One of the world’s largest photovoltaic power plants has started full operation in San Luis Obispo County in California. The 250 megawatt solar power plant received a hefty $1.2 billion loan guarantee from the U.S. Department of Energy[i] for a project whose total cost is estimated at $1.6 billion[ii]. California offered its own tax breaks and approved long-term power-purchase contracts, requiring ratepayers to pay billions more for electricity for over two decades. Those incentives along with others for which the project is eligible result in taxpayers and ratepayers providing subsidies worth almost as much as the entire cost of the project. Government support (loan guarantees, cash grants and contracts that require electric customers to pay higher rates) eliminates most of the risk to the private investors and generally guarantees large profits for many future years. California’s Renewable Portfolio Standard, which requires one-third of its electricity to come from renewable energy by 2020, also helped to promote the project.
The California Valley Solar Ranch Project
Construction on the 250 megawatt California Valley Solar Ranch began in September 2011 and the project began providing power from its first 22 megawatts in October 2012.[iii] The solar plant is located on 4,700 acres in San Obispo County, of which 30 percent is covered by nearly 750,000 solar panels.[iv] The plant’s power is being purchased by Pacific Gas and Electric according to two long-term power-purchase agreements.
In 2011, NRG Energy purchased the project from SunPower, who designed and built the plant using its solar panels. The two companies will jointly operate and maintain the plant for two years, after which NRG will assume sole responsibility for operating the site.
Some believe that the large California Valley Solar Ranch may be one of the last of its kind to be built. It is expected that such gigantic solar projects will not become the norm, being replaced instead by projects of smaller scale (50 to 100 megawatts) because smaller projects are easier to locate closer to load and easier to integrate with the grid.
Government Subsidies and Loan Guarantees
The California Valley Solar Ranch is estimated to cost $1.6 billion, with key components made by SunPower at factories in California and Asia. The U.S. Department of Energy agreed to guarantee a $1.2 billion construction loan, with the U.S. Treasury Department lending the money at an interest rate of around 3.5 percent, compared with a 7 percent rate from the private market. That federal support is worth about $205 million over the life of the loan, according to an analysis performed by Booz & Company, a strategic consulting firm that performs studies for private investors.
NRG is also eligible to receive $430 million from the Treasury Department that is part of the 1603 program that allows renewable energy projects to receive 30 percent of their cost as a cash grant upfront in lieu of taking tax breaks gradually over several years.[v]
While the California Valley Solar Project received subsidies from both these programs, those particular subsidies have since expired. The federal loan guarantee program expired on September 30, 2011. The Treasury grant program expired at the end of December 2011. But other federal subsidies are available for projects of this type.
California provides its own state subsidies. Under a California law passed to encourage the construction of additional solar projects, NRG does not have to pay property taxes to San Luis Obispo County on its solar panels, saving an estimated $14 million a year.
Because of California’s Renewable Portfolio Standard that mandates its utilities to purchase 33 percent of their power from clean-energy sources by 2020, the project’s developers received lucrative contracts with the local utility, Pacific Gas and Electric, to buy the plant’s power for 25 years. Pacific Gas and Electric’s customers will pay NRG $150 to $180 a megawatt-hour, which was about 50 percent more than the expected market cost of electricity in California from a newly built gas-powered plant when the contract was awarded. The extra cost to ratepayers is expected to total $462 million over the life of the contracts.
It is expected that depreciation tax breaks for renewable energy plants could save the company an additional $110 million, making the value of all subsidies total about $1.4 billion, leading to an expected rate of return of 25 percent for the project’s equity investors, according to the Booz and Company analysis. However, NRG expects the company’s return on equity to be in the mid-teens. NRG, which initially invested about $400 million in the project, expects to get all of its equity back in two to five years.
Subsidies Not Unique to the California Valley Solar Ranch
Other renewable companies have also secured Energy Department loan guarantees and the Treasury Department grant, and have obtained long-term agreements to sell power. And, their renewable projects also benefit from Renewable Portfolio Standards in 29 states that make local utility companies buy a significant share of their power from renewables such as solar or wind power. These mandates often result in contracts with above-market rates for the project developers with a steady revenue stream. According to one solar developer, “It is like building a hotel, where you know in advance you are going to have 100 percent room occupancy for 25 years.”[vi]
Even companies whose business has little to do with energy benefit from government subsidies. Google, for example, has invested in several renewable energy projects, including a giant solar plant in the California desert and a wind farm in Oregon, to receive federal tax breaks that it can use to offset profits.
The California Valley Solar Ranch is one of the world’s largest photovoltaic power plants and has been constructed with little risk to its developers thanks to U.S. taxpayers and PG&E ratepayers. Government loan guarantees, direct rebate subsidies, tax benefits, and state renewable mandates all support such renewable projects, which are more costly to undertake than their coal and natural gas counterparts.
[i] San Francisco Chronicle, Big solar power plant opens in San Luis Obispo County, October 31, 2013, http://blog.sfgate.com/energy/2013/10/31/big-solar-power-plant-opens-in-san-lois-obispo-county/
[ii] New York Times, A Gold Rush of Subsidies in Clean Energy Search, November 11, 2011, http://www.nytimes.com/2011/11/12/business/energy-environment/a-cornucopia-of-help-for-renewable-energy.html?pagewanted=all
[iii] Forbes, The Rise of a Giant Solar Power Plant in California’s Central Plain, October 31, 2013, http://www.forbes.com/sites/uciliawang/2013/10/31/the-rise-of-a-giant-solar-power-plant-in-californias-central-plain/
[iv] Sustainable Business, Another Big Solar Project Comes Online, This Time Solar PV, November 1, 2013, http://www.sustainablebusiness.com/index.cfm/go/news.display/id/25329
[v] Clean Energy, California Valley Solar Ranch, http://www.cleanenergyactionproject.com/CleanEnergyActionProject/CS.California_Valley_Solar_Ranch___
[vi] New York Times, A Gold Rush of Subsidies in Clean Energy Search, November 11, 2011, http://www.nytimes.com/2011/11/12/business/energy-environment/a-cornucopia-of-help-for-renewable-energy.html?pagewanted=all