Moving beyond coal

The California energy crisis was good for Nevada. Front-row seats to rolling black-outs, astronomical electricity prices, utility bankruptcy and political mayhem inspired Nevadans to consider the Silver State’s energy future carefully.

Plans to deregulate the power supply were wisely scrapped, and in 2001 Nevada embarked on an ambitious plan to develop the state’s potentially vast renewable-energy resources, or “green power.”

Since then, alternative-energy developers have painfully realized the difficulty of their task. The challenges are complex and require cooperation among entrepreneurs, utilities, banks and a host of regulators. Now is the critical decision-making time.

Under the guidelines of the Renewable Portfolio Standard (RPS), Nevada’s utilities must either generate or purchase ever-increasing amounts of electricity from renewable sources, such as geothermal, wind, solar and biomass. For 2004, the utilities must have at least 5 percent renewables in the mix, stepping up 2 percent every other year until 2013, when 15 percent of Nevada’s electrical power must come from renewable sources.

Energy production investments are long-term choices. No matter the fuel source, power plants are expensive and designed to operate for decades. Moving forward without considering our renewable-fuel options is a decision that would echo for generations.

Dr. Daniel Kamman, director of the Renewable and Appropriate Energy Laboratory at the University of California, Berkeley, says Nevada’s RPS provides cohesion, focus and, most important, timely opportunity.

“The biggest issue holding back renewables has been market opportunity. That’s actually what the RPS gets at, market opportunity.”

The true costs of fuel
The RPS is a hedge against an energy market skewed in favor of fossil fuels. Under the rubric of traditional economics, renewables can’t compete with the nation’s cheapest source of electric power, coal. U.S. supplies are abundant and likely to remain inexpensive for 100 years or more.

Kamman says the price of coal is falsely low.

“Traditional economics haven’t taken into account externalities—meaning things external to the market. In the past, we simply haven’t charged for pollution. That’s not good environmental policy, but [it] turns out that isn’t even good financial policy. If you don’t have the true price of resources factored into the cost of energy, it leads to waste and misinformed decision making.”

Coal is the nation’s leading fuel source for electrical power, accounting for 56 percent of production, but its list of “externalities” is long and alarming. According to the Union of Concerned Scientists, coal combustion is responsible for some of the planet’s most severe environmental problems: sulphurous smog, acid rain, global warming and toxics—especially mercury. In an average year, the Valmy coal plant generates almost four million tons of carbon dioxide (CO2), the primary human cause of global warming. Adding that much CO2 has the same effect as cutting down 161 million trees.

Kamman concedes that coal will continue to be “cheaper” than renewables until the true cost of coal power is considered.

“Until we come up with better ways to tax pollutants, we will continue to have this difference between the economic costs of these resources and their true social and environmental costs.”

Taxing “dirty” commodities is a well-established and lucrative government practice, with consumers paying taxes on things like cigarettes, alcohol or gasoline. Energy companies would have to pay a pollution tax.

“What’s the largest business in the world?” Kamman asks rhetorically. “Energy, right? As the world’s biggest industry, the political lobby is highly influential. There is no industry that benefits from taxing pollution, other than green power. But green power is young and doesn’t have the clout.”

In today’s energy market, geothermal and wind are just becoming cost-competitive with natural gas. Natural gas is a cleaner electricity source than coal, and a modern, highly efficient natural-gas plant is a proven source of power. Even with the high price of fuel, there is a lot of comfort in the reliability and convenience of natural-gas technology. Some resource analysts quip that using natural gas to generate electricity is like paving your driveway with diamonds—it’s might be more expensive than it’s worth.

But the natural-gas market recently has proven to be volatile, resulting in prices per kilowatt-hour five times those of coal. Market watchers predict an uncertain future for the supply of natural gas, which could make Nevada renewables more attractive over time.

But for now, green power needs a boost, even when competing with comparably priced natural gas. Nevada Public Utilities Commission (PUC) Chairman Don Soderberg is enthusiastic about the RPS, saying the act is the most important regulatory factor in developing renewables.

“I don’t think there would be a great deal of renewable-energy investment over the next 10 years, unless it was mandated by the public.”

Yet, Nevada geothermal-power plants have been succeeding on slim profit margins since the late 1980s, consistently adding 200 megawatts to the grid every year. Sparks-based Ormat Inc. has been involved since the beginning.

During the 1990s, before the RPS and when natural-gas prices were low, the incentive to develop geothermal power in Nevada was marginal. So Ormat focused on overseas operations, helping countries such as the Philippines and New Zealand generate more than 500 megawatts of geothermal power, based on what it was learning in Nevada.

But, since passage of the RPS, Ormat has shown vigor in developing Nevada’s geothermal resource, purchasing several existing facilities, solidifying its position as Nevada’s leading renewable-energy producer.

Ormat’s vice president, Dan Schochet, has been with the company for almost 30 years. He says the RPS is driving the industry.

“Knowing that there’s a market in place, there will be more companies, including ourselves, investing in exploration in previously unexplored areas, so that as the utility needs more and more power, we’ll be in a position to provide them proposals.”

Ormat has grown steadily since its entry into the geothermal-power business. In 1984, the company recorded roughly $10 million in energy sales. This year, it may exceed $200 million worldwide.

As of now, geothermal is Nevada’s only renewable-energy success story. Aside from a 20-megawatt biomass plant near Portola, Calif., and a small solar facility outside Las Vegas, geothermal power creates almost all of the state’s renewable energy. Other facilities are badly needed to help meet incremental goals.

Green power means money power
Colin Duncan is Sierra Pacific’s director of renewable-energy projects. He knows the challenges of establishing green power in Nevada all too well.

“How many wind farms are there in Nevada?” he asked in a gravelly voice. “None,” was the dejected response. Nevada Power had a signed deal with MNS Wind Company for a mammoth 260-megawatt wind farm slated for Shoshone Mountain on the Nevada Test Site. In a midnight surprise, the Air Force halted the project, saying the windmills would interfere with radar.

The test site wind farm is just one of a half-dozen failed or delayed green energy projects in Nevada.

Dick Burdette, director of the Nevada State Office of Energy, says a lack of financing has been the single biggest obstacle in establishing renewables. The California energy crisis damaged Sierra Pacific’s credit rating. Many renewable developers lack the capital to finance large projects out of pocket. And when a lack of confidence in a credit-impaired utility is combined with renewable technology’s lack of a track record, industrial banks aren’t willing to take what they see as pure risk.

Notably, two Nevada projects are currently delayed due to financing problems, a wind farm in Ely and a solar plant near Boulder City. But the real problem is not Sierra Pacific’s credit rating. Banks regularly fund large-scale fossil-fuel projects for utilities with less attractive credit than Sierra Pacific has. Clearly, financiers are nervous about the viability of a young industry. But, according to UC Berkeley’s Dr. Kamman, banks will come around as renewable technology proves itself over time.

“Five years ago, renewables were not a good economic field. That has changed. In parts of Europe, wind energy meets 25 percent of power demand. We are seeing some wind farms in the U.S. that are performing very well. Whenever we see gas prices spike up or down, it is consistently reported that having renewables in the mix makes the portfolio more solid on a financial basis. The financial sector will realize that having renewables in the mix is good business.”

Not only is it good business, in Nevada and 12 other states, it’s also the law. The penalties for not meeting RPS goals are intentionally vague, however. The PUC may impose “administrative fines” or “other administrative actions” against the utility for not meeting incremental standards, or the commission can exempt the utility from short-term goals altogether. The PUC’s challenge is to keep the utility motivated.

Chairman Soderberg said he couldn’t comment on how the commission would respond to problems with the 2004 goal, but he did express confidence in the utility and renewable entrepreneurs.

“Just because we haven’t met the standard so far is not a reason to be pessimistic. These things are going to happen. They may take more time than we thought. But we need to make the investment now because once we make the investment, it will be a boon for Nevada’s economy and utility ratepayers in the future. We just have to keep working at it.”

Burdette remains hopeful renewables will ultimately flourish in Nevada, but he also believes the governor and the PUC need to be firm.

“I don’t want to easily let the utility off the hook; if you do, nothing will be built,” he said. “But I don’t think we have that problem. Our utility is committed. They recognize the governor is intent on enforcing the law. I think the goal that was set is proper. We’re just going to have to be patient while these problems are worked out, but not too patient. … I don’t think they’ll meet the standard in 2005. But starting in 2006 and 2007, now it’s time to be a little more impatient. But we are starting something new, so it’s not unreasonable for the people of Nevada to be a little more patient with this process.”

Duncan’s frustration is palpable, as is his commitment to meeting RPS goals. Duncan hopes to have the utility’s credit problems resolved by the end of the year, but unexpected failures like the test site wind farm still sting.

“I worked directly on the MNS project negotiating that contract. We got it all signed. It was all going forward. And the Air Force said, ‘No way.’ That doesn’t help encourage all the other developers looking at Nevada. … Nothing is a slam dunk here.”

Many ask why Sierra Pacific doesn’t take control of its renewable destiny and develop facilities itself. Duncan says the utility would rather see independent contractors take the risks, not Sierra Pacific.

“We’ve looked at self-build for years and years, but to be honest it’s a very risky business. We’ve signed many contracts that have failed. After you drill a couple unsuccessful million-dollar wells, financiers are not too excited to watch money go down the hole.”

The developers and the utility are caught in a bind, Duncan explained.

“In order for them to have money to develop projects, they have to have a contract to sell their power. In order for us to sign a power sales contract, we have to know they are able to deliver, so the contractor has to spend significant money up front to get a contract.”

That’s why a company like Ormat has been an ideal partner in developing Nevada’s renewables. Since the RPS was enacted, Ormat has raised $450 million in financing for its projects. With the money, Ormat has cornered Nevada’s geothermal market, purchasing Desert Peak, Brady Hot Springs, Steamboat and Steamboat Hills. Ormat is in the process of upgrading existing plants and building new facilities on proven resources and could be producing some 400 megawatts within five years.

Building a sustainable future
Over the next 20 years, market analysts predict the price of coal will remain stable, rising slightly. Oil and natural gas will likely be significantly more expensive. The cost for renewable power in Nevada will decrease. Ormat’s Dan Schochet says his company is banking on that scenario.

“The risk-adjusted cost of geothermal electricity over time is around five cents a kilowatt hour. The risk-adjusted value of fossil-fuel energy is almost double that. If a utility tried to lock in a 20-year price on gas- or oil-fired power, they’d be paying a prohibitively high price, so we assume that over years we will become an absolute bargain.”

Another factor is politics. If a future president or Congress enhances and strictly enforces laws like the Clean Air Act, or if pollution is taxed, the cost of coal power could rise sharply, making alternative energy desirable enough to attract large-scale investment. But just because market forces create demand for renewables does not mean resources will be easily developed. The future of geothermal power is risky.

“The future of Nevada is a little bit of a crap shoot,” Schochet explained. “Because much of what we hope to develop in the future hasn’t been discovered. But the reason for optimism is that geologists are confident the resources are out there.”

Scientists and engineers estimate there are 1,000 to 2,000 megawatts of geothermal potential in Northern Nevada. That much power would effectively make the northern part of the state energy self-sufficient, even considering rapid population growth. But because these resources take a long time to develop, starting now is important, if Nevada ratepayers want a hedge against rising fossil-fuel prices in the future.

Schochet says Ormat’s success is largely based in conservative and considered expansion. Historically, imprudence can lead to failure.

“If you look statistically at what’s been accomplished, about 50 percent of the [geothermal] explorations are successful, and 50 percent are not. These explorations can range in price from $1-$5 million per well. Then, once you drill a well, there is a 70 percent success rate. If you need seven wells, you drill 10.”

Infrastructure considerations will also affect how green energy develops in the state. Renewables are site-specific. World-class geothermal, wind and solar resources dot the state. Most of them do not match the existing power grid. Constructing expensive transmission lines to harness small renewable facilities can be prohibitive in Nevada’s vast spaces.

That’s why the PUC’s Soderberg believes coal and possibly mining can lead the development of Nevada renewables.

“We really believe the development of coal resources will help the development of renewable resources. To run a tap to a small renewable plant is not cost-effective. Coal can build a plant large enough to make such a spur cost advisable, and renewables could then hopscotch onto coal-established infrastructure.”

In its latest regional newsletter, the Sierra Club bemoaned a plan to build two advanced coal-fired power plants in northern Washoe County. According to the EPA, Nevada’s airshed is already the dirtiest in the country, yet the decision to burn more coal in the name of sustainable low electricity rates is justified to many. If coal power makes footprints for renewables that wouldn’t otherwise exist, is the trade-off worth the pollution? Are low rates and a convenient fuel source worth building more dirty coal-power plants? Why not natural gas, if the plan is short term?

There are momentous decisions ahead. Soderberg believes Nevada must consider a spectrum of future energy choices.

On one end, coal and natural gas are well-established fuel supplies and technologies. At the other, renewable technology and resource location are young and not immediately available. Over the next 20 or so years, the reality is that fossil fuels will have to be burned before Nevada achieves energy independence. Whether that’s coal or natural gas, the commissioner emphasizes that the state shouldn’t over-rely on any single source of fuel. Soderberg says we should develop fossil-fuel plants with a renewable future in mind.

Mining, too, could lead to the development of renewables. The terraced walls of an open-pit mine are suited to accommodate solar panels. Many remote mining sites are also ideal for wind farms, and, most important, mine sites have industrial power lines and other infrastructure already in place to bring the watts to market. If all the state’s abandoned open-pit mines were rehabilitated thus, the result would mean hundreds of additional megawatts of clean Nevada energy.

But Sierra Pacific’s Duncan knows there is a deep chasm between thoughts of new power plants and actual electricity-producing facilities. He’s not certain that independent contractors will build the facilities needed to meet the RPS goals.

“No, I’m not 100 percent certain we’ll make our goals. We work as best we can with the developer to remove the barriers to get that facility on line. We will provide as much help as possible. We need to both work together to get these projects going.”

The hope is that, as renewables become more competitive and profitable, developers will flock to Nevada. In 2002, Nevada ratepayers paid $2.5 billion to out-of-state energy producers. The market for power is robust and statewide is growing at nearly 2 percent a year. Nevada’s Renewable Energy Task Force foresees renewable power as a viable economic-development tool, especially in rural areas.

In the latest Task Force Report on the Potential Economic Impact of Nevada’s Renewable Energy Resources, the group concludes that a Nevada with 15 percent renewables in the mix would create some 5,000 jobs across the state. You would think such job creation numbers would be popular with politicians.

But state Assemblywoman Sheila Leslie says she’ll never forget the rancorous debate over the RPS.

“It was not passed without a huge battle on the floor of the Assembly. Some lawmakers said the law would bankrupt the utility, causing all sorts of problems. ‘People weren’t going to pay extra for green energy. Global warming’s a myth.’ While the rest of us said, ‘Hey c’mon, let’s give a boost to renewable energy in our state and at the same time do what’s right for the environment and our economy.’ I’m glad we got the bill through.”

For Leslie and other advocates of alternative energy, a national RPS should be a priority. George W. Bush vigorously opposes a nationwide RPS, whereas Democratic challenger John Kerry proposes a plan that would mandate 20 percent renewables by 2020. Long-shot candidate Dennis Kucinich proposes an even more ambitious agenda. A Kucinich RPS would mandate 20 percent renewables by 2010. Helping achieve this highly ambitious goal, Kucinich proposes sending NASA on “a mission to earth,” directing the agency’s brain trust to develop renewable-energy resources instead of spending possibly trillions on manned missions to the moon and Mars.

Back in Nevada, it’s difficult to say how soon the utility will get on track. Sierra Pacific’s Duncan says developer response to the 2003 request for proposals has been encouraging. The utility is currently negotiating new power purchase agreements with geothermal, wind, solar and hydroelectric projects.

The near future may be frustrating. Tantalizing resources are in place, pockets of eternal energy resting above and below the state’s sagebrush ocean. The rub is in having to wait.