INTERVIEW: SCOUT CLEAN ENERGY CEO ON THE RISK OF CORPORATE BUYERS AND LOOKING TOWARD 2021
As the wind industry makes one last push to meet the production tax credit deadline, renewable advocates have high expectations for 2021 with a new federal administration. Michael Rucker, the CEO of Scout Clean Energy, a wind development company that recently expanded into solar and hybrid projects in 2020, spoke to New Project Media about what we can anticipate in the new year, the growth of corporate interest and what the clean energy industry needs to build on its momentum.
NPM: What does Scout expect to see going forward in 2021? Will the new administration have a large impact on the industry?
Our industry has done very well under the Trump administration, and that's probably not due to specific policies that were put in place to support it but really just in terms of the momentum that renewable energy has established through the competitiveness of the technology and efficiency. We’re the lowest-cost energy sources on the grid these days, and the transition from coal and fossil fuel to renewables is just a juggernaut that can’t really be stopped. A lot of it is coming from corporate initiatives and interests as well, in terms of corporate buyers for renewable power, things that are happening outside of the government sphere.
But then again, it's the energy sector, we’re still dependent on the tax credits that are like the foundation for the economics of wind and solar projects. We’ll never be separated from policy, there’s no doubt about that.
NPM: What are some ways to ensure industry growth as renewables, and wind in particular, face tax credit expirations?
Renewable portfolio standards were the ways, historically, that we got utilities to force renewables into their portfolio and pay more for renewable energy. Well, now, renewable energy is cheaper, so generally they’ll take it anyway. As the tax credits go out, I think finding ways where we can monetize the price of carbon is probably the most efficient way to allocate resources across the sector between technologies. It’s more technology-agnostic and broader. It even considers transportation across other parts of the economy that we haven’t been able to target as easily as the power sector in terms of deploying decarbonization technology. So, I hope we move to incentives that are more based on the price of carbon than a pure tax credit. Either putting a price on carbon or continuing with portfolio standards are good methods that aren't distorted. But then, with portfolio standards you’re starting to choose technology over classes of technologies, but it’s easier to achieve. We have a history of doing that, and from a legislative perspective we tend to be good at doing the same thing again. It’s very difficult to innovate.
I’m not saying I expect states to [intensify existing standards], but I think that would be a good, solid, policy approach to achieve those goals. And traditionally it has been the states that have driven that, but with a federal government that’s more focused on a wide-scale deployment of energy storage, for example, that can be done at a federal level. We’ve never seen that in the United States. There are certain pockets in the United States that have no incentives whatsoever, particularly in the Southeast. What’s interesting is you are starting to see renewables penetrate even those markets just because it’s price competitive, but we can do a lot more [with federal support].
NPM: Beyond tax credits and RPS, what else can be done to incentivize growth?
Other incentives can be less about the markets of projects but more about access to markets via transmission. Infrastructure investments, the backbone of electricity production in the United States, is becoming very weak in some places that are not really supporting growth or definitely fuel switching and renewable construction. So, you have parts, particularly in the central part of the United States, where wind is pretty much completely saturated. Without major capital investment, we’re really at a pace where new project development is going to be declining. It is currently.
If you look at places like California, now it's so solar saturated that suddenly wind energy is much more valuable because it can’t be developed in California...so we’re seeing very fundamental changes in how our power markets work as a result of renewables and intermittent energy. So, I think there’s additional infrastructure we need to install to support that from a transmission perspective, and we need to find a way to truly incentivize storage markets. If there’s any place we should have an ITC it should be for storage, not solar or wind because that’s the new emerging technology that we really need and it's difficult to deploy because there’s no clear incentive for it. There's some deployment, if you couple it with a solar project, but it's difficult to do that. The construction is complicated and there’s no standalone incentive for storage that’s being built. Plus, the revenue models for storage aren’t fully developed, so we need to find ways that we can create long-term revenue streams for solar so they can finance those projects.
NPM: Scout recently made a switch to include solar builds, and is in the midst of developing Horse Heaven, Washington's biggest ever wind-solar-storage project. What kind of a future do you see for hybrids? Do you expect growth?
I do, but I think it might be a bit overblown. It depends on which hybrid you’re looking at. I think solar-plus-storage is almost every project that we plan for right now, so that’s going to become very commonplace over time. Wind and storage, much less so. We won’t see so much.
Another issue, this also applies to utility-scale solar, if you’re a utility trying to integrate resources into your system, the location of each asset isn’t so important, right? You’re happy to have wind where it's windy, solar where it's sunny, and logically your storage should probably be downtown or in the suburbs, closer to the loads, and you can develop in those places with storage, too, because it's just containerized batteries. So, in a way, utilities would look to integrate on a system basis not necessarily on a project basis. So, there will be a lot of hybrid projects, particular solar-plus-storage, but it doesn’t necessarily add as much value for an offtaker. I think some people overblow that, because most offtakers of any particular size can pretty easily just mix and match and get the best of the technologies integrated themselves.
NPM: You mentioned interest from corporate buyers, as well. What's that market looking like?
Corporate buyers overtook utility buyers for renewables, I understand, maybe last year, or relatively recently in the last few years...and we’ve never seen that, ever. So, we’ve truly deregulated the markets significantly. Most of those are virtual power purchase agreements, so they’re financial transactions, not physical transactions for energy. Still, it’s created the secured revenue streams that have allowed us to finance projects and driven most of the growth. If it was utility-only, it would have been half as much, maybe less, so we appreciate it for that. Also, we’ve seen a little mismatch, particularly in the last four years between public policy and corporate policy, right? Corporate buyers have been driven by ESG goals, significantly, and we’ve had, in the Trump administration, not a particularly strong orientation towards ESG in terms of sustainability. That’s not been a great focus.
Corporates, though, listening to their customers and to their investors, are really driven to do that and independently have been driving the ESG component of growth in that market, which is significant. It’ll be interesting to see in the next few years if corporate buyers keep up the same pace of investment in power purchase agreements, particularly as the subsidies for wind and solar phase out. Or if their buying interest will start to wane as the rate of price decline for renewables slows down. [From a cost perspective without tax credits] renewable energy may not necessarily be the great deal it was a few years ago, so we’ll see if their ESG focus and motivations really keeps them buying or slows them down a bit in renewables without any incentives.
NPM: How does this corporate interest impact pricing?
Basically, [corporations are] pushing the risk to the generator to absorb the cost of basis between where they’re generating and where they’re delivering energy. Logically, that really shouldn’t be passed through to generators, it should be utilities and loads that pay for that, not generators. But the market, there have been so many renewable projects and fewer buyers, it's really been a buyers’ market for renewables, that they’ve really been able to drive those settlements to areas that are somewhat risky. So that’s been a negative just in terms of how that virtual PPA market has been developed. The classic utility model where they buy your energy right where you generate it is a hell of a lot easier for us to finance, and has better risk allocation, but we’re seeing fewer and fewer of those. So, it could create a lot of economically shaky projects, frankly, as a result. Unless that switches back to being more seller-friendly in terms of those structures, but I don’t see that happening anytime soon. It's become very difficult and risky to build out and finance these projects. And it's becoming harder over time, you’d think it would be the opposite but it's becoming difficult.
Another issue is as you start to saturate the grid with a certain production shape, like wind or solar, which either follows the wind or the sun...it depresses prices massively in those hours. So, although your average energy price might be high at a hub, the price we’re actually seeing, when you production-weigh the time we deliver energy, is just massively depressed because, for example, the production tax credit is driving that price very low. So that’s making the realized prices that we see in the market almost too low to finance. Probably two-thirds of the projects I see these days really don’t cut it, frankly. But there are a lot of very aggressive people that are investing in them, but as that covariance of production price increases over time, you might see projects 5-10 years in the future that are economically struggling without some kind of change. I don’t think a lot of people understand that yet.
NPM: What can be done to combat this issue and make sure the industry stays afloat?
Make it known that we need investment in transmission and grid infrastructure, if we’re going to keep the growth that everyone is expecting to see from us happen, then we’re going to need those investments and it is going to need an alignment of public policy.
We still see the long-term future for renewables as being very positive, definitely. Sometimes the revenue models, the financing models, need to change and that happens over time. But generally, the momentum’s in the right direction. So, we’re investing in that long-term pipeline.