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The Real Reason PG&E Wants to Own Solar Projects: Startups Are Risky

Last week the CEO of northern California utility PG&E, Peter Darbee, made one of the strongest pronouncements yet that it plans to invest in and own solar projects — rather than solely buy power from solar developers. By doing so PG&E can help usher along the solar power that will help it reach the state-mandated goal of 20 percent of its electricity generated by renewable energy by 2010, and the company generates billions in taxable income that could provide needed funding.

But here’s another reason: insurance. A lot of the solar projects from which PG&E has agreed to buy power from are being built by young startups, which by nature can be risky, unreliable, and prone to failure — particularly in these difficult economic times when capital is scarce. In recent weeks, three of the solar startups that PG&E has contracted with are showing signs of struggling, laying off staff, refocusing on different markets, and giving hintS of potential construction delays.

Take OptiSolar, which has been planning a 550MW-solar plant — dubbed Topaz Solar Farms — in San Luis Obispo County, Calif. and from which PG&E has contracted to buy power. The Hayward, Calif.-based company said earlier this month that it is laying off 300, or almost half, of its employees, and has delayed construction of a 1-million-square-foot, 600 MW annual capacity, Sacramento plant until at least the second half of this year.

OptiSolar insists that the layoffs and construction delay needn’t change the timeline of its solar power projects. And that very well may be true, as just today the California Public Utilities Commission (CPUC) approved the contract between PG&E and OptiSolar for Topaz Farms, which is supposed to go online by the end of 2011.

Solar startup Ausra, which has also contracted with PG&E, is also facing hurdles. While the startup is a poster child of the recent wave of cleantech firms — backed by Kleiner Perkins and lauded by Al Gore — the company said today that it has cut 10 percent of its staff, or 12 people, and is refocusing on using its technology for steam generation and smaller plants in the near term. Ausra spokesperson Katherine Potter tells us the layoffs had to do with spending capital widely, and those new goals require different skill sets than the development of massive solar plants, explained Potter.

Like OptiSolar, Ausra says that its project with PG&E, which is expected to start generating 177 MW of power in San Luis Obispo in 2010, remains on track and on time.

Other solar plants with contracts with PG&E are also facing potential delays. According to Reuters, solar startup BrightSource could be pushing back the construction date of its 900 MW solar plant in Calif, which was scheduled to go online and sell power to PG&E at the end of 2011, if the stimulus package doesn’t provide enough funds for solar power.

So that’s a sizable three companies, and over 1.5 GW of solar power contracted with PG&E, in the hands of startups that are being hammered by the downturn. That can’t be reassuring for the utility, which has been racing to meet that state mandated deadline. What’s the best way to minimize the risk of the young companies that you’re relying on? Own the plants themselves.

15 Responses to “The Real Reason PG&E Wants to Own Solar Projects: Startups Are Risky”

  1. Travis Randolph

    Pg&E you have been around a long time, the rest of us in america are young. You should do more to encourage young american companies. stop complaining. You could help with financing and spouncer tax credits in many different ways, but you dont.

  2. I foresee PG&E making equity investments in projects with proven solar technologies. Start-ups need to first demonstrate at Big Solar scale their technologies are competitive and reliable. Near term, PG&E might seek an equity interest in projects similar to the SunPower 250MW California Valley Solar Ranch project in San Luis Obispo County based on crystalline silicon or a First Solar module based project. A PG&E equity investment in a CSP plant is also possible once these are proven at scale. CIGS and CPV based technologies are on the cusp of inclusion in the equity investment list.

    Perhaps solar technologies only becomes utility investment grade after the start-up goes public.

  3. Ed, I think they’ll be able to plead their case to CPUC, but it’s still a PR nightmare not to meet it, given they’re one of the most progressive utilities in the most progressive state. Also, I think PG&E has little desire to invest in unproven technologies, as they need to provide stability, but it just happens to be a relatively new area. And also are you saying PG&E doesn’t really intend to own plants? If so, interesting, I would love to hear your thoughts on that more . . .

  4. A PPA is a great way for PG&E to invest in unproven technologies and start-ups. All the execution risk is with the start-up. If the start-up’s technology has problems or their power yield does not deliver to contract, PG&E just pays for what they get. And PG&E can argue with the CPUC they made their best possible effort to acheive the RPS goal.

    Even with the utility ITC exemption rescinded, do you really think PG&E would take on these risks and move to own the OptiSolar Topaz Solar Farm?

  5. Katie, a major reason – the biggest – that PG&E is now looking at investing directly in solar is b/c last year’s solar tax credit extension (8 years at 30%) now allows utilities to claim this tax credit. Previously, it did not.

  6. Werner, True, agreed. SunPower is one of PG&E’s solar partners that is pretty stable and going strong.

    Clean Future Energy, Interesting, but the PPA solar agreements are a deal on a set price before the plants are built, so PG&E knows how much it will be paying – the problem is more about getting the plants built in a time when there is not a lot of funding around and the partners are so new.

  7. Larry Werner

    Good points, but there are companies out there such as SunPower that has a proven track record, is an established manufacturer, supplier and installer of solar products and has been around for years.
    The start up companies which only rely on capital investment are risky. It is good to see solid companies like SunPower in this market as there is a great need for these projects to succeed.

  8. Couldn’t they simply prepay? Would it not have the same effect?

    Negotiate a lower price, and prepay for a significant chunk of the electricty, so that the projects get built.

    Utilities after all, have a vested interest in there being a variety of companies to purchase from.

    Alternatively they could take a stake in return for a cash injection.