Despite pressures from lower natural gas prices, solar energy — both utility-scale and distributed generation projects — continues to be an attractive investment, according to senior executives with Sempra Energy and NRG Energy Inc. who talked bullishly about the renewable energy resource on separate earnings conference calls on Tuesday.
With what CEO Debra Reed described as an extensive “land position” in the Southwest for both solar and wind project development, Sempra considers itself in a strategically strong position to reap benefits from solar and other renewables. “With the strong pipeline [of projects] we have, I think we will continue to grow the [renewable] business at significant rates,” said President Mark Snell.
“Solar has been a very profitable business for us,” Snell said. “When we look at all our options for renewables generally, we are pretty excited about where that growth could go. There are all sorts of options that should allow us to put very little capital into it and take great returns.”
As part of its report of a significant year-over-year profit increase in 2011, Sempra said it is changing its accounting method for solar tax credits so that the advantages will be spread over a long period into the future, adding at least a couple pennies-per-share to earnings annually, Reed said.
For NRG Energy, despite reporting a 4Q2011 loss ($109 million) due to depressed merchant power prices, CEO David Crane praised the results from the large independent power producer’s retail operations, particularly its growing portfolio of solar projects.
“We showed of resiliency and diversity, and our solid results reflected the fact that we benefited from a substantial amount of retail business, the benefits for which tend to be inversely correlated to natural gas prices,” Crane said. “We’re very proud of the success we achieved in our clean energy businesses in 2011, moving more than 900 MW of new solar power generation capacity into construction. And all of these projects are progressing smoothly in construction with no significant cost or timetable issues having arisen.”
Crane said in the solar area every NRG project is either ahead of or on budget and timetable. He said NRG’s assessment is that a low-gas price environment will remain for at least the near- and mid-term, and the solar push will thrive despite this added pressure.
Solar is a financial play for NRG, in a sense, and like Sempra it plans to take advantage of tax advantages that are accentuated in the current depressed gas price environment. Ideally, NRG is looking to put together solar “development packages” of well built and operated projects with long-term power contracts that all or part of can be sold at some point, accelerating the independent power company’s returns while providing a good long-term investment for the buyers.
“We have a thriving solar portfolio of projects and a first-rate team, but only a finite amount of capital we can contribute in the space,” said Crane, noting in the development field there has always been a market for what he called well-structured power deals. “If you can lock-in a premium, you can achieve the same return you would get from owning a project for 20 years and bring it forward. That is obviously a very appealing approach.”
“There is also the fact that the changes in the gas price environment are changing our tax position, and since a lot of investment in solar projects has tax attributes associated with it, we are obviously going to look to maximize the tax attributes of our various solar projects — both existing ones and ones coming down the path.”
For the longer term, Crane thinks smaller-scale distributed solar projects are going to be the mainstream developments, but for now he likes both large-scale and distributed solar projects’ prospects.
Crane acknowledged that it is impossible from a grid parity perspective for anything to compete with natural gas-fired generation when gas costs $2.50/Mcf, but competing with distributed solar at retail grid parity is a different story. NRG’s analysis sees distributed solar being able to compete with retail grid parity in 20 states in the next two years, he said.
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