Another record quarter and new trends in the drive for grid parity

By Ryan Edge

New signs that utility-scale solar projects can successfully compete with traditional generation in wholesale markets may be the big story coming out of new third quarter figures for the utility-scale sector.

Of the 18 utility-scale projects coming online in Q3 — totaling 424 megawatts (MW) — three were built and went into operation without utility or other customer offtakers. All three are instead selling their electricity into bulk power markets, according to analysis from the Solar Electric Power Association (SEPA).

Owned by First Solar, an 18-MW phase of the 30-MW Barilla project in Pecos County, Texas is selling its output into the Electric Reliability Council of Texas’ (ERCOT) market. NJR Clean Energy Ventures Corp. of New Jersey owns the other two projects — the 7-MW West Pemberton project and 5-MW Jacobstown project, both also in New Jersey — with power going into the 13-state PJM grid.

SEPA’s figures for Q3 include utility-scale projects of 5 MW and over. Installations under 5 MW are counted only if they came online as phases or sections of larger projects, for example, a 3-MW phase of the 6.5-MW Porterville project in California. All projects completed this quarter were photovoltaic.

Other key trends included:

Another record quarter: Like the second quarter of 2014, Q3 hit a new high in total capacity additions for what has traditionally been a slow quarter. While slightly down from Q2’s 443 MW, the 424.28 MW that came online in the third quarter represented a 57 percent increase from the 270 MW completed in the three-month period from July-September in 2013, which at the time was a record for the quarter. (See Figure 1.)

Figure 1: Utility-scale capacity additions (MW) by quarter.

Similarly, the third quarter’s 18 projects were down 36 percent from Q2’s 28, but year-over-year showed an 80 percent jump from the 10 projects completed in Q3 2013.

Looking at the year as a whole, as of the end of the third quarter, 1,899 MW of utility-scale projects were completed, surpassing the 1,600 MW installed in all of 2012 and closing rapidly on 2,201 MW completed by the end of 2013.

The cumulative impact of these figures remains unclear. The question now is whether the accelerated pace of project completions in Q2 and Q3 could take away from capacity totals in the final quarter of 2014 or signal an even larger year-end surge.

But with smaller project size: The downsizing trend in the utility-scale sector continued in Q3, with one significant outlier skewing the figures. The final 130 MW of the now-complete 230-MW Antelope Valley solar project went online this quarter, accounting for about one-third of the period’s total capacity. With Antelope Valley’s final phase, average project capacity for the quarter was 23.6 MW, a 44 percent jump from the 16.4-MW average in Q2. Without it, the average provided a more modest bump to 17.3 MW, again reflecting the industry-wide shift toward smaller projects.

Figures for median project size, which are less affected by outliers, back up the trend. With Antelope Valley, the median project size for Q3 was 6.5 MW; without it, 6 MW. The caveat here is that medians tend to be less reliable indicators for relatively small datasets, such as the Q3 figures.

California still the market leader: The Golden State accounted for 258 MW and six of the new projects this quarter, that is, more than half the capacity and one-third of the number of projects. Texas followed with 57 MW from two projects, Nevada added a single 54-MW project, and North Carolina contributed 25 MW with five new projects.

Figure 2: Utility-scale capacity (MW) added by state

Predictably then, California utilities also topped the list of offtakers for the quarter, with Pacific Gas & Electric accounting for two projects totaling 175 MW and Southern California Edison having four projects with a total of 83 MW. The power from all five projects in North Carolina is going to Duke Energy Progress, putting it at the top of the list for number of projects.

Figure 3: Utility-scale capacity (MW) added by offtaker
*LADWP and City of Burbank are offtakers for a single project; capacity allocated proportionally.

Utility ownership remains rare: Among the projects coming online, the Koloa Solar project built on the island of Kaua’i stands out as a rare example of a utility-owned project. The Kaua’i Island Utility Cooperative (KIUC) is the owner of the 12-MW project.

This exception and the three merchant plants notwithstanding, power purchase agreements (PPAs) are expected to remain the preferred vehicle for solar energy procurement through the end of 2016, due to the 30-percent federal investment tax credit (ITC). Still, as in the case of KIUC, some utilities prefer to own solar assets, based on a range of factors including tax liability, financial considerations, jurisdictional differences and organizational culture. How a future decrease in the ITC — or a possible extension — might affect the cost-benefit balance of PPAs and utility ownership is still uncertain.

Merchant plants coming online

That developers are building solar projects as merchant plants — to sell electricity onto the grid the same as any other bulk power generator — provides evidence of utility-scale solar’s increasing competitiveness with other fuel sources in some markets, incentives and installed costs being taken into account.

Both First Solar and NJR have confirmed their respective projects are selling into wholesale regional markets. Power from the Barilla project is being sold to ERCOT, while NJR’s two New Jersey projects are selling into PJM, the regional transmission organization serving 13 Eastern and Midwest states.

First Solar has also confirmed that Barilla is self-financed; the final 12 MW of the project are under construction. Financial details for the NJR projects were not immediately available. Community Energy Solar of Radnor, Pa., was the developer on both NJR projects.

According to an EPA filing, Community Energy planned to sell energy from the projects unbundled from the associated solar renewable energy credits (SRECs). In the same filing,  the projects’ financing and ownership structure was projected as either “ultimately financed through a sale/leaseback structure or sold to a large balance sheet holder of solar assets like a utility or utility parent.”

The two NJR projects were also both built on greenfield sites in New Jersey, even though they were approved after the 2012 New Jersey Solar Act, which encouraged solar development instead at brownfield locations.

Even as the declining cost of solar opens the market to more development, solar projects — and especially large utility-scale plants — still rarely break ground without a negotiated PPA. The appearance of merchant plants could reflect a change in market dynamics as demand for solar is spurred by the downward pressure on installed costs and the rising stress of increasingly high retail electric rates. With ongoing reductions in installed costs, states such as Idaho, Utah and Georgia have seen solar procured at or below avoided costs either through normal resource planning or as facilities qualifying under the Public Utility Regulatory Policies Act (PURPA).

Add to that the competitive markets for SRECs in Massachusetts and New Jersey — which have created an additional revenue stream for solar projects — and more merchant plants might be expected in the future as favorable conditions persist.

The phase-in effect: A plus or minus?

As previously noted, the 1,899 MW of total utility-scale capacity installed as of the end of Q3 in 2014 puts the year within easy reach of 2013’s record cumulative total of 2,201 MW. The fourth quarter has consistently been the largest three-month period for new capacity, but the trend of bringing large projects online in phases, instead of all at once when construction is complete, could undercut the traditional year-end growth spurt.

Both Q2 and Q3 this year came in roughly 50 percent higher year-over-year. If project phase-ins have been driving performance in these two quarters, they could have a downward impact on installed capacity in the fourth quarter.

Ongoing questions about short- and long-term expectations for utility-scale’s project pipeline are another consideration. At present, projects totaling 2,938 MW are under construction, and 1,007 MW of that total represent phases of projects that already have completed portions in operation. Virtually all projects now under construction are slated to be finished by the end of 2016 at the latest, in order to qualify for the ITC. Smaller projects of 10 MW or less could still be developed before the 30-percent ITC expiration, allowing smaller project build-out to continue while the larger-scale project pipeline approaches completion.

This expectation should hold true unless renewed interest in large-scale plants is triggered by precipitous price declines or policy changes such as an ITC extension or an increase in state-level renewable energy targets.

At least one sign for cautious optimism is the pipeline of 13,026 MW of new projects in some stage of development that have a PPA offtaker for at least a portion of their planned output. This total represents a slight uptick over the previous quarter, which could be the result of new projects, previously announced projects that have secured an offtaker since Q2 or a combination of both.

Disclaimer:
This analysis by the Solar Electric Power Association (SEPA) draws on primary data from SNL Energy and independent sources. SEPA’s quarterly or annual totals may differ from other sources for a variety of reasons. All SEPA megawatts are utility-compatible grid capacity (AC); SEPA’s totals also include only projects 5 megawatts or greater. Project announcement, construction and completion dates can be interpreted differently and assigned to differing quarters or years.  Updates or corrections are welcome; send to [email protected].

Ryan Edge is a research analyst for the Solar Electric Power Association. He can be reached at [email protected].