Green-Energy Firms Seek an Outlet

Power: Generators want to expand, but California continues to favor nonrenewable sources of electricity.

Source: Jerry Hirsch LATimes 2001.11.05

More than a mile beneath the Imperial Valley, heat from magma boils a mixture of water, salt and minerals into a briny soup.

Steel piping drilled into the desert floor taps this reservoir. The superheated liquid flashes into steam, spinning electric turbines that generate a small portion of the
power that zips across Southern California Edison's massive transmission grid. The steam condenses into water and is injected back below the surface, allowing the
cycle to start again.

CalEnergy Co., owner of the Imperial Valley plant, wants to expand its operation to take advantage of higher wholesale electricity prices and a pending change in the way SCE pays its suppliers of renewable energy. Despite public pronouncements about the need to increase the amount of renewable energy supplies, actions by state power officials have ensured that, at least for the next few years, conventional electricity generators will be favored over renewable providers such as
CalEnergy.

When California began buying power this year for insolvent SCE, a subsidiary of Edison International, and bankrupt PG&E Corp. unit Pacific Gas & Electric at the
height of the energy crisis, it rejected deals offered by CalEnergy and other renewable suppliers, opting instead for long-term contracts with fossil-fuel, or
nonrenewable, generators, such as Dynegy Inc. and Mirant Corp.

Moreover, after taking into account what the big utilities generate and purchase, the state bought more electricity than California's businesses and consumers are
likely to use over the next three to four years, according to several energy experts and some state power officials.

In essence, the state played it safe and went with the conventional generators at the expense of the renewables despite the promise of renewable energy's being
immune to the type of natural gas price fluctuations and shortages that contributed to the crisis in the first place, according to green-energy advocates.

The combination of the state's actions has left renewable generators without any way to expand. Lenders won't finance new green-power ventures if the companies
don't have customers lined up. And the big utilities look to have their needs covered by their own generation, existing contracts with CalEnergy and its sister green
companies and the power the state has purchased.

This turn of events comes at a time when the renewable power industry--which includes wind and solar power as well as generation from geothermal, biomass and
small hydroelectric projects--was on an upswing.

After a slump in the mid-1990s, renewable energy generation has climbed steadily in the state, topping 24,000 gigawatt-hours last year. One gigawatt-hour can
power about 750,000 homes. Encouraged by that growth, the California Energy Commission wants to increase renewable energy from 12% of the state's
consumption now to 17% by 2006.

One favorable development for green-energy companies in the long term is expected to be a change in how they are paid, which grew out of the way Pacific Gas &
Electric and SCE plan to resolve their financial problems.

Before the utilities' insolvency, payment for most renewable energy was tied to the price of natural gas, a key component of conventional electricity generation. That
system was subject to huge fluctuations, depending on whether there was a shortage or surplus of natural gas, even though the fossil fuel played no role in renewable
energy production.

During some periods, the renewable energy companies earned just pennies per kilowatt-hour; at other times, prices were significantly higher. Now, green-energy companies will get paid about 5.4 cents a kilowatt-hour for the next five years.

Green-energy producers, which according to conservative estimates make up at least a $1-billion industry in California, prefer long-term, fixed-price contracts
because they provide financial stability and can be used to finance expansion and improvements, said Kelly Lloyd, chief financial officer of Enxco Inc., a Danish
company that operates a wind-energy farm near Palm Springs.

And lacking a potential electricity surplus, Lloyd said, establishment of fixed-price contracts for green energy in the fallout from the energy crisis should have been a
positive development for the industry. "This could be a catalyst to expand," Lloyd said. "But in the near term it looks like there is no room for expansion for anyone."

Marwan Masri, the California Energy Commission's manager of renewable energy, acknowledged similar concern. But he said some renewable ventures should be
able move ahead. "These projects can last 20 or 30 years," he said, noting that the state's power purchases will peak in the next two to three years and then decline, making room for other power providers.

Green-Energy Firms Seek New Contract Talks

State policy still encourages renewable energy projects, Masri said, providing about $135 million a year in various incentives. The money is raised through a 30-cent
monthly fee in residential electricity bills.

Though the subsidies are helpful, they are of little use if the renewable companies can't find customers for their energy. That's why John White, executive director of
the Center for Energy Efficiency and Renewable Technology in Sacramento, would like the state to negotiate its way out of enough of the long-term power
purchases to open the market to alternative power ventures. "If there is not some renegotiation of the long-term contracts the state has signed, we fear there will be a green-energy blackout," White said. Indeed, there already is something close to a green-energy blackout. About 96% of new energy generation in California through 2007 will be from natural gas-fired plants, according to the California Energy Commission. Although Gov. Gray Davis and S. David Freeman, chairman of the state's power authority, have in the past been friendly to green power, White said it is their appointees who have thwarted industry expansion. And this is taking place as the cost of producing renewable energy is falling.

Wind power, for example, has fallen from 18 cents a kilowatt-hour in the 1980s to about 5 cents, a price competitive with other forms of electricity, said Masri of
the energy commission. "Davis and Freeman talk the talk when it comes to renewable energy, but judging by the actions of the state they have not walked the walk," said Jonathan Weisgall, spokesman for MidAmerican Energy Holdings Co., the parent of CalEnergy.

Documents obtained by the Los Angeles Times show that state power officials balked at signing renewable energy generators to long-term contracts at a time when
they were negotiating with the traditional providers. In April, MidAmerican offered a 20-year contract to sell 380 megawatts of geothermal generation from the Imperial Valley for 7.5cents a kilowatt-hour. Much of the generation would have come from proposed new turbines.

MidAmerican, a subsidiary of Warren Buffett's giant holding company Berkshire Hathaway Inc., lowered the price to 6.9 cents just two weeks later to be
competitive with what the state was signaling it was willing to pay conventional generators under long-term contracts. MidAmerican eventually lowered the price to 6 cents and changed the lengths of the contracts and output to reduce generation by the end of 2004, near the expected peak in the state's power purchases. In each case, various state officials indicated an interest in the proposals but never followed through with a contract.

Immediate Energy Need Played Role in Rejection

Now, the company is looking for other customers, which are likely to be smaller municipal utilities not affected by the state's power purchases. "We are in the process of trying to expand," Weisgall said. "The biggest problem is trying to find a customer." In passing up contracts from MidAmerican and other renewable energy producers, state officials said they were focusing on electricity they could lock down quickly to stave off an expected shortage.

"For what we needed at that point in time, we needed real megawatts that we could pick up and put into the system," said Pete Garris, acting deputy director for the
California Department of Water Resources, the state's power-buying agency. "It wasn't like we're ignoring them or saying they're not needed."

An Oct. 4 memo from Department of Water Resources Director Thomas Hannigan to Freeman illustrates the problem facing the state. Hannigan said the state has only a "limited need" for new sources of power and that Southern California, which is where the MidAmerican energy would have gone, "already has excess resources." This has left the renewable energy companies pondering their next step.

The state and some of the big generators have talked about revisiting the long-term contracts. But with California officials also accusing many of the same companies
of price-gouging during the height of the energy crisis, no one is predicting the outcome of those proposed talks. Another proposal would let green-energy companies supply energy to residential and small commercial customers under a new "direct access" plan. Direct access, in which individuals and companies contract with independent power suppliers for electricity, was intended to be a cornerstone of deregulation. But the state abandoned direct access when energy prices spiked, forcing customers to purchase power from the utilities that serve their areas. The Legislature has rejected several efforts to reestablish direct access.

White is lobbying for a plan that would allow residential and small commercial customers to purchase power directly, as long as the providers are renewable energy
generators. White said such a plan could help the state double the amount of renewable energy resources over 10 years to 20% of the state's requirements. But it also could add to the state's excess energy supplies by reducing demand for the power that the state has contracted to purchase. Additionally, it could slow the
return of Pacific Gas & Electric and SCE to solvency. The recovery plans for both companies rely on taking the difference between their cost of producing electricity and what they can charge customers to pay off billions of dollars of debts.