Investment In Renewables Generates Illuminating Dividends: John McIlveen

Renewable energy's days as the industry's disruptive stepchild are nearly over, says John McIlveen, senior vice president of Jacob Securities. Costs have fallen in recent years, making wind and solar competitive in a growing number of markets. In this interview with The Energy ReportMcIlveen explains that 20-year take-or-pay contracts are turning renewable energy developers into steady, dividend-paying power producers, and he names the companies making the most of their opportunities.


The Energy Report: John, how has the renewable space changed in the last five years?

John McIlveen: Cost. The cost of standardized technologies for wind and solar have fallen by at least a half in five years, to just below $2 million per rated megawatt ($2M/rated MW), versus the same cost for a coal plant. That coal plant may deliver two to three times the power at that all-in cost, but the costs are about the same because wind and solar do not have fuel and heavy maintenance costs. Fossil fuel plants deliver much more power, but because they pay for their fuel, the overall cost is about the same as for renewables.

TER: Bloomberg Business recently wrote that fossil fuels have lost the race with renewables, and Vox responded with some cogent counterarguments. Which is correct?

JM: I think Vox. Bloomberg measured the growth of the power grid only. If you include all sources, especially transportation, fossil fuel is still the leader. Vox is also right in that fossil fuels deliver two to three times the power per rated megawatt as renewables such as wind and solar. However, I believe renewable growth will surpass fossil fuel growth within 20 years.

TER: Besides wind and solar, do any other renewable technologies approach competitiveness?

JM: Geothermal and also small hydro. Small hydro is totally dependent upon its distance from the road. It can cost $2M/MW if it's right beside a road, but if you have to go deep into the woods and create a base camp, roads and a lot of infrastructure, then the cost could rise as high as $4M/MW.

"I believe renewable growth will surpass fossil fuel growth within 20 years."

Geothermal can be competitive too—if all goes right, and that's difficult for geothermal. After all, there's drilling risk, and a dry hole will cost you about $5M. If you get too many of those, you'll end up with a price for power that's higher. But if it's done right, geothermal can also be cost-competitive with fossil fuels.

TER: Can renewable energy compete without production tax credits, investment tax credits and the renewables portfolio standard (RPS)?

JM: I think so. In the areas where renewables now have grid parity, they are already cost-competitive. I don't think you're going to need monetary incentives. It's always good to have targeted mandates in terms of how many megawatts you want by a given date. But I don't think the monetary incentives would be necessary for those renewables that have already achieved grid parity.

TER: Some states in the U.S. have discarded the RPS because they've shot past the goal and don't need it anymore. In other states, the RPS is under attack. Is this a sign that the standard is no longer required?

JM: No, I think you still need it. For all those renewables that are not cost-competitive, we still need some monetary incentives. I think it's always good to have a mandate, a measuring stick.

Really, the evidence is that the RPS worked. Twelve years ago, solar cost 10 times what it does today. There are still a variety of technologies that could solve a lot of big problems, like municipal solid waste through to power. But this is not yet a standardized technology. When the technology becomes standardized, and you can get the General Electrics (GE:NYSE) and the Siemens AGs (SI:NYSE) of the world involved, that's when the costs come down. For those technologies, the focus should be on becoming standardized.

TER: How do low oil and gas prices affect the investment attractiveness of renewable energy?

JM: Low gas and oil prices only affect the renewable power prices for new projects. They don't change an existing project because these companies have 20-year take-or-pay contracts. So their price is set, and the grid must take all the power that they can produce. However, it does lower prices for new projects. It can put pressure on a new renewable energy project.

In North America, the gas price sets the marginal price of power. In the rest of the Western Hemisphere, it's largely oil prices that set the marginal price of power. The fuel of necessity or choice in those two areas sets the price.

TER: What trends in the power industry are boosting the prospects for renewable energy now?

JM: I think the trends are all favorable here. If we want to talk about distributed power, utilities actually like renewables. They don't have to build transmission. They don't have to build transformers. What's needed, from a regulatory point of view, is for states to allow for individual residences to sell power back into the grid if they're producing more, say with rooftop solar, than they actually consume in a particular afternoon. Quite a few jurisdictions already allow this, but not all of them do.

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1) Tom Armistead conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and ...

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