantgrowthinenergystoragecapacityforexcess wind and hydropower, according to Robert Pike, director of marketdesignforNewYork ISO.That isbecauseNewYorkalreadyhas3percentofpeakwindloadandabout7,000mWofwindinthequeue,whichwouldbringitto 25 percent of peak load capacity. New York State has already installed acentralizedwindforecastingsystemintegratedasa‘dispatch tool thatmakes itpossible to foresee wind changes and commit conventional wind storageresourcesaroundthem.’”8

Pike noted that New York State has 1,500 mW of pumped hydro storagespread between Niagara Falls and Albany and “significant geologicalopportunities”(incaves)toaddcompressedairenergystorage.In other regions of the United States, there are various examples of quite

similarcoordinationandcollaborationbetweenneighboring“gridsystems.”Thetopthreewind-richstates”ofTexas,Kansas,andNebraskahaveacleargoalindevelopingtheirlargescalebulkstorage.JayCaspary,directoroftransmissiondevelopmentforSouthwestPowerPool,

sees “huge potential for off-system energy storage export. There are a lot ofgeologic formations in Southwest Kansas, Western Oklahoma and the NorthTexas ‘Panhandle’ thatwouldsupportcompressedair storage.”Also, therehasbeen a lot of interest in the potential for large pumped hydro facilities in theMissouriRiverValley.“Iseesignificantvaluetooperationsandmarketshavingstoragetohelpusdealwiththeseintermittentresources.”9

In a totally different type of regional multi-energy collaboration, “theUniversity of Delaware, PJM, and other partners in the Mid-Atlantic GridInteractive Car Consortium (MAGICC) have been running a demonstrationproject involving grid integration of plug-in electric vehicles (PHEVs). Thevehicles feature a two–way flow of power. They're equipped to respond to asignal fromPJManddischargepower from theirbatteriesback to thegrid forfrequencyregulationservice.”10

Electriccarsare inuse foronlyaboutanhouradayand idle the restof thetime. Dr. Willett Kempton who runs the grid integration of plug in electricvehicles demonstration project argues these PHEVs “present a “large storageresource.”Hedescribeditas“storageattheendofthedistributionsystem.Wewanttomakeuseofall thatstoragethat'soutthere.”Oneoftheadvantagesofgrid-integratedvehiclesis“usingsomethingthatsomebodyelsehasboughtandputtingnewcontrolsonit.You'renotpayingfor thebattery:you'renotbuyingthewholesystem.”11

FlywheelTechnologyEnergyStorageHastheLowestCycle-Life-Cost

Flywheelshavebeenusedinfactoriesandphysicsclassesforover170years,aswell as in various energy industries in order to generate ever faster energyproduction easily, inexpensively, and dependably. Flywheel technology is alsobeingusedforregulationservice.BeaconPowerwasrunningandbuilding20-mW flywheel installations inNewEngland andNewYorkState.The plant inNewEnglandwasinoperationsincelate2009.ConstructionwasstartingontheplantinNewYorkState,andasecondwasintheapprovalprocess.F.WilliamCapp,president andCEOofBeaconPower, likened flywheels to

“energystoragemachines.”Theycost$25to$30millionfora20-mWflywheelinstallation—theyhavealonglife,capableof20,000cyclesover20years.Capp

saidthe“cycle-life-costisthelowest[ofany]resourcewe'reawareof.”12

Olderflywheelenergystoragesystemsusedalargesteelflywheelrotatingonmechanicalbearings.Newersystemsusecarbon-fibercompositerotorsthathaveahighertensilestrengththansteelbutaremuchlighter.Newerflywheelsystemshover,spinningbetweenmagneticbearings.Theyeliminatemechanicalbearingsmaintenanceanddangerousfailures.13

Today's lithium ion polymer batteries can operate for only limited periods,such as 36months.Yet,modern flywheelsmay potentially have the ability tospinindefinitely.FlywheelsbuiltaspartofJamesWatt'ssteamenginehavebeencontinuouslyspinningforover200years.WorkingmodelsofancientflywheelshavebeendiscoveredinAsia,Africa,andEurope,whichwereusedformakingpottery, milling of grains, and sharpening weapons. In short, of all energystoragemechanisms,flywheelsreachhighspeedsmorequickly,andtheycanrunpotentiallyindefinitely,sotheyarebeingexperimentedonwidelythroughouttheworld.The vital weakness of flywheel technology for energy storage is the tensile

strength of the physicalmaterial of the rotor.When the tensile strength of theflywheel isexceeded, theflywheelwillshatter,causinga“flywheelexplosion”in which there are fragments of metal that are lethal. As a result, modernflywheel rotors made of carbon-fiber composite polymers become clouds ofdust,notsteelshardsiftheyexperienceaflywheelexplosion.14

However,BeaconPower,akeymanufacturerofflywheelbasedenergystoragesystemswasforcedtofileforbankruptcyonOctober31,2011becauseitscostswerehigh:muchhigherthanthecurrentextraordinarilylowcostofshalegas.

SupercapacitorsorUltracapacitorsSupercapacitorsareanotherkeyenergystoragedevicewhichnowhavebecomevital to the automotive, aircraft, and new electronic and computer devicesindustries.Theyarebeinginnovatedupontobeusedinenergystoragedevicesfor power plants. A supercapacitor charges in seconds, has no danger ofovercharge,havehighratesofchargeanddischargebuttraditionallytheycouldonlyprovideveryshorttermenergystorage.However,supercapacitorstodayhavehighcycleefficiency(over95percentor

more). In fact,newsupercapacitorsproducersclaim theycancyclemillionsoftimes=10-to12-yearlife.Someofthenewestsupercapacitorsaretinyandalso

biodegradableandcanbepoweredbybodyfluidsandusedinmedicaldevicestorepoweranddischargeenergyinsidethehumanbody.Supercapacitorsdisadvantagesarethat their lineardischargevoltageprevents

theuseofthefullenergyspectrumandtheirlowenergydensity—typicallytheyhold one fifth to one tenth the energy of an electrochemical battery.Supercapacitor cells have low voltages—serial connections are required toachievehighervoltages.Also,voltagebalancing is required ifmore than threecapacitorsareconnectedinseries.Historically, supercapacitorswere initially used by theU.S.military to start

enginesoftanksandsubmarines.Mostapplicationsofsupercapacitorstodayareinsmallappliances,handheldelectronicsandhybridelectricvehicles.Mosthybridvehiclesuse42Vsupercapacitors.GeneralMotorsdevelopeda

pickuptruckwithaV8enginethatusedthesupercapacitortoreplacethebattery.The efficiency of the engine rose by 14 percent. The supercapacitor suppliesenergy to the alternator. Toyota has developed a diesel engine using the sametechnologyanditisclaimedtousejust2.7litersoffuelper100km.From the standpoint of supercapacitors’ capability for being used in power

plants,theyneedbatteriestostoretheenergy.Theyarebasicallyusedasabufferbetween the battery and various types of power devices.UPSbattery backupsprovide power protection for all kinds of electrical equipment. As a result,supercapacitorsarebeingmergedwithbatteriesintoakindof“hybridbattery.”Supercapacitorscanbechargedanddischargedhundredsofthousandsoftimes,whichbasicbatteriescannotdo.Becausethepriceofsupercapacitorsisexpectedto decline, supercapacitor manufacturers argue that virtually anything nowpoweredbybatteriescouldbeimprovedbyasupercapacitorenergysupply.Theycanbemadeinanysize.Theirlightweightandlowcostmakethemavaluableaddontobatteriestodevelopnewtypesofenergystoragedevices.Today,supercapacitorsareusedforenergystorageforshortperiodsoftimein

powerplantsandotherenergystoragesituations.Inordertoexpandtheiruseinpower plants and sizable energy storage supercapacitors must be furtherdevelopedtomergewithbatteriesonalargescale.

SummarySincerenewablepowerplantsdon'tsupplypower7daysaweek/24hoursaday,their future success will be determined by energy storage: The new energy

storagelaw'sinvestmenttaxcredits&FERC'snewrulehelp.Manynewcheapenergystoragetechnologiescouldbethemostvitalgame-changersintheworld.Pumpedhydroenergystorage,whichistheoldestandmostwidelyusedmethodintheworldforcenturies,continuestobetheleader.But,compressedairstorageinabandonedminesandcavesisnowbeingbuiltinvariouspartsoftheUnitedStates and the world and it is a much cheaper and quicker built storagetechnology toprovideenergystorage forwhole statesand regionsofanation.Solarenergyhasnowfullydevelopedgiantmolten salt tanksnext to the solarplants, so these are now a “U.S. government proven storage technology” topower the generators on solar plants for 8 to 12 hours when the sun is notshining.Yet,solarplantstodaycancostbillionsofdollars.Likewise,newelectricpowercenterscontainingmanylithiumionbatteriesare

beingusedtosupplytemporaryelectricityforpowerplantsinthenationofChileand are beginning to be used in the United States. Electric car fleet parkingdepots are alsonowbeingused to supply energy forpowerplants.Flywheels,whichlastforseveraldecadesorevenpotentiallyover100yearsofcontinuousoperation, are being introduced into energy power storage systems as thelongest-lastingformofenergystorage,buttheytoo,areexpensive.In short, various innovative energy storage technologies are now expanding

therangeoftypesofenergythatcanbecomeconnectedtothepowergridsacrosstheUnitedStatesandotherregionsandnations.Thisenablesmorewidespreadgeographicandcollaborativeenergydevelopmentthatcouldultimatelylowertheregional, national, and international cost of energy, widen the availability ofenergy, and also improve the civilian and military security of energy gridsystems.However, the key question remains whether shale natural gas, currently the

lowestcostenergy,willpreventvitallynecessarynewinvestmentsinwind,solarpanel, solar thermal, wave, tidal, geothermal and all the other alternativeenergies to develop and prevent funding all new energy storage technologiestheyrequire.InChapter7,wediscussshalenaturalgas.

Notes

1.TerryBoston,speechonNewEnergyStorageTechnologies,[2010EPRI-PJMStorageSummitonApril20,2010“EnergyStorage:TheNewDimension”(accessedon9/9/2010)APDFofthisdocumentisonPJM's

websiteunder“Conferences.”ElectricPowerResearchInstituteandPJMInterconnectco-conferencesonEnergyStorage2010.PDFexcerptsfromconferencespeechesbyU.S.DepartmentofEnergy,FERC,EnergyIndustryprofessionalsonenergystorage.2.UciliaWang,“DOEOffers$737MLoanGuaranteeforSolarReserveProject,”GigaOM,earth2tech(blog),May19,2011.3.Wang,“DOEOffers$737MLoanGuarantee.”4.http://theenergycollective.com/jim-greenberger/68565/good-news-energy-storage-story.5.“EnergyStorage:TheNewDimension,”EPRI-PJMEnergyStorageSummitProceedings,April20,2010,www.pjm.com/committees-and-groups/stakeholder-meetings/symposiums-forums/~/media/committees-groups/stakeholder-meetings/epri-pjm/postings/2010-epri-pjm-storage-summit-proceeding.ashx.6.“EnergyStorage:TheNewDimension,”EPRI-PJMEnergyStorageSummitProceedings.7.SimonPockley,“CompressedAirEnergyStorage(CAES),”May19,2008,www.duckdigital.net/Research/CAES_Assignment.doc8.“EnergyStorage:TheNewDimension,”EPRI-PJMEnergyStorageSummitProceedings.9.Ibid.10.Ibid.11.Ibid.12.“EnergyStorage:TheNewDimension,”EPRI-PJMEnergyStorageSummitProceedings.13.www.distributedenergy.com/may-june-2007/primer-flywheel-technology.aspx.14.M.M.El-WakilPowerPlantTechnologies(NewYork:McGraw-Hill,1984).

Chapter7

ShaleNaturalGasandItsEffectonRenewablePower

Successishalfluckandhalfbrains.—KemmonsWilson,founderofHolidayInn

Aswas described in the chapter on coal, renewable power projects operate inworld of competing technologies and fuels. As was also mentioned, recenttechnological advances have allowed large amounts of U.S. shale gas to becheaply developed. These new technologies include horizontal drilling andhydraulic fracturing. One company, Mitchell Energy, worked out how“slickwater” fracturing combined with horizontal drilling could free gas fromdense shale rock previously uneconomical to develop. Last year, the firm'sfounder, George Mitchell, received the Gas Technology Institute's lifetimeachievementaward.1

FrackingGas production rates are dependent on porosity or the gaps between rockparticles,andpermeability,ortheabilityoffluidstomovethroughtherocksdueto the connectedness of those gaps. Fracking or the forcing of fluids at highpressureintoawellbore,willcreatecracksinhydrocarbon-bearingrockthatwillallowthegoodstufftoflowout.2Arecentconcernisthatthewastewaterfromshaledrillingoperationshasahighradioactivity level.Theconcern is that thiswaterisbeingsenttowastewatertreatmentfacilitiesthatarenotabletoproperlytreatitandisultimatelybeingreleasedintoriversandstreams.Thiscouldcauseproblems with drinking water supplies. Since the fracking process is new,regulatoryagenciesarenotusedtodealingwithissuesofthistype.U.S.shalegashelpswithsecurityofenergysupply in that it isnot imported

fromanunfriendlycountry.ForeignfirmsareinvestinginU.S.shalegasplaysinorder to learn about the business. However, this currently cheap natural gas

makes itdifficult for renewablepowerplantsanddemand-sidemanagement tocompete in the electric powermarket.Regulators that had encouraged electricutilities to sign power purchase agreements with renewable projects are nowconcerned that the future price for power from renewable projectswill be toohighoverthelongterm.Thislowpricefornaturalgasisalsomakingitdifficultforcoalpowerplantstocompete.TherearealsopotentiallargeshalegasreservesinChinaandcoalbedmethane

andtightsandsgasinIndia.PolandaloneisestimatedtoholdshalegasreservesequaltohalfofEurope'sexistingconventionalreserves—afactalreadyalteringthestrategicbalancebetweenEuropeanditssoon-to-be-formerenergyoverlord,Russia.3 On February 28, 2010, the Department of Energy's (DOE) EnergyInformation Administration (EIA) reported that the United States produced21.57trillioncubicfeet(Tcf)ofnaturalgasthankstoshalegasproduction.Thisisjustshortofthe1973recordof21.73Tcf.4

NewAttitudesinNaturalGasThis recentabundanceofnaturalgas isamajorchangefromtherestrictionontheuseofnaturalgastogenerateelectricityundertheFuelUseActandProjectIndependenceduringPresidentJimmyCarter'sadministration.Alargenumberofnuclear and coal plantswere partly spawned by the FuelUseAct,whichwasrepealed in 1987. In July 1989, theNaturalGasWellheadDecontrolActwassignedintolaw.Thisactallowedforthecompletedecontrolofnaturalgaspricesby January 1993. In the early tomid-2000s in theUnited States, therewas aconcern that a dependence on natural gas would change America from beingdependent on one Organization of Petroleum Exporting Countries (OPEC) toanother.ThisnewOPECwouldbecountries thathad largedepositsofnaturalgasthatwouldbeshippedtotheUnitedStates.Renewable projects face a situation where they have to compete against

natural gas–fired combined-cycle power plants since they are able to getpermitted and built cheaply. This creates a classic tactics versus strategychallenge. Natural gas plants can be built quickly, but there is no long-termenergy plan for theUnited States.Most politicians are in office for only fouryears.This is not a long enough time to set overall energypolicy.Developersandregulatedutilitiesalsounderstandthatnaturalgas–firedpowerplantswillberequired to back up renewable power plants. Unlike coal plants, natural gas

turbineenginescanbestoppedandstartedrelativelyquicklyandhaveabetterabilitytocurtailtheiroutput.Intherecentpast,thepriceofnaturalgaswasconsideredveryvolatile.Itwas

possibletofixadeliveredpriceofnaturalgasusinghedges.Thisinvolvedcostandpotentialcounterpartyrisk. Industrialcustomerswouldbeconcernedaboutusing natural gas for theirmanufacturing processes due to this concern. Nowindustrialsmayfindthatthereisanewshalegasdepositintheirbackyardorthelocalarea.

LiquefiedNaturalGasAnumberofliquefiednaturalgas(LNG)terminalshavebeenbuiltintheUnitedStates to import natural gas from places like Angola, Qatar, and Trinidad. Inthesenaturalgas–richcountries, it isnotuncommonfor theproductioncostofthegastobeaslowas$1/millionBritishThermalUnits(MMBtu).Asaresult,theeconomicsofshippingthisgas toforeignmarketswork.Unlike theUnitedStates, these countries have not developed pipeline and overall natural gasinfrastructure that allows for the widespread use of this domestic gas. Theseexportcountrieshavealsounderstatedthetruecostofnaturalgasfordomesticconsumptionandhaveonlyrecentlyraisedtheprice.TheproductioncostofU.S.shalegasisatleast$4/MMBtuandhigherinmost

shaledeposits.TheDOEEIAfeelsthatagaspriceof$4/MMBtuactslikeafloorfornaturalgasprices.Atapricelessthan$4/MMBtu,thereisaswitchtonaturalgastobackoutcoal.TheDOEEIAfeelsthatitishardtoarguethatnaturalgaswillstaybelow$4/MMBtu.TheMarcellusShaleissaidtobeeconomicatagasprice of $4/MMBtu. TheHaynesville Shale is economic at $5/MMBtu. Somehave argued that this price covers only finding and development costs andnothing else. There is also a concern that more stringent future permittingrequirementscouldalsoraisethecostofproduction.Mostconventionalnaturalgasneeds$7to$8/MMbtutobeeconomic.Shalegasproducershavestatedthatthe price of gas has to get to $6 or $7/MMBtu to support the last marginalMMBtuthattheUnitedStatesneeds.IntheUnitedStates,saystheOil&GasJournal,

Companies generally can develop shale plays located in the U.S.Midcontinent andEast, wheremost land is owned privately, withminimal

political wrangling. The fact that shale developments can cover entirecounties means that royalties are spread among thousands of individuallandowners,oftenaligningthemwithoperators.5

ThefivelargestshaleplaysareshowninTable7.1.

Table7.1FiveLargestShalePlays.Barnett TX

Fayetteville AK

Woodford OK,TX,NM

Haynesville LA,TX

Marcellus PA,NY

The overall economics of individual shale gas wells may be better than iswidelythoughtatthecurrentlowgaspricessincetheymayalsoproduceeithernaturalgasliquidsoroil.Inthecurrentmarket,bothoftheseproductsaremorevaluable than natural gas. Natural gas liquids are used as a feedstock forchemicals.Thisalsohelpsexplainwhyshalegasproducerscancontinue tobeprofitable even at very low prices for natural gas. The value of natural gasliquids and oil could be reduced be a lack of infrastructure to move them tomarket.

CostofProductionSince this costofproduction ishigher than formarkets likeQatar,Algeria,orRussia,theeconomicsofexportingshalegastoothermarketsisdifficult.SinceU.S.shalegasismostly“strandednaturalgas,”thiswillhelpkeepthepricelowintheUnitedStatesfor thenear term.U.S. lawallowsformineralrights tobesoldorleasedbylandownerstoshalegasdevelopers,whichmakesdevelopmenteasier.ThereisanargumentthatindustriesthatrequirealargeamountofnaturalgasmightbeencouragedtomovetotheUnitedStates.LNG projects are financed on a project finance basis and require long-term

offtakecontracts.AlloftheLNGfacilitiescurrentlylocatedintheUnitedStatesarebasedonimportingandnotexportingnaturalgas.Itwouldbeexpensiveandtime consuming to reconfigure these terms to export natural gas. It will bedifficulttoobtainalong-termsupplycontractwithshalegassupplierswhoare

concernedabout capturing futureprice increases.Shalegaswellshavea steepdecline curve, and this would be a challenge for an LNG terminal. LNGterminalsrequirea20-yearsupplyofnaturalgastomatchtheirofftakecontracts.ThequickdeclinecurveofashalegaswellwouldbehardforanLNGdeveloperto contract with. Although some natural gas is a long-lived resource, peakproduction generally exists for a relatively short period and then declinesthroughout the remainder of its life. This situation is especially true for shalegas. In the Marcellus Shale, there is a 50 percent decline in natural gasproductionbyyear two.As a comparison, coal is a long-lived resource and istypicallysoldunderlong-termcontracts.AsiancountriesthatimportLNGtypicallyagreetolong-termcontractsat85to

90 percent of the price of oil on a Btu basis. If one assumes an oil price of$90/barrel,thiscalculationbecomes:

Atamultiplierof85to90percent,thisbecomes$13.08to$13.85/MMBtu.Asacomparison,theU.S.HenryHubnaturalgaspriceiscurrentlyintherangeof$4/MMBtu or a factor of 3.27 to 3.46 times lower. The overall cost ofconstruction has increased for new LNG terminals. An annual tonne of gasliquefactionhasincreasedfrom$400to$1000overthepastdecade.6

TheMarcellus,with489Tcfofrecoverablereserves,issecondintheworldinsizetotheSouthPars/NorthDome,whichislocatedinIranandQatarwith1,235Tcf. This is very interesting since conventional thinking was that few if anyelephant natural gas reserves remain to be discovered.According to theDOEEIA,the2009U.S.naturalgasdemandis23Tcf,andtheMarcellusalonewouldmeet theU.S.needforover21years.TheU.S.gas resourcepotential is1,836Tcf,7whichat2009consumptionlevelsisenoughgasfor80years.Compressednatural gas (CNG)vehiclesmake sense for urban fleet vehicles

(e.g.,deliveryvehiclesandbuses).Inadditiontolimitationswithbatteries,thereisanargument that theelectricgridwillnotbeable tohandle the loadfromalarge implementation of electric cars at peak times. There is currently limitedinfrastructure for natural gas vehicles. Honda is the only consumer automanufacturertoproduceacarthatrunsonCNG.CNGenginemanufacturers require natural gas supply of a high purity.This

canrequirenaturalgasutilitiestostopusingtheirpropaneairfacilities.Propaneairfacilitieshelpnaturalgasutilitiestoextendtheirwinternaturalgassupply.In

someareas,refinerygasorethanesaremixedinwiththenaturalgassupplyandwill also have to be removed from the gas grid. This can be a technical andenvironmentalchallengethatcanrequirestudytimeandcapitalexpenditure.Natural gas–fired power plants also produce about 50 percent less carbon

dioxide(CO2)emissionsthanacoal-firedpowerplant.Thishasbecomelessofanissuerecently.Infact,theChicagoClimateExchange(CCX)closeddownonNovember 28, 2010. It had stated that itwas “NorthAmerica's only cap-and-tradesystemforgreenhousegases.”AtitspeakinMay2008,CCXwastrading10milliontonsofcarbonpermitspermonth.Thepriceofcarbonhitahighof$7.40/toninmid-2008.Themarketcollapsedin2009whenpricesfellto$1/ton.The lackof successof theCCX is related to the failureofCongress topass amandatorycaponcarbonemissions.Therewillbeanumberof interestingopportunitieswithnaturalgas storage.

Even though the current price for natural gas is low, there canbevolatility innatural gas prices on a daily and/or seasonal basis. A number of natural gasstoragefacilitiesarebeingdevelopedtotakeadvantageofthissituation.Naturalgas–firedpowerplantsarerequiredtobackuprenewablepowerplantsandmighthavetostartrunningonshortnotice.Thelargeamountofnaturalgasthattheyrequire will also have to be stored. Since renewable power projects can goofflinequicklyandunexpectedly,itisunlikelythatasufficientamountofnaturalgaswouldbeavailableinthelocaltransportationgridtorunagasturbineengineforanylengthoftime.Thereisanaturalgasstorageprojectunderconsiderationin thestateofColorado inorder tobackup the largenumberofwindprojectsthat are currently under development. Power plants typically nominate theamountofnaturalgasthattheyusethedaybeforetheyactuallydispatchorrun.Duetotheuncertaintyofthedispatchofawindproject,thislevelofinformationisunknown.Theconcernisthatifshalegasismoreexpensivethanfirstconsideredorifthe

wells have a faster decline curve than first calculated, a country could beexposedtohighenergycost.Thereisnolonger-termoperatinghistorywithshalegas. The science of modeling shale gas deposits is getting better, but is stillunderdevelopedgiventhecapitalandpolicycommitmenttotheindustry.8IntheUnitedStates,itisnexttoimpossibletodevelopanewcoalplant,andanumberof smaller coal plants may be forced to shut down. This also increases theoverallU.S.exposuretopotentialnaturalgaspriceandsupplyrisk.Table7.2helpstoillustratethelargecostandproductiondifferencesbetweena

shalegaswellandatraditionalwell.

Table7.2ShaleGasWellversusTraditionalWell.

Itisharderforconsumersofnaturalgastorespondtocheaperprices.Itiseasyforconsumerstojustdrivefurtherinordertoconsumemoregasolineasaresultof cheaperoil.Residential demand fornatural gashasbeen stagnant foryearswith increasing efficiencyof gas heating systems,while demand fromenergy-intensiveindustriessuchaschemicalsandmetalsmanufacturingwashitbytherecessionanddeclinesintheU.S.manufacturingbase.9

There has been a concern about the large use ofwater for shalewells.Onestudy from Range Resources finds that all of the wells in the Marcellus inPennsylvaniause60milliongallonsofwaterperday.Asacomparison,allofthepowergeneratorsinPennsylvaniause5,930milliongallonsofwaterperday.

SummaryShalegashaschallengedtheeconomicsofcoal,renewablepower,anddemand-sidemanagement.Therecentproductionofshalegashasdramaticallychangedboth the fossil and renewable energy markets. Unlike other inventions in theenergy market, shale gas is immediately relevant since it fits in the existingenergypipelineandpowerequipmentinfrastructure.Chapter8discussesdifferenttypesofsolarpowerprojectsandtheireconomics

inaworldofabundantshalegas.

Notes

1.H.Jenkins,“ListeningtotheShaleRevolution,”WallStreetJournal,February5,2011.2.J.Dizard,“TheShaleGasFairytaleContinues,”FinancialTimes,July18,2010.3.H.Jenkins,“ListeningtotheShaleRevolution.”

4.MattDay,“RecordU.S.Natural-GasOutputLikelytoContinuein2011,”WallStreetJournal,March2,2011.5.ScottStevensandVelloKuuskraa,“SpecialReport:GasShale—1:SevenPlaysDominateNorthAmericaActivity,”PennEnergy,www.pennenergy.com/index/petroleum/display/8128977500/articles/oil-gas-journal/volume-107/Issue_36/Drilling___Production/Special_Report__GAS_SHALE_1__Seven_plays_dominate_North_America_activity.html.6.J.Dizard,“PitfallsoftheU.S.CheapGasHabit,”FinancialTimes,February13,2011.7.“PotentialGasCommitteeReportsUnprecedentedIncreaseinMagnitudeofU.S.NaturalGasResourceBase,”ColoradoSchoolofMines,June18,2009,www.mines.edu/Potential-Gas-Committee-reports-unprecedented-increase-in-magnitude-of-U.S.-natural-gas-resource-base.8.J.Dizard,“DebateOverShaleGasDeclineFiresUp,”FinancialTimes,October10,2010.9.Day,“RecordU.S.NaturalGasOutputLikelytoContinuein2011.”

Chapter8

SolarPVandSolarThermalPowerPlants

LogicwillgetyoufromAtoB;imaginationwilltakeyoueverywhere.—AlbertEinstein

Likewindpowerprojects,solarpowerprojectsfacethechallengeofnotbeingaseven-day-a-week,24-hour-a-day,muchlessa5×16,resource.Theeconomicsofsolarprojectsarealsodependentontaxcreditsand/ortaxequityinvestorsingeneral.

TheEconomicsofSolarPowerWindprojectsarepaidarenewableenergycredit(REC)foreachmegawatthour(mWh)ofpowerproduced.SolarprojectsalsogenerateRECcreditscalledsolarrenewableenergycredits(SRECs).Thecurrentlowpricefornaturalgasandthelackofameaningfultaxoncarbonalsomakesittoughforsolarpowerprojectsto compete in the United States. Solar photovoltaic (PV) projects currentlyrepresent less than 1 percent of the nation's power assets.1 According to theDepartmentofEnergy's(DOE)NationalRenewableEnergyLab(NREL),about0.1 percent of the earth covered with 10 percent efficient solar cells couldprovide the whole world's energy needs. The reality would be the siting,intermittency, coordination, and transmission and distribution of all of thesedisparatesolarcells.Solar projects also face the challenge that there is no national renewable

portfolio standard (RPS) in theUnitedStates.Aswithwind,manystateshavealreadymet theirRPS requirements. States typically have a different categoryforwindandsolarpowerRPSstandards.ThecapitalcostestimatesforsolarPVprojects are in the range of $3,800 to $5,000/kW. Solar PV projects have acapacity factor only in the range of 21 to 31 percent. U.S. states have beenunrealisticonthepotentialsizeoftheirRPSstandard.Massachusettsclaimedto

berelyingonfuturepowerplantstobelocatedinthestateofMaineinordertomeetitsunrealisticRPSstandard.Unlikewindprojects,solarprojectstendtoproducepowerattimeswhenitis

requiredbythegrid.Utilitieshavebeenwillingtoagreetohigher-pricedpowerfromsolarprojectssincethepowertendstobeavailableduringon-peaktimes.Autilitycouldcomparethecostofpowerfromasolarprojecttothatofapeakinggasturbineengine.Therehavebeendiscussionsonhavingagridbasedonsolarpowerduringthedayandwindintheevening.Thisconceptmissesthepointthatsolarandwindpowerprojectsarenotdispatchablelikeagasorcoalfossilpowerplantandtheweaknessoftoday'sbatterytechnology.In the currentmarket, solar developers are having a difficult time obtaining

long-term,financeableofftakecontractsfortheSRECsthattheyproduce.OnlylocalutilitiescanpurchaseSRECS;theyarecurrentlynottradedbyWallStreetfirmsandotherenergybrokers.Inordertoobtainnonrecourseprojectfinancing,lenders want power project to have long-term defined prices in their offtakecontracts. A utility can get comfortable about taking the energy from a solarprojectoveralongperiodsinceithasaregulatedratebase.SRECs,however,arenotpartoftheirratebase,and,likeotherparties,theyareconcernedaboutadropinSRECpricing.Utilitiesalsofacethesameproblemthatindependentoperatorsface—thelimitedliquidityintheSRECmarketmakesitdifficulttohedge.

FinancingTechniquesThe internal rate of return for solar projects can also be below that of aninvestment in the first or second lien of a distressed natural gas power plant.Similarly, solar projects produce a large number of tax benefits that typicallycan't be used by small developers. Solar projects also have been usingpartnership flip structures and leveraged leases. Some developers have beentaking advantage of solar power equipment built in China. China has beenwillingtosubsidizesolarPVtechnology.CompetitionwithChinainthiscaseisnotanoption.Solar projects havemore experience with using leveraged leases since they

always qualified for the investment tax credit (ITC).Asmentioned, it is onlyrecently thatwindprojectsqualifiedfor theITC.Windprojectshadpreviouslyonlyqualifiedfortheproductiontaxcredit(PTC).TheITCcanpassthroughalease, whereas the PTC can't be used in a leasing structure. The PTC also

requires investors to take performance risk and to forecast if they will haveenough tax appetite for the next 10 years. Leveraged leases can provide 100percent financing and avoid the capital account and outside basis issues in apartnership.Attheendofthelease,thelesseeistypicallyprovidedanoptiontobuy the lessor's position at a market price. The expenses of putting a leasetogetherishighandwilltypicallyworkonlargerprojects.Solardevelopersarealsotakingadvantageofthe1603cashgrant,whichwas

extendeduntiltheendof2011.Thisstrategyentailstakingthecashgrantforthe30 percent ITC and then carrying forward the five-year modified acceleratedcost recovery system (MACRS) depreciation as the project generates earningsbefore interest, taxes,depreciation, andamortization (EBITDA) touse it.Likewindprojects,theDOEloanguaranteeprogramalsoexpiredforsolarprojectsinSeptember2011.Anumberofsolarprojectsareteamingupthecashgrantwithleverage, which could create some future restructuring opportunities. In thecurrentenvironmentinWashington,thecashgrantwasnotextendedpasttheendof2011.Solar projects have even less operating history than wind projects. The

argumentthatsolardevelopersaremakingtocontinuethegrantprogramisthatit will help with the continued commercialization of solar projects. It can bearguedthatthePublicUtilitiesRegulatoryPolicyAct(PURPA)encouragedthedevelopment of numerous natural gas power plants, which helped furthercommercialize gas turbine combined-cycle power plants in cogenerationapplications.Ithasalsobeenconsideredthatasolarpowerplantcouldreplaceanaturalgas

turbineoperatingasapeaker.Theconstraint that thesolarplantwouldhave issize. The 21-mW solar PV plant located in Blythe, California, requires 200acres!Thisprojectwillgenerateonly45,000mWhperyearorwillbeavailabletogenerate electricity 24.5percent or 2,146hours per year.ThepeakdemandtimeforelectricityisduringthesummermonthsofJunetoSeptember.Basedon52weeksperyearand12monthsperyear,thereare(52/12)or4.33weekspermonth.Sinceon-peakpower is calculated in theCaliforniamarketbasedon6days per week and 16 hours per day, this converts to 96 hours per week.Multiplying96hoursperweekby4summermonthsand4.33weekspermonthequatesto1,663hours.Thisisonly77percentor1,663/2,146ofthehoursthatareavailabletobeproducedfromtheBlytheproject.Iftherewerealocalpowerrequirementforover100mW,thiswouldbeeasy

to meet with a new gas turbine engine. As a reference, a 240-mW solar PV

power plant under construction in Arizona will require 2,400 acres of land.Basedon the conversionof 1 squaremile equals 600 acres, this converts to 4squaremiles.A solarPV facilityof this sizewould require andunmanageableamountofproperty. If thesundidn't shineor if therewerea lotofclouds, thesolarfacilitywouldhavetopayliquidateddamagesforlackofperformanceandcould wipe out any profits. There is also limited operating history for solarpower projects, and long-term availability, operating cost, and reliability areuntested.Solarthermalprojectsaretoughtobuildandprojectfinanceduetothedifficulty of obtaining a lump-sum, date-certain, fixed-priced contract withliquidateddamages.Aswithintegratedcombined-cyclecoalplants,itisdifficulttoobtainperformanceguaranteesfromtheequipmentsuppliersofsolarthermalpowerprojects.Therehavebeenmanysolarprojectsdeveloped inEuropedue to thefeed-in

tariff program. In fact, 85 percent of the installed global solar market is inGermany, Spain, Japan, and theUnited States.2 These projects didn't have todealwithtaxissuesorrenewablecredits.Theywerepaidahighpricefromthestart of operations.As a result of the recent economic crisis, a number of theEuropeancountrieshavereleasedthattheycouldnotcontinuetopaytheseveryhigh prices for power. Spain set the price for the feed-in tariff too high andcreatedasolarboom.SolarpowerinSpaingrewfrom400mWin2007to2.5gWin2008.3Spainhasstartedtheprocessofattemptingtoreducethepriceforpower forsolarandother renewablepowerprojects.Germanyhas reduced thepriceforpowerfornewsolarprojects.Likewind,solarpowerprojectsproduceasmallamountofEBITDAandareductionintariffcouldcauseadefaultsituationforaprojectwithdebtandorhighoperatingcosts.

TheTechnologyThere are two main types of solar technology: solar photovoltaic and solarthermal. Solar PV includes both thin film and crystalline. Both thin film andcrystallinehasbothutilityscaleandcommercialrooftopversions.SolarPVtechnologyhasthefollowingattributes:Uses“globalisolation”—canbeinstalledanywhere.Clouds=immediateloss.Noeconomicallarge-scalestorageoption.Unattendedoperation.

Approximately10to15percentsolartoelectric.Mostlymaturetechnology.Canbefixedorientation:nomovingparts.Modular—sametechnologyfor30kW,3mW,and100mW.Simplepermittinganddevelopment.Lowwaterusage.Rapidinstallationtime.

Costsarewellknown.4

Solarthermaltechnologyhasthefollowingattributes:Uses“directisolation”—viableonlyindesertSouthwest.Thermalinertia.Commercialthermalstorageforsomesystems.Typicalpowerplantoperationsandmaintenance(O&M).Approximately10to15percentsolartoelectric.Manyprecommercialtechnologies.Musttrackthesuninoneortwoaxes.Typicallyrequireslargesystemsforeconomyofscale.Moredifficultpermitting.Wetcooling(mostefficient)requiressubstantialwater.Longerinstallation.

Costscanbehardtoestimate.5

Solarprojectsthatarelocatedinsensitiveareascanalsofacelocaloppositionissuesjustlikefossil-basedpowerplants.Solarprojectslocatedonfederallandrequire permits from the Bureau of LandManagement (BLM). In addition toNIMBY(ornotinmybackyard),oppositiontosolarandotherpowerprojectsalsoincludethefollowing:LULU:locallyundesirablelanduse.NIMTO:notinmytimeofoffice.NIMEY:notinmyelectionyear.BANANA:buildabsolutelynothinganywherenearanybody.NUMBY:notundermybackyard.Due to these issues; overall cost; and engineering, procurement, and

construction (EPC) contracts, a number of solar projects recently have beencanceled. In late January 2011, developer SolarMillennium canceled its 250-

MWparabolictroughsolarplantnearRidgecrestinCalifornia'sMojaveDesert.InDecember,SouthernCaliforniaEdisoncanceleda20-year663.5-mWpowerpurchaseagreement(PPA)ithadwithaparabolicdishproject.InJune2010,a107-mW solar and biomass project in FresnoCounty,California,which had aPPAwithPacificGas&Electric,withdrewitslicenseapplication.Another290-mW solar thermal project was canceled in late 2009 after the EPC stated“unexpectedlyhighsupplybasecosts”aswellasoverallsizeandriskprofileoftheproject.6

Solar radiation components are based on direct and diffuse insulation andreflectedoralbedoradiation.Globalradiationisthesumofallofthefollowing.7SolarPVplantsusedglobalradiation.SolardevelopersusetheNRELNationalSolarRadiationDatabasetohelpinthedevelopmentoftheirprojects.Typically,onlysolarthermalandverylargesolarplantsrequireonsitemeasurement.WithPV technology, sunlight is converted to direct current (DC) electricity in asemiconductormaterial. An inverter converts the DC electricity to alternatingcurrent (AC).Withsolar thermal, sunlightheatsa fluid.A turbineorengine isused to convert heat to electricity. Solar thermal uses mirrors to concentratesunlight.

SummarySolar power has two main technologies and faces a number of challenges,including a large land requirement.TheDOE loan guarantee program and thecashgranthavehelpedtosupporttherecentgrowthofsolarpowerplants.Likeother renewablepowerplants, solar projects face extremely tough competitionfromlargeamountsofinexpensiveandplentifulshalegas.InChapter9,wedescribewindpower—theothermostdevelopedrenewable

powertechnology.

Notes

1.StevenAndersen,“SolarDawn,”PublicUtilitiesFortnightly,March15,2011.2.http://files.eesi.org/Clavenna_071108.pdf.3.www.kinesis.org/pdfs/KINESIS_MONITOR_15_MAR2010.pdf.4.Black&VeatchCorporation,EnergySeminarinNewYorkCity,November

3,2010.5.Black&VeatchCorporationEnergySeminar.6.StevenAndersen,“SolarDawn.”7.Blackand&VeatchCorporationEnergySeminar.

Chapter9

WindPowerPlants

Stayhungry.Stayfoolish.—SteveJobs,AppleComputerfounderandCEO

Windpowerprojectsfacetoughcompetitionfromotherfuels.Thisisespeciallytruefromthecurrentlowpriceofnaturalgas.Theoveralldemandforpowerisdepressedduetothesloweconomicrecoveryandthefactthatnumerousnaturalgas power plants were built in the past 10 years. Wind projects are alsodependent on tax subsidies, which are currently difficult for most developerswith no or limited tax appetite to use. The extension of the cash grant hasprovidedashort-termfixtothelackoftaxappetiteamongtaxequityinvestors.Eachstatealsohasvaryingdegreesofasupportforwindviarenewableenergycredits.

ProjectsOverviewDuetothelargesizeoftheUnitedStates,itisnotpossibletoreliablypowertheentiregridwithrenewablepowerplants.UnliketheUnitedStates,Iceland,withapopulationofonly318,500people,hit therenewablepowerlotteryduetoitsgeography.ThisconceptwasfurtherdevelopedbyJohnDizard:

The hydroelectric and geothermal power stations in Iceland generate fivetimesthenationalrequirementsinanonpollutingway.Powerisexportedasendproductsofanenergyintensiveprocessaluminumandferrochrome.1

According to the Department of Energy's (DOE) Energy InformationAdministration (EIA), renewable energy provided for 8 percent of the U.S.energy consumption in 2009. Of this 8 percent, wind made up 9 percent. In2009,38,610megawatts(mW)ofwindpowerplantswereinstalledglobally,and

in2010thisfellto35,802mW.Theaveragesizeofwindpowerprojectshasalsoincreasedfrom50mWin2003to150mWin2009.2

Onshorewindprojectshaveanall-incostintherangeof$2,200perkilowatt(kW). This includes capital cost, development cost, and interest duringconstruction. The dispatch of a wind project can range from only 30 to 42percent.Incomparison,afossilpowerplantcanoperateatanavailabilityofover90percentifrequiredbytheelectricgrid.Ashasbeenpointedoutelsewhereinthisbook,awindprojectdoesn'tprovidepoweronanindustrystandardcontractbasis of 7 × 24 or 5 × 16 (e.g., five days per week, 16 hours per day). Thisrequiresthatwindprojectsbebackedupbyfossilpowerplantsorbatteries.AsstatedinanOctober25,2010,WhiteHousebriefingmemo:

Renewables’ intermittency problem limits the deployment of thesetechnologies,whichcouldberemediedbyinstallingbackupcapacity(likelyincreasingthecostby2to4cts/kWh).

ThememolaterreferencesDOEEIA,whichshowsthatthecostofgeneratingpower from a wind project is 8.8 cts/kWh without subsidies and not takingbackuppowerintoaccount.Thiscostdropsto6.7cts/kWhwiththecashgrantprogram and to 4.0 cts/kWhwith the cash grant and theDOE loan guaranteeprogram.As stated by Nathan Myhrvold of Intellectual Ventures, and former chief

technologyofficerofMicrosoft:

Batteries suck.They're better than they used to be.Theyget a little betterevery year. The current rate of progress will take a very long time to getthere. What it means is we have to roll up our sleeves and invest insomethingradicallybetter.3

Thisraises thecostofwindpowerabovethatofafossilpowerplantdespite

numerous claims thatwind is “competitive”with fossil power plants.A fossilpowerplantcanagree toa5×16contract,whereasawindprojectcan'tmeetthisrequirementduetotheuncertaintyofwindpowerproductionandthelackofbatterytechnology.Powercontractsalsohavepenaltiesfornonperformance.

WindProjectEconomicsMostofthewindprojectsontheEastCoastoftheUnitedStateshaveacapacityfactor in range of 30 percent. The wind projects that are offshore and in theplains operate in the high 30s to low 40s. A developer of a wind project iseffectivelypurchasinganexpensivemachine thatoperates foronlya relativelylownumberofhours.Italsotendstoproducepowerduringtimeswhenthepriceforpowerislowest.Itisnotuncommonthatawindprojectwillproducemostofitspowerduringtheearlymorninghoursandduringthewinterseasonwhenthedemandforpowerislowest.Winddevelopers seem tomiss theuseof a simple relativevalue calculation

whenevaluatingtheeconomicsoftheirprojects.Itisfrequentlypossibletobuythefirstorsecondlienofadistressednaturalgaspowerplantthatwillprovideahigherreturnthantheequityofawindproject.Thereisalsonodevelopmentriskinthepurchaseofanexistingdebtissue.Winddevelopersthathavepurchasedanumberofwindturbinesmightagreetodevelopaprojecttoreducetheirholdingcost.Even if the returns for theseprojectsare low itmight stillmakesense todevelopandfinancetheprojectinordertoreduceholdingcosts.Unlikeafossilpowerplant,thereisalimitedamountofongoingoptimization

possiblewithawindplant.Withagasturbinecombined-cycleproject,thereareanumberofwaystoreducetheoverallvariablecostof theproject.Thiscouldinclude reductions in natural gas transportation expense, gas turbine engineupgrades,andreductionsinvariableoperationsandmaintenanceexpense.First,costisthekeyissuewithawindproject.

WindProjectTaxAttributesThe economics of a wind project is based on the sale of energy, renewableenergy credits, capacity payments (depending on the power market) and taxbenefits.Regulatedelectricutilitiesarealsoable toplacewindprojects in ratebase if they can obtain approval from their local public service commission.These entities don't have toworry about hedging the output of a power plant

since they have a regulated rate base and only have to demonstrate that aparticular power plant is “used and useful.” As a result of this rate base,regulated utilities produce a lot of cash and have the appetite for the taxattributesthatawindprojectoffers.Theyareanaturalinvestorintheirownandin third-party renewable power projects. Some utilities and their unregulatedsubsidiarieshave recently invested in somanyprojects that theyhaveactuallyhitthealternativeminimumtax(AMT).Duetothegenerousfeed-intariffprogramthroughouttheEuropeancontinent,

alargenumberofrenewablepowerprojectshavebeendeveloped.Foreignwinddevelopers have an extensive amount of experience from European powermarkets.However,theycanhavetroubleusingtaxbenefitsduetotheirlimitedamountofU.S. source income.These investorswill alsobe forced to look fortaxequityinvestorsafterthecashgrantexpiresattheendof2011.The taxattributes that areavailable toawindproject include theproduction

tax credit (PTC) and,more recently, the investment tax credit (ITC).The ITCwas first introducedbyPresidentKennedy in 1962, and theprogram ranuntil1969.Atthetime,thepurposeoftheITCwastoencouragethebuildingofnewinfrastructure.Inthepast,windprojectsqualifiedforonlythePTCandnottheITC.ThePTCcan'tpassthroughalease,andasaresult,windprojectscouldnotuse a leveraged leasing structure. The PTC is calculated based on mWhproduced by the plant. Assuming a 100-mW wind plant, the PTC would becalculatedasfollows:

ThePTCispaideveryyearfora10-yearperiodandisindexedeachyearbyinflation.As theprior calculation shows, an individualor a corporationwouldhavetohaveaminimumannualtaxburdenofatleast$5,781,600.Theactualtaxappetite would have to be higher since a wind project also produces a largeamount of tax depreciation over the first five years of its life. Only a verywealthyindividualwouldhavethislargeataxappetite.

InvestmentTaxCreditversusProductionTaxCreditItisveryeasytorunintopassiveincomeissues,andadeveloperwithoutataxappetiteisforcedtolookonlytowidelyheldCcorporations(asdefinedbytheIRS)ashistaxequity.Oncetheprojectstartsoperation,thePTCwillcontinuetobepaidaslongasitproduceselectricity.Inthepast,theU.S.governmenthaslet

thePTCexpireeverysooften,whichhas led toboom-bustcycles in thewindindustry.Asofthetimeofthiswriting,theplaced-in-servicedatefornewwindpower plants isDecember 31, 2012.The requirement to operate has led somemerchantwind developers to bid their energy at $0/mWh so that theywill beselected to run. This ensures that they will at least receive some tax benefitsfromthePTC.Thesecondtaxbenefitthatawindprojectreceivesistaxdepreciationbasedon

a five-year modified accelerated cost recovery schedule (MACRS). As acomparison, most fossil power plant equipment is depreciated over a 20-yearperiod.AccordingtoKeithMartininFortnightly'sGreenUtility:

The accelerated depreciation onmost renewables is worth about 26 centsperdollarofcapitalcostintermsofthevaluethetaxsavingsonegetsfromclaiming it. The tax credit varies in value, but for most projects it's aminimumof30centsperdollarcapitalcost.4

In recentwindprojects,developershave selected thecashgrantandplanonusingthenetoperatinglossescreatedbythefive-yearMACRSoverthelifeoftheproject.Developershavefoundthistobeamoreefficientwaytousethesebenefitsthentobringinataxequityinvestor.Winddevelopershavebeenallowed to select the ITC,which isbasedon30

percentoftheproject'scapitalcost.Forexample,ifaprojectcost$100,thenthedeveloper would either receive $30 as a tax credit or, if the project startedconstructionbeforetheendof2011,acheckfromthegovernmentfor$30.Thisworks especially well if a particular wind plant has a low dispatch factor. AhigherdispatchfactormightdirectadevelopertofindtaxequitythatcanusethelargenumberofPTCsthatwouldbeproducedbysuchaproject.Thecashgranthas been especially popularwith private equity funds. The limited partners ofthese funds are not taxpayers, and as a result, a PTC or ITC has no value tothem.Aftertheexpirationofthecashgrant,theywillalsobeforcedtogotothetax equitymarket.Asof 2008, regulated utilities cannowalso qualify for theITC.Thishasresultedinregulatedutilitiesdevelopingandsitingsolarprojectsintheirownserviceterritoryandplacingtheminratebase.

WindProjectPowerContractingWind projects that are developed by independent power producers frequentlysign long-term power contracts with regulated utilities. These long-termcontracts allow for a large amount of project finance debt. Utilities typicallypurchase the energy, capacity (at a discount to generator name plate), andrenewableenergycredits(RECs).Utilitiestypicallydon'tliketopurchasepowerfrom independent generators under long-term contracts since they can't earn areturnontheseinvestments.Theratingagenciescanalsotreatthesecontractsasimputeddebt.Inthecaseofawindproject,theyagreetothepurchasesincetheyaremandatedbythestatetheyoperateintopurchaseRECs.Onemegawatthourof power produced by a renewable power plant is equivalent to oneREC.Byway of example, a 100-mW wind project that is operating at 30 percentavailabilitywouldproduce100mW×8,760hours/year×30percentavailability=262,800mWhand262,800RECs.Thereiscurrentlynonationalstandardforrenewablecreditsandmanystates

havealreadymettheirRECrequirements.Asaresult,thepricesforRECshavebeendepressed.Typicallywind,solar,andotherrenewableenergyprojectshavedifferentRECcategories.Amerchantwindgeneratorcanhaveadifficult timedeterminingfairvalueforRECsandobtainingalong-termcontractfortheRECssincetheyarenotwidelytraded.Energytradingdesksthatquoteenergypricingandenterintoenergyhedgesdon'tquoteRECsduetoanoveralllackofliquidity.Most analysts feel that REC programs would disappear if a carbon dioxide(CO2)taxwereimplementedinthefuture.Thereasoningisthatpricesforpowerwould increase for fossil power plants that had to purchase CO2 allowances.Thisoverallpricingstructureallowsindividualstatestopayforaportionoftheadditionalcost fromrenewableswithRECsand the federalgovernment topaywithtaxcredits.

TransmissionConstraintsWind projects are typically located far from population centers. This requiresthat transmission linesbedeveloped tomove their electricity tomarket.TherehavebeencasesinTexasthat,duringcertaintimesoftheday,awindprojectisnotabletosellitspowerduetotransmissionconstraints.Infact,projectsinWestTexas have experienced 10 to 30 percent curtailment. Texas experienced lowwindyearsin2005and2007.5BothTexasandCaliforniaareintheprocessof

expanding their transmission infrastructure for renewable power projects. Asmentionedearlier, theFederalEnergyRegulatoryCommission (FERC)doesn'thaveeminentdomainauthoritytositetransmissionlines.Itisnotuncommonfortransmissionlinestotakeyearstodevelopduetostate-leveloversight.Thereisalsotheissueofwhopaysforthetransmissionline.Awindproject'seconomicsmightnotbeabletostandtheadditionalcostofatransmissionline.Transmissionissuescanalsocomeintoplaywithexistingpowerplants.Some

coal plants have been forced to back down when a wind project is able toproducepower.Thiscanresultinanetincreaseinemissionssincethecoalplantwill producemore emissionswhileoperating at part load.The solution to thisproblemisatransmissionupgradethatwoulddirectthewindand/orcoalplant'soutputtoanotherpartofthegrid,resultinginareductionofforcedcurtailment.As pointed out earlier in this book, this unscheduled curtailment by a coalfacility is another example of the lack of overall coordination in the energymarket.Operating power plants are still required for overall grid stability andcan'tbereplacedinstantlylikeanewwebsite.

OpportunitieswithDistressedWindProjectsWind turbine projects can also face environmental issues. The Beach RidgeWindFarminWestVirginiawasforcedtoreduceitssizefrom1221.5-mWGEwindturbinesor183mWto671.5-mWwindturbinesor100.5mW.ThiswasduetoaconcernthattheprojectcouldkilltheIndianabat,whichisprotectedbythe Endangered Species Act. The project also had to agree to restrictions onoperating hours to protect the bats. The turbines are allowed to be in 24-houroperation betweenmid-November andApril 1,when the bats are hibernating.For the remaining 7.5 months, the turbines may operate only in the daylighthours. The overall reduction in project size and restriction in operating hoursmake this an interesting candidate to watch for a potential future distressedinvestingopportunity.A large number of older vintagewindprojectswere basedon a 100percent

equity capital structure and are owned by deep-pocketed developers. Thesedevelopersalsotendtohaveataxappetiteandcanbecontentwithalowreturnsince they are also enjoying both PTC and five-year MACRS depreciation.Newervintagewindturbineshaveselectedthecashgrantandalsohaveprojectfinance debt. These projects are worth watching as potential distressedrestructuring candidates. Since wind projects produce a small amount of

EBITDA,overstatingenergyproductionorunderstatingmaintenancecaneasilycauseaprojecttobecomedistressed,leadingtoapossibledebtdefault.Thereisalso limited operating history and actual operating and maintenance cost fornewerturbines.Windturbineavailabilityhasbeenanissue.Thissituationoccurswhenthewindblowsbutthewindturbineisnotavailabletomakepower.U.S.averagewindturbineavailabilityhasbeen93percentasopposedtoanexpected97percent.Olderwindenergyproductionforecastssufferedfromoveroptimism.There was measurement bias and wind flowmodeling issues for pre-2001 to2003windprojects.However,olderwindprojectsmostlyhad100percentequitycapital structures. Newer wind forecasts have improved their accuracy, andnewerprojectshavemoreleverage,whichcouldexposethemtofuturedefaults.Distressedwindopportunitiescouldalsoincludeprojectswithacurrentpower

pricecalculatedbyavoidedcost.Thistypeofopportunitycouldbefoundwitharenewableprojectthatstartedoperationswithafront-loadeddefinedpowerpriceandthenconvertedtoavoidedcostatalaterdate.Inthecurrentlow-powerpriceenvironment,aprojectofthistypecouldeasilyshiftintodefault.AstudyfundedbytheGermangovernmentfoundthattheavailabilityof10-yeardebtforwindparks had fallen by asmuch as 40 percent, while the cost of debt relative tobenchmarkinterestratesmorethantripledin2009.ThecreditsqueezehaseasedinAmerica,but less so inEurope.Wind farmers inSpain andPortugal find ithard to borrowbecause ofworries that their governmentsmaydefault or trimsubsidies.6

WindEnergyPredictionOne of the challenges for wind projects comes from the projection of futureproductionofelectricity.Futuremegawatthourproductioniscalculatedbasedonbothonsiteandwindspeeddatafromlocalsourcessuchasanairport.Onewindproject investor stated that on its 54wind farms, based on 90 years’worth ofdata, they had been underperforming by 10 to 11 percent. This is due to lesswind turbine availability, wake effect due to terrain layout, and errors in theultimatecalculationfromgrosstonetelectricoutput.Adropinanavailabilityof10percentwouldresultinadropinatypicalwindprojectinternalrateofreturnof 300 basis points.Aswind turbines got taller, correlationwith lower heightmeteorologicaltowersproducedbaddata.Somedevelopershaveinvestedinmettowersthatarethesameheightastheactualwindturbines’hubs.

InGermany,forthefirstquarterof2010theBreezeTwowindprojectrecordedwindconditionsat81percentof the long-termaverage.Theproject's financialstructurewasbasedonmoreoptimisticwindforecasts.Asaresult,theClassBdebtofBreezeTwohasbeendowngraded toCbyStandardandPoor's,withanegativeoutlook.7

Themaintoolforassessingthewindresourcesatprospectivewindfarmsitesis “measure, correlate, predict” (MCP) analysis. This involves comparing ashort-term sample wind measurement at the site itself with years’ worth ofhistoricalwinddata taken fromanearbyairportorpermanentweather station.Usingstatisticalmodelstotakeaccountofthedifferencebetweenthetargetsiteand the reference site, developers can then build a detailed picture of thepotentialwindresources.8

Prediction ofwind turbine output has been especially unreliable in complexterrainareas.Thesearelocationswithforestsandmountains.Toimprovewindgeneration predictions, some companies are turning to laser-and sonar-basedmeasurementinstrumentstocomplementMCP.InDenmark,whichalreadygetsnearly20percentofitselectricityfromwindpower,achangeinwindspeedofonemeterpersecondcantranslateintoachangeof450mWinnationalpoweroutput.9

LenderstowindprojectsconsideraP99,P90,andaP50output.Theseoutputseachhavedifferentpercentchances,asfollows:ForaP50output,thereisa50percentchancethatthewindprojectoutputwillbe higher than this value and a 50 percent chance itwill be lower than thisvalue.ForaP90output,thereisa90percentchancethatthewindprojectoutputwillbe higher than this value and a 10 percent chance itwill be lower than thisvalue.ForaP99output,thereisa99percentchancethatthewindprojectoutputwillbehigherthanthisvalueanda1percentchanceitwillbelowerthanthisvalue.LendersalsouseadifferentdebtcoverageratiodependingonthePlevelused.The focus for newwind turbines is to reduce weight by using carbon-fiber

blade materials. Turbine manufacturers are also taking out their gearbox andusinggearlessturbines.Inthiscase,thegeneratorturnsatthesamespeedastherotor. The plant then uses an inverter to convert from direct current (DC) toalternating current (AC). There has also been a focus on remote sensing for

performance anticipation and monitoring/trending for condition-basedmaintenance.Offshorewindprojects facehardoperating conditions, and theseupgradeswouldalsoberequiredfortheirsuccessfullong-termoperation.

SummaryWindprojectshavealowcapacityfactorandaredependentontaxbenefits.Likesolar power projects, wind projects face tough competition from abundantsuppliesofnaturalgas.ThelackofaU.S.CO2taxandthechallengeofsitingnew transmission lines also make it difficult for wind to compete with fossilpowerplants.Chapter10furtheraddresseselectricpowertransmissionconstraints.

Notes

1.J.Dizard,“IcelandIsHotterthanYouMightThink,”FinancialTimes,October15,2010.2.GarradHassan,oneoftheworld'sleadingwindenergyconsultants.3.AlanMurray,“TheNextSmartThing,”WallStreetJournal,March7,2011.4.KeithMartin,Fortnightly'sGreenUtility,March1,2011.5.AlanMurray,“TheNextSmartThing.”6.“GreenEnergy:WildIstheWind,”Economist,September23,2010.7.Standard&Poor's,“Summary:CRCBreezeFinanceS.A.,”www.alacrastore.com/research/s-and-p-credit-research-Summary_CRC_Breeze_Finance_S_A-916421(accessedDecember9,2011).8.“WindForecasting:AndNow,theElectricityForecast,”Economist,June10,2010.9.“WindForecasting,”Economist.

Chapter10

ElectricPowerTransmission

[T]heelectrificationofthewholecountry.—VladimirIlyichLenin

Hundreds of wind farms and solar farms haven't been financed in the UnitedStates because they can't obtain electric power transmission access at acompetitivecostandtheycannotsupplyenergy24hoursaday,7daysaweek,365 days a year. In short, these two major types of renewable power areavailableonlyintermittentlyeachyear—onlyone-thirdtoone-sixthofthe8,760hoursinayear—andtheyarelocatedtoofarfromelectricitygridsorpowerfultransmission lines. Because of this immutable fact, it is very frequentlyextraordinarilydifficult to selldebt inawindpoweror solar renewablepowerprojectatanacceptablerisk-adjustedrateofreturn.

OverviewBecausekeylocationsintheUnitedStateswiththehighestnaturalwindvelocityor highest solar power available are usually a very long distance frommajorpopulationcentersorfrommajorindustrialorcommercialcenters,itisessentialtoinventnewenergystoragedevicesornewenergytransmissiontechnologytoexploitvastamountsoftheworld'senergythatiscurrentlytotallylost.Likewise, unless power plants are located directly next to the power grid

system, even when the wind blows furiously or the sun shines for hours, theexcessenergywillsimplybe“spilt,wasted,or“dissipated”becauseitcannotbeusedinourelectricpowergridsystem.Major energy storage facilities and major energy transmission lines require

huge financial investments. Very few companies, governments, independentsystemoperators(e.g.,PJM),orelectricutilitiesintheUnitedStateshavebeenwillingtosignlong-termenergysupplycontractswithpowergenerationplants.Yet without major electric storage facilities and new transmission lines, fewrenewablepowerplantdeveloperswill take thehuge financial riskofbuildingbrandnewpowerplants.Theseplantswillbevitallyneeded ifournation is to

diversifyawayfromfossilfuelssuchascoal,oil,orgas.High-voltage electric transmission (or electric power transmission) is quite

simply the bulk transfer of electrical energy from generating power plants tosubstations located near population centers. This high-voltage electrictransmissionisdifferentfromthelocalwiringbetweenhigh-voltagesubstationsandcustomers,whichisusuallyreferredtoaselectricdistribution.Transmissionlines, when interconnected with each other become high-voltage grid, or theNational Grid in Great Britain. We have three grids in North America: theEastern Interconnection, the Western Interconnection, and the ElectricReliabilityCouncilofTexas(ERCOT)Grid.Transmissionlinesanddistributionlines,whichusedtobeownedbythesame

company, have recently been separated by regulatory reform into electricitytransmissionfromthedistributionbusiness.IntheUnitedStatesandEurope,transmissionnetworksarecalledpowergrids

or “The Grid.” The regional transmission lines use three-phase alternatingcurrent (AC), although single-phase AC is sometimes used in railwayelectrificationsystems.High-voltagedirectcurrent(HVDC)technologyisusedonlyforverylongdistances(typicallygreaterthan400milesor600kilometers);submarine power cables, which are typically 30 miles to 50 km); or forconnectingtwoACnetworksthatarenotsynchronized.In theUnitedStates,electricity is transmittedat110voltsormore to reduce

energy lost in long distance. In the United Kingdom and most of Europe,electricityistransmittedin220volts(muchhighervoltageandrequiresfarmoresecurityofgroundingthecurrenttopreventfiresorhumanphysicalrisks).IntheUnitedStates,transmissionpowerisusuallytransmittedthroughoverheadpowerlines because it is cheaper than underground power cables. Voltage over 250kilovolts (kV) is used to reduce energy lost in long distance transmission.Underground power cables are typically used in city areas or technicallysensitiveareas.Becauseelectricalenergycannotbestored,itmustbegeneratedinanamount

equal to the actual power demanded. Electricity can be stored only in verylimited amounts and inefficiently in batteries. For example, the battery of theNissanLeafcanholdonlyapproximately24kWh.Toputthisincontext,a100mWwindturbinewouldgenerateatapproximately30percentavailabilityoverthe 8,760 hours in one year or 100 mW × 8,760 hours/year × 30 percentavailability=262,800mWh/yearor 262,800,000kWh/year.Thiswind turbineprojectalonecouldsupply262,800,000/24=10,950,000NissanLeafs!

Whenelectricity supplydoesnot equaldemand, transmissionequipment canshutdown,which,inextremecases,canresultinmajorregionalblackoutsoftheentireNorthwest orNortheast. In Europe,whole nations such asGreece havesuffered blackouts. To guard against this major risk, electric transmissionnetworksareinterconnectedintoregional,national,orcontinentalwidenetworksto assure multiple redundant alternative routes for power to flow. This couldoccurduetoweather,equipmentfailures,orpoliticalormilitarycrises.Agreatdealofanalysisisdonebytransmissionfirmstoestimatethemaximumreliablecapacityofeachline,whichislessthanitsphysicallimitinordertobecertainthereissparecapacityshouldtherebeanymajorpowerfailureinvariouspartsofthisnetworkorindifferentnetworks.In electrical systems, high-voltage overhead conductors are not covered by

insulation. The conductor material is nearly always a lightweight aluminumalloywithdifferentnewmaterialsusedtoincreasecurrentcarryingcapacityandimprove resistance to badweather conditions, lightning, highwind, or boilingheatorbelow-freezingtemperaturesthatcancausepowerfailuresormotionofthephysicallinecausinggalloporflutteringorcausingriseandfalloffrequencyoroscillation.

UndergroundTransmissionUnderground transmission consists of power cables used in densely populatedurban areas or under rivers to protect vital infrastructure such as bridges ortunnels, or to drastically reduce the danger from chemical emissions into theatmosphereoravoiddangerouselectromagneticfields.Underground electric transmission is several times more expensive than

overheadpowerlines,andthelife-cyclecostofanundergroundpowercableistwotofourtimestheoverheadpowerlines($10versus$20to$40perfoot).Thecostoffindingandrepairingoverheadwiresissmallandcantaketimemeasuredinhours,whereasthetimeneededtorepairundergroundcablescanbemeasuredindaysorweeks.Asa result, extra (or redundant)cablesare run.Becauseundergroundcables

touch theearth, theycannotbemaintained live,whereasoverheadpower linescanbe.Not only dounderground cables produce large charging currents, theymake voltage control difficult.Nevertheless, in some cases, the advantages ofundergroundcableoutweighitshighcosts.Thehistoryofelectricpowerdirectcurrent(DC)transmissiontrulytookoffin

1882. In 1886, in both Massachusetts and Italy, alternating current (AC)distributionsystemswereinstalled.In1888,NikolaTeslagavehislecturecalled“ANewSystemofAlternatingCurrent,Motors andTransformers,”describingequipment that allowed efficient power generation and use of multi phasealternating current. The key was the transformer, and Tesla's polyphase andsingle-phase induction motors were essential for a combined AC distributionsystem for both lighting and machinery. This “universal system” usedtransformers to step up voltage from generators to high-voltage transmissionlines, and then to step down voltage to local distribution circuits or industrialcustomers.Bycorrectlyselectingutilityfrequency,bothlightingandmotorloadscouldbe

served. Rotary converters and later mercury-arc valves and other rectifierequipment allowedDC to be providedwhere needed.Generating stations andloads using different frequencies could be interconnected using rotaryconverters.Byusingcommongeneratingplantsforeverytypeofload,importanteconomies of scale were achieved, lower overall capital investment wasrequired, and load factor on each plant was increased, allowing for higherefficiencyandalowercostfortheconsumer,resultinginincreasedoveralluseofelectricpower.By allowing multiple generating plants to be interconnected over a region,

electricityproductioncostwasreduced.Themostefficientplantscouldbeusedtosupplythevaryingloadsduringtheday.Reliabilitywasimprovedandcapitalinvestmentcostwasreduced,sincestand-bygeneratingcapacitycouldbesharedovermanymorecustomersandawidergeographicarea.Remoteand low-costsources of energy, such as hydroelectric power ormine-mouth coal, could beexploitedtolowerenergyproductioncost.Thefirsttransmissionofthree-phaseAC using high voltage took place in 1891 during the international electricityexhibitioninFrankfurt.A25-kVtransmissionline,approximately175kmlong,connectedLauffenontheNeckarandFrankfurt.Voltages used for electric power transmission increased throughout the

twentieth century. By 1914, 55 transmission systems, each operating at morethan 70 kV,were in service. The highest voltage then usedwas 150 kV. Therapidindustrializationinthetwentiethcenturymadeelectricaltransmissionlinesand grids a critical part of the infrastructure in most industrialized nations.Interconnectionof local generation plants and small distribution networkswasgreatly spurred by the requirements of World War I, where large electricalgenerating plants were built by governments to provide power to munitions

factories.Later,theseplantswereconnectedtosupplycivilloadsthroughlong-distancetransmission.

BulkPowerTransmissionToday, a regional transmission network is managed on a regional basis by atransmission systemoperator.Transmissionefficiency is enormously improvedbymanydevicesthatincreasethevoltageandproportionatelyreducethecurrentintheconductors,thuskeepingthepowertransmittednearlyequaltothepowerinput. The reduced current flowing through the line reduces the losses in theconductors.AccordingtoJoule'sLaw,energylossesaredirectlyproportionaltothesquareofthecurrent.Therefore,reducingthecurrentbyafactoroftwowilllowertheenergylosttoconductorresistancebyafactoroffour.This change in voltage is usually achieved in AC circuits using a step-up

transformer.DCsystemsrequirerelativelycostlyconversionequipment,whichmay be economically justified for particular projects, but is less commoncurrently.Atransmissiongridisanetworkofpowerstations,transmissioncircuits,and

substations. Energy is usually transmitted within a grid with three-phase AC.Single-phaseACisusedonlyfordistributiontoenduserssinceitisnotusablefor large polyphase induction motors. In the twentieth century, two-phasetransmissionwasusedbut requiredeither threewireswithunequal currentsorfourwires.Higher-orderphasesystemsrequiremorethanthreewiresbutdelivermarginalbenefits.Thecapitalcostofelectricpowerstationsissohigh,andelectricdemandisso

variable,thatitisoftencheapertoimportsomeportionoftheneededpowerthantogenerateitlocally.Becausenearbyloadsareoftencorrelated(hotweatherintheSouthwestportionof theUnitedStatesmightcausemanypeople touseairconditioners), electricity often comes from distant sources. Because of theeconomics of load balancing, wide-area transmission grids now span acrosscountries and even large portions of continents. The web of interconnectionsbetweenpowerproducersandconsumersensuresthatpowercanflow,evenifafewlinksareinoperative.The unvarying (or slowly varying over many hours) portion of the electric

demandisknownasthebaseloadandisgenerallyservedbestbylargefacilities(whicharethereforeefficientduetoeconomiesofscale)withlowvariablecostsfor fuel and operations. Such facilities might be nuclear or coal-fired power

stations or hydroelectric power plants, while other renewable energy sourcessuch as concentrated solar thermal and geothermal power has the potential toprovidebaseloadpower.Renewableenergysourcessuchassolarphotovoltaics,wind,wave, and tidal are, because of their intermittency, not considered baseload,buttheycanstilladdpowertothegrid.Theremainingpowerdemand,ifany, is supplied by peaking power plants, which are typically smaller, faster-responding, and higher-cost sources, such as combined-cycle or combustionturbineplantsfueledbynaturalgas.Peakingorsimple-cyclegasturbineenginesalsohavearelativelyhigheremissionsprofilethancombined-cyclegasturbines.Thus,distantsupplierscanbecheaperthanlocalsources.TheLindenVariable

Frequency Transformer connects the PJM grid with New York City Zone J.Multiplelocalsources(evenifmoreexpensiveandinfrequentlyused)canmakethetransmissiongridmorefaulttoleranttoweatherandotherdisastersthancandistantsuppliers.Long distance transmission allows remote renewable energy resources to be

used to displace fossil fuel consumption. Hydro and wind sources can't bemovedclosertopopulouscities,andsolarcostsarelowestinremoteareaswherelocalpowerneedsareminimal.Connectioncostsalonecandeterminewhetherany particular renewable alternative is economically sensible. Costs can beprohibitive for transmission lines, but various proposals for massiveinfrastructure investment in high-capacity, very-long-distance super gridtransmissionnetworkscouldberecoveredwithmodestusagefees.Withcurrenttechnology there are still limits on the ultimate distance that power can bemoved.

GridInput,Losses,andExitAtthegeneratingplants,energyisproducedatarelativelylowvoltage,betweenabout 2.3 kV and 30 kV, depending on the size of the unit. The generatorterminalvoltageisthensteppedupbythepowerstationtransformertoahighervoltage (115 to 765 kV AC, varying by country) for transmission over longdistance.Transmittingelectricityathighvoltage reduces the fractionofenergy lost to

resistance. For a given amount of power, a higher voltage reduces the currentandthustheresistivelossesintheconductor.Forexample,raisingthevoltagebyafactorof10reducesthecurrentandthereforetheI2Rlossesbyafactorof100,

providedthesame-sizedconductorsareusedinbothcases.Eveniftheconductorsize(cross-sectionalarea)isreduced10-foldtomatchthelowercurrent,theI2Rlossesarestillreduced10-fold.TransmissionanddistributionlossesintheUnitedStateswereestimatedat6.6

percent in1997and6.5percent in2007. Ingeneral, lossesareestimated fromthe discrepancy between energy produced (as reported by power plants) andenergysoldtoendcustomers;thedifferencebetweenwhatisproducedandwhatisconsumedconstitutetransmissionanddistributionlosses.At the substations, transformers reduce the voltage to a lower level for

distribution to commercial and residential users. This distribution isaccomplished with a combination of subtransmission (x ke to 132 kV) anddistribution(3.3to25kV).Finally,atthepointofuse,theenergyistransformedtolowvoltage(varyingbycountryandcustomerrequirements).

High-VoltageDirectCurrentHVDC is used to transmit large amounts of power over long distances or forinterconnectionsbetweenasynchronousgrids.Whenelectricalenergyisrequiredto be transmitted over very long distances, it is more economical to transmitusingdirect current insteadof alternatingcurrent.Fora long transmission linethe lower losses and reduced construction cost of a DC line can offset theadditionalcostofconverterstationsateachend.HVDC is also used for long submarine cables because over about 30 km

length,ACcannolongerbeapplied.Inthatcase,specialhigh-voltagecablesforDCarebuilt.Manysubmarinecableconnectionsupto600kmlengthareinusenowadays.HVDClinksaresometimesusedtostabilizeagainstcontrolproblemswiththeACelectricityflow.Theamountofpowerthatcanbesentoveratransmissionlineislimited.The

originsofthelimitsvarydependingonthelengthoftheline.Forashortline,theheatingofconductorsduetolinelossessetsathermallimit.Iftoomuchcurrentis drawn, conductors may sag too close to the ground, or conductors andequipmentmaybedamagedbyoverheating.Forintermediate-lengthlinesontheorder of 100 km (62mi), the limit is set by the voltage drop in the line. Forlonger AC lines, system stability sets the limit to the power that can betransferred.Up to now, it has been almost impossible to foresee the temperature

distributionalongthecableroute,sothatthemaximumapplicablecurrentloadwasusuallysetasacompromisebetweenunderstandingofoperationconditionsand risk minimization. The availability of industrial distributed temperaturesensing (DTS),whichmeasures temperatures along thecable in real time, is afirst step in monitoring the transmission system capacity. This monitoringsolution is basedonusingpassive optical fibers as temperature sensors, eitherintegrateddirectlyinsideahigh-voltagecableormountedexternallyonthecableinsulation.

ControllingtheComponentsoftheTransmissionSystem

To ensure safe and predictable operation, the components of the transmissionsystemarecontrolledwithgenerators,switches,circuitbreakers,andloads.Thevoltage, power, frequency, load factor, and reliability capabilities of thetransmissionsystemaredesigned toprovidecost-effectiveperformance for thecustomers.

LoadBalancingThe transmission systemprovides forbase loadandpeak loadcapability,withsafetyand fault tolerancemargins.Thepeak load timesvaryby region largelydue to the industry mix. In very hot and very cold climates, home airconditioning and heating loads have an effect on the overall load. They aretypically highest in the late afternoon in the hottest part of the year and inmidmorning and midevenings in the coldest part of the year. This makes thepowerrequirementsvarybytheseasonandthetimeofday.Distributionsystemdesignsalwaystakethebaseloadandthepeakloadintoconsideration.Thetransmissionsystemusuallydoesnothavealargebufferingcapabilityto

matchtheloadswiththegeneration.Thus,generationhastobekeptmatchedtotheload,topreventoverloadingfailuresofthegenerationequipment.Multiplesourcesandloadscanbeconnected to the transmissionsystem,and

they must be controlled to provide orderly transfer of power. In centralizedpowergeneration,only localcontrolofgeneration isnecessary,andit involvessynchronizationofthegenerationunits,topreventlargetransientsandoverloadconditions.

FailureProtectionUnder excess load conditions, the system can be designed to fail gracefullyratherthanallatonce.Brownoutsoccurwhenthesupplypowerdropsbelowthedemand.Blackoutsoccurwhenthesupplyfailscompletely.Rollingblackouts,orload shedding, are intentionally engineered electrical power outages, used todistributeinsufficientpowerwhenthedemandforelectricityexceedsthesupply.

ElectricityMarketReform:CostsandMerchantTransmissionArrangements

Someregulatorsregardelectrictransmissiontobeanaturalmonopoly,andtherearemovesinmanycountriestoseparatelyregulatetransmission.Spainwasthefirst country to establish a regional transmission organization. In that country,transmission operations and market operations are controlled by separatecompanies.Spain's transmissionsystemis interconnectedwiththoseofFrance,Portugal, and Morocco. In the United States and parts of Canada, electricaltransmissioncompaniescanoperateindependentlyofgenerationanddistributioncompanies.The cost of high-voltage electricity transmission (as opposed to the costs of

electricity distribution) is comparatively low, compared to all other costs arerisinginaconsumer'selectricitybill.IntheUnitedKingdom,transmissioncostsare about 0.2 p/kWh compared to a delivered domestic price of around 10p/kWh.Merchant transmission is an arrangementwhere a third party constructs and

operates electric transmission lines through the franchise area of an unrelatedutility. Advocates of merchant transmission claim that this will createcompetition to construct the most efficient and lowest-cost additions to thetransmission grid. Merchant transmission projects typically involve DC linesbecause it is easier to limit flows to paying customers. The cost for a typicaltransmission line is $1,000 to $1,500/kW. Most of these merchant projectsconnect disparate grids,which require a conversion fromAC toDC and thenback to AC in order to synchronize between grids. For shorter transmissiondistancesbetweendifferentgrids,avariablefrequencytransformercanbeused.TheFERChasbeenverysupportiveofthesemerchanttransmissionprojects.The challenge for merchant projects is locating them in areas that are

environmentally sensitive. To avoid this problem, transmission lines arefrequentlyplacedunderwater.Thiscanbeaproblemwhenthelinesareburiedin a sensitive area like a lake. Transmission projects can suffer fromNIMBY(not inmy backyard) andBANANA (build absolutely nothing anywhere nearanybody).Merchant transmission projects have been developed by holding an open-

seasonbiddingprocess.Duringtheopenseason,potentialtransmissionshippersbid for the amount and term of capacity they require. The successfultransmissiondeveloperthenselectsoneormorebiddersandusestheirpurchasecommitmenttofinancetheproject.Therecanbeconcernsincertaincasesthataparticularpowermarketismovingitslow-costpowertoahigh-costmarketandprovidingthebuyerwithanunfairadvantage.Someoftheseprojectshavebeenstructuredusingaholdco/opco-typestructure(holdcodenotesholdingcompany;opcodenotesoperatingcompany).Inthiscase,theFERCprovidesanincentivereturnonequityfortheprojectandallowstheprojecttoobtainholdcoleverage.Thisholdcoleveragehelpstheprojectmagnifyitsequityreturn.1

There is currently no federal eminent domain to support the siting of newtransmission lines. In the case of natural gas pipelines, the FERC does haveeminent domain to support siting. The potential closure of the Indian Pointnuclear power plant in Westchester County, New York, could result in thedevelopment of a newmerchant transmission line.This newHVDCmerchanttransmission line could move power from upstate New York, where there isexcess capacity, to the IndianPoint area.The current capacitymarket inmostparts of theUnitedStates is only for a three-yearperiod and can't support thebuilding of a newmerchant transmission line or a power plant.AlCoase, theeminenteconomist,wouldsaythisisnotamarketfailure,onlythatthemarketneedstobefurtherdeveloped.A U.S.-based transmission superhighway is an impractical way to deliver a

large amount of power from renewable power plants. Onshore wind is alsobecoming difficult to site in some locations. It is possible that offshore windcould become competitive in the future if there is a relatively high CO2 tax,naturalgaspricesincrease,theUnitedStatesbecomesseriousaboutmeetingitsfuture power needs from renewables, and the cost of offshore wind projectscomesdown.At the timeof thiswriting, the costofproduction fromoffshorewind is not competitive with other resources. Developing and permittingoffshorewindprojectsisalsodifficult.TheCapeWindprojectspent$60million

todevelopitsyetunfinancedoffshorewindprojectinCapeCod,Massachusetts.From a financing standpoint transmission projects can now use a master

limited partnership (MLP) structure.AnMLP is a publicly traded partnership.MLPsarerestrictedtofirmsthatownnaturalgaspipelinesandhaverestrictionson the amount of electric power assets that they can own. AnMLP structureprovidesafirmwithatremendoustaxadvantage.EveryfirmwouldbecomeanMLPifitcould.Operating merchant transmission projects in the United States include the

CrossSoundCable fromLong Island,NewYork, toNewHavenConnecticut;NeptuneRTSTransmissionLine fromSayreville,NewJersey, toNewBridge,NewYork;andtheLindenVFTfromLinden,NewJersey,toStatenIsland,NewYork.The660-mWNeptunelineprovides20percentofLongIsland'selectricity.The thesis for all of these projects is to move power from a low-cost,noncongested area to a high-cost, congested area. Except for Linden, each ofthese projects was financed based on a long-term offtake contract with atraditional electric utility. These transmission projects also provide electricpower supply and fuel diversity in that power is moved from a mostlycoal/nuclearregiontoanaturalgas–basedregion.

AdditionalConcerns

EffectsonHealthThe preponderance of evidence does not suggest that the low-power, low-frequency, electromagnetic radiation associated with household currentconstitutes a short-or long-term health hazard. Some studies have foundstatistical correlations between various diseases and living or working nearpowerlines,butnohealtheffectshavebeensubstantiatedforpeoplenotlivingclosetopowerlines.There are established biological effects for acute high-level exposure to

magnetic fields. In a residential setting, there is “limited evidence ofcarcinogenicity inhumans.Inparticular,childhoodleukemia isassociatedwithaverageexposure toa residentialpower-frequencymagnetic fieldabove0.3 to0.4 UT. (Ultrasonic testing [UT] is a measurement of magnetic flux densitywhichcausespotentialharmtohumans.)Theselevelsexceedaverageresidentialpower-frequencymagneticfieldsinhomesinNorthAmerica.

GovernmentPolicyIn the United States, power generation is growing four times faster thantransmission,butbigtransmissionupgradesrequirethecoordinationofmultiplestates,amultitudeofinterlockingpermits,andcooperationamongasignificantportionofthe500companiesthatownthegrid.Controlofthegridisbalkanized,andevenformerEnergySecretaryBillRichardsonreferstoitasa“thirdworldgrid.”Therehavebeenefforts in theUnitedStatesand theEuropeanUnion toconfronttheproblem.TheU.S.nationalsecurityinterestinsignificantlygrowingtransmission capacity drove passage of the 2005 energy act giving theDepartment of Energy (DOE) the authority to approve transmission if statesrefuse to act. However, soon after using its power to designate two nationalinterest electric transmission corridors, 14 senators signed a letter stating theDOEwasbeingtooaggressive.

SuperconductingCablesHigh-temperature superconductors promise to revolutionize power distributionby providing lossless transmission of electrical power. The development ofsuperconductors with transition temperatures higher than the boiling point ofliquid nitrogen has made the concept of superconducting power linescommerciallyfeasible,at leastforhigh-loadapplications.Ithasbeenestimatedthat the waste would be halved using this method, since the necessaryrefrigeration equipment would consume about half the power saved by theeliminationofthemajorityofresistivelosses.SomecompaniessuchasConsolidatedEdisonandAmericanSuperconductor

havealreadybeguncommercialproductionofsuchsystems.Inonehypotheticalfuture system called SuperGrid, the cost of cooling would be eliminated bycouplingthetransmissionlinewithaliquidhydrogenpipeline.Superconductingcables are particularly suited to high-load-density areas such as the businessdistrictsoflargecities,wherepurchaseofaneasementforcableswouldbeverycostly.Single-wireearthreturn(SWER)orsingle-wiregroundreturnisasingle-wire

transmissionforsupplyingsingle-phaseelectricalpowerforanelectricalgridtoremoteareasat lowcost.It isprincipallyusedforruralelectrification,butalsofindsuseforlargerisolatedloadssuchaswaterpumpsandlightrail.SWERisalsousedforHVDCoversubmarinepowercables.BothNikolaTeslaandHidetsuguYagiattemptedtodevisesystemsforlarge-

scalewirelesspowertransmission,withnocommercialsuccess.Wirelesspowertransmission has been studied for transmission of power from solar powersatellites to earth.A high-power array ofmicrowave transmitterswould beampowertoarectenna.Majorengineeringandeconomicchallengesfaceanysolar-powersatelliteproject.

SecurityofControlSystemsThefederalgovernmentoftheUnitedStatesadmitsthepowergridissusceptibleto cyber-warfare. The U.S. Department of Homeland Security works withindustry to identifyvulnerabilitiesand tohelp industryenhance thesecurityofcontrolsystemnetworks.Thefederalgovernmentisalsoworkingtoensurethatsecurityisbuilt inastheUnitedStatesdevelopsthenextgenerationof“smart-grid”networks.

SummaryRenewable projects are often located in remote areas and are dependent ontransmission to serve load. Huge financial expenditures on new electrictransmission lines or underground transmission cables or new wirelesstransmission,orsatellitetransmission,willneedtoberesearched,evaluated,anddeployed carefully in the next 5 to 10 years, in order for renewable energies(suchaswind,solarPV,orsolarthermalenergy;tidalandwaveenergy;etc.)tohave any significant opportunity to drastically reduce the world's reliance onfossilfuels.In addition, the U.S. federal government admits that the power grid is

susceptible to cyber-warfare, so therewill be costs associatedwith improvingthingsonthisfront,too.TheU.S.DepartmentofHomelandSecurityworkswiththe industry to identify vulnerabilities and to help the industry enhance thesecurityofcontrolsystemnetworks.ThefederalgovernmentisalsoworkingtoensurethatsecurityisbuiltinastheUnitedStatesdevelopsthenextgenerationof“smart-grid”networks.Enormousadvancesinelectricenergytransmissionhavebeenmadeinthepast

140 years. It is essential that equal if not greater investments in advances ininnovativeelectricaltransmissionsystemsplusinnovativeelectricpowerstoragetechnologieswillhavetobefullyresearched,developed,andlaunchedintomassproductiononaglobalscaleiftherangeofrenewableenergiesistosucceedin

creatingadrasticdecline in toxicemissions, reduction inglobalwarming, andtransforming the world to a decline in pollution and global long-term self-sufficiencyincleanenergy.InChapter11,wediscussnaturalgaspowerplants.

Notes

1.Powerassetsareplacedatthe“opco.”TheFERConlylooksattheamountofdebtandequityattheopcoanditisnotconcernedaboutthecapitalstructureof“holdco.”

Chapter11

NaturalGasPowerPlants

IsPokeragameofchance?NotthewayIplayit.—W.C.Fields

Powerpriceforecasts in theUnitedStatesarebasedon theassumption thatallfuturefossilpowerplantswillbenaturalgas turbineenginefired.Therevenuerequirement for a natural gas turbine fired power plant has become thebenchmark or proxy unit that renewable and other fossil power plants arecomparedagainst.ItiscurrentlynexttoimpossibletoobtainanairpermitforanewcoalplantintheUnitedStates.Inaddition,thelowpriceofnaturalgasandthe high price of coal have made it difficult for coal plants to compete.Improvementsingasturbineengineheatratehavemadecompetingagainstthemevenmoredifficult.Operatingcoalplantsfacenewregulationonsulfurdioxide(SO2),nitrousoxide(NOx),particulate,andmercury,whichmightmakesmallerprojects uneconomic. Natural gas represents approximately 22 percent ofelectricitygeneration.1

GasTurbineEnginesGasturbineengineshavebecomethetechnologyofchoiceforthegenerationofelectricpower.Overthepast20years,therehavebeentremendousadvancesingas turbine engine technology. This has resulted in improved part-loadperformance,increasedpoweroutput,reductioninheatrate,andlargedecreasesinemissions.Gasturbineenginesarefrequentlyusedinacombinationwithoneor more steam turbines to create a combined-cycle power plant. The termcombinedcyclecomesfromthefactthatthegasturbineengineisbasedontheBrayton Cycle, and the steam turbine is based on the Rankine Cycle. Theexhaust heat from the gas turbine engine is captured in a heat recovery steamgenerator (HRSG),whichproduces steam todrive a steam turbine.AdditionalsteamcanbegeneratedintheHRSGbyburningadditionalnaturalgasinaduct

burner. This additional steam can be used to provide additional power and/orprocess steam. Gas turbine engines can be configured on a one-on-one basis,which is one gas turbine and one steam turbine, or a two-or three-on-oneconfiguration,whichreferstotwoorthreegasturbinesononesteamturbine.Unlike coal-firedpowerplants, naturalgas–firedpowerplants canobtain an

airpermitandlocalapprovalrelativelyquickly.IntheUnitedStates,thereisanextensiveinfrastructureofnaturalgaspipelinesandnaturalgasstorage.Itisaloteasier dealing with natural gas transportation and commodity than with thesupply,handling,and resultingashdisposalofacoalpowerplant.There isnoconcernwiththedisposalofashoranyfutureashdisposalregulationsissuewithanaturalgas–firedpowerplant.Thebestgreenfieldsitesfornewgasturbineenginesareattheintersectionof

one or more natural gas pipelines and one or more electric substations.Frequently, agas turbinepowerplantwill seek tohaveaccess to twoormorenaturalgastransmissionlinesforreliabilitypurposes.Anaturalgastransmissionlinethatsuppliesnaturalgasatahighpressureremovestheneedforthepowerplant topurchaseanaturalgascompressor.Anaturalgascompressor increasestheparasiticloadatthepowerplant,resultinginadecreaseofpoweroutputandan increase in heat rate. Gas turbine power plants will also attempt to getlanguage in their air permits that allows them tooperate forup to30ormoredaysonfueloiloranotherbackupfuel.Theremaybecertaintimesoftheyearwhenitmakeseconomicsensetorunonfueloilinsteadofnaturalgasorduringtimeswhennaturalgascommodityor transportation is interrupted.Naturalgasprojects can also increase their cash flow by reselling some of their firmtransportation.Asoldercoalplantsareshutdown,thesebrownfieldsitescouldberepowered

with new natural gas turbine–based projects. The objectivewill be to use theemissionsprofile from theoldcoal-firedpowerplant inorder to “netout” theemissions from the new gas-fired power plant. Gas turbine combined-cycle(GTCC)powerplantsrequirewaterfortheirsteamturbinecycleandmaylocatenext toawastewater treatmentplant inorder touse the“gray”waterproducedbythetreatmentfacility.Makeupwaterwouldstillhavetocomefromtraditionalsources.Typically,areasthathostwastewatertreatmentplantsarealsolocatedinindustrial areas thatwill support the development of a new power plant.U.S.states have been supportive of locating new combined-cycle power plants onexistingbrownfield industrial sites.Allof these issuesmake iteasier toobtainlocalsupportfortheproject.

BenefitsofGasTurbineEnginesUnlikecoalandnuclearpowerplants,newercombined-cycleplantsareabletooperate at part-loadand stillmeet lowemission levels.Combined-cycleplantsarealsoabletooperateonlythegasturbineengineportionof thepowerplant.Naturalgasplantscanprovidebackuppowertotheintermittentperformanceofwind and solar power plants. It is important for developers to consider“optionality” issues in their air permit. A gas turbine engine with quick startcapability can capture thevolatility thatwill bepresent in futurepowerpricesdue to the intermittency of renewable power plants. This allows for thepossibilityof24-hour-a-day,seven-day-a-weekoperationandtheabilitytostartthegasturbineenginequicklywithoutviolatinganyairpermitconditions.Ifthepriceforpowerishigh,theairpermithastoallowthegeneratortodispatchinordertocapturethisprice.Itisimportantforagasturbineenginepowerplanttobeabletoridethrough

periodsof low-pricedpowerwithoutbeingforced to turndowntozerooutput.Starting a gas turbine engine from a cold start is expensive, takes time, andmight cause the project to miss a high price for power. Gas turbine enginemanufacturers are offering more products that improve the part-loadperformance and ramp rate of their new and existing engines.These upgradescanalsohelpthegasturbineenginemeetitsairpermitconstraints.Aspreviouslyexplained,coalandnuclearplantsareinefficientatpart-loadperformance.

GasTurbinesandCO2Whenandifthereisataxoncarbonnaturalgas,combined-cycleplantshaveanadvantageovercoalplantsinthattheircarbonemissionstreamisapproximately50percentlessthanacoalplant.Therearecurrentlysomestudiesunderwaytocalculatethemethaneandothergreenhousegasemissionsstreamthatalsoresultfrom theproductionof shalegas.This incremental streamof emissionswouldalsobeaddedtotheemissionstreamfromtheoperatinggasturbineengineplant.Initial calculations show that even taking into account natural gas productionfromshale,combined-cyclepowerplantshavethelowestcarbonemissionsforafossilpowerplant.It isalsopossibletoshiftoutthehydrogenandtheCO2fromnaturalgasby

using a shift reactor. The gas turbine engine would operate on 100 percent

hydrogen,andtheCO2streamcouldbeburiedunderground.Inadditiontotheburialchallenge,gasturbineengineshaveonlylimitedhistoryonoperationwith100 percent hydrogen, and it might not be possible to obtain a guarantee onperformancefromtheenginemanufacturer.GasturbineenginesthatusedrylowNOx(DLN)combustorsalsohavelimitsontheamountofhydrogeninthefuelthat they consume. The latest performance standard is a maximum of only 5percenthydrogen.DLNhasbecomethestandardtechnologyfornewgasturbineengines and a large number of the operating gas turbine engines. The lack oftheseguaranteeswouldmakeitdifficulttoobtainlong-termprojectfinancingonanonrecoursebasis.

CogenerationCogenerationisthesaleofsteamfromgasturbineenginepowerplantstolarge,industrialusersofsteam.Cogenerationcanalsobedefinedasworkingonefueltwice. Cogeneration captures the heat that would normally be wasted whilegeneratingpowerandsupplyingtheheatingand/orcoolingneedsoftheuser.2

It is possible for the industrial user to shut down its operating boiler and topurchaseallofitssteamneedsfromthegasturbinepowerplant.Thisapproachalso creates emission reduction,which can help the power plant obtain its airpermit.Inanonattainmentlocationoranareathatexceedsfederalstandardsfora particular pollutant, this may be the only way to obtain an air permit. Asdescribed earlier, aGTCC projectwill typically producemore electricity thansteam.Withacoalboilersteamturbineconfiguration,thereverseistrue.Thequalityofthesteam(e.g.,steamtemperatureandpressure)willdetermine

theultimateplantheatrateandfuelchargeabletopower.Thiscalculationtakesinto account the amount of British Thermal Units (Btus) sold as steam andadjusts the heat rate down accordingly. A net reduction in CO2 and otherpollutantssuchasNOxandSO2resultsfromanefficientcogenerationprocess.It may also be possible for the gas turbine to burn some of the waste fuelprovided by the industrial host. This can allow the power plant to reduce itsstrikepriceascomparedtoitscompetitors.

GasTurbineOperationsGas turbine projects typically execute a long-term service agreement (LTSA)

withthegasturbineenginesupplierthatprovidesformaintenancesupportonthegas turbineengines.Under theLTSA, theengine supplierwill supplyallpartsandlaborforthescheduledandunscheduledmaintenanceofthegeneratorsandancillariesduringatermoftypicallyupto15yearsfromexecutionofacontractofsaleforthegasturbines.Basedontheanticipatedmodeofoperationforthefacility, the term is expected to be 10 years from the start of commercialoperation and will include a hot gas pass inspection and two combustioninspections. The engine manufacturer's fee for the scheduled maintenanceserviceisbasedonalumpsumforthetermtobepaidinproportiontothestartsaccrued on the gas turbines. The LTSA typically includes a provision for theengine manufacturer to remotely monitor the condition of the engines tofacilitate data acquisition and detect abnormalities early with the intent ofmaximizingenginereliabilityandplantavailability.It is possible to burn landfill gas in a gas turbine engine. The gas turbine

engineusuallyrequiresthatthelandfillgasbecleanedtoalevelthatcouldmaketheprojectuneconomical.ReciprocatingenginesfromfirmssuchasCaterpillartendtobethebestchoicetoburnlandfillgas.Typicalreciprocatingenginesizetendstobe1megawatt(mW).Itisraretoseealandfillgasprojectthatislargerthan 5 mW in size. Landfill gas consists of mostly methane, which is agreenhousegasthatis21timesstrongerthanCO2.Asaresult,thereisactuallyareduction in overall greenhousegas emissions from the combustionof landfillgas.Alongwithcogeneration,thisisatechnologythatisavailabletodaythatcaneconomicallyandmeaningfullyreduceCO2emissions.Duetothisfact,landfillgasprojectscanqualifyforrenewableenergycredits(RECs).Itwaspointedoutinotherchaptersthatinvestor-ownedutilitieswillagreetopurchaseenergyfromprojectsofthistypeinordertomeettheirRECrequirements.Thelocalnaturalgasgridcancontainimpurities,includingethanefromnatural

gas liquidproductionand industrialwastegases.These impuritieswillhave tobe removed prior to the large-scale implementation of compressed natural gasvehicles. In some cases, these gases can be cleanly burned directly in a gasturbineengine,resultinginanetreductioninemissions.

SummaryGasturbineenginetechnologycontinuestoimprove.Thisresultsinlowerheatrates,improvedemissions,andincreasedpoweroutput.This,alongwiththelow

price of natural gas, no material CO2 tax, and no technology to remove andsequester CO2 at scale, makes it difficult for renewable projects to competeagainstnaturalgasturbineenginepowerplants.Chapter12 reviewscoal-firedpowerplants, another existing technology that

renewableshavetocompeteagainst.

Notes

1.NaturalResourcesDefenseCouncil,October2008.2.www1.eere.energy.gov/industry/distributedenergy/pdfs/chp_report_12-08.pdf.

Chapter12

Coal-FiredPowerPlants

Thenumbersshouldbetalkingtoyou.—LarryGrundmann,energyexpert

Whywould a book on renewable energy discuss coal-fired plants, much lessdevote an entire chapter to them? Renewable power plants don't operate in aworldwithoutotherpowerplants.Renewablepowerprojectscan'tsupplypowerona7×24basis,andeachgridhastorelyonfossilfuel–basedpowerplants.Aspreviously discussed, there is no battery technology that can store powerproduced by renewable power plants during off-peak times. Coal-fired powerplants create the following discharges, which require environmentalconsideration:Thedischargeofparticulateandgaseousemissions.Thedischargeofheatorthermalenergy.Thedischargeofsolidandliquidwastes.Noise.Onlyafewcountrieshaveaccesstoalargeamountofhydroandgeothermal

power projects with a high enough availability to achieve grid stability.Understanding how coal plants operate and their economics is critical forrenewablepowerinvestors.

Coal'sHighOutputCapacityCoalpowerplantsproduceapproximately50percentoftheenergyintheUnitedStates.Suppliesofhighheatcontentcoalarefoundinlarge,mineablequantitiesthroughout the United States. The coal-to-cover ratio in the United States ascompared to other countries is relatively low. The heat content or BritishThermal Unit (Btu)/lb content of U.S. coal also tends to be higher than thatfoundinothercountries.Oneofushasworkedoncoal-firedpowerprojectsinother countries that would require a large subsidy to make electric power

competitively.ThisisduetothefactthatthecoalwasburieddeepundergroundandcontainedalowBtucontent.Itisimportantfornewinvestorstounderstandthatthe$/tonpriceforcoalorbiomassisnotasimportantatthe$/MMBtuprice.If onepays$20/ton for an8,000Btu/lb coal, this is equivalent to$20/ton×1ton/2,000lb×lb/8,000Btu1,000,000Btu/MMBtu=$1.25/MMBtu.Powerplantdeveloperswilloftenmakethismistakewhentheyconsiderafuelthatischeaperinpriceona$/tonbasisbutexpensiveona$/MMBtu.Inorder todetermineadeliveredpriceforcoal,onewouldaddinthecostoftruckingand/orrailtothe$20/ton in order to determine the delivered cost of coal on a $/MMBtu basis.This is especially true when one considers the use of wood waste and otheropportunityfuels.A natural gas–fired power plant produces approximately half of the carbon

dioxide(CO2)emissionsofacoal-firedplant.ThefollowingisthecalculationofCO2 production from a new 500-megawatt (mW) coal plant with a 9,000Btu/kWhheatrateoperatingat90percentavailability:

At an allowance cost of $10/tonofCO2, thiswould be an additional yearlyexpenseof$36,666,510/year.Transportationofcoalviarailand/ortrucktendstobemoredevelopedinthe

United States than in other countries. At the time of this writing, there is nofederalCO2taxorcap-and-tradeprogramthatwouldgreatlyhurttheeconomicsof coal-fired power plants and conversely help renewable power plants.MostexpertsacknowledgethatwhentheCO2comesabout,itwillbeintherangeofonly$10/ton.ItisdifficultfortheU.S.EnvironmentalProtectionAgency(EPA)to regulate CO2 emissions since there is currently no economically proven,available technology tocontrolCO2emissions.TheEPA isvery limitedunderbest available control technology (BACT) regulations to restricting CO2emissions. Earlier in the book we discussed how controlling other pollutantssuchassulfurdioxide(SO2)andnitrousoxide (NOx)waseasydue toprovenandoperatingcontroltechnologiessuchasSO2scrubbers.

LifeofaCoalPlantOnceapowerplantisgivenitsoperatingpermits,itisdifficultfortheplanttobeshutdownby theEPAunless theproposedcleanair transport rule (CATR)forSO2andNOxormaximumachievablecontroltechnology(MACT)formercuryis promulgated. As a comparison, a natural gas–fired combined-cycle plantwouldproduce50percentlessCO2emissions.Coalplantsarefrequentlylocatedinareaswheretherearecapacity/reliability

requirementsortransmissionconstraintsorwherethereisaneedforvoltageorothertypesofgridsupport.Inthesecases,itwouldbedifficulttoforceacoal-fired power plant into retirement. As stated elsewhere in this book, a typicalwind plant operates only 30 percent of the time andwill require backup fromoperating power plants. It is possible that a coal-fired power plant could berepowered by a natural gas–fired facility. Thiswill require at least a one-yearpermittingperiodandanadditionaltwo-orthree-yearconstructionperiod.Itwillprobablybenecessarytoupgradethelocalnaturalgaspipelinesystem.Currentmarket prices for power don't support the economics of a new build or arepowering with a natural gas combined-cycle power plant. There is aprobabilitythatnaturalgaspriceswillclimbintothe$5or$6/MMBturangeinthe future,whichwouldhelpmake coal plantsmore competitive.When all ofthese issues are considered, it might be possible that a larger number of coalplantswouldcontinuetooperateinthefuture.Some studies have come out that state that 35 to 50 gigawatts (gW) of

operatingcoalplantsunder300mWwouldclosedowninthenearfuture.Somelenders have also expressed concern about financing coal-fired plants in thefuture due to uncertainty about coal plants being able to achieve full costrecoveryforCO2emissions.Thismissestheissuediscussedabove.Anumberofplantsinthissizerangearewellmaintainedandhavealsoinstalledscrubbersorselective catalytic reduction (SCR) for NOx control and will remain incompliance.Inthecurrentpowermarket, itwillalsobedifficult torecoverthefull capital cost of building a newcombined-cycle power plant.Once existingcoalholdingpondsarefilled, it ispossiblethatfutureashdisposalwillrequireClass1status.Arulingof this typewoulddrastically increasetheashdisposalcostforapowerplant.Therewillalsobeanumberofopportunitiestoconvertcoalplantsbelow70

mW in size to fire biomass. Biomass is typically defined as wood waste,

constructionwaste, and forest trimmings. It is difficult to find a large enoughsupply of wood waste to supply a project larger than 70 mW in size. Forexample, a 50-mW biomass project would require 50,000 kWh/hr × 12,000Btu/kWh × lb/4,500 Btu × ton/2,000 lb = 66.67 tons/hr or, based on 8,760hours/year,584,029 tons/year.Overa30-yearoperating life, this is17,520,876tonsofbiomass!Thenameplatemegawattoutputofanexistingcoalplant that isconvertedto

biomass will also drop by 20 percent or more. This is due to the fact that atypicalbiomassfuelhasaheatcontentofonly4,500Btu/lb,whileatypicalU.S.coalisover10,000Btu/lb.Acoal-firedprojectthatconvertedtobiomasswouldalso be eligible for renewable energy credits (RECs) and, depending on theamountofcapitalrequiredforconversion,couldqualifyfortax-exemptdebtorenergytaxcredits.

ExtendingCoalPlantOperationsTheoperationofcoal-firedpowerplantscanpotentiallybeextendedbysellingsteamtoanearbyindustrialhost.ThesaleofsteamwouldactasanadditionalrevenuesourceandhelpinanoverallreductionofCO2sincetheindustrialhostwould be able to shut down its existing boilers. In a number of cases, theseboilers tend tobeoldand relativelyhighemittersofairpollutants.This steamsale could cause operating issues for the coal plantwhen itwas not called todispatch by the local grid or power purchaser. A number of older plants arecurrently facing an issue that their steam saleswere priced too low. This canespeciallybeaproblemwhenanindustrialcustomerrequiressteamwithbothahightemperatureandpressure.Boilersteamturbine–basedcogenerationsystemswork bestwith steam hosts that require a large amount of process steam. Putanother way, the thermal/power ratio is higher for boiler steam turbine asopposedtogasturbineenginecombined-cycleprojects.Anewboilercanalsobesized tomeet a required steamandpowerneed,while gas turbine engines areproducedinstandardsizes.Operating circulating fluidized bed (CFB) boilers will also have interesting

futureoperatingpotential.ThesefacilitiesalreadyhavetheabilitytocontrolSO2andNOxemissionsandhavetheabilitytocombustdifferenttypesoffuels.Theyalso typically includeabaghouseorequivalent forparticulatecontrolandcanmeetfuturemercuryemissionstandards.Withpollutioncontrolequipment,CFB

boilers are better able to operate at part-load and continue to meet theiremissionsperformance. Inanyevent,aCFBboilerwillnotwant tooperateatlessthan60percentoffulloutput.Atlessthan60percentoffulloutput,aCFBwill have trouble meeting the emission requirements of its air permit. At thepresenttime,aninvestorcangetcomfortablewithaninvestmentinCFBboilerswithaviewthataCO2taxwillbesmallandthatthefuturepriceofpowerwillrecover to the replacement cost of a combined-cycle power plant. Thiscombined-cyclerevenuerequirementcalculationwasdevelopedinChapter2ofthebook.Sincecombined-cyclepowerplantscangetpermittedandbuilt, it isimportant to consider this calculation when evaluating any new or existingpowerplantinvestment.OperatingcoalplantsthatalreadyhaveSO2scrubbersandNOxcontrolshould

beabletomeettheproposedfuture90percentremovalrequirementformercurycontrol.Ifanoperatingcoalplantdoesn'thavethesecontroltechnologies,itmaybeforced to installactivatedcarboninjection.Anumberofsmallercoalplantsdon'thavethesecontrols,andasaresultitwouldbeuneconomictoretrofitthem.Plantsofthistypemightoperateonlyona“limitedhoursofoperation”basistoprovidegridsupport,asmentionedearlier.Dependingonlocalfuelconditions,theymayalsocofirebiomassor,ifsmall

enough, switch solely to biomass. There is also a potential technology underdevelopment thatwouldallow thecofiringofmunicipal solidwastewithcoal-firedpowerplants.Coal-firedplantsthatadoptedthistechnologymightalsobeabletoqualifyforRECsforthepercentageofpowerthatwasgeneratedwiththiswasteorbiomassfuel.Thekeyissuewillbethedeliveredcostofthisfuelona$/MMBtu basis and the value of any renewable energy credits that could beclaimed.Theemissionsoftheboilerwillalsobeaffectedbythisfuel.Thegoalwillbetotrytocontinuetomeettheupperboundontheexistingairpermit.Thisstrategywouldresultinonlyanadministrativechangeandwouldavoidhavingtofileamajorchangetotheexistingairpermitsandapubliccommentperiod.Useofbiomasscouldhelpanexistingcoal-firedpowerplantreduceitsSO2andCO2emissionsbutnotitsNOxemissions.Sometypeofparticulatecontrolwillalso be required. The future absolute emissions requirements of the EPA andlocal conditions, including attainment and nonattainment standards of keypollutants,willalsodeterminethelevelofemissioncontrolsrequired.Operatingcoalplantsarefacingasituationwherethepriceofcoalhastaken

offdue to theneed forboth thermalandcokingcoal in IndiaandChina.Coal

mines in both India and China can't keep up with their respective countries’internaldemandforcoal.CoalinIndiatendstobeoflowheatcontent,andasaresult is expensive to ship for a long distance. Coal from the U.S. CentralAppalachian region is actually being shipped to China for use in coking coalfurnaces.A coal export terminal on theWestCoast,whichwould export coalfromthePowderRiverBasin, isalsounderconsideration.Coalplantsarealsocompetingagainstthelowpriceofnaturalgas.Inthepast,coalplantsoperatedin a world of natural gas at prices above $6/MMBtu and delivered coal of$2/MMBtu.Thishighercostfornaturalgasprovidedcoalplantswithanaddedenergymargin.

CoalTechnologiesThere are currently threemain coal-firedpowerplant technologies, circulatingfluidizedbed(CFB),pulverizedcoal(PC),andintegratedgasificationcombinedcycle(IGCC).Duetothedifficultiesinobtainingnewairpermits,thelowcostofnaturalgas, and theoverall reduction indemand forpower, sitingnewcoalplants of any type is difficult. There will be a number of restructuringopportunitieswithoperatingcoalplantswithexistingairpermits.CFB boilers have a niche in the combustion of low-quality fuels likewaste

coalorpetroleumcoke.UnlikePCboilers,thelargestsingle-unitCFBtendstobe300mWinsize.Single-unitPCboilerscanbeaslargeas700mWinsizeandenjoy economies of scale. CFBs can enjoy diseconomies of scale since theopportunityfuelsthattheyburncanbemuchlowerincostthanthepremiumfuelthataPCboilerburns.Thesefuelsmightalsohaveatippingfeeorapaymenttothe fuel purchaser. Depending on existing fuel-handling infrastructure, CFBsalso have the ability to burn different fuels. Bubbling fluidized bed boilers, aCFBderivative,havebeenusedrecentlytocombustbiomass.Theall-incostofaCFBboiler,includingtheengineering,procurement,andconstruction,wouldbeintherangeof$3,000/kW.ThiscostwouldmakeanewCFBuneconomicinthecurrentpowermarket,anditwouldbenexttoimpossibletoobtainanairpermitduetoCO2concerns.FosterWheelerandAlstomaretwomanufacturersofCFBboilers.LikeatraditionalPCboiler,atypicalCFBprojectwouldincludeoneormore

steam turbines, generator, condenser, and cooling tower. Other componentswould includea fuel storagebuilding,water treatmentbuilding,administration

building, and amaintenance andwarehousebuilding. In aCFBboiler, air andfuel are fed into the bottom of the combustion chamber and circulatedcontinuously until combustion is complete.A fluidized bed is a suspension ofcoalandlimestoneinaflowofhotair.Asitburns,limestonereactswithsulfurinthecoaltoformsulfate.Theonlyby-productofthecombustionprocessisabenign alkaline ash that can be used in mine reclamation and to reduce aciddrainage from coal mines. Continuous circulation of solids provides longerparticulate residence time, resulting inefficient fuelcombustionandemissionscontrol. In theCFBboiler,air, limestone,and fuelare fed into thecombustionchamberandthesolidsarecirculatedcontinuouslyandcombusteduntiltheyaresmallenoughtobecarriedoutwiththefluegas.Continuouscirculationofsolidsprovideslongerparticulateresidencetime,resultinginefficientfuelcombustion.Low combustor temperature and introduction of limestone into the combustorchamberreduceemissions.LimestoneisusedtocontrolCFBboilerSO2emissions.Limestoneistypically

deliveredbytruck,storedinasilo,andfedintotheboiler.Aqueousammoniaisfed into the flue gas to control NOx emissions. This process is known asselective noncatalytic reduction (SNCR). Flue gases exiting the CFB passthroughbaghousestoremoveparticulatespriortodischargefromtheplantstack.Theuseoffabricfiltersinthebaghousereducesparticulatemattertoaverylowlevel. Fly ash and bottom ash are collected and conveyed to an ash silo.Ashfromthesiloisdischargedintotrucksfordisposalatoffsitelocations.As a result of the limestone injection for ash control, the ash by-product

produced by the CFB is high alkaline. It is very good for both active andabandoned coal mine reclamation. The ash can neutralize acid mine drainagefromwaste coal sites.Most newerCFBandPCplants alsohave a zerowaterdischarge requirement. This means that no water from the plant would bedischargedintolocalriversorstreams.PCboilers aredrum-typeboilers equippedwith air preheaters, sootblowers,

andfans.LikeaCFB,theyaresizedtoprovideanadequateamountofsteamforthesteamturbine.PCboilersaretypicallyequippedwiththreemillscapableofreducing coal to a required fineness and mesh size. PC boilers are typicallydesignedwiththeabilitytooperatewithonemilloutofservice.LikeaCFB,PCboilers are usually equipped with a baghouse or electrostatic precipitator tocollect and control fly ash.Modern PC boilers also have a scrubber for SO2control and SCR for NOx control. Foster Wheeler and Alstom are two

manufacturersofPCboilers.Bothof these firmshavemaximized their useofChinese-manufactured equipment.A number of Chinese manufacturers arechallengingbothofthesefirmsinbothPCandCFBboilers.ForaPCplantbuiltintheUnitedStates,estimatesfromtheDepartmentofEnergy's(DOE's)EnergyInformation Administration (EIA) are $3,167/kW for a 650-mW single-unitfacility.Aswith aCFBboiler, itwouldbe extremelydifficult to obtain an airpermitforafacilityofthistypeintheUnitedStatesduetofutureCO2concerns.IGCCallowsfor theuseofcoal inagasificationprocess.Coal isgasified to

produce a synthetic gas, which is used to fire a gas turbine engine. As in atraditionalGTCC,exhaustheat fromthegas turbineengine isused toproducesteam to drive a steam turbine. IGCC also has the advantage of potentiallycontrollingCO2emissionsby theuseofashift reactor.TheCO2 stream fromthesyntheticgaswouldbeshiftedouttocreatehydrogen.Thehydrogenwouldbe used to fire the gas turbine engines, and the CO2 would be buriedunderground. Most gas turbine engine manufacturers have limited experiencewithburning100percenthydrogenonalargescale.CO2storageonalargescalehas not yet been proven and will be expensive. Other IGCC projects havestudied the use of selling their CO2 to a CO2 products pipeline. CO2 has anumberofuses,includingforenhancedoilrecovery.Thechallengeisthatthereisnota largeenoughmarket touse ifallof theCO2wascapturedfromeveryoperatingpowerplant.ThisisthereasonthatundergroundsequestrationofCO2has to be studied. The enhanced oil recovery market use of CO2 would bequicklyoverwhelmedifacost-efficientmethodforcapturingCO2werefound.The challenge that IGCC faces is its cost. Unlike wind and solar projects,

IGCCplantsdon't qualify for the investment taxorproduction tax credit.TheU.S.governmenthasbeenofferingoutrightgrantstoIGCCprojectsinaneffortto try to make them competitive. States are not required to buy power fromIGCCfacilitiesundertheirRECprogram.Likeothercoalprojects,thelowcostfor natural gas makes it hard for IGCC facilities to compete. The DOE EIAshows thecost fora600mWIGCCfacilityat$3,565/kW,which isbelow theprojectedcostforprojectsunderdevelopment.WhenCO2controlisconsidered,theoutputdropsto520mWandthecostincreasesto$5,348/kW.ThestateofIllinoisencouragedthedevelopmentofanIGCCplantbyforcing

the local utilities to buy power from a project that uses Illinois coal and fully

sequesteredorsolditsCO2emissions.TheproposedIGCCTaylorvilleEnergyCenter(TEC)inIllinoisisestimatedtohaveanall-incostof$3.52billionfora602-mWpowerplant.Thisworksoutto$5,847/kW,abovetheDOEEIAIGCCestimate.TECattempted tocontractwithaCO2pipeline thatwouldmove theplant'sCO2to theGulfCoast.Thisconceptdidn'tworksince thepipelinewasnot able toobtain all of its right-of-ways.Asof January14, 2011, the Illinoisstate senate had voted against approving the plant since itwould significantlyraisethecostofpower.Atthetimeofthiswriting,theTECisstalled.DukeEnergy'sEdward'sPort IGCC facility is theonly IGCC facility that is

currently under construction.Duke originally estimated that the projectwouldcost$1.985billion.Themost recentestimate,as theproject isnow57percentcomplete,is$2.88billion.NumerousotherIGCCprojectshavebeendeferredorcanceled.XcelEnergyannounced in2007 that itwas indefinitelydeferring itsplanstobuildanIGCCfacilityinColorado.

SummaryThetechnicalandeconomicissuesofcoalplantshavetobeunderstoodinordertoevaluaterenewablepowerplants.Likerenewablepowerprojects,coalpowerprojects face a challenge fromabundant supplies of shale gas. Some investorsbelievethatitwillbedifficultforcoalpowerplantssmallerthan500mWinsizeto continue to compete.Obtaininganairpermit for anewcoalpowerplant isnext to impossible, making some operating coal plants interesting investmentopportunities.Chapter 13 reviews biomass, which can be cleanly burned in specially

designedboilersorcofiredwithcoal.

Chapter13

BiomassEnergyandBiomassPowerPlants

“ThegreatestOakshavebeenlittleAcorns.”—ThomasFuller'sGnomologia,1732

Biomassisdefinedasarenewableorganicmaterialthatcanbeusedtoproduceenergy. Most U.S. states allow biomass-based power plants to qualify forrenewableenergycredits(RECs).Unlikeawindorsolarpowerplant,abiomasspowerplantcanbeaseven-day-a-week,24-hour-a-dayresource.Onanannualbasis,abiomasspowerplantcanhaveanavailabilityandcapacityfactorover90percent.Likeotherrenewablepowersources,biomasspowerplantsalsohavetocompeteagainstlow-pricednaturalgas.Biomass energy isderived fromvarious typesofvegetation, trees, branches,

roots,bark,andanimalorhumanwaste.InChinaandIndia,variousnonedibleplants, likebagasse,arecollectedandburned inpowerplants tocreateenergy.Bagasseisaby-productfromsugarcaneproductionthatisusedasaboilerfuel.Other types of biomass that are not used for food can be collected formulch,fertilizer,orburnedinpowerplantsasfuel.Today,biomass,whichissafe,nonhazardous,andnonlethalfuel,isburnedin

powerplantsatveryhightemperaturesandcanproduceagreatdealofheatorenergy.Theburningofbiomassfueldoescreatecarbondioxide(CO2),nitrousoxide(NOx),andparticulateemissions.

WoodWasteToday,woodwasteisoneofthemostwidelyusedformsofrenewablefuelintheUnitedStatesforhomes,schools,factories,prisons,andpowerplantsingeneral.In2010,biomassfromwoodwasteexceededthetotalenergyproducedfromallour nation's hydropower plants. Biomass fuels produce more than 7,700megawatts (mW)of electricity.This is becausemany thousands of smallU.S.powerplants,pluslargeU.S.powerplants,canusewoodwasteaccordingtothe

U.S.DepartmentofEnergy'sFederalEnergyManagementProgram.Less than 50 percent of each tree ends up in finished lumber, furniture,

flooring, cabinetry, doors,walls, stairs, toys, children's climbing frames, beds,framebuildings,andconstructionsites.Therefore,alltherestofeachtreeresultsin underutilized products or is dumped in landfill sites.Much wood waste isderived fromconstruction sites fornewbuildingswheremanypiecesofwoodareusedtoframethebuilding,oraslongwoodenmoldsforcementtobepouredintoharden.Thegreaterthenumberoflumbermillsandfurnituremanufacturersor the more new construction sites in a city, the more wood waste can beexpectedtobeavailableforwoodwastetoenergypowerplants.Thechallengeforabiomasspowerplant is to locateascloseaspossible to these supplies inordertoreducetransportationcostOn a $/MMBtubasis,woodwaste is oftenmore expensive than coal.Wood

wastehas a typical as-receivedheat contentofonly4,500Btu/lb.Assumingadeliveredpriceof$40/ton,thisconvertsto:

Thisdeliveredpriceiswellabovethedeliveredpriceofcoal.Itistherangeofthe delivered price of natural gas. Unlike a natural gas plant with a 7,000Btu/kWh heat rate, a typical biomass plant will have a heat rate of 13,500Btu/kWh.Thisconvertstoanenergypriceof:

Thiscomparestotheenergypriceofanewcombined-cycleplantofonly:

AccordingtotheDOEEIA,thecapitalcostforabiomassprojectwouldbeintherangeof$3,860/kW,whichissubstantiallyabovethecapitalcostforanewgas-firedcombined-cyclepowerplant.Depending on the quality of the wood waste, the cost of disposal can be

avoidedandwoodwastemayhaveanegativeprice.Withtheincreasedinterestin biomass-fired power plants, this has become a rare situation. Wood wastecollectedonfederallandsafterlumberingmayreducetheriskofforestfires.Woodwastecanbeused for spaceheating,processheat,ordirectelectricity

production.Themostcommonindustrialuseofwoodforenergyproduction iswhensteamisproducedinaboilerusingstandardstokertechnologyorbubblingorfluidizedbedboilertechnology.Woodwastecanalsobeblendedwithcoalin

ordertodecreasethelevelofemissionsofNOxandsulfurdioxide(SO2)thattheburning of ordinary coal produces. It is possible to retrofitmost existing coalplants for cofiring with wood, and this can significantly decrease the toxicemissionsofSO2andNOx.

EconomicsofBiomassAt thepresent time, it isdifficult tomake theeconomicswork forgasificationusingbiomass.Biomassprojectstendtobesmallerinsizeanddon'tbenefitfromeconomiesofscale.There are many U.S. federal agencies that can use wood as a way to use

energy-savingperformancecontractstofinancetheirenergyprojectsthatenableU.S. government facilities to reduce their energy use and costs withoutrequesting congressional appropriations to fund these projects. All over theworld,U.S.federalfacilitiescanusetechnology-specificbiomassandalternativemethanefuel(BAMF),whichoffersprivate-sectorexpertisespecificallygearedtousingrenewableBAMFresources.InVermont,25schoolsoverthepast15yearshavebeenusing8,000tonsof

wood chips per year to heat their schools. Similarly, in Maryland, theDepartmentofCorrections facilitieshavecut their fuel costsby63percentbyproducing their own power by using wood chips for heating all their prisonsinsteadofcoalorgas.InthecaseofboththeMarylandprisonsandtheVermontschools, the power plants involve burning wood chips to boil water, whichproducessteamtopower twocondensingsteamturbines ratedat1.9mW.Theprisonwasexpandedto3,100beds,resultingina60percentincreaseinenergydemand. The original system continues to service the expanded facility withreliablelow-costenergy.In another case, the Central Michigan University (CMU) campus at Mount

Pleasantwasgivenawood-firedenergysystemasaretrofittoanexistingnaturalgas–firedsystematacostof$3.6million.Thisresultedinapaybackperiodofless than fouryears.Theconversion included theadditionofaboiler rated for50,000lbperhourofsteam.A1-mWsteamturbinegeneratorprovideselectricalpowerandservesasapressure-reducingvalveforsteamthatisuseddownstreamforheat, air conditioningandhotwater.TheCMUsystem isdesigned toburn43,700tonsofwoodtreechipsperyear.Thechipsareharvestedfromlow-gradewoodsupplieswithina50-mile radiusof thecampus.CMUestimates that the

school is saving $1 million per year through the reduced cost of fuel and isinjecting approximately $1 million per year into the local and state economyfromwoodharvestingandprocessingoperations.

SummaryBiomass is a renewable technology that enjoys a high capacity factor. It isdifficulttofindenoughwoodwastetosupplyapowerplantlargerthan50mWinsize.OhioEdisonattemptedtorepoweranapproximately300-mWcoalplantandwas unsuccessful in locating enough biomass that could be economicallydelivered to the plant. Transporting wood waste more than 50 miles is noteconomical due to its low as-received heat content of approximately 4,500Btu/lb.Dependingonapowerplantlocationanditscostofcoal,existingcoal-firedpowerplantscanoftenbecofiredwith10percentwoodresidueswithonlyminorplantmodifications.Certain states aremaking it difficult for biomass projects to collectRECs if

theydon'thaveabaghouseorfabricfilterforparticulatecontrol.Thiscanoccureven if the biomass facility is in compliance with local air regulations. RECpayments tobiomassprojects are critical due to their capital andvariable costdisadvantagestonaturalgas–firedpowerplants.InChapter14,wediscussnuclearpowerenergyplants.

Chapter14

NuclearPowerEnergyPlants

Tothemakingofthesefatefuldecisions,theUnitedStatespledgesbeforeyou—andthereforebeforetheworld—itsdeterminationtohelpsolvethefearfulatomic dilemma—to devote its entire heart and mind to find the way bywhich the miraculous inventiveness of man shall not be dedicated to hisdeath,butconsecratedtohislife

—PresidentEisenhower'sspeechtotheUnitedNationsonhis“AtomsforPeaceProgram”

OnMarch11,2011,Japanexperiencedamajorearthquakethatwasratedas9ontheRichterscale,thehighestleveleverrecordedinJapan.Infact,itwasoneofthemost powerful earthquakes recordedworldwide during the past 100 years.ThisearthquakecausedahugetsunamiintheoceanrightofftheJapaneseshore,and together they caused a nuclearmeltdown in three nuclear power plants atFukushima Daiichi nuclear station and also negatively impacted two othernuclearpowerplants.Theresultofthiscombinationofnaturaldisasterswasthesuccessive failure of the three safetymechanisms that Japanese nuclear plantsreliedupon.Thesepowerplants,builtinthe1970s,hadbeenbuilttowithstandearthquakesbecauseJapan is locatedon topofawell-knownearthquakezone.However,noneoftheearthquaketestsonJapan'snuclearpowerplantshadbeenratedashighas9.Also,nonuclearpowerplantshadbeenbuiltwithtestingofthefullimpactofahugenearbysimultaneoustsunami.GlobalTVvideosofmassivedestructionwerebeingbroadcastcontinuallyas

international nuclear rescue teams were rushed to the site and the localpopulationwas evacuated.Although the Japanese government'smunicipal andnationalmeasures tocalmthepublicand topreventpanic in thisdisasterwereextraordinarilysuccessful (basedonmanyyearsof Japanesepublicearthquaketraining), the deaths numbered over 25,000.Yet unrecovered bodies of peopledrownedintheoceanandburiedunderhugecatastrophiclevelsofbuildingandinfrastructuredebris led toawide rangeofestimatesof fatalities, injuries,and

damage.Theradioactivityoftheair,water,dust,andiodineintheseawaterwerethousandsoftimeshigherthanthe“safelevel.”

GlobalImpactofJapan'sThreeNuclearPlantMeltdowns

On January 6, 2011, China announced publicly that it would begin a majorprocessofreusingvirtuallyits totalofspenturaniumfuel.However,followingthe Japanese nuclear crisis of March 11, 2011, China—which had 79 newnuclear power plants to be constructed—announced that it had temporarilyhalted until the results of its scientific investigations of nuclear power plantsafety (under the new earthquake, tsunami, and nuclear plant meltdowns inJapanandelsewhere)couldbemoredefinitivelyevaluated.In theEuropeanCommunity (EC), theMinisterof theEnvironmentdeclared

thattherewouldbeathree-monthinvestigationofall143nuclearpowerplantsintheECtodeterminewhetherexistingnuclearpowerplantswerevulnerabletoearthquakes,tsunamis,airplanecrashes,terroristorcyberattacks,ormajorwaterproblems or coolant problems. In Germany, Chancellor Angela Merkel hadrecentlyproposedanautomaticextensionof12yearsaddedtothelifeofthe17Germannuclearreactors;shewassuddenlyforced,threedaysaftertheMarch11nuclearcrisis,todeclareathree-monthcontractors’moratoriumontheextensionofanynuclearpowerplantsuntilanin-depthscientificstudycouldbeconductedand completed.Within days, two older nuclear German nuclear power plantswere discontinued, and otherEuropean nationswere testing their own nuclearpowerplantsforsafety.ByMay31,2011,MerkeldeclaredthatGermanywouldcloseallitsnuclearplants.OnMay26,Switzerland,where40percentoftheentirenation'selectricityis

derivedfromnuclearplants,declaredthattheSwisscabinetrecommendedtotheSwissParliamenttheendofnuclearpowerasanenergysource.1Italyandothernations around the world also put their proposed nuclear power plantconstructionprojectsonhold,andmanyinstantlysetinmotionvastinspectionsofnuclearplantsafety.Globalfinancialmarketsimmediatelyloweredthestockprice of nuclear power corporations, and the rating agencies downgraded thecreditratingofsuchcompaniesaroundtheglobe.Continuing global research studies of the nuclear damage in Japan three

monthsaftertheeventindicatedongoingdamagefromtheoriginalevents.They

nowsuggestedthattheyhadnotsuccessfullycontainedthenucleardangertothetotaloffivenuclearplants,andnewongoingdangerswerebeingdiscoveredinthewater,hydrogen,andremainingnuclearfuelstillintheplant.The already high cost estimates for constructing new nuclear power plants

versusotherformsofenergypowerplantssuddenlyrosetotakeintoaccountthemanyanticipatedextracostsofearthquakeandtsunamiprotectionthatwouldberequiredworldwide,andalso thenewgovernmentsafetyprecautionsandwiderangeofnewteststhatwouldberequiredforfinalauthorizationofnewnuclearpowerplants.Therewas also a spike inprojected costs becauseof thewidelyanticipatedcancellationofmanynuclearpowerplantsinvariousnations.Francewasanationnearly80percentdependentonnuclearpowerplantsfor

all its electricity needs, theUnitedStateswas 19 percent dependent for all itselectricity (and produced the most nuclear power–derived electricity of anynation),andJapanwas20percentreliantonitsnuclearpowerplantsforitstotalelectricity needs. These were three nations most directly affected by thisinternationalnuclearcrisis.However, well over 30 nations were dependent on nuclear power for

significant portions of their electricity, as well as for energy for hundreds ofnavalships, icebreakerships,andaeronauticspacerocketsandmanyscientificexperiments in medicine, new materials, and mining and numerous otherindustries,werealsothrownintofinancialandenergysafetyuncertainty.Even before the Japanese nuclear plants disaster, nuclear power plantswere

alreadyoneof themost (ifnot themost) expensive sourcesof electricityonacostperplant/kilowattbasis,compared tonotonlyvarious fossil fuels suchascoal, oil, gas, natural gas, shale gas, and liquefied natural gas, but also thevarious renewable energy sources, such as hydropower, solar power, windpower, thermal power, biomass, wave power, and tidal power. The cost ofmining theuraniumorother radioactiveore suchasplutoniumand thorium(alessradioactiveore),aswellasthecostofthentransformingoreintoasafeformof“yellowcake”orothertransportablesubstance,werereallyonlythefirstbasiccosts, compared to the total all-in cost of obtaining all government regulatorypermissions, designing the plant, and constructing the plant, and finalcompletion testsandnumeroussafetyevaluationprocedures,whichwereoftensubjecttoverylongdelaysandchanges.Thecostsoffueloncetheplantwasfullybuiltandapprovedwererelatively

small, since the nuclear fuel lasted so long and could generate electricity fordecades.Yet,all the initialcostsof thenuclearpowerplantwerehugeand the

scaleofnuclearplants tended tobe thehighestbecause itwasbaselinepoweravailable24/7forthreetosixdecades.Theresultwasthatthecostcomparisonsof other types of power plants,whichweremuch smaller than nuclear powerplants, were much cheaper to build but often required very high continualongoing fuel expense. The fact that the cost comparisons for one electrickilowattwereoftennottruly“applestoapples”equivalenciesfornuclearpower,becauseof thehugeup-front costs thatnuclearpowerplants required, enabledlarge-volumediscountsperkilowatt.

ComparativeCostsofEnergyTodoacomparativeevaluationofa typical“UpdatedEstimateofPowerPlantCapital and Operating Costs” calculated by the U.S. Energy InformationAdministration(EIA),wefindthat“conventionalnaturalgascombinedcycle”isstatedasof2010tohaveanominalcapacityof540,000megawatts(mW),hasan“overnightcapital cost”of$978/kW)witha“fixedoperatingandmaintenance(O&M)cost (2010$/kW)of $14.39.By contrast, a “uraniumdual-unit nuclearplant” has a “nominal capacity” of a large 2,236,000mW, but a low variableO&Mcostof$2.04/kW.SeeTable14.1.

Table14.1UpdatedEstimatesofPowerPlantCapitalandOperatingCosts.

Thebasicupdatedcapitalcostestimatesforelectricity-generatingplantshave

been repeatedly evaluated by both the EIA and various private researchorganizationsandcorporationsliketheNationalEconomicResearchAssociation(NERA),atdifferenttimeseveryyear.

KeytotheEIACostEstimatesThe following is a key to the assumptions and sources used in calculating arangeof“levelizedcostsforgeneratingelectricityfromdifferentfossil,nuclear,and renewable energy technologiesbroughtonline in2015.”Levelized cost ofelectricity is a measure often used by analysts to compare and evaluate therelative costs and competitiveness of different electric power generatingtechnologies.Different major research organizations use somewhat different key

assumptionsandsourcesincalculatingarangeof“levelizedcostsforgeneratingelectricity” from different fossil, nuclear, and renewable energy technologies.SeeTables14.2and14.3.

Table14.2LevelizedCostofElectricityfromFossilandNuclearTechnologies.

Table14.3LevelizedCostofElectricityfromRenewableEnergyTechnologies

(2010$).

NuclearPowerPlants’50YearsofElectricityGlobally

Globally, nuclear powerplant historyhas experienceddramatic shifts over thepast 50 years due to very strong political, military, scientific, financial, andsocialconfrontations.GreatBritainwastheoriginalpioneerofthepeacefuluseofnuclearpowerreactorsforpublicenergy.However,differentnationscreatedarangeofdifferent typesofnuclearpower reactors.Thesedifferentnationsalsohaddifferentconceptionsofwhattherequiredsafetystandardsofnuclearpowerplantsshouldbeandallthesafetyprotectionprocedurestopreventameltdownanddifferentcontainmentproceduresafteranuclearmeltdownoccurred.Over the years, a few nuclear accidents and meltdowns occurred: the

ChernobylplantintheSovietUnion,theThreeMileIslandplantintheUnitedStates,plus accidents atnuclear submarinesand ships, and soon.Allof theseaccidentsgalvanizedGreenpeaceandotherinternationalantinuclearmovementsto launch major national political marches, demonstrations, and sometimesviolentattacksagainstgovernmentsfortwodecades.In2003,inresponsetonuclearprotests,theBritishLabourGovernmentpassed

anacttostopallnuclearpowerplantconstruction.However,by2006,theBritishLabor Government plus the atomic scientific community and the financialmarketsdecided tomake thenuclear industryacenterofanewnationalgreeninitiative to reduceBritain's carbon footprint and very significantly to removecarbondioxidefromtheBritishlungs,climate,air,water,wastetreatment,roads,transport,buildings,andthetotalenvironment.Francecontinuedtoderivenearly80percentofitsentireelectricenergyfrom

nuclear power plants. TheUnited States continued to derive 19 percent of itselectricenergyfromitsnuclearpowerplants,andmanyothernationscontinuedtorelyheavilyontheirnuclearpowerplantsortobuynuclearpowerfromothernations. Germany had relied on nuclear power plants for 47 percent of itselectricity and, in fact, the prime minister, Angela Merkel, had continuedextending the lives ofGermany's nuclear power plants for decades, even daysbeforeJapan'snuclearmeltdowncrisis.Almost immediately following the Daiichi Japan level 9 earthquake, the

tsunami, and triple nuclearmeltdown disaster,Merkel announced a halt to allnewnuclearworkuntiltherewasanin-depthscientificandengineeringanalysisofallGermany'snuclearplants.TheUnitedStatesandmanyothernationsalso

ordered themost stringent tests on all their nuclear power plants to be certainthattheycouldallwithstanda9-ratedearthquakeontheRichterscale,avolcaniceruption,ajetaircraftcrash,agiantmeteor,actsofterrorism,ornaturaldisastersliketornadoes,cyclones,orhurricanes.Even when the simultaneous giant Japanese earthquake, tsunami, and three

nuclear power plantsmeltdown occurred inMarch 2011, theBritishCoalitionGovernment of Conservatives plus Liberal Democrats publicly declared theywouldcontinuetheBritishnuclearpowerindustry.Whiletheywouldtakeextrasafety precautions and conduct careful scientific studies on their own, and inconjunctionwithothernations, theU.K.Statesaid itwould“goforward”withtheirmaster plan for a newgenerationof nuclear plants, fast breeder reactors,andnewnuclearequipmentforreprocessingofusednuclearmaterial.While Germany and Switzerland decided to abandon their nuclear power

option, other, faster-growing nations in Asia and Europe proclaimed theirconviction that theywould increase efforts todevelopadvancednuclear “thirdgeneration”and“fourthgeneration”nuclearreactorsasavitalpartoftheirtotalenergymix.

RequiredUp-FrontPaymentforNuclearWasteDisposalbeforeaNewPlant's

ApprovalOnemajorrecentinnovationofnewnuclearpowerplantplanninginanumberofnationsistherequirementofa“geologicaldisposalfacility”(GDF),whichisaguaranteedfinancialcommitment(upfront)topayforthesafedisposalofthenuclearwastecreatedbyeachnuclearpowerplant.Thisprepaymentprogramisespecially reasonable because the cost of new advanced methods of creatingnuclear power will have to be originally factored into the cost of their“reprocessing”their“spent”or“wastenuclearmaterial”one,two,ormanytimestogetherwiththeirpotentialrangeofultimatenuclearwastedisposalcosts.Asaresultoffinancialplanningandbudgetinginadvance,theextraaddedlife

spanoftheoriginalnuclearfuelthatwillbereprocessed,andthesafenumberoftimesitcanbereprocessed,whileitwillcostmoreinitiallythanitwouldhaveoriginally, the nuclear power plant will have a prepaid right to reprocess thisnuclearfuel.Thislowerstheaverageall-indisposalcostofspentnuclearfuelby

reducingtheultimateamountoftotallyspentnuclearfuel.Inotherwords,astheFrench,theJapanese,andnowtheChinesehavediscovered,themoretimesthatnuclearfuelcanbesafelyreprocessedandusedtocreatenewenergy,heat,light,orpower,theeverhighertotalamountofnuclearfuelthatnationhasultimatelycreatedandused.Conversely,theever-lowerfinalamountofusedfuelthatwillbeleftover,intheend,willcostsignificantlylesstobesafelydisposedof.Thereductionof that nuclearwaste disposal cost for decades has been a huge and“verycostlyunknowninthenuclearpowerindustry”asdemonstratedbythetwodecades wasted nationally, regionally, and locally by numerous governmentregulatoryagenciesandlegislatorsintheultimatelyfruitlesseffortintheUnitedStates trying to site and test and then failing to get approved the “YuccaMountainNevadanational nuclear disposal site” thousandsof feet deepundersolidrock,whichwasultimatelyrejectedbystate,local,andfederallaw.It is only by calculating accurately these total reprocessing costs of nuclear

fuelandthetotalfinancialbenefitsintotalreprocessednuclearenergyproducedbyeachextragiventonofmaterialthatitcanbeaccuratelyquantified.Itisthisnewwayofcomprehensivelyevaluatingthetotalcostsandtotalbenefitsofthenew reprocessing technologies for nuclear plants that can now bring down itslifetimecostofenergytobecomesomewhatmorecomparabletocoal,oil,gas,orotherenergiesoverthelongterm.Nuclear power generates few greenhouse gas emissions into the earth's

atmosphere,whereasoilandcoalgeneratelargeemissions.Eventraditionalgas,and“shalegas”acquired through the frackingof shale rocks toextractnaturalgas,doesproduceCO2emissionsatabouthalftherateofcoal.ThisislessCO2,butfornationsthatstatedtheirintenttoreducegreenhousegasemissionstotheirabsoluteminimum,aswitchtoshalegaspollutionemissionsisstillacarcinogen.

AsiaWillLeadtheNextShifttoNuclearPowerPlantDevelopment

China, India, South Korea, and Russia are each significantly expanding theircurrent total of nuclear power plants. China is building new nuclear energyplants by its own CPR 1000 design construction, plus joint ventures withWestinghouse/ToshibaAP, Russia's VVER nuclear plant design, South Korea'sAPR1400nuclearplantdesign,andseveralotherforeignnationalnuclearenergyconstruction companies. China also is purchasing other nations’ new nuclear

powerplants.In2010,Indiahad20operatingnuclearpowerplants.By2011,ithadsixmore

newnuclearpowerplantsunderconstruction.Indiaalsohadstatedplanstobuildand/orpurchase40morenewnuclearpowerplantsfromforeignnationstobeinoperationby2032.Indiahassignedbinationalcontractsfornuclearplantswithnine foreign nations. The India–South Korea Civil Nuclear Cooperation Pactwas first signed in 2009, and finally reaffirmed by both nations, India'spresident,PratibhaPatil,andSouthKorea'scounterpart,LeeMyung-bak,onJuly25,2011,inSeoul,Korea.2

SouthKorea'ssalesof itsAPR1400nuclearpowerplants to theUnitedArabEmiratesin2009–2011areforecasttoleadtomoresalesofglobalnuclearpowerplants.3 Edward Kee, vice president at NERA Economic Consulting inWashington,D.C.,hasspokenon the impactChinaandSouthKoreawillhaveontheglobalnuclearindustry.4

In his speech inHongKong inDecember 2010,Kee stressed that themostimportantissueforreactordesignsisto

...getalotofunitsbuiltandintooperationasfastaspossible.Thisgetsthedesigndown the learningcurve to lowercostsandshortensschedules,butalso stimulates additional sales from buyers who look for low risk anddemonstratedsuccess.Whiledesign featuresare important,marketsuccessismuchmoreimportant.5

GE and other nuclear corporations let themselves get tied up in highlycomplexU.S.NuclearRegulatoryCommission (NRC) licensingprocesses andlegalandfinancialprocedures,withtheresultthatfewmajorU.S.projectshavestarted, while China, India, South Korea, and Russia are all building manyplants.Thevital fact is that all theseAsiannuclear power plant builders have their

total governments’ financial backing, and all state electric utilities have largenumbers of continuing orders for new plants. None of the U.S. or Europeannuclear companies have anything like that. Thus, Asian nuclear firms gain

continualexperienceandexpertiseandrelationshipswitheachotherandmanygovernmentsworldwide.Kee makes a key point when he compares Asia to the United States and

Europe:

Westernvendorsmustcobbletogetheraseriesofsubcontractorsandrelatedagreements from unrelated commercial entities; each of these agreementsadds cost tomeet riskpremiumsandprofitmarginsof subcontractors risk(as responsibility is shared between multiple commercial entities), andcomplexity (project management is more difficult due to multiple entitieswithmultipleinterestsandcontractualrights....”6

China'sNewNuclearReprocessingIsaVastExpansionofAtomicFuel

Until recently, the total amount of nuclear fuel “reprocessing” done in India,China, the United States, and other nations has been limited, so that themaximum cost savings from one reprocessing has been estimated to havereducedtheoverallnuclearfuelcostby15to25percent.However, inChina's extraordinary announcement on January 3, 2011,Wang

Junfeng, the project director of the Chinese National Nuclear Commission(CNNC),statedonChinaCentralTelevision(CCTV)thatataremotesiteintheGobiDesert in theGansu Province, they had successfully begun to reprocessspentnuclearfuelmaterialfromlightwaterreactors.WangJunfengthenstatedthatChinanowhadenoughfueltolast70years,andthenewtechnologycouldyieldenoughnuclearfueltolastfor3,000years.This incredible leap in nuclear fuel production stunned the world's nuclear

communityofscientistsandengineers.VirtuallyallagreedthatChinacouldonlyconceivablyachievethatunbelievabletotalexpansionofnuclearfuelif itweretocontinuallyreprocessallitsnuclearfuelmanytimesover.Butthisalternative,manyscientists fear,mightcausepotentialhealthhazards thathaveneverbeenfacedbefore.Potential Chinese global nuclear power plant health hazards resulting from

excessive reprocessing of used radioactive nuclearmaterial instantly remindedsome experts of the Russian Chernobyl nuclear plant catastrophe. That mostfamoushistoriceventcausedbyfartheworstnuclearpowerplantdisastereverin1986atChernobyl.ThatwasbecauseitspreadnuclearcloudsandradioactiveashdestructionoverthousandsofmilesofEuropean,Asian,andMiddleEasternterritory. It virtually stopped all new Russian construction of nuclear powerplants for a decade. Its antiquated, unregulated, unsupervised, andextraordinarilydangerousplantbecamesynonymouswith“nucleardeath.”Asaresult, various older Russian plant reactors and their designs will never beacceptedanywhere.Yet,nowRussiaappearstohaveinpartadaptedsomeaspectsofU.S.,French,

German, Indian, Canadian, and Scandinavian nuclear power plant designs.However, much more importantly, Russia has focused intently on rapiddevelopment of third-and fourth-generation nuclear plant designs specifically.Thesearefastbreederreactorsthatareusually“closed.”Therefore,supposedlynohumanerroroccursinrunningthesepowerplants.Most other advanced nations have also targeted their own scientific and

technological development of these same third-and fourth-generation fastbreederreactors.Nevertheless,Russiaisnowbackintosignificantnuclearplantconstruction and is selling its plants and joint-venturingwithChina and othergovernments.It is specifically China's willingness to very aggressively joint-venture with

Russia innewnuclearpowerplantdesignandconstruction thathasconcernedmany of the best-known nuclear power plant contractors elsewhere becauseChina is now the very largest customer, by far, in the entire world. All othernuclear power plant producers, mining companies specializing in uranium,thorium,plutonium,andother radioactiveminerals anywhere in theworld, arecompeting to sell their ore, their power plants, their technology systems, theirnuclearfuel,ortheirspentnuclearfuel,ortoenterintoshort-termorlong-termcontractsorjoint-venturepartnershipswithChina.ThereasonisthatChinahasproclaimed its firm plan and clear intention to build 90 to 110 nuclear powerplants, including those for its own use and for sale to other buyers or othernationsalongwithverylong-termservicecontracts.Inthisway,Chinacouldnowattempttobepositionedtobeabletosetworld

standards for nuclear power plants. China could drive their basic costs ofconstruction down to rock bottom and also could be able to gain the greatestnumberand fastest-achieved“experiencecurve”benefitsofanynuclearpower

plantproducerintheworld.BecauseChinadidnotembroilitselfinmajorwarsoverthepasttwodecades,

nordiditblowupitsownfinancialsecuritiesmarkets,itisinabetterfinancialposition than is theUnitedStates topartnerwithothernations in theirnuclearpowerplantplansandmanyactualconstructionprojects.WestinghouseCorporationintheUnitedStateshasformedahighlysuccessful

joint venture with Toshiba. Together, they have created what is currentlyconsideredthemostadvancednuclearpowerplantintheworld.Thisisthebestthird-generation fastbreeder reactor. It is also saidby someexperts topossesscertainelements that arecapableofbeingused inbuildinga fourth-generationnuclearpowerreactor.TheseWestinghouse/ToshibapowerplantshavebeensoldtoChinaandtovariousothernations.ThisWestinghouse/ToshibatechnologicalplatformisthemainreasonthattheUnitedStatesisstillabletocompeteintheworldmarkets.However,sincetheUnitedStateshasnotbeenyetbeengivenfinalregulatory

approvaltobeabletocompleteabrandnewnuclearplantintheUnitedStatesfor30years,ithasonlybeenabletocontinuetoworkontryingtodeveloponenewnuclearpowerplantandalsoupgrade itsexisting100-plusnuclearplants.The United States also has joint-ventured with major nuclear power plantproducersinothernationsandassistwithfinancingforvariousplantsabroad.For the past decade, China has been continually making million-pound

purchases of uranium on the spotmarket for its planned giant 80-gW nuclearreactor.Asadirectresult,Chinadrovethespotpriceup$62.50/poundfromlastyear.ReportersatFuelCycleWeekbelievethatChina'sannouncementisnotsomuch a breakthrough as the start of development of a commercial-sizedreprocessingplantof800-to1,000-tonne/yearthatusesFrenchtechnology.”7

LastJuly,Chinaachievedcriticalityat itsfirstprototypefastneutronreactor.TheChineseexperimentalfastreactorisexpectedtoreachathermalcapacityof60mWandproduce20mWofelectricpower.DevelopedbytheChinaInstituteofAtomicEnergy, it is the first sodium-cooled fast reactor in thecountry.Thereactor was built in collaboration with four different Russian nucleardevelopment centers: the Kurchatov Institute, NIKIET, OKB Gidropres, andOKBMAfrikantov.AccordingtoFuelCycleWeek:

It appears that China has set aside plans for 600MWChinese design infavorofbuyingtwoBM800fastreactorsfromRussiaforSanming-1and2.TheprojectisexpectedtobreakgroundinAugust2011.Abilateralprogramonfuelcycleforfastreactorsispartoftheeffort.Chinawillbuildanuclearcity around the two reactors to house construction workers, reactoroperators,andsupportservices.8

Summary:NuclearPowerFacesaCapitalCostandOngoingLocalApprovalChallengeThefutureofglobalnuclearpowerplantstodayisafarmorecomplexforecastthanitwouldhavebeenbeforethe2011Japaneseearthquake,tsunami,andthreenuclear power plant meltdowns. The entire nuclear power industry is underintensenationallyorinternationallymandatedinvestigationstotestwhetheranyoftheirnuclearpowerplantsareatriskfromalevel9earthquake.Certain factsconcerning the futureofnuclearpowerplantsand the futureof

other nuclear projects do raise important questions for investors in variousnations.First, therearenuclearplantsalreadybuiltonbarges,readytobeinstalledin

the Arctic Sea on the north coast of Russia that will power small new urbandevelopments.Theseare forecast tobepartofnewRussian,Norwegian,U.S.,Canadian, andmultinational oil, gas, andmineral exploration and commercialexplorationofhugesectorsoftheArcticOceanasaresultofnewconclusionsof30yearsofterritorial,economic,andfinancialnegotiationsworthmanybillionsofdollarsofnewextractioncontractsforoil,gas,minerals,andsoon.Second, such new isolated urban nuclear power plants on barges potentially

couldbealsoaprecursortoasimilarmultinationalcommercialoil,gas,mineral,fishing,andfishfarmingexploitationofthecontinentalshoresofAntarctica.Third,theUnitedStatesandEuropeoriginallydevelopedthird-generationfast

breeder reactors and the initial development of fourth-generation breederreactors. But it is not yet clear whether other Asian or Western nations willfollow the very large-scale joint ventures between the Chinese and Russiannuclear power fast breeder reactors of the third-generation and even fourth-generation reactor designmodels.Although it is known that theUnitedStates

andIndiahaveenteredajointventuretodevelopfastbreederreactors,itisnotknownwhethertheyorotherswillbeexploitingthenewestFrenchandChinesejointventureinverylarge-scalecontinualreuseandreprocessingofusednuclearmaterial.Thishugevolumeofreprocessingofusednuclearfueldoeslenditselftofastbreederreactor'sveryhighlevelsofproductionandatpresent, therearesignificant safety questions about the very large-scale continual reuse andreprocessing of nuclear spent fuel. This particularly relates to the absolutesegregation of, and the absolute safety and the containment of, the specificamounts of spent nuclear fuel, the reused nuclear fuel, new uranium, newplutonium, and finally what is called “MOX fuel,” a separate and exactingchemicalmixtureofthreepreviousfuels.Finally,asDanYurmanpointsout:

OnekeyquestionisexactlyhowmuchMOXorcombinedspenturaniumfuel,plusnewuraniumfuel,plusplutonium,Chinawouldbeable toproduce inthat one decade. According to published data on French spent fuelreprocessing and MOX manufacturing, French calculations estimate that800 tonsof spent fuelwouldproduce8 tonsof plutoniumand760 tonsofuranium. The two would be combined with enriched uranium to produceMOXfuelequaltouraniumfuelat4.5percentu235.9

InChapter15,wediscusshydropowerplants.

Notes

1.GoranMijukandMarkusGerman,“SwissMovetoEndNuclearEra,”WallStreetJournal,May26,2011.2.http://newsdawn.blogspot.com/2011/7/india-southkorea-civil-nuclear-pact.3.EdwardKee,NERAEconomicConsulting,NuclearPowerConferenceProceedings,HongKong,December7–8,2010.4.Kee,NuclearPowerConferenceProceedings.5.Ibid.6.Ibid.7.FuelCycleWeek,No.358,December6,2010,

http://fuelcycle.blogspot.com/.8.DanYurman,“ChinaNowReprocessing:ABeginning,NotaBreakthrough,”FuelCycleWeek10,no.406(January6,2011),http://fuelcycle.blogspot.com/.9.Yurman,“ChinaNewReprocessing.”

Chapter15

HydropowerPlants

Nothingis100percent;everythingisaweightedprobability.—PresidentBillClinton

Interesting investment opportunities are available in terms of operatinghydropower plants. Hydro is the only carbon-neutral energy source that iseconomic. The best project opportunities involve low-impact hydro projects.Projects of this type havebecome acceptedbynongovernmental organizations(NGOs) as a bona fide clean energy source. In some states, regulators arelookingforwaystoencouragetheoptimizationofoperatinghydroplants.Thesehydropowerplantscanalsoqualifyforrenewableenergycredits(RECs).Asitisforwindandsolarpowerprojects,itistoughinthecurrentmarkettomaketheeconomicsworkonthedevelopmentofanewhydropowerplant.

AUniqueRenewableTechnologyGlobally, hydropower provides 16 percent of electricity, slightly more thannuclear power and closing in on natural gas, according to the London-basedInternational Hydropower Association. In the United States, by contrast,hydropower now provides about 7 percent of electricity generation. All otherrenewablesourcescombinedaccountforabout3percent.1Norwayhas12,000megawatts (mW) of hydro that is more than 30 years old which runs on amerchantbasis.Older,operatinghydropowerplantswithpowerpurchaseagreements thatare

indexedtoavoidedcostaregoodrestructuringcandidates.Sinceavoidedcostistypicallydeterminedbynaturalgas inmostmarkets, this tends tobeanaturalgas–fired power plant. Power projects that are based on the current forwardcurvearealsofacingrevenuechallenges.Thelowcostofnaturalgasisreducingthe overall cost for electric power and reducing the cash produced by ahydropowerplant.Someolderhydroprojectsevenhaveapriceforpowerthatis

based on a discount to the forward curve for power. In certain states, electricutilitiesmay have a tracking account that takes into account any front-loadedpower pricing. Since this account could be rejected as an unsecured claimagainsttheestateinabankruptcyfiling,itmightbesecuredbyasecondlientothe project's debt. The fulcrum security for these projects will be the secureddebtandnottheequity.Unlike wind and solar projects, most hydro projects have a relatively high

yearlyavailability.Arun-of-riverprojectcanhaveanaverageavailabilityof65percentorhigherover a10-yearperiod.Theseprojects tend tohave lowhead(e.g., less than 30 feet). They are located at dams built for flood control ornavigation. There are 80,000 dams in the United States that don't havehydropowerplants.2 This can allow the hydro project to qualify for a higher-capacity payment revenue stream than awind or solar power plant. Insurancecompaniesliketoinvestinthedebtofhydropowerplants.Thestrong,long-termcash flows match the funding requirements of their required policy payouts.Insurance companies are willing to provide relatively high levels of leverageover a long term to hydro projects as opposed towind and solar due to theseissues.The relatively high availability of hydro projects can complementwind and

solarpowerplants.Thissituationmaynotoccurduringdryyears.Somehydroprojectsalsohavelowpoweroutputduringthecriticalsummercapacityperiod.WaterflowtoafacilitymayalsobereducedbythelocalwatersupplyauthorityortheArmyCorpofEngineersforotherreasons.Iftheplanthasafirmenergyorcapacityobligationthiscancauseanissue.There is also an extensive amount of information that can be learned about

operating hydro plants on the Federal Energy Regulatory Commission's(FERC's)website.TheFERCgrantseachhydropowerplantanoperatinglicensefor an initial 50-year period. Before a license is issued the FERC takescommentsfromthelocalcommunityandconsidersenvironmentalissuessuchastheimpactonlocalfish.Afterthisperiod,theprojectcanapplyforanextensionof its license or relicensing. Each hydropower plant has its own unique Pnumber.TheprocedureistoenterthePnumberandthefour-digitunitcode(e.g.,P-0000). The following FERC web site is very useful for researchinginformation on operating hydropower plants: http://elibrary-backup.ferc.gov/IDMWS/search/fercgensearch.asp.

HydropowerandRECsExistinghydropowerplantscanhave troublequalifyingforTier1oranyRECcredits depending on the date that they were built. The typical position of aregulator is that a subsidy should not be given to an existing project. Theirreasoningisthattheprojectisalreadybuiltandshouldn'trequireanyadditionalsubsidies. Operating hydro projects also don't qualify for the production taxcredit (PTC) or investment tax credit (ITC). The extended development andpermittingperiodforahydroprojectalsomakeitlikelythatanyexistingtaxITCandPTCcreditsmayexpire.ThissituationcreatesachallengeforhydropowerprojectsinthecurrentlownaturalgasandnoCO2taxenvironment.TherevenuestreamfromastrongRECcreditstreamisimportanttohitanacceptableinternalrateofreturnfromahydroproject.Inordertoobtainlow-impactcertification,hydroprojectshavebeenturningto

the Low Impact Hydro Institute (LIHI). In a number of power markets, it isnecessarytobecomecertifiedbyLIHItoqualifyforRECs.LIHIreviewseachhydro project's FERC filings andmakes sure that the project is in compliancewithallofitspermits.Theyarealsoconcernedabouttheprojectseffectonlocalwildlife. The approach with current hydro technology is to achieve turbineefficiencies greater than 90 percent and fish passage survival greater than 96percent.

EngineeringReportAnoutline for an engineering report thatwouldbeobtainedwhenconsideringthe acquisition of a typical operating hydro power plant would include thefollowingissues:1.ExecutiveSummary(one-page)a.Nodeal-killers/OverallVGcondition/NPVimpactofrecommendations

2.Introductiona.Purposeb.Scopec.Organizationofreport

3.ProjectSummariesa.Projectdescriptionb.Conditionassessment

c.Part12issues4.RegulatoryCompliancea.Introductionb.FERC101c.Projectsummaries

5.EnergyReviewa.Introduction(organizebyriversystem,methodology)b.Summarizehistoricalgenerationc.Reviewstudiesbyotherconsultantsd.Discussanyadjustments/changes

6.GoingForwardCostsa.Introductionb.CapExc.OpEx

7.ConclusionsandRecommendationsa.Summarize:i.Studyresultsii.Significantfindingsiii.Recommendationsiv.Roll-upoperatingdatatorealtimedatabasev.CompleteinstallationofnewPLCoperatingsystemsvi.Implementspecificmeasures:1.Project#1—installcathodicprotectiononpenstocks,etc.

Engineering consultants also estimate replacement and operating andmaintenance costs. The following text outlines a typical calculation for amediumsizedhydropowerplant.

OperationsandMaintenanceCostsUsing200,000mWhforannualgeneration,a$2.8millionbudgetrepresents1.4cts/kWh—which is in the range of industry experience. We've seen valuesanywherefrom0.5Cts/kWhto2cts/kWhormore,dependingonthespecificsofeach individual project. Major components of operations and maintenance(O&M) include staff labor, third-party services (contractors, regulatorycompliance, instrumentation and control technicians, etc.), minor and majoroverhauls,consumables,propertytaxes,insurances,leases,andfees.

We have no information on taxes, insurance, and fees butwe can share thefollowinghigh-levelplanningnumberswithyou:Labor.BeinglocatedatanArmyCorpsLockandDamfacility,thepowerhousemayhavetobestaffed24/7.Theminimumstaffsizetocoverthisissevenfull-time employees (FTEs) plus a plantmanager.A fully loaded ratewith someovertimewould be in the range of $80,000 per FTE.A good plantmanagerwithincentiveswouldbeintherangeof$150,000.Aballparknumberwouldbe(7×$80,000)+$150,000=$710,000.Minor and major overhauls. Following is an overhaul (OH) budget from asimilarprojectontheOhioRiverthatweworkedonin2008.MinorOHsworkout toapproximately$25,000/yearperunit ($70,000/3+esc to2010).MajorOHswouldbeapproximately$40,000/yearperunit ($550,000/15+esc).Fortwounits,theannualizedOHcostswouldbeapproximately$130,000peryear[2×($25,000+$40,000)].Third-partyservices.Couldbeanywherebetween$50,000and$250,000peryear;say$150,000.Consumables.Allow$100,000Subtotal:

Thiswouldleave$1.7millionperyearforpropertytaxes, insurances, leases,andfees,whichsoundsreasonable—andperhapsabitconservative—dependingonspecificsoftheproject.

RelicensingMajor issues regarding relicensing typically include fish passage; ESA (rare,threatened, and endangered species) and recreation.We do not anticipate anysignificant Part 12 issues (Dam Safety). We researched the FERC web site,relevantagencycorrespondence,andthelicense.Here'swhatwefound:Fishpassage.Thedamsaresofarupinthewatershed,andtherearesomanylarge dams downstream (on the Allegheny and the Ohio) that we do notanticipate any anadromous fish passage issues. A quick look suggests thatnobodyispushingabiganadromousrestorationplan.Also,becausetheseare

onlocks,itislikelyfisharemovingup-anddownstreamnow.Therecouldbeentrainment concerns, now or in the future, but I have not seen any agencynastygramstosuggestitissomethingofcurrentconcern.ESA. Potential issueswould likely includemussels. It looks like there havebeensomemusselsurveysintheareaintherecentpast.Theissueherewouldbe the potential for something to be found or listed between now andrelicensing.Weaccountedforthisintherelicensingcostestimate.Recreation.RecreationuseatArmyCorpsLockandDamfacilitiesistypicallylimited todayuse (fishingaccess,picnicking, etc.).No significant issues areanticipated,butweincludedamodesallowanceintherelicensingestimate.Budget.Tobesafe,wewouldputeachfacilityata$500,000licensingcostin2009dollars.Thatwouldcover$150,000 inconsultationand filingcostsand$350,000forstudiesandfieldwork.Giventhesizeoftheriver,anystudieswillbe expensive, and I would anticipate mussel surveys, maybe some fishentrainment studies, recreation studies, and maybe some water qualitymodeling(thoughdissolvedoxygendoesnotappeartobeanissuecurrently).Table15.1 shows a typical cash flow for a five-year relicensing, and Tables15.2and15.3showvariouscosts.

Table15.1TypicalCashFlowforaFive-YearRelicensing.

Table15.2Two8mTubeUnitsat17-FootHeadRated@37mWTotal.No. Item $1,000s

1 Mobilization,demobilization $8,645

2 Cellularcofferdam $9,724

3 Intakestructure $24,003

4 Powerhouse $27,292

5 Tailrace $908

6 Accessbuilding $2,704

7 Turbineandgenerator $27,090

8 Substation $5,854

9 Gatesandmiscellaneousmechanical $17,082

10 Accessroadsandfishingpier $2,600

11 Totaldirectcosts $125,902

12 Indirectcosts

a Engineering $6,295

b Administration/Regulatory $3,148

c Subtotal: $135,345

d T/Gcontingencies(10%) $3,294

e Civilworkscontingencies(20%) $18,592

13 Totalestimatedconstructioncosts $157,231

$/kW $4,249

Table15.3Adjustmentto14-ftHead.mW@17-ftHead 37

mW@14-ftHead 30.5

$/kW@17-ftHead $5,160

Based on our work at a similar two-unit project on the Ohio River, wedevelopedthereplacementcostsshowninTable15.4.

Table15.4Project Unit1 Unit2

Replacementcost $5,160/kW $4,250/kW

These values reflect only the direct construction costs. They do not includelicensingcosts,siteacquisitioncosts,lenders’fees,andsoon.

HydropowerEconomicsHydro projects are optimized at the time of development and have to beoptimized to takemaximum advantage of current average annual river flows.Thisoptimizationcanincludenewhydraulicpowerunits,newgovernors,remotepond control, andmovable forebaywall gate. This upgrade requirement is nodifferentthanforotheroperatingpowerplants.Allprojectscanbenefitfromthesaleofdifferentproductsindifferentmarkets.

InthecaseoftheMarcusHookpowerproject,itscapacityissoldtoNewYorkIndependentSystemOperator (NYISO)ZoneK(LongIsland)via theNeptunetransmission lineand its energy is sold to thePJMmarket.The following textprovidesadditionalinformationonthisproject:

TheNeptune cable that runs fromNew Jersey toNassauCounty on LongIslandcancarry660megawatts(MW)ofpower,whichisenoughtomeetthe

average electric demand of about 600,000 homes. LIPA customers savedover$20millioninthesummerof2007byusingthenewNeptunecabletobringnearly1.2millionmegawatthours(MWh)oflowcostpowertoLongIslandduringthepeaksummerseasoninJuly,AugustandSeptemberwhendemandforelectricitywashighest.LIPApurchasesofwholesalepowerfromthePJMpowermarketprovidedeconomicandreliabilitybenefitsforLIPA'scustomersin2007andareexpectedtocontinueformanyyearsinthefuture.In2006LIPAselectedFPLfor685MWofcapacityfromtheMarcusHook

generatingstationinNewJersey.TheMarcusHookpurchaseisforcapacityonlywithemergencyenergy, i.e.,LIPAcanpurchaseenergy from it ifbothNYISOandPJMISOdeclareasystememergency.Otherwise,thecapacityispurchased as an unbundled market product used to meet on-Island andstatewidecapacityobligationssetbyNYISO.LIPAcanandwillusethecableto import energy purchased elsewhere, such as the spot market and PJMwholesalemarket.TheMarcusHookpurchaseisscheduledtobeginonJune1, 2010. LIPA will continue to make energy purchases from a variety ofmarket sources to import over the Neptune cable after the Marcus Hookcapacitypurchasebegins....”3

Pumpedstoragefacilitiespumpwater toahigherelevationinordertoturnaturbine toproduceelectricity.Thewater ismovedusingcheaperpowerduringoff-peakperiods.Thesefacilitiesaretypicallylocatedinthesideofamountain.During on-peak periods, the water is released to drive a hydro turbine. Theconcept is that sincewind turbines produce nonfirm power, a pumped storagefacilitywouldactlikeabatterytostorepower.Unlessthewindprojectislocatednexttothepumpedstoragefacility,anadditionalinvestmentintransmissionwillbe required. In certain markets, wind power operates at night, which canintegratewellwith pumped storage.China has 2,200 pumped storage projectsunderconstruction.4

ThechallengeintheUnitedStatesisthatmostcapacitymarketshaveatermofonlythreeyears.Pumpedstoragefacilitiesareexpensiveandcaneasilyexceed$2,000/kW.5 It is alsodifficult to obtain local approvals andother permits forthese facilities. As a result of the low price for natural gas, the intrinsiceconomics of pumped storage plants is negative. This is another example of

inexpensivenaturalgashavingaperverseincentiveonnotjustrenewablepowerbutalsostorage.Theroundtripefficiencyofapumpedstorageplantistypically70percent.6UsingtheforwardcurvefromthePJMmarket,theeconomicsofapumpedstorageplantasofApril1,2011,wouldbeasshowninTable15.5.

Table15.5SimplifiedPumpedStorageEconomics.

Theseissuesshowthatpumpedstorageprojectssufferfromamarketfailure.

SummaryHydro plants have a low environmental impact and can have a high capacityfactor and they can produce power much more reliably than wind and solarpowerplants.However,theyareexpensivetoconstructanditcanbedifficulttoobtainpermitsfornewsites.Buthydropowerplantswithdammingcanprovidepeaking power that, depending on transmission, can be combined with otherrenewablesourcesofenergy.InChapter16,wediscussgeothermalpowerplants.

Notes

1.StephanieSimon,“WaterSurgeHydropower,OnceShunnedBecauseofEnvironmentalConcerns,IsMakingaComeback,”WallStreetJournal,September13,2010.2.Simon,“Hydropower,OnceShunned.”3.www.lipower.org/pdfs/company/projects/energyplan09/energyplan09-b.pdf.4.Simon,“Hydropower,OnceShunned.”5.MarkGriffith,“ConqueringTime:UnderstandingtheValueofPumpedStorage,”PublicUtilitiesFortnightly,October28,2008.6.Griffith,“ConqueringTime.”

Chapter16

GeothermalPowerPlants

Pitytheplanet,alljoygonefromthissweetvolcaniccone.—RobertLowell

Over many millions of years, the history of our Earth has been shaped bycountless volcanic eruptions, which created thousands of mountains andmountainrangesandcountlessislandssuchasHawaii,thePhilippines,Iceland,andothers.InThera,aGreekislandoffthecoastofCreteintheMediterranean,a volcanic eruption exploded and destroyed the ancient Greek Minoancivilization. In Italy,MountVesuvius'svolcanic eruptiondestroyed theancientcitiesofPompeiiandHerculaneum.AccordingtotheU.S.DepartmentofEnergy(DOE),undertheearth'ssurface

there is a layer of hot molten rock called magma, which is the source ofgeothermalenergy.Today, thismagmadrives8,900megawatts (mW) in large-scale industrial power plants in 24 nations. The places in the world with thehighest temperatures underground often have active young volcanoes that aresometimes called hot spots. These occur where the giant continental tectonicplatesmeeteachotherandtheEarth'scrustisthin,enablingheat,fire,orgeysersto break through the Earth's surface. The world's largest numbers of hotspotswith volcanoes are found in many places, but especially on the boundariesbetween these continental plates in what is known as the Pacific Rim on the“Ring of Fire.” These hot spots occur in the Philippines, Japan, Alaska,California,Nevada,Mexico,andElSalvador.

SteamTechnologyThelargestcollectionofhotspotsintheworldisinnorthernCalifornia,wheredry steam spouts from many cracks in the Earth's rocky crust and continueseveryday.This location is called “theGeysers.”Thedry steam frommanyofthesecracksintheEarthrisesdirectlyintoturbinesofmanygeothermalpowerplantsthatareplacedontopofthesegeologiccracks.Thedrysteamdrivesthe

turbines, which directly drive electric generators that capture the geothermalenergy,andtransfersthatpowerdirectlytotheelectricpowerstation.Electricityfrom the Geysers is then distributed out to the West Coast high-voltageelectricity power transmission system, which is a part of our interconnectednationalelectricgrid.TheGeysersisownedbyamajorelectricutilitycompanycalledCalpine,whichsuppliesmostofthenortherncoastofCaliforniauptotheborderofOregon.TheGeysersplantsuseanevaporatingwater-coolingprocessto create a vacuum that pulls steam through the turbines more efficiently.However,thiswater-cooledprocessloses60to80percentofthesteamintotheair.Itdoesnotinjectitbackintotheground.Therefore,whenthesteampressuredeclines, the rocks underneath remain very hot. The result is that 11 milliongallonsofwatereveryday is treatedseparatelyandmustbe transported to theGeysersplantsfromawideradius.Inshort,therearesignificantcoststobalanceagainstthefreegeothermalenergyfromthecenteroftheearth.For decades, this dry steam technologywas themost common in use at all

geothermalpowerplantsaroundtheworld.However,thedrysteamrequiredthepowerplanttobebuiltactuallytositontopofthecrackintheearthwherethedrysteamescaped.This limitedtheamountofgeothermalpowerthatcouldbeobtainedfromtheearth,andsoasecondnewtechnologywascreated.Boreholesweredrilledintotheearthinmanynearbylocations,wherethegeothermalliquidcould be obtained. That geothermal liquid, which was at temperatures higherthan360degreesFahrenheit,couldnowbeusedtosprayintoagiantcontainerholding a different liquid that was held at a much lower pressure than thegeothermal fluid and thus cause thenew fluid to instantly “flash steam.”Thatflashsteamcouldthendrivea turbine,whichcoulddriveanelectricgenerator.Thisnewflashsteamwasusefulinsomanymorelocationsthanthenumberofdrysteam locationsdirectlyon topofvolcaniccracks that flashsteambecamethemore successful technology,and soon itbecame themostwidelyusedandthemostsuccessfulgeothermalpowerplantdesignintheentireworld.However, after a number of years, it was discovered that most geothermal

regionshavemoderate-temperaturewater in themthat is lower than thehottestgeothermal fluid. Scientists found that energy could be extracted from theselower-temperature fluids and thereby developed what became known as abinary-cycle power plant due to the use of two different fluids. Both thegeothermal fluid and a secondary (binary) fluid that has amuch lowerboilingpointthanwaterpassthroughaheatexchanger.Heatfromthegeothermalliquidcausesthesecondaryfluidtoflashintovapor,whichthendrivestheturbinesand

thentheelectricgenerator.Thisbinary-cyclepowerplantisaclosed-loopsystemsothatalmostnothingescapesintotheatmosphere.Because moderate-temperature water is the much more widely found

geothermal liquid resource across the world, it is widely forecast that themajorityofnewgeothermalpowerplantswillprobablybeusingthebinary-cyclepowerplantdesign.Geothermal energy and geothermal electricity are now being scientifically

investigated in a number of differentways in both government and universitylabs,aswellasincompaniesacrosstheglobe.Thatisbecausethemagmaatthecenter of the earth plus millions of the very hot dry rocks provide a hugegeothermal resource that is cheap, clean, and virtually unlimited once sciencecreatesnewtechnologies touse themcommercially.AcrossAmerica, theDOEhasspentmillionsofdollarsinitsgeothermaltechnologydevelopmentprogramsonthephysicsofmagmaindifferentformsanddifferentconditions,aswellashot rocks, tosponsor labsatuniversities in researchanddevelopmentworkingwith U.S. national laboratories and scientists, venture capitalists, and largecompaniesinthegeothermalenergyfieldtospecificallydrivedownthecostofgeothermal power to three to five cents per kilowatt hour (kWh). If it wereachieved,thisthree-tofive-centcostwouldbemuchmorecostcompetitivewithnaturalgas.

GeothermalProjectCostsGeothermal power plant projects are very expensive compared to natural gas–fired power plants. These projects involve drilling risk from project inceptionand during operations. Existing wells continue to need maintenance and mayquit after a certain operating period. This situation requires the owner to drillnewprojectwells.According to the DOE's Energy Information Administration (EIA), a dual

flash steamgeothermal facilitywill haveanovernight costof$5,578/kW.Thesame source estimates that abinarygeothermal facilitywill haveanovernightcostof$4,141/kW.Unlikenaturalgasplants,geothermalfacilitiesbenefitfromfive-year modified accelerated cost recovery system (MACRS) depreciation,depletion, and an annual production tax credit or cash grant. (Please note: theMACRSisthecurrenttaxdepreciationsystemintheUnitedStates.Underthissystem, the capitalized cost [basis] of tangible property is recovered over a

specified life by annual deductions for depreciation. The lives are specifiedbroadly in the Internal Revenue Code. The Internal Revenue Service (IRS)publishes detailed tables of lives by classes of assets. The deduction fordepreciationiscomputedunderoneoftwomethods[decliningbalanceswitchingtostraightlineorstraightline]attheelectionofthetaxpayer,withlimitations.1)With the low price of natural gas reducing the price of power, even these

varioustaxbenefitsmaketheoveralleconomicsofgeothermalprojectsdifficult.AlthoughAmericahasmoregeothermalenergycapacity (3,000mW) thananyother nation, U.S. geothermal energy power plants are located in only eightstates. Three other nations of theworld obtain over 25 percent of their entireenergycapacity fromgeothermalpowerplants.These threenationswithmanyhotspotsareIceland,thePhilippines,andElSalvador.Thegeologicstructureandmoonlike landscape of Iceland, with steam rising from cracks in the rockeverywhere,isparticularlystriking.EightypercentofU.S.geothermalpowercapacity isproduced inCalifornia.

Over40geothermalplantsproduce5percentofthatstate'selectricity.

HydrothermalPowerSystemsTheearliestknowncommercialusesofgeothermalenergysystemsdatingbacktotheancientEgyptian,Chinese,andRomanEmpireswereformedicalspasandswimmingpools all theway fromcentralChina toEgypt toSpain, and in thenorthtoGreatBritainandHungary.Anumberofthosemedicalspaswereusedformanyhundredsofyears,andsomearestillinusetoday.The most common commercial uses of low-temperature geothermal energy

today are in greenhouses and fish farms.Most greenhouse operators estimatethat using geothermal resources instead of traditional energy sources saves 80percent of fuel costs.They also estimate that they save5 to8percent of totaloperatingcosts.InHolland,thegrowingofflowersandfruitsandvegetablesinwaterinhydroponicglass“hothouses”isthemostefficientandleastexpensiveagriculture.Thetemperatureremainsconstant.Eachcropmaturesmorequicklyand, at the same time, with virtually no disease, blights, or wind or weatherdeformities. The same fertilizer stays in thewater for a number of crops anddoesnotneedtobethrownoutwitheachcrop.

Ground-SourceHeatPumpsThroughouttheentireyear, thetemperatureoftheEarth,eightfeetbeneaththesurface, remains relatively constant, at between50 and60degreesFahrenheit,dependingonthelatitude.Ageothermalheatpumporground-sourceheatpumpextracts underground heat in the winter for heating houses, office buildings,schools,prisons,orhospitals,andthentransferstheheatbackintothegroundinthesummerforcooling.Ground-sourceheatpumpsareextremelywellmatchedarchitecturally to underfloor heating and baseboard radiator systems,undergroundgarages,workrooms,andfinishedbasementsforlivingquarters.In the United States, it is vital to realize that ground-source heating and

cooling is farmore efficient than using electric or oil heating and cooling. Infact,thesenaturalthermalsystemsmoveuptofivetimestheenergytheyuseandsignificantlyheatandcoolhomesattheleastexpenseovertheirusefullifetime,whichcanbe severaldecades.TheEconomicandStimulusEmergencyActof2008includesaneight-yearextensionto2016ofthe30percentinvestmenttaxcreditforgeothermalheatpumps,withnoupperlimittoallhomeinstallationsof“EnergyStar.”The simplestgeothermal improvement is to laya25-to40-footpipeeightfeetbelowgroundandthenfeeditintoyourhome.Although the heat pump was first described by Lord Kelvin in 1853 and

developedbyPeterRittervonRittinger in1855, itwasnotuntil1946 that thefirstsuccessfulcommercialprojectwasinstalledintheCommonwealthBuildinginPortland,Oregon.Swedenpopularizedthecommercialheatpumpforheatingand cooling, and there are now several million heat pump units installedworldwide. Open-loop heat pump systemswere by far themost popular until1979,whentheclosed-looppolybutylenepipeprovedtobeeconomic,andtheyhavebecomemorepopularwith amixtureofwater and antifreeze.Open-loopheatpumpsusenaturalgroundwater.Thereareseveraldifferentdesignsofgeothermalheatpumpsorgroundheat

pumps, startingwith the direct-exchange pump,which is the simplest, easiest,and cheapest and uses a loop of copper pipe buried underground. The coppertube's thermalconductivity ishigher thanplasticpipe,whichcontributes to itsgreater efficiency; although it uses more refrigerant than closed-loop watersystems,thedirectexchangerequiresonly15to30percentthelengthoftubingand half the diameter of drilled holes. Braised copper tubing is required;otherwise,thegasintheantifreezecanleakout.Closed-loopsystemsneedaheatexchangerbetween the refrigerant loopand

thewaterloopandelectricpumpsinbothloops.Closed-loopsystemshavelowerefficiencythandirect-exchangesystems,sotheyrequiremuchlongerandlargerpipe in theground; therefore, theirexcavationandinstallationcostsarehigher.Closed-looppipescanbeinstalledverticallydeepinthegroundfiveorsixfeetapart.Aholeisbored75to500feetdeepforlargebuildingsincitiesifthereisatight restriction on available land for the heat pump system.Closed-loop heatpumpsystemsarealsolaidhorizontallyasloopfieldsorslinkyloopsintrenchesthataredeeperthanthefrostline.Thecostofexcavationforahorizontalloopedheatpumpfieldisfarlessthanhalfthecostofaverticalfieldandisbyfarthemost commonly built. Slinky tube fields are used if there is not space for ahorizontaltrenchheatpumpfield.Slinkycoilslayontopofeachotherinthreerowsacross the trench, so the excavated trench ismuch shorter thananormalhorizontalgroundloopheatfieldandcheaper.Horizontaldirectionalheatpumpfieldscanbebuiltunderdrivewaysorgardensoroutbuildingsiflandislimitedoraestheticprecisiondemandsit.

StandingColumnWellsAmultiplestandingcolumnwellsystemisthelargestformofgroundpumpthatcansupportacityortown.Therearemanysuccessfulmultiplestandingcolumnwells in the fiveboroughsofNewYorkCityandalso throughout the states inNewEngland.A standing columnground-sourcewell systemhas heat storagebenefitswhereheatisrejectedfromthebuildingandthetemperatureinthewellis raised during the summermonths,which can then be harvested for heatingduring the winter months, thus increasing the efficiency of the heat pumpsystem.However,thesizingofthestandingcolumnwellsystemiscriticalasitrelatestotheheatgainorheatlossoftheexistingbuildingorthetownorcity.Because the heat exchange is actually with the bedrock, it uses water as thetransfer medium. However, if there is adequate water production, then thethermal capacity of the well system can be enhanced by discharging a smallpercentage of system flowduring the peak summer. Since this is essentially awater pumping system, standing column well design requires criticalconsiderations to obtain peak operating efficiency. Should a standing columnwelldesignbemisappliedor leaveoutcriticalshutoffvalves, forexample, theresultcouldbeanextremelossinefficiencyandtherebycauseoperationalcosttobemuchhigher.

EnhancedGeothermalSystemsEnhancedgeothermalsystems(EGSs)arebeinginstalledbytheDepartmentsofEnergyinmanynations.AccordingtotheU.S.DepartmentofEnergy:

EGSs in the United States, Australia, France, Germany and Japan.EnhancedGeothermalSystemsarealsoinstalledbymanycorporations,andby many Universities, and by Venture Capital firms including Google toenablecapturingtheheatindryareascalledHotRockReservoirstypicallyat greater depths below the earth's surface than conventional sources, arefirst broken up by pumping high pressurewater through them. The plantsthen pump more water through the broken hot rocks where it heats up,returnstothesurfaceassteam,andpowersturbinestogenerateelectricity.Ultimately,theirwaterisreturnedtothereservoirthroughinjectionwellstocomplete the circulation loop. Enhanced geothermal systems that use aclosedloopbinarycycle,releasenofluidsorheat-trappingemissionsotherthanwatervaporwhichmaybeusedforcooling.2

OnekeyriskofEGSsisthattheycancauseincreasedseismicactivity,whichinduces many small earthquakes similar to those that result from extensivehydraulic fracturing and drilling used to increase the rate of oil and gasproduction from huge shale rock formations. EGSs and increasing carbonsequestration capture and storage, in deep saline aquifers activity, can bedangerous to surrounding populations, especially if built near major geologicfault lines. These must be checked in advance and then must be monitoredregularly.

CoproductionofGeothermalElectricityinOilandGasWells

Coproduction of geothermal electricity in oil and gas wells is a major futuregrowthmarket.Intheoilandgasfields,whichareproducingverywellalready,there is virtually always the highest probability for electricity productionsimultaneously.AnMITstudyforecaststhattheUnitedStateshasthepotential

todevelop44,000mWofgeothermalpowerby2050,primarilyintheSoutheastandtheSouthernPlainsstates,whichwouldsupply10percentofthebase-loadelectricityforallAmerica.All these dynamic newgeothermal developments are funded bymajorDOE

grants for 10 large research-and-development demonstration projects to provethe feasibility of enhanced geothermal systems technologies and also to provetheviabilityoflow-temperaturegeothermalprojects.Magma from the center of the earth and hot, dry rockswill provide almost

unlimitedenergythatiscleanandcheap,assoonaswedevelopnewtechnologytousethemsafely.Until then,moderate-temperaturesitesrunningbinary-cyclepowerplantsaregoingtobethemostcommonofallgeothermalplants.

DirectUseofGeothermalEnergyGeothermal energy is widely predicted to be heavily funded by manygovernments because it is among the lowest-cost heating and cooling systemsandbecauseithasbeenfoundtobeavailableallaroundtheworld.Geothermal temperaturesof50 to60degreescanbewidelyusedforheating

homes, offices, commercial greenhouses, fish farms, gold-mining operations,and avarietyof special applications in addition.Spent fluids fromgeothermalelectric plants can be used subsequently for direct-use applications calledcascaded operations. Savings can be asmuch as 80 percent under the cost offossil fuels. In addition, geothermal energy usually has few, if any, pollutants,emissions,or toxic residues.Theprimaryusesofdirectgeothermalheatare indistrict and space heating.A survey of 10western states identifiedmore than9,000 thermal wells and springs, plus more than 900 low-to moderate-temperaturegeothermalresourceareasandhundredsofdirect-useareas.“Dryheatpowerisaspecializedformofgeothermalenergythatescapesfrom

hundreds of cracks in the Earth's surface. In order to fully exploit dry heatgeothermalpower,manyverydeepholesaredrilled in therockor theground,andheatpumpsare inserteddown theholes todrive theheatup to theEarth'ssurface,whereitiscapturedtobeuseddirectlyinnewcommercialoperationsormunicipal heating or cooling operations. In addition to the United States,Germany is substantially increasing government feed-in tariffs for geothermalenergydevelopmentanddistribution.Althoughgeothermal energy iswidely available globally, it does require the

coexistence of very substantial amounts of heat, fluids, and permeability inreservoirs. If hydrothermal reservoirs do not exist, these can be engineered orman-madebyexploitinghotrocksdeepinthegroundforcommercialuse.Thisalternativeiswidelyknownasaformofhotrockenhancedgeothermalsystems.TherearenormallyfivestepsinthedecisionprocessfordevelopingEnhanced

GeothermalSystemsandtheyinclude:1.Findasitewherehotrocksexist.2.Createthereservoir.3.Completeawell-field.4.Operatethereservoir.5.Operatethefacility.Hotrockenhancedgeothermalreservoirsrequiredrillingwellsdownintohot

rocks and fracturing the rock sufficiently to enablewater to flow between thewells. Thewater flows alongwhat are called permeable pathways picking upheat,andfinallyexit thereservoirproductionwells tocomplete thecirculationloop. (Note that if the plant uses a closed-loop binary cycle to generateelectricity,noneoffluidsventintotheatmosphere.)The adequacy of all these technologies for creating an EGS has been

determinedforbothnear-termandlong-termapplications.Itexists.However,tofully achieve large-scale (100,000 mW) use of cost-competitive geothermalenergy, significant advances are needed in the site characterization, reservoircreation,well-fielddevelopmentandcompletion,andsystemoperation,aswellas improvement in drilling and power conversion technologies. Technologyinnovationsandimprovementswillalsosupportlong-termongoingdevelopmentandexpansionof thehydrothermal industry. Inorder to realize thepromiseofEGS as an economic national resource, we have to create and sustain eachreservoirovertheeconomiclifeofeachoftheEGSprojects.”3

SummaryFor a renewable power technology, geothermal power plants have highavailability and have to also compete against shale gas.There aremany otherusesbeingfoundforgeothermaltechnologiessuchasfood-processingfacilities,gold-miningoperations,physical therapy facilities, injectionwells, and storageponds.Enhanced geothermal technologies are forecast to be a significant growth

industryworldwideforthenexttwotosixdecadesbecausescientistsknowthatthegeothermallayerofmoltenmagmaislargerintotalthanallotherenergiesonEarth.However, the technologiesweneed in order to handle andmanage thatmagma under fail-safe controls are one of the great challenges the worldscientistsandengineersface.Chapter17discussesenergyefficiency.

Notes

1.SeeIRSPublication946fora120-pageguidetoMACRS.2.http://energy.gov/.3.http://energy.gov/.

Chapter17

EnergyEfficiencyandSmartGrid

Withdemandsidemanagement,itmayneverbenecessarytobuildanotherpowerplant.

—AmoryLovins,RockyMountainInstitute

Thecheapestandcleanestsourceofpowercomesfrompermanentlyreducingormanagingpowerdemandduringtimesofshortage.Energyefficiencyisdefinedas a permanent change in the use of energy.Demand response is a temporarychangeintheuseofpower.

Demand-SideManagementOften referred toasdemand-sidemanagement (DSM)ornegawatts, andmuchlikerenewablepower,this“source”hasnoemissions.Thesmartgrid,advancedmetering,andsmartappliancesallowfortheexpansionofDSM.Someinvestorsfeel that the smart grid could havemore impact than the Internet. The futurepotentialforDSMisalsopartlydeterminedbythelowpriceofnaturalgasandthe cost of emissions such as carbondioxide (CO2).Utilities and independentpowerproducersalsohavetomeetcybersecurityregulations.Thiscanstoptheinstallation of smart meters. There is a concern that cheap natural gas couldmake theUnited States complacent on reducing the use of energy.DSM alsofaces thechallenge that itmightnotbeavailable to theutilitywhencalledon.Similar towind and solar power plants, DSM is not a seven-day-a-week, 24-hour-a-dayresource.AsstatedinBloombergMarkets:

Utilities and state regulators are loath to make sweeping changes to thissystem, especially after California's disastrous experiment in deregulationthat enabledEnronCorp. energy traders to createartificial shortagesandrollingblackoutsin2000and2001.1

Utilities in New Jersey can't install smart meters because the New JerseyBoardofPublicUtilitieswillnotcurrentlyapprovethem.Thereisalsoacaseinfront of the Maryland Public Service Commission by Baltimore Gas andElectric.Alargechallengetothissourceisthatmostresidentialandcommercialconsumersdon'tseethereal-timepricethattheypayforpower.ThereisajokeintheutilitybusinessthatstatesthatifThomasEdisonreturnedtolife,hewouldfeel that nothing has changed in the electric utility industry. If AlexanderGrahamBell returned to life,hewouldbeamazedbywhathaschangedin thetelecomindustry.Inthecurrentmarket,utilitiesdon'tknowifserviceisouttoanindividualhouse.The individualhas tocall theutility.This results in theirnothaving an incentive to reduce their electricity consumption.All customers arealso not currently charged for transmission congestion and environmentaldegradation. There is also a landlord-tenant challenge in some apartmentbuildings. This situation results in the landlord's supplying the large, power-consuming appliances,while the tenant pays the electric bill.This reduces theincentiveforthelandlordtoinstallmoreefficientappliances.In thepast, regulatedutilities earnedonlyon their ratebasewhen theybuilt

newpowerplantsortransmissionlines.InordertoencourageDSM,ratebaseshave been “decoupled” so that regulated utilities can now earn on DSMinvestments.This is referred toasperformance-based ratesor ratedecoupling.This is favoredby someovernetmetering sinceautilitymightnotbepayingenoughforthepoweritobtainsfromitscustomers.Abusinesscanincreaseitsprofits by either increasing revenue or reducing expenses. As a comparison,ConEd spends $1.2 billion per year on infrastructure.2 One way to achievedemandresponseisbycurtailingthecentralairconditioningorwaterheatinginprivate homes. It is not uncommon for these controls to be overridden by theindividual homeowners. This results in no loss of demand for the utility. Apowerplantwouldhavetopayliquidateddamagesifitfailedtodeliverpower.Apenalty of this type is not typically required of a residential user of power.Apermanent reduction in loadcouldbeachievedbyconvertinganelectricwaterheatertonaturalgas.It is important to remember that customers want only what the energy

provides. They really want cold beer and hot showers. However, behaviorchange is often underestimated by the electric industry to implement DSM.

Customerscanchangebehaviorwhengiveninformation.ConsumerswantHBO,so they are willing to pay for cable. There are times during off-peak periodswhenthepriceforpowerisnegative.This isduetothefact thatwindprojectscanproducealargeamountoftheirpowerduringoff-peaktimes.Thisis“cheap”power that could be tracked by the smart grid and sent to storage devices orelectricvehicles.Asnotedelsewherein thebook,batterieshaveaverylimitedstoragecapability.Oneventurecapital investorhas stated thatevenwitha10-yearfundlife,thisistooshortaperiodtoinvestinelectricvehicles.Subjecttolimits on transmission and distribution, the smart grid could also be a newproviderofancillaryservicesandcapacity.

RewardingEfficiencyCon Edison has offered rebates to residential customers in the past whopurchasedmore efficientwindow air conditioners. It is important to point outthat a regulated utility will have a lower cost of capital and hence a lowerinvestment hurdle rate thanmost of its customers. As a result, it couldmakesense for theutility to finance theDSMequipmentor smartmeter cost for itscustomersorofferarebatetothecustomerthatcanreduceitselectricload.Thiscostfortheutilitywouldbeplacedinitsratebase,anditwouldbeallowedtoearn a return just like it could on an investment in a new power plant. Anexpenditureof this type isverycheap,quickcapacitywithout theexpenseandriskofdevelopinganewpowerplant.Theutilityhastheobligationtoserve,andaslongasitcanmaketheusedandusefulargumentwithitsregulators,ithasnoelectricitypriceorvolumerisk.In a commercial application, an office building could agree to reduce its air

conditioning load and send the employees home.A commercial buildingmayalso have a backup generator that could be operated during times of peakdemand.Localairemissionsregulationsmaylimitthisgeneratorfromoperatingormay limit thehours that itcanoperate.Theproblemwouldbe if theywenthomeandturnedontheirhomewindow/wallairconditioningunits.Infact,thereare over 6.1millionwindow/wall units inNewYorkCity out of a total of 30millionintheentireUnitedStates.3Someoftheseairconditionersarelocatedinmaster metered buildings, where individual residents don't see the price forpower.Ascomparedtoaresidentialapplication,thereareanumberofleversthatcan

bepulledbyan industrialorcommercialelectricpoweruser to reduceelectric

load.This includesheating,ventilation,andairconditioning(HVAC), lighting,electricchillers(airconditioning),elevatorbanks,anddatacenters.Theconceptisthatifenoughbuildingsinacityareacanreducetheirelectricload,itcanactlikeasinglepowerplantduringtimesofpeakpower.EnerNOC claims that is has 5,300-mW of capacity under its control from

demand response asofDecember31, 2010.This is equivalent to a numberoflarge coal, natural, and/or nuclear power plants. As mentioned earlier, theconstraint is that this resource is located inanumberof areasand is availableonlyduringlimitedtimes.However,electricloadscanalsobeaggregatedinoneparticularareawithnoorlimitedtransmissionloss.Anapartmentbuildingcouldpotentiallyshutdownitshalllights,someofitselevators,anditslaundryroom.Unlikeapowerplant,thereisnoemissionprofilefromreducingconsumerand

industrialload.ThisisespeciallytruesincethepowerplantthatDSMtypicallycompetes with is a gas turbine engine peaking power plant that might havelimitedemissioncontrols.Itisexpensivetostopandstartagasturbineengine.There is also a time limit on howquickly a gas turbine engine can be startedfromacoldcondition.Ifabuildingstartedastandbydieselengine,therecouldactuallybeanincreaseinemissions,dependingonthesulfurcontentofthefuelthatisusedandtheemissioncontrolsonthedieselengine.ThebestbangforthebuckforDSMwillcomefromcommercialandindustrial

usersofpower.Someutilityexecutiveshavebecome“smartgrid”skepticsaboutthe consumerDSMmarket. They feel that the amount of demand that can beshed from an individual apartment or house is notmaterial and offers no realeconomic benefits. They don't see the business case for switching off thewashingmachineandupsettingconsumers.Theirfeelingisthatthesmartgridisonly a lobbying effort from information technology companies. However, thecurrent installedbaseofmetersprovidesonlyone-waycommunication,doesn'tdisplay real-time pricing, doesn't notify the utility of any power outage, andprovidesnoreal-timecustomerpowerconsumptiondata.

AdvancedMeterInfrastructureThe cost to install advancedmeter infrastructure (AMI) is high, and regulatedutilities are always concerned about increasing their rates and the “used andusefulconcernsofregulators.”BothregulatorsandutilitiesareconcernedaboutAMItechnologybecomingobsoleteonceitisinstalled.Theyarealsoconcerned

that consumers will accidentally continue to buy power during on-peak timesandcomplainabouthighpricesforpower.Residentalconsumershavealimitedability to reduce or reschedule large amounts of electric load. Meters areexpensivetochangeoncetheyareinstalled.TheinstallationonAMIbecomesasimple net present value (NPV) calculation. The NPV calculation for thisinvestmenteasilycanbenegativeifonlyasmallamountofloadisreducedbytheconsumer.Theelectricbillisfrequentlytheleastexpensiveconsumerutilitybill.ThereisabattlegoingonhowAMImeterswillcommunicatewiththeutility

and/or independent system operator (ISO)/regional transmission organization(RTO) head office. Some technologies such as Silver Springwill be based onusingradiowaves.Theconcernisthatthiscommunicationprotocolmaynotberobustenough.Usersofhomewirelessmodems(WiFi)canexperienceproblemswith their Internet connection when a microwave oven is turned on. WiFitechnologyisbasedonradiowaves.Radiowavescanbeespeciallyproblematicincitylocations,wheretherearealotofconflictingsignals.OthersmartmeterdevelopersarefocusingonusingWiMaxorareteamingwithcellphonecarriersto send data over their networks. Supports ofWiMax argue that “its massivebandwidth and secure, standardized spectrumwill enableutilities to copewiththepossiblehugeflowsofdatafromelectricvehicles,rooftopsolarpanelsandothergreen-energytechnologiesinthenextdecade.”4

The cost to participate in demand response programs is rising due to ever-tightening rules by both ISOs and regulated utilities. These costs include thedirect costs of aggregating demand response, the required profit margin foraggregators, the indirect cost associated with consumer inconvenience, andrecently tightened penalties for nonperformance. Pure-play electricityaggregatorssuchasEnerNOCare facingcompetitionfromsuppliersofnaturalgaswhocanalsoofferdemandresponseservices.Thesesuppliersalreadyhaveaccesstoindustrialandcommercialcustomersandcancross-subsidizedemandresponseserviceswiththesaleofnaturalgas.

IncreasingEnergyNeedsAsmentionedelsewhereinthisbook,itisbecomingmoreandmoredifficulttosite new power plants. In addition to numerous locations being declarednonattainment for criteria air pollution such as nitrous oxide (NOx), they can

also be designated as an environmental justice area. Each individual stateDepartment of Environmental Protection will take these issues into accountbeforegrantinganewairpermit.Nongovernmentalorganizations(NGOs)suchas theEnvironmentalDefenseFund, theNationalResourcesDefenseCouncil,and the Sierra Club will also opine on the siting of new power plants. Thechallengeforanewplantdeveloper is that theremightnotbeanydueprocesswithNGOgroups.It is not just air conditioners that have high power demand. The new 3D

television technology requires 30 percent more power than older TVs.Homeowners will agree to have their air conditioning curtailed by their localutility but not their TV. Consumers would also not accept being forced tospontaneously shut off their personal computers or to stop charging their cellphones.AcableTVtechnicianoncetoldoneoftheauthorsthatconsumerscanlivewithout theirTV servicebut not their Internet.Residential customerswillnotwant theirwashingmachines stoppingbefore they finish theircycles.Thisload can be partly offset by new buildings that are designed to be energyefficientfrominitialdesign.Thechangesthatcanbemadeonexistingbuildingsaremorelimited.If plug-in hybrid electric vehicles (PHEVs) becomemorewidespread in the

future,utilitieswillwanttomanagewhentheyarecharged.Theywillnotwantcarstobechargedat4p.m.Thepreferredtimewouldbebetween2a.m.and7a.m.Aspointedoutelsewhereinthisbook,currentbatterystoragetechnologyisverylimited.Thisfactwillultimatelylimittheadoptionofvehiclesofthistype.In NewYork, Con Edison has designated its demand response season from

May to October. This time period is coincident with its summer peak period.Utilities,ISOs,andRTOsstillfacecustomerbarrierstotheintroductionofDSMand energy efficiency programs. According to ConEd, these barriers includeignorance,fear,confusion,andeconomics.At thepresent time,utilitiesare seeinga2.5-hour response time fordemand

response resources and a 70 percent performance factor. This translates to 70mWfromevery100mWofcontractedload.Performancelevelsofthistypearenot competitive with a gas turbine engine. The future approach will beautomateddemandresponse(ADR).Thiswouldhavea4-to10-secondresponseanda90percentperformance factor.Theconcern is that this supplyofpowercould still be overridden by the consumer that had “offered” this electricitysupplytothelocalutility.ADRalsoremainsuntestedinthecurrentmarketplace.A Federal Energy Regulatory Commission (FERC) ruling dated March 15,

2011,statedthatdemandreductionshouldbepaidthesamelocationalmarginalprice (LMP) as a traditional generator would if it were selected for dispatch.PriortothisFERCruling,PJMhadattemptedtolimittheamountofmegawatthoursthatcouldbeclaimedbydemandresponse.ThefollowingcommentfromEnerNOCfurtherclarifiesthisissue:

EnerNOC firmly believes that end-users participating in demand responseshouldbecompensated foractual, verified loadreductionsprovided to thegrid,andthisshouldnotbelimitedbywhattheirloadhappenedtobeinthepreviousyear.ThePJMandMarketMonitorposition is that ifacustomerreducesitsreal-timedemandfrom25megawatts(MW)to5MWinresponseto a system emergency, but the customer's peakdemand from the previousyearwasonly10MW,thennoneoftheloaddropfrom25MWdownto10MW should be compensated. This is impractical and unfair,” said DavidBrewster, President of EnerNOC. “The purpose of this filing is to enableEnerNOCtocontinuetomanagedemandresponseresourcesinaccordancewithexistingmarketrulesandestablishedpractices.5

SummaryThesmartgridhasalargefuturepotentialandalsohastocompeteagainstshalegas. Like renewables and coal plants, demand side management faces toughcompetition from inexpensive shale gas. It is even difficult to make capitalexpendituresonmoreefficient lightingwhenthepriceforpoweris lowduetoinexpensivenatural gas.Except for largeusers of power, it is difficult to shiftmeaningfulamountsofloadtooff-peakperiods.Theexpirationofthe1603cashgrantforrenewablepowerprojectsmayshiftmoreinteresttoinvestinginDSMopportunities.

Notes

1.EdwardRobinson,“EnerNOCReturns260%fromLoweringLightsin2009'sPowerGrid,”BloombergMarkets,August14,2009.

2.ConsolidatedEdison,“SteamLongRangePlan,2010–2030”(December2010),presentationfromMarch24,2011.3.ConEd,“SteamLongRangePlan.”4.Robinson,“EnerNOCReturns260%fromLoweringLightsin2009'sPowerGrid.”5.EnerNOCfilingfromFebruary23,2011.

ConclusionBecausehugevolumesofshalenaturalgashavebeendiscoveredacrossmuchofAmerica at currently very cheap costs, it is widely forecast that there willcontinue to be a glut of shale gas in theU.S.market. This cheap natural gassupplyhasmadeitverydifficultforanyotherpowertechnologytocompeteonpriceortobeeconomicallyviable.Inthemajorityofcasesofrenewableenergyprojects, there is a very real question of whether they would have had betterprospectsifshalegashadneverbeendiscovered.For the past 10 years, new shale natural gas deposits have reportedly been

discovered in France, Germany, Poland, China, and other nations. However,because most other nations lack U.S. natural gas volumes, very specializedequipment,andexpertteamsforhydraulicfracturingfornaturalgasandnaturalgasliquids,theywerenotyetreadytobecomeseriouscompetitorstotheUnitedStates inhorizontaldrilling,pre-perforatedpipes,andadvancedexplosivesanddoing comprehensive scientific forecasts of total volumes of potential naturalgas.Foryears,thestandardmethodofhydraulicfrackingofasitetookoneortwo

weekstofirstsecuretheactualsiteanddeterminethepathofthedrillingandtomeasure the pipe distances and perforate the top and bottom of specific pipelengths that would be blocked off at a fixed end point. This was in order toseparatelyexplodeonerelativelyshortsectionofthenaturalgasfield,extractthegasfromit,andthenmoveontothenextsectionofpipeeachdayuntilbytheend of a week or two, the separate sections of pipe had been sequentiallyexploded.However,today,thisnewnaturalgashydraulicfrackingadvancedtechnology

equipment race has become evenmore intense. That is especially because themost advanced horizontal drilling equipment piping today is pre-perforatedaboveandbelowthepipewithalltheexplosivechargespresetalongtheentirepipe.Themultipleexplosivechargesarepresetinordertocompletethenaturalgaspipeexplosionsinthree,two,oronegiantexplosionallinonlyoneortwodays,insteadofmuchsmallerexplosionsstretchedoveroneortwoweeks.Theremaybeapotentialincreaseinrisksofpipecracks.As practiced now, natural shale gas fracking puts ready money profits into

specific land owners’ pockets. It is not yet clearwhether there is a permanent

economicimprovementoradeclineintheeconomyofmanyruralcommunitieswherenaturalgasfrackinghastakenplace.

TheNewYorkTimes front-page lead storiesonboth June26and27,2011,1stated that while natural gas was discovered across the world, the volume ofshale gas from specific shale wells was unpredictable. This fact was widelyknown,aswasthefactthatsomewellsremainedfinanciallyproductiveafterfiveyears,whilemanyotherwellshad sharplydeclined, and someshalewellshadpeteredoutwithinadecade.TheNewYorkTimes'simplicationwasthatnaturalgas frackingwasnot the long-termoildrillingexperienceofTexasoilbarons.Yet,akeypointthatwasnotstressedwasthatgiantnewnaturalshalegasfieldsarebeingdiscoveredeverymonthindifferentpartsoftheUnitedStatesaswellassimultaneouslyindifferentnationsoftheworld.The New York Times also reported that after 15 years, shale natural gas

production from a number of these same hydraulic wells had so dramaticallydeclined that some wells were operating at steep financial losses. At somesmaller shale fields therewas steep decline of gas production over time. TheNewYorkTimesalsostated,“Thereisundoubtedlyavastamountofgasinthe[giant shale gas] formations. The question remains how affordably can it beextracted?” However, this evidence of steep decline in shale gas was notobtained from theMarcellus ShaleGas Formation, [which is the richest shalegasformationintheUnitedStates]butinstead,fromcertainothersouthernandwesternmuchsmallershalegasrockformations.This divergence of scientific results from shale gas production in different

locations has led to two entirely different financial forecasts. In the first, theUnitedStateshasanincreasingglutofshalegas,whichisleadingtoever-largerinvestments both by small, independent companies and by giant energyconglomerates like ExxonMobil, Royal Dutch Shell and British Petroleum,ConocoPhilips,Texaco,andHalliburton.Thisglutofcheapshalegascomingontothemarketnowhasappearedtohave

underminedalreadyplannednationalandstate funding,pluscorporate fundingof previously planned alternative investments in renewable power plants.Thisincludessolarpowerplants,windpowerplants,biomassenergyplants,newrun-of-river hydropower plants, and even combined-cycle energy plants, nuclearpowerplants,andgeothermalpowerplants.Inthecaseofeachoftherenewableenergyplants, aswell as the traditionalpowerplants, allof themwere severaltimesmoreexpensivethanthenaturalgas-firedpowerplantalternative.

Unless abundant scientific and irrefutable clinical medical evidence is soonbrought forward to prove that hydraulic fracturing of natural gas is a provencarcinogenorothertypeofseverehealthhazard,theshalegasindustrylobbyistsandcorporatelaboratorieswillclaimthattwodecadesofpreviouslydiscoveredhealthdangersfromhydraulicfracturinghavebeencarefullystudied.Theywillsay all of those toxic or dangerous chemicals previously found are nowbeingbannedorremediatedorrigidlyconstrainedinordertoprotectpublichealth.They will attest that none of the prior dangerous chemicals are now in the

“multiplechemicalscocktail”thatisaddedtothesandandmillionsofgallonsofwaterthatarepumpedatveryintensepressureintotheshaledrillingpipes.Theentireshalegasindustryhasbeenpermittedtodohydraulicfracturinginmanystates, and it has so intensely lobbied the U.S. Senate and House ofRepresentatives,aswellasmanystatecapitalsandstates’ legislators,basedonthefactthatshalenaturalgasistodaytheonlymajor,high-volume,domesticallyproduced, U.S. substitute for OPEC and other foreign nations’ oil, that theyanticipate governments at all levels in theUnited Stateswill virtually have tograntwidespreadpermissiontodohydraulicfracturing.Thedrillingcorporationshave now finally agreed to publicly print a list of all the chemicals and otheritemsusedateachspecificwelldrilled.ScientistsandtechnologistsatautomanufacturerslikeFord,GM,Volkswagen,

and Toyota have already carefully analyzed shale gas [by converting “gas toliquids”,andsomehavealreadydemonstratedthatnaturalgas–poweredcarsarecommerciallyviable—theHondaCivicnaturalgas–poweredcarsarealreadyinproduction and are being sold. Likewise, aerospace companies have alreadydoneextensivetestsonshalegasbyconverting“gastoliquids”todetermineifitcanbeconvertedtoasafeandacceptablesubstituteforjetfuelonmajornationalcarrierjetfleets.Themajornationalandinternationalairlinesareveryinterestedinthescientificproofthatthisnaturalgasbasedconvertedjetfuelistotallysafe,can be manufactured in huge volume, and can become a major commercialsuccess. This should be possible since natural gas turbine engines used incommercialairlinesarealsousedinland-basedpowerprojects.Thatisbecausetoday'ssky-highcostofjetfuelanditscontinuingescalatingcosts,plusjetfuelsurchargesonpassenger ticketprices andair cargo fleets’ jet fuel prices, haveeaten into world airlines profits. This could be expected to result in a majorsavings for airlines and also potentially for airline passengers and air cargoshippingfirmsifthosesavingswerepassedalong.Lessexpensivenaturalgasconvertedtoliquidfuelsassubstitutesforjetfuel

for jets and gasoline for cars could represent significant cost savings for theAmerican consumer. This is clear because of the current universal jet fuelsurcharge plus extra taxes on gas for cars based on “9/11 charges” and hugeextrataxesongasolinebecauseofthehugenegativevolatilityanduncertaintyofforeign oil prices due to the continuing Iraq, Afghanistan, Libyan, and othercontinuing civil strife, civil wars, or religious or tribal conflicts or potentialforeignmilitary conflicts thatmight impact the daily price of oil and gasolineandjetfuel.Thereisnodoubtthatanumberofthesecostreductionsforairlinesandcars

could potentially or theoretically nowbe available for funding new renewableenergies.However, it is clear that it is highly probable that corporate, federalU.S.government,and/orstatefundingwouldstillberequiredinordertoachievecommercialsuccessinanyrenewableenergyproject.Itmustalsobe remembered that fordecadesbefore today'sshalenaturalgas

wasdiscovered,therewereworldmarketsfornaturalgasandliquidnaturalgas(LNG).Itmustalsoberealizedthatwhilenaturalshalegasiscurrentlyavailableat$4/MMBtu,thereareMideastnationsandotherswherenaturalgasisplentifulandcanbeproducedatonly$2/MMBtu.Thus, theU.S.shalenaturalgasdoesnothavethelowestglobalpriceandsocouldbelookedatasatrappedbasinthatcould keep future prices low. LNG export from the United States could belimited due to high cost, regulatory approvals, the relatively higher cost of itsindigenousgasandthesteepproductiondeclinecurveofshalegaswells.There are certain states, aswell as certain foreignnations, that have already

bannedhydraulicfracturingofshalegas,shalegasliquids,andshaleoil.AnumberofthefinancialandeconomicconsequencesofU.S.statessuddenly

banning hydraulic fracturing of natural gas could be the exact reverse of thebenefitsthatAmericawouldreapifhydraulicfracturingweretocontinuetobeencouraged.TheUnitedStatesmaywellbeforcedintoapositionwhereithastocompete

againstavarietyofforeignnationalandconsortiagreenenergyinvestmentsrunby foreign developers or foreign technologies. China is willing to fund newgreen energy prototypes and innovations to potentially achieve first-movercriticaladvances.Chinacouldbeinabetter technologicandscientificpositiontosetnewerrenewablegreenenergyindustry-widestandards.

WhereDoWeStandTodayinTermsofRenewableEnergy?

Todate,mostwindandsolarenergyplantshavebeensmallscale.Theyarenotabletoachievetherequiredeconomiesofscale.Thereareanumberofproposedlargesolarplantsthatrecentlywonhugeloan

guaranteesfromtheDepartmentofEnergy.They requiredhuge tractsof landonwhich to sitehundredsof solarmirrors

andtallsolartowers,andsomehavelargemoltensalttankstostoretheheatofthe sun during the day to be used when the sun is not shining. These areextraordinarilyexpensive.Similarly,originalwindenergyfarmswereoftensmallscale.Thenextfrontier

forwinddevelopmentisoffshoreandalsoareveryexpensiveandverydifficulttosite.Renewable power continues to be dependent on energy storage. As we've

statedalreadyinthisbook,renewablepowerisnota24/7resource.Large amounts of additional researchdollars are required to develop the car

batterystoragetechnologies,andnewmassvolumepumpedairstorageandhugesolarpowerplantsusingmoltensalt tanksaremajor required improvements inU.S.energydevelopment.However, in both of these classic examples of renewable energy, where the

highesttotalwindpowerandtotalsolarpoweroneartharethegreatestaremostfrequentlylocatedlongdistancesfromthemajorU.S.electricitygrids.Thehigh-tension electric transmission lines, and long distances from cities or majorindustrialcenterswhereallthatlargeamountofenergycouldbestbeputtoitsmostefficientproductivework.Therefore,many new electric transmission technologies stillmust be further

developed scientifically in order to put all these new advanced sources ofrenewable energy onto the national and international grids, where high-techelectricitytransmissionsystemscouldnowconnectthemtotheindustrialcentersandcities.Finally,followingJapan'striple“meltdown”ofthreenuclearpowerplantsand

GermanyandSwitzerland'sdecisionstoendtheirnuclearpowerplants,weseeChina,Russia,India,andSouthKoreamakingthegreatestadvancesinnuclearenergy growth. In terms of masses of new nuclear power plants, which theirnationalgovernmentsarenotonlywillingtofundtodevelopandbuildbutalso

tobuyin largevolumesofneworderflow.Thesenationsarespearheadingthefastestgrowthinreprocessingoftheirnations’existingnuclearfuelandtherebypushing the envelope of third-and fourth-generation nuclear power plants fortheirownuseandforpowerplantsalesabroad.Itremainstobeseenwhetheranew nuclear power reactor will be built in the United States after Japan andbecauseoftheglutofnaturalgas.A “dash to gas” could create a dangerous dependency for the U.S. energy

market.OnlytheU.S.governmentcanfundandtakeontheriskofnewenergytechnology.

Notes

1.IanUrbine,“DrillingDown:InsidersSoundanAlarmAmidaNaturalGasRush,”NewYorkTimes,June26,2011,A1;and“BehindVeneer,DoubtonFutureofNaturalGas,”NewYorkTimes,June27,2011,A1.

AppendixAAsdiscussedthroughoutthebook,renewablepowerprojectshavetocompeteagainstnaturalgas–firedpowerplants.Thefollowingtermsheet(TableA.1)wasfiledwiththeMarylandPublicServiceCommissionforaproposed640-mWgasturbinecombined-cyclepowerplant(GTCC).ItprovidesahandyreferenceonGTCCperformanceandkeypowerandnaturalgasmarketterms.

TableA.1St.CharlesLong-TermContractTerms.

AppendixB

DTC'sCoalvs.NatgasDisplacementModelMethodology,January6,2009

This material here provides a comparison between natural gas and coal firedpowerplants fromareportbyDoyleTradingConsultants,LLC.It reviews thefactors that are required to complete this analysis and reviews some ofchallenges of shifting from coal to natural gas power plants. This analysis isimportantforrenewablepowerplantssincetheyoperateinaworldofbothcoalandnaturalgas–firedpowerplants.

DTC'sCoal/NatgasDisplacementModelMethodology

ExecutiveSummary:Congratulations!Ifyouarereadingthisreport, thenyourealize that it is sheer folly to hope to derive a truly digital coal vs. natgas“switchingprice” fromsomethingascomplicatedasournation'sgrid.Sowhydid DTC invest thousands of dollars and hundreds of hours into a verycomplicatedmodelthat,infact,resultsinadigital“switchingprice”?Obviously,webelievethatthereisaleveltowherenatgaspricescandrop,whichwillresultin a meaningful displacement of coal-fired generation. However, we do notbelieve that ourmodel delineates the “switching point.” Instead,we believe itshowsthatatsomelevelbelowthatswitchingprice,materialdisplacementcouldoccur.We believe that if the user is acquainted with our methodology and isarmedwithveryimportantcaveats,he/shecanusetheoutputasatooltogaugethevulnerability(orlackthereof)thatcoal-firedplantshavetobeingdisplacedby natgas plants. This report provides an overview of our methodology and,more important, provides some very important color around the factors thatdetermineswhethernaturalgasplantsdispatchaheadofcoalplants.SeeFigureB.1.

FigureB.1

DTC'sMethodology

Time period: Our model calculates the switching price based on promptquarter. We also calculate prompt year for in-house purposes, but do notincludetheresultsinourdailyflashe-mail.Wedonotusepromptmonth,duetothefactthatmostcoal-firedpowerplantsarenotyetnimbleenoughtoreactto promptmonthmarket signals.Coal and transportation logistics are almostalwaysscheduledatleastonemonthinadvance.Whileagencocouldmakethedecisiontotakeacoalplantofflineanddispatchnatgas,itwouldbedoingthisto conserve inventory andnot necessarily for economic reasons.Note:Somemerchantgeneratorsareshiftingtopromptmonth,butthemajorityofthegridhasnotyetadaptedthis.NERCpowerregions:Duetoseveralfactors,determininganationwide,one-size-fits-all switching price is implausible. Therefore, we chose six powerregions for our model: NY ISO West, PJM East, PJM West, SERC,Illinois/Midwest,andErcot.Genericpowerplant:We chose a generic power plant for each region thatuses themost common coal quality for that region. In the real world, somepower plants are dependent on a special coal quality (e.g.,NorfolkSoutherncompliance coal), which puts that specific plant at a higher risk of beingdisplacedbynatgas.Conversely,therearesomeplantswithinthesameregionthat might be very close to the coal mines or perhaps have excellenttransportation alternatives and much lower transportation costs (and arethereforeatalowerriskofbeingdisplacedbynatgas).Wechoseamiddle-of-the-roadgenericpowerplantforourmodel.Minimumemission controls:Our goal is to find the threshold pricewherematerial,incrementaldisplacementoccurs.Whileweuseheatrates(seebelow)that are considered reasonably efficient, our model assumes that the powerplants do not have the most sophisticated emissions controls (scrubbers forsulfur dioxide [SO2] removal; selective catalytic reduction [SCR] for nitrousoxide [NOx] removal). This is an important issue since SO2 and NOxallowances can result in an additional +$1.50/MMBtu for a coal plant withsuchcontrols.However,ifwewereonlytomodelsuchplants,wewouldmissour objective of identifying at what point material and incrementaldisplacementoccurs.Heatrates:Coalplants:Themostefficientcoalplantsuseabout9.5MMBtutoproduce1 megawatt hour (mWh) of electricity; the least efficient coal plants use

about12.5–13.0MMBtutoproduce1mWh.Forourmodel,weusea10heatrate(10MMBtu=1mWh).Natgas plants: Themost efficient natgas plants use about 6.6MMBtu toproduce1mWh;theleastefficientnatgasplantsuseasmuchas15MMBtuto produce 1 mWh. For our model, we use a 7 heat rate (7MMBtu = 1mWh).

Coalprices:DTCusestheendofdaysettlepricesfromtheOTCmarketforthepromptquarterandpromptyear.Coal quality: DTC uses themost common coal quality for each region. Invirtuallyeveryregion,powerplantsconsumecoalqualitiesrangingfromhighsulfur to low sulfur; from high ash to low ash; from bituminous to sub-bituminous.Theexactqualityand/orblendofqualitiescanhaveadirectimpactonhowvulnerable (or impervious) the coal-firedplant is todisplacement bynatgas.Natgasprices:DTCusestheNymexHenryHubpricesforthepromptquarterandpromptyear.Natgaspipelinecosts:DTCusesafixed$0.50/MMBtutocapturethepipelinecost for natgas in all power regions.Pipeline fees aremarket-driven and canfluctuateaccordingtosupplyanddemand.Weareunabletocapturethis.Emissionprices:SO2:OurmodelusespricesforSO2allowancesbasedonend-of-daysettlepricesintheover-the-counter(OTC)market.NOx:MoststateseastoftheMississippiandthosewesternstatesborderingtheMississippimustcomplywithNOxemissionsduringtheMay–September“ozone”season.WeusepricesderivedfromtheOTCmarket.OnDecember23,an importantcourt rulingreinstated theEPA'sCleanAirInterstateRule(CAIR),anditwillremainineffectuntilanewruleisformedtoreplaceit.CAIRcomprises the samegroupof states that comply to theozone seasonrules(May–September)andalsoincludesTexas.OzoneseasonNOxcreditshave always been included in ourmodel. Since theCAIR ruling,we haveaddedthecostofCAIRannualNOxcreditsintoourmodel.Thedifferenceinprices is dramatic: ozone season NOx credits in early January 2009 weretradingat675(approx.$0.15/MMBtuimpact),whereasannualNOxcreditswere trading at $5,250 (approx. $1.20/MMBtu impact). It is important torecognize that during the ozone season, affected states must comply withozoneseasonNOxcreditsandCAIRannualNOxcredits.

Mercury:Eventually, therewillbeanationwidecomplianceregulationformercury emissions and presumably a cap-and-trade program from whichemission prices will be derived.We have included a model input for thisfeature,butitiscurrentlyenteredinas“zero.”Carbon dioxide (CO2): TheRegionalGreenhouseGas Initiative (RGGI)was enacted January 1, 2009, which causes the cost of CO2 credits to beaddedatbothcoal-andnatgas-burningutilitiesinRGGIstates(Maine,NewHampshire, Vermont, Connecticut, New York, New Jersey, Delaware,Masssachusetts,Maryland,Rhode Island).While thecostof thecreditspermegawatthourvariesdependingonthecharacteristicsoftheindividualplant(heat rate, efficiency, etc.) as well as the price of the credits, coal plantstypicallyincurdoublethecostpermegawatthourascomparednatgasplantsduetoRGGI.WeincludeonlyRGGICO2creditstoNYISOWestandPJMEast.Note:Even thoughPennsylvaniaplantsare included inPJMEastandPennsylvaniaisonlyan“observer”toRGGI,,weincludeRGGI,CO2creditstoPJMEastsinceMaryland,Delaware,andNewJerseyareRGGIstatesandhavesignificantcoalgeneration.

Transportationprices:DTCusesourbestguessof transportationratesas ifthegencorecentlynegotiatedthecontractandwillbeusingtrainsetsownedbythe genco. The model assumes that the coal plant is served by captive railservice (only one rail company has access to the plant); approximately twothirds of utilities are served by captive rail; gencos that are served by dualrailroadstypicallyhavelowertransportationrates.Fuelsurchargeprices:Weestimatefuelsurchargesthatwouldbeappliedtoour transportation rates that are based on fuel surcharge clauses that areprevalent.Operations andmaintenance (O&M) costs:We used representativeO&Mcostsfornatgas-coal-firedplants.O&Mcostsareverysensitivetothetypeofpollutionequipmentbeingusedatthepowerplants.Powerprices:Wedonotincorporatepowerpricesintoourmodel,butkeepinmind that when power prices (especially on-peak) are above the generationcostsofourgenericcoal-firedandnatgas-poweredplants,thenbothplantswillbedispatchedontothegrid,regardlessofwhichoneislowestincost.Natgasheatratesandcapacityavailability:Forinitialdisplacementtooccurthere must be sufficient capacity of underutilized efficient natgas plantsavailable to displace coal plants. For significant displacement to occur, less

efficient natgaswill have to be used (i.e.,wewill have to go further up thedispatch stack to natgas plants with 7.5 heat rates, 8.0 heat rates, etc.).Obviously, the higher the heat rate of the natgas plant, the higher the natgasswitchingpricewillbe.Intherealworld,theleastefficientcoalplants(12heatrates) will be the first to be displaced by natgas. And for a significantdisplacementtooccur,moreefficientcoalplantswillhavetobedisplacedbynatgasgeneration (i.e.,wewillhave togo furtherdown thedispatchstack tocoal-firedplantswith11.5heatrates,12heatrates,etc.).

GridReliabilityandTransmissionIssuesGridandvoltagestability:Somecoalplantsmightbedeemed“must-run”forreasonsofgridreliabilityandcannotbeeconomicallydisplacedbynatgas.Transmission limitations:Due to infrastructure, theremaybe limitationsontheamountofenergythatcanbetransmittedthroughpowerlinescomingfromcertainplants.

OperationalIssuesStart-uprisks:Onceacoalplantisshutdown,thereisaseriousriskthatthestart-upwillnotgosmoothly(tubeleaks,turbinevibration,etc.)andtheplantwillnotbeavailablewhenexpectedtoresumeoperations.Plantmanagersareloathtoallowcoal-firedplants togo“cold”forshort-termeconomicreasons.Therefore, thedecision todisplacecoal-firedgenerationwouldhave toentailanextended,several-dayperiodandnotjustaseveral-hourperiodinbetweenon-peakandoff-peakperiods.Coalplant start-upcosts:To restart a coal plant, between1,000 and2,500barrels of #2 oil can be needed (with 42 gallons in each barrel).We do notmodelthis,butitisacostthatisfactoredinbythegencos.Natural gas plant start-up costs: It can take up to 4 to 6 hours to start anaturalgasplant,withbetween17and25percentofthedailygasrequirementsexpended to get the plant to the necessary temperature before generatingelectricity.We do not model this, but it is a cost that is factored in by thegencos.Heatratepenalty:Adecision couldbemade to ramp-downa coal plant tominimaloutputtoallowforshort-termeconomicdisplacement.However,asaruleofthumb,aplantmanagerwouldnotwanttoramp-downa600-mWplantbelow300mWforreliabilityissues.Theefficiencyofa600-mWplantwitha10 heat rate can drop to a 12 heat rate when ramped down to 300 mW.(Turbines incombined-cyclegasplantsalsohaveoperational limitations,andplant managers have a difficult time running below 75 to 80 percent ofcapacity. Many installations have multiple turbines, in which case the plantmanagercanopttoshutdownoneturbinewhilekeepingtheothersatnear-maxcapacity.) Warranty issues: In order to maintain manufacturer warranties, majormultimillion-dollar overhauls requiringmultiple-week outages aremandatoryafteracertainnumberofoperatinghoursand/orcoldstarts.Warrantyissuesareanimportantinputinthecoalvs.natgasdecisionmatrix.Natgascommitments:Weunderstandfromagencoexpertthatanatgasplantwillnot replaceacoalplantwithoutpurchasingat leasta fewdaysofnatgasconsumption(asaprecautionforadelayedrestartofthecoalplant).Wedonotmodelthis,butitisacostthatisfactoredinbythegencos. Pipeline capacity: While the economics could argue for widespread

displacementofcoal-firedplantsbynatgasplants, theavailabilityofpipelinecapacitycouldbeaconstrainingfactorincoal-heavyelectricityregions. Inventory costs: Most power plants prefer to unload coal directly into thepowerplantbunkers.Anadditionalcostof$1.50/tonisincurredwhenthecoalissenttothestockpile.Inventoryconstraints:Whereasthemodelmightargueforthenatgasplanttodispatch ahead of the coal plant (and allow the genco to ship coal intoinventory),somegencosareconstrainedbyacertainstockpilefootprintabovewhichcostscanbeprohibitive.Take-or-paycoalcontracts:Somegeneratorshavetake-or-paycoalcontractsandareunabletoparticipateineconomicdispatchofnatgasgeneration.Liquidateddamagesfortransportationshortfall:Undersometransportationagreements,penaltiesof$2.00 to$3.50per toncanbe incurred ifcoal isnotdeliveredpursuanttotheagreement.Self-correctingmarket:Marginaldisplacementwillhaveanimpactoncoal,natgas,andemissionprices;therefore,thedisplacement“window”maybeforonly a short time frame.Ninety percent ofU. S. coal production is used forpowergenerationcomparedtoapproximately32percentofnatgasproductionthat is used for power generation. This results in natgas prices being moresensitivetoincrementalchangesindemand.On-peak/off-peakpowerprices:Powerpricesfluctuateaccordingtodemand,andgasgenerationusuallysetstheprices.Inmostcases,on-peakpowerpricesare high enough to dispatchall coal generation and efficient gas generation.Mostdisplacementwilloccurduringoff-peakhours. Inability to resell coal:Many gencos cannot resell coal in order to pursueeconomic displacement. Some are prohibited by specific contractual clauses;somehave“understandings”that theywon't resell thecoal;somehavenoin-houseprocedurestoresellcoal.

RegulatedGencoIssuesMarket-pricedcoaland transportationcontracts: Themodel incorporatesmarket prices for coal and transportation. In the case of coal, virtually allutilities have amix of spot and term contracts,which can be asmuch as 50percentbelowprevailingmarketprices.Inthecaseofrail,manygencoshavelegacy,below-market rates thatare30 to40percentbelowprevailingmarketprices. Most regulated gencos (and many unregulated gencos) dispatch coalplantsbasedonaveragecostofdeliveredcoal,whichcandilutetherelevancyofourmodel'sswitchingprice.Emissionsallowances:Mostutilitiesaregrantedacertainnumberofemissionallowances at zero cost by the Environmental Protection Agency (EPA).Although many utilities calculate emission allowances at market whendeterminingdispatch,asurprisinglyhighnumberstilluseazeropricefortheallowances that they have been allocated (making coal generation morecompetitiveascomparedtonatgas). Utility carrying costs: The public utility commissions typically allot theregulatedutilityacertainnumberofdaysofcoal inventory,abovewhich thecarrying costs are borne strictly by the utility, not ratepayers. (All carryingcostsofinventoryarebornebymerchantgencos.)Merchantgencos:About30percent of thenation's coal-fired fleet is in thehandsofmerchantgenerators.Theseentitiesaremorelikelytodispatchbasedonmarket-to-marketpricesignals.However,theyarestillconfinedbymanyofthesameissuesastheregulatedgenerators(take-or-paycontractsforcoalandrail, inability toresellsomecoal,etc.).Merchantgencosaremoreapt to takerisks fromwhich theywill profit (as opposed to their regulated counterparts,whoseshareholderswouldhavetobeartheriskandhandovertheprofittotheratepayers).

HowMuchNatgasIsNeededtoDisplaceCoal?

Manyclientsareinterestedinknowinghowmuchnatgasisneededtoreplaceacertain monthly volume of coal. The exact volume varies according to coalqualityandtotheefficiencyofthenatgasunitthatisdoingthedisplacement.In

ourtable,wechosetheCappcoal(12,500btu/lb.)sinceCappcoalisusuallyonthedisplacementfiringline.Wechosetwonatgasheatratestoprovideanideaforthemagnitudeofnatgasconsumptionwhengeneratorsareforcedtomoveupthedispatchstacktouselessefficientgasunitstodisplacecoalgeneration.SeeFigureB.2.

FigureB.2

AbouttheAuthorsTomFogartyhasspenthisentireover-25-yearcareerintheenergybusinessandis an energy executive at a major international corporation. Prior to this, hefoundedandledPNTEnergy,anenergyrestructuringandinvestmentconsultingpractice to early-and late-stage private equity investors, corporations, hedgefunds, and developers. He has an extensive international background in thedevelopment, financing, technology, design, valuation, operations, andrestructuring of gas, nuclear, wind, solar, hydro, geothermal, landfill gas,biomass,coal,andwastecoalelectricpowerassets.PriortoPNT,TomwaswithSitheEnergyandFosterWheeler.Hehasalsowrittenaneditorial in theDailyBankruptcyReview andhas beenquoted in other sources on themany currentchallenges facing renewable power. He received his MBA from New YorkUniversitySternSchoolofBusinessandhisBSMEfromFairfieldUniversity.

RobertLambiscurrentlyaprofessoratNewYorkUniversity'sSternSchoolofBusinessandamanagementconsultant.HewaspreviouslystrategyadviseranddebtadvisertoNewYorkStatePowerAuthority,andoverthepast25years,hehas developed and taught a number of customized courses for specificinvestment banks and corporations includingGoldman Sachs,DeutscheBank,MerrillLynch,MorganStanley,andCitibankAmericanExpress.Hehaswrittenbooks and chapters on the financing of public power projects. He is also afoundingmemberofStandard&Poor'sAcademicCounselofAdvisors.

Index

AbengoaSolarAerospaceindustryAfrica,energyissuesinAirpermits:difficultyobtainingforemissionsfuelsupplyalterationstopowerplanteconomicevaluationincludingAlstom

AmericanElectricPowerAmericanSuperconductorAquionEnergyArizonaPublicServiceUtilityCompanyAsia,energyissuesin.SeealsospecificcountriesbynameAutomobileindustry

BaltimoreGasandElectricBeaconPowerBiomassenergyandpowerplants.SeealsoRenewablepowerprojectsbiomass,definedcoal-firedplantsconversionto/cofiringofcostsassociatedwitheconomicsofemissionsfrompriceofelectricityfromrenewableenergycreditsforsupplyofbiomassfortaxissuesrelatedtowoodwastefor

BlackoutsBloombergBoston,TerryBritishPetroleumBuffett,WarrenBureauofLandManagementCaliforniaIndependent[ElectricTransmission]SystemsOperatorsCalpineCanada,energyissuesinCap-and-tradeprogramCapp,F.WilliamCarbondioxideemissions:frombiomassenergyandpowerplantscap-and-trade

programforfromcoal-firedpowerplantscogenerationandcontrol of, technological challenges with landfill gas projects reducing fromnaturalgaspowerplantstaxeson

Caspary,JayCaterpillarCentralMichiganUniversityChicagoClimateExchange (CCX)China, energyissuesinCirculatingfluidizedbed(CFB)boilersCoal-firedpowerplants:airpermitsforbiomass conversion of/cofiring of circulating fluidized bed (CFB) boilers incogenerationatcostsassociatedwitheconomicevaluationofemissionsfromextendingcoalplantoperationshighoutputcapacityofintegratedgasificationcombinedcycle(IGCC)inlifeofcoalplantsnaturalgasvs.coaldisplacementmethodologypriceofcoalpriceofelectricityfrompulverizedcoalboilersintechnologiesin

Coase,AlCogeneration power projects Compressed air energy storage (CAES)CompressednaturalgasConocoPhilipsConsolidatedEdison

Demand-sidemanagement:energyefficiencyandincreasingenergyneedsandoverviewofregulatedutilityincentivesassmartgrid/metersand

Department ofEnergy (DOE).See U.S.Department of EnergyDepartment ofHomelandSecurityDistressedrenewablepowerprojects:debtservicecoveragecalculationsforeconomicsofleveraged lease structure of municipal waste-to-energy power plants asopportunitieswithrisksrelatedtotaxissuesimpacting

Dizard,John

DoyleTradingConsultants,LLCDukeEnergy

EasternInterconnectionEBITDA (earnings before interest, taxes, depreciation and amortization)EconomicandStimulusEmergencyAct(2008)Economics:analysisofpowerprojecteconomicsofbiomassenergyofcoal-firedpowerdemand-sidemanagementanddistressedrenewablesandEBITDAandelectricitypricesandemission control technology impacting energy storage impacting hedgeprovidersimpactingofhydropowerprojectsjobcreationandofnaturalgaspowernaturalgaspricesimpactingpowerplantevaluationandpowerplantfinancingandregulatedutilitiesandreturnonequityforrenewablepowerprojectsriskimpactingshalenaturalgasimpactingofsolarpowerspecialexemptionsimpactingtax-related(seeTaxes)ofwindpower

Electricity:electricitymarketreformlong-termpowerpurchaseagreementsforpriceofstorageoftransmissionof

Electricpowertransmission:blackoutandfailureprotectioninbulkcontrollingcomponentsoftransmissionsystemcostofelectricitymarketreformandenergystorageandgovernmentpolicyimpactinggridinput,lossesandexithealtheffectsofloadbalancinginmerchanttransmissionprojectsforoverheadoverviewofrenewablepowertransmissionconstraintssecurityofsuperconductingcablesforundergroundvoltagesandcurrentsusedforElectricReliabilityCouncilofTexas(ERCOT)GridElectricvehicles

ElSalvador,energyissuesinEmissions:airpermitsforfrom biomass energy and power plants cap-and-trade program for carbondioxidefromcoal-firedpowerplantscogenerationandcontrolof,technologicalchallengeswithlandfillgasmercuryfromnaturalgaspowerplantsnitrousoxidefromnuclearpowerplantsparticulatesulfurdioxidetaxeson

Energyefficiency:advanced meter infrastructure for demand-side management via increasingenergyneedsandrewardsandrebatesforsmartgrid/metersand

EnergyInformationAdministrationEnergystorage:categories of technologies for compressed air energy storage as demand-sidemanagementandelectricpowertransmissionandfinancingofflywheeltechnologyasimportanceofinnovativetechnologiesformoltensalttanksasnaturalgaspumpedhydrostorageasregionalmulti-energystoragecollaborationssupercapacitorsorultracapacitorsastechnologicalchallengesofEnerNOC

Environmentalissues:coal-firedpowerplantscreatingemissionsas(seeEmissions)frackingcausingradioactivity/radioactivewasteaswaterconsumptionaswindfarmscreating

EnvironmentalProtectionAgency(EPA)ESOEurope,energyissuesin.SeealsospecificcountriesbynameExxonMobil

FederalEnergyManagementProgramFederalEnergyRegulatoryCommission(FERC)FederalReserveBoard

FloridaPowerandLight(FPL)FlywheelsFordFosterWheelerFrackingFrance,energyissuesinFuelUseAct(1978)

Gasturbineengines.SeealsoNaturalgaspowerplantsGeneralElectric(GE)GeneralMotors(GM)Geothermalpowerprojects:binary-cycledesignofcoproductioninoilandgaswellscostsassociatedwithdirectuseofgeothermalenergyenhancedsystemsforgeologyimpactingground-sourceheatpumpsinhydrothermalpowersystemspriceofelectricityfromstandingcolumnwellsinsteamtechnologyintaxissuesrelatedtotechnologicalchallengesoftransmissionfrom

Germany, energy issues in Great Britain/United Kingdom, energy issues inGreece,energyissuesinGround-sourceheatpumpsHalliburtonHedgeprovidersHighviewPowerHondaHydropowerprojects.SeealsoRenewablepowerprojectscostsassociatedwitheconomicsofengineeringreportsongeologyimpactinghydrothermalpowersystemslicensingofpumpedhydrostoragerenewableenergycreditsforriskassessmentoftaxissuesrelatedtotransmissionfromuniquetechnologyof

Icahn,CarlIceland,energyissuesinIllinois/MidwestIndia,energyissuesinIntegratedgasificationcombinedcycle(IGCC)IntellectualVenturesInterestratesInternationalHydropowerAssociationInvestmenttaxcredit(ITC)Italy,energyissuesinJapan,energyissuesinJPMorgan

Kee,EdwardKelvin,LordKempton,Willett

LandfillgasprojectsLeeMyung-bakLegislation:EconomicandStimulusEmergencyAct(2008)FuelUseAct(1978)NaturalGasWellheadDecontrolAct(1989)PublicUtilitiesRegulatoryPolicyAct(1978)SecuritiesAct(1933)The Storage Technology for Renewable and Green Energy Act (2011)LeveragedleasestructureLiquefiednaturalgas

LongIslandPowerAuthority(LIPA)LowImpactHydroInstitute(LIHI)Martin,KeithMaryland Public Service Commission Master limited partnerships (MLPs)McIntosh,JamesMerchanttransmissionprojectsMercuryemissionsMerkel,AngelaMid-AtlanticGridInteractiveCarConsortium(MAGICC)MiddleEast,energyissuesinMitchell,George/MitchellEnergyMoltensalttanksMorocco, energy issues in Municipal waste-to-energy power plants: bondofferingriskdisclosureforcostsassociatedwithdebt service coverage calculations for distressed and abandoned, exploitingprofitability of duties of professionals in engineering feasibility study onfinancialadvantagesof

opportunitieswithtaxissuesrelatedto

Myhrvold,Nathan

National Economic Research Association (NERA) National RenewableLaboratoryNationalSolarRadiationDatabaseNatrionCorporationNaturalgaspowerplants:airpermitsforbenefitsofcoal vs. natural gas displacement methodology cogeneration projects incompressednaturalgasfromcostsassociatedwitheconomicevaluationofelectricitygenerationfromemissionsfromfinancingfrackingforgasturbineenginesforlandfillgasburnedinliquefiednaturalgas fromoperationsagreements forpriceofelectricity fromprice of natural gas from renewable power backup via renewable powerprojectsimpactedbynaturalgasshalenaturalgasforstorageofnaturalgasbysupplyofnaturalgasfortermsheetfor

NaturalgasvehiclesNaturalGasWellheadDecontrolAct(1989)NewmarkettaxcreditsNewYorkIndependentSystemOperator(NYISO)NGKInsulatorsNitrousoxideemissionsNorway, energy issues in Nuclear power plants. See also Renewable powerprojects

50-yearhistoryof

accidentsandsafetyfailuresat

Asianleadershipindevelopingcostsassociatedwithemissionsfromfuelreprocessingin

globalstancesonprice of electricity from radioactivity and radioactive waste from NuclearRegulatoryCommissionNVEnergy,Inc.

OhioEdisonOrganizationofPetroleumExportingCountries(OPEC)PacificGas&Electric(PG&E)Corp.Particulateemissions“Partnershipflip”transactionsPassivelossesPatil,PratibhaPhilippines,energyissuesinPike,RobertPJMPockley,SimonPoland,energyissuesinPortugal,energyissuesinPowerpurchaseagreements(PPAs) Production tax credit (PTC) Public Utilities Regulatory Policy Act(PURPA/1978)PulverizedcoalboilersPumpedhydrostorage

Qatar,energyissuesin

Radioactivity/radioactivewasteRangeResourcesRegional Greenhouse Gas Initiative (RGGI) Regional multi-energy storagecollaborationsRegulatedutilitiesRenewable energy credits Renewable portfolio standards Renewable powerprojects.SeealsoBiomassenergyandpowerplants;Geothermalpowerprojects;Hydropower projects;Municipalwaste-to-energypower plants;Nuclear powerplants;Solarpowerprojects;Windpowerprojectsauxiliarybackupforcostsassociatedwithcurrentstatusofdebtissuefordistressed, opportunities with economics of (see Economics) electric powertransmissionissuesforemissionsfromenergystorageforfinancingof

jobscreatedbylong-termpowerpurchaseagreementsfornaturalgasimpactingoverviewofprice of electricity from renewable energy credits for renewable portfoliostandardsforriskassociatedwithspecialexemptionsrelatedtotaxissuesrelatedto

Richardson,BillRisk:hedgingkeyissuesanalysisformunicipal bond offering risk disclosure postcompletion/operationalrisks/mitigants power project risk assessment precompletion risks/mitigantsRiverBankPower

RoyalDutchShellRussiaandformerSovietUnion,energyissuesinSecuritiesActof1933SERCShalenaturalgas:emissionsfromfrackingforpriceofproductioncostsofrenewablepowerimpactedbysupplyof

Smartgrid/metersSolarMillenniumSolarpowerprojects.SeealsoRenewablepowerprojectsauxiliarybackupforcancellationofcostsassociatedwithcurrentstatusofeconomicsofenergystorageforfinancingofNational Solar Radiation Database for price of electricity from renewableenergycreditsforrenewableportfoliostandardforsize/acreageofsolar photovoltaic technology for solar thermal technology for special

exemptionsrelatedtotaxissuesrelatedtotechnologicalchallengesoftransmissionconstraintsforSolarReserveLLC

SolarTrustofAmericaSouthernCaliforniaEdisonSouthKorea,energyissuesinSouthwestPowerPoolSpain,energyissuesinSpecialexemptions:economicimpactsofleveraged lease structure as master limited partnerships as new market taxcreditsas“partnershipflip”transactionsasStandingcolumnwells

The Storage Technology for Renewable and Green Energy Act(STORAGE/2011) Sulfur dioxide emissions Supercapacitors or ultracapacitorsSweden,energyissuesinSwitzerland,energyissuesinTaxes:carbonenergystoragetechnologytaxcreditsinvestmenttaxcreditmunicipalwaste-to-energypowerplanttaxissuesnewmarkettaxcreditspassivelossesandproductiontaxcreditrenewablepowertaxissuesspecialexemptionsimpactingTesla,Nikola

TexacoToyota

UnitedKingdom/GreatBritain,energyissuesinUniversityofDelawareU.S. Bureau of Land Management U.S. Department of Energy EnergyInformation Administration Federal Energy Management Program NationalRenewable Laboratory U.S. Department of Homeland Security U.S. FederalEnergy Regulatory Commission U.S. Federal Reserve Board U.S. NuclearRegulatoryCommissionVolkswagenvonRittinger,PeterRitterWangJunfengWaste-to-energy power plants. See Municipal waste-to-energy power plantsWaterconsumptionWellinghoff,JohnWesternInterconnection

Westinghouse/ToshibaAPWindpowerprojects.SeealsoRenewablepowerprojectsauxiliarybackupforcostsassociatedwithcurrentstatusofdistressedeconomicsofenergystorageforlong-termpowerpurchaseagreementsfornumberandsizeofoverviewofprice of electricity from renewable energy credits for renewable portfoliostandardforriskassessmentofspecialexemptionsrelatedtotaxissuesrelatedtotechnological challenges of transmission constraints for wind energypredictionsfor

XcelEnergy

Yagi,HidetsuguYurman,Dan