Renewable Energy Industry May Be Endangered Species

It was a vision from the energy-short 1970s that seemed on the verge of coming true in the boundless '80s: harnessing the wind, the sun and hot water from the bowels of the earth to produce electricity without pollution and without end.

But that dream has foundered in the bottom-line '90s. Now, with costs still high and a new era of competition roiling the long-protected energy business, alternative sources of power are fighting for their lives. These so-called renewable sources may well survive only as window dressing for utility company annual reports, many industry experts say.

As the renewables lose ground, there is more on the line than the fortunes of producers like Kenetech Corp., the biggest supplier of wind-generated energy, and California Energy Co., a major geothermal player. Their fate also has implications for the environment and the pace with which the country uses up nonrenewable fuels like coal and natural gas.

The decline of renewables carries long-term risk, for example, if global warming becomes something more than just a threat, said Daniel A. Kirshner, an analyst for the Environmental Defense Fund, a major environmental group. In that instance, there would be pressure to reduce pollution quickly. "It's going to be much more difficult to do that without a ready renewable industry," he said.

The renewables are turning into an endangered species because of the brutal economics of the utility industry, which is awash in surplus power and increasingly faced with big commercial customers demanding lower rates and finding them through independent energy wholesalers.

Renewables are a luxury that belt-tightening utilities can no longer afford, executives complain, particularly now that natural gas is so plentiful and gas-fired generating plants so inexpensive to operate.

The price gap is big enough that one utility, Southern California Edison, a unit of SCEcorp, is even paying Kenetech not to produce electricity for future delivery, saying it will save millions by not fulfilling a long-term contract for wind-generated power.

What is more, state and federal programs that fostered the growth of renewables by guaranteeing them a market despite high startup costs have been effectively gutted by a recent decision by the Federal Energy Regulatory Commission.

In its ruling, the commission greatly weakened a provision of a 1978 federal law that enabled states to force utilities to use renewables for some of their electricity through long-term contracts at what turned out to be above-market rates.

Although the decision was limited to California, where renewables have their strongest base, it is already being used by utilities in Iowa, Minnesota, New York and Texas to avoid future contracts. Without such contracts, there is little chance that much new capacity for wind, solar and geothermal power will be built.

"It's been devastating," said Jan Smutny-Jones, executive director of the Independent Energy Producers, a group of nonutility companies that provide power, sometimes from renewable sources, to big industrial customers and utilities. "The decision raises serious questions whether renewables will be allowed to compete in future markets."

The supporters of renewables believe that any short-term savings for the utilities will come at the expense of long-term benefits.

"Society will have to pay somewhere through respiratory problems from pollution," said Ken Karas, president and chief executive of Zond Systems of Tehachapi, Calif., a major developer of wind power.

Peter Fox Penner, head of one of the renewable energy projects at the Department of Energy, said that if environmental costs were added in, the renewables could increasingly compete for the new capacity that would have to be added by the end of the decade.

"In some ways it's cheaper to meet environmental standards by using renewables," he said.

Paradoxically, the decline of renewables comes at a time when some forms, particularly wind power, are making technical breakthroughs to bring down costs and make production more reliable.

But utility executives say the price gap is still too wide. Plants fired by natural gas can produce electricity for 3 cents a kilowatt hour or less. Even the most advanced wind turbines produce power at about 5 cents a kilowatt hour. Geothermal plants cost from 5.5 cents and solar power is 14 cents and higher.

Because of the federal ruling, producers of alternative power are facing "a different world," said David K. Owens, a senior vice president of Edison Electric Institute, which represents private utilities. "They have to be able to compete in the market. Utilities will now say to the wind power producers: `Why should I buy power at 5 cents when I can get it much lower?' "

But not all utility executives are ready to drive a stake through the heart of the renewable energy sources. Some states will continue to foster their use, they say, and foreign markets beckon. And if costs continue to fall, a market in the United States should eventually re-emerge.

"Some states, such as California, will come up with a way for renewable resources to stay in the mix," said Robert Glynn, executive vice president of Pacific Gas and Electric Co. of San Francisco, the nation's largest utility and one that has had extensive dealings with renewable suppliers. "The big unresolved issue is how much are they willing to pay for it and who will pay."

Indeed, the California Public Utilities Commission has asked that the ruling of the Federal Energy Regulatory Commission be stayed while it considers what course to take.

State regulators and legislators who support renewables are in a bind, however, since they also want to bring more low-cost power into their states to prepare their utilities for more competition.

Those who produce alternative power are not ready to throw in the towel, either.

"There is no question that a large amount of business has been placed at risk," said Clarence Grebey, a spokesman for Kenetech, the wind power producer. But, he added, "That doesn't mean that we are moping around thinking we don't have a future."

Still, that future is not nearly as bright as it was in the '70s, when alternative power was touted as the vehicle that would help free the country from the dirty grip of fossil fuels and the risks of nuclear energy.

Even with the big push provided by the 1978 federal law, the Public Utility Regulatory Policies Act, renewables now account for only 2 percent of energy use in the United States.

If renewables found a home anywhere, it was in California, which went beyond the federal law with its own supportive legislation.

Because of that support, companies like Kenetech were able to thrive. Based in San Francisco, Kenetech got commitments in recent years from the state's three largest utilities to buy up to 945 megawatts of power _ enough to run a city the size of Phoenix and the biggest order for wind power ever. It meant supplying 2,800 turbines, worth about $1 billion.

But the three utilities _ Southern California Edison, Pacific Gas and Electric and San Diego Gas and Electric _ were strongly opposed to making such commitments because of the extra cost.

Last November, Southern California Edison agreed to pay Kenetech an undisclosed amount to keep it from producing 420 megawatts of power. The utility said the payment would produce a net savings of about $200 million.

Kenetech will still be able to build a much smaller plant and have the right to build more if the utility should need more power in the future. That, some industry executives concede, is the window dressing.

The federal agency ruling has put other Kenetech contracts in jeopardy, including one for 100 megawatts with Pacific Gas and Electric. Kenetech's chances of adding any more capacity in the future in the United States now appear to be slim.

The blow comes at a time when Kenetech is finally surmounting startup problems with a new variable-speed turbine that makes the conversion of wind to energy more efficient.

The combination of the startup problems and the federal ruling has sent Kenetech stock into a tailspin. The stock, which traded as high as $29.50 a share last year, has been trading at less than $12 per share.

"They basically made a regulatory bet, not a market bet, and they lost," said Lawrence D. Gilson, the president of Venture Associates, a consulting group that follows the utility industry for Arthur Andersen.

Kenetech is now looking overseas. It recently signed agreements to ship 92 turbines to India and is building plants in Spain and the Netherlands.

At this point in the United States, "no other fuel source can compete with spot market gas pricing," said David Sokol, chairman and chief executive of California Energy, the Omaha-based geothermal company.

But while gas prices are now low, there are no guarantees for the future, said Karas of Zond Systems, the wind power developer.

"Gas prices are at a historical low," Karas said. "Will they stay that way forever? I don't think so." And when they go up, he said, wind and geothermal plants built now to produce at 5 cents a kilowatt hour will look pretty good, he said.

"To burn gas to save a few cents per kilowatt hour and not do anything to support renewables is absurd," Karas said.

Copyright 1995
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