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SolarReserve CEO Kevin Smith on federal loan guarantees and building the largest CSP plant in the US

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They don’t have good cell phone coverage on the outskirts of Tonopah, Nevada, but soon, the former silver-mining town located about halfway between Las Vegas and Reno will be home to one of the United State’s largest concentrated solar thermal power projects.
SolarReserve CEO Kevin Smith on federal loan guarantees and building the largest CSP plant in the US

The 110 MW Crescent Dunes Solar Energy Project is being built by SolarReserve, of Santa Monica, Calif., with the help of a recently approved $737 million federal loan guarantee from the US Department of Energy.

The concentrated solar power project is the nation’s first commercial scale solar power tower with fully integrated energy storage, and when it is completed in between 28 months and 30 months time, it will be the largest such facility in the world, said Kevin Smith, SolarReserve’s CEO, as drove between the project site and Las Vegas Tuesday afternoon.

The project will feature 17,500 mirror assemblies that will focus the sun’s thermal energy to heat molten salt flowing through a 653-foot tall tower, and at peak operation it will provide enough electricity to power about 75,000 homes.

The DOE loan guarantee came from the same program that backed Solyndra LCC, the California-based manufacturer that declared bankruptcy on September 6, leaving US taxpayers on the hook for $535 million.

But that is where the similarities between the two projects end. SolarReserve has a 25-year contract to sell 100 percent of the electricity the Crescent Dunes project produces.

In addition, it and its partners, ACS Cobra, a global engineering and construction firm, and equity capital practice Santander, have put $260 million of their own money on the line.

Driving in and out of areas with spotty cell phone reception, Smith spoke at length about the project, governmental support for the renewables sector, and the future of CSP, which has been hard-pressed by the dramatic reduction in the cost of competing PV technology.

Along the way, he touted Crescent Dunes’ potential to create 600 direct construction jobs over the next two-and-a-half years, and perhaps as many as 4,300 direct, indirect and induced jobs at companies throughout the US.

The company’s next project is a 50 MW solar thermal plant to be built in Spain through a joint venture with Preneal, a Spanish renewable energy firm. The company is also in the early stage of the tender process in South Africa, Saudi Arabia and Australia, China and Latin America.

All told, the company currency has more than 3,000 MW of projects in development across the US and internationally.

“We’re pretty pleased with how things are going,” Smith said early on in the conversation.

It has now been about five weeks since Solyndra declared bankruptcy and touched off a political firestorm in Washington, DC; what do you see as the ultimate fall out from all that? Will it have a long-term affect on Congressional or Presidential support for renewables?

Well, to answer the second part of your question first, the hope is that with some solid projects going into construction and some more success stories that the Solyndra issue will kind of fade a bit.

As has been pointed out, the Solyndra loan guarantee was only one-and-a-half percent of the total loan guarantees given out by the US Dept. of Energy, and there are some great projects that received funding through that program. We think we’ve got a good project.

We’re a completely different structure than Solyndra. We are a power generation facility selling electricity. We’ve got a 25 year contract to sell 100 percent of the output; as opposed to Solyndra, which was a manufacturing firm. And a lot of the projects in the program our similar to ours, in terms of how they are structured.

So hopefully, those projects, those success stories and the jobs they create will put the focus more on the benefits that the solar industry is providing rather than the one-off issues with Solyndra. That said, we’re still in a tight budgetary climate, both here in the US and abroad.

Given that reality – Solyndra aside – do you foresee additional support flowing from governments to the industry?

That remains to be seen. Right now in the US, the political situation is a bit of a stalemate – on a lot of things, not just renewable energy. We’ve got additional projects in development in the US, in Colorado, California, New Mexico, Arizona and other markets, and I think the issue for us is whether or not those projects are going to proceed in the near term.

We do have an increased focus on international activities. We’ve got a project in Spain that was awarded a contract with the government back in June, and we’re looking to get that under construction in the first half of 2012. We’ve also got a joint venture in Saudi Arabia. We’ve got some bids going into the government in South Africa. We’re looking at some things in Latin America and China and other places.

Even though Europe, in some markets, has had a pull-back on PV activities, we still see other international markets that are expanding, including South Africa, the Middle East and Latin America. And certainly China has just instituted a substantial feed-in structure for PV, and they are now looking at CSP as well.

I think the issue is whether or not the focus, for us, moves internationally, if it turns out there are not the necessary structures in place in the US to promote these kinds of projects.

Are all of these projects you’re talking about CSP projects?

It’s a mix. We actually have two sides of development activity at Solar Reserve. Our core focus is on CSP activities, but we are doing some PV. We have been doing PV development for the last couple of years. Actually, since early 2009, and we have a joint venture in the US with GCL, the large polysilicon manufacturer. So we’ve got some activities in the US involving PV, and certainly those activities are going to continue.

The stuff that we are looking at in the markets I just mentioned, including the Middle East and South Africa are both CSP and PV activities. And some of them are combined projects, where we’ve got PV and CSP on the same sites. PV can provide a reasonable load during the day and then the CSP projects can help level out supply and take it over late in the day.

Even in, say, the Middle East, their load goes well into the evening hours, so with our energy storage technology, we can run day or night on solar.

Is CSP established enough now to stand on its own, without extensive government support?

The issue is what does stand on its own mean, because if you look at the energy markets in general – oil, natural gas, coal, the nuclear industry, they are all still getting substantial subsidies as well. And a lot of the coal, oil and natural gas are kind of built into the tax code as tax credits, incentives, credits against US taxes for foreign leases.

And then on the nuclear side, the only nuclear projects that are going forward in the US are based on loan guarantees. So I don’t think you’ll see that many nuclear projects going forward without that kind of structure.

So when you say, “stand on its own,” well, there are subsidies going into all forms of energy, so the question is, what does the level playing field look like?

What are your thoughts on that?

Well, I mean, even when you look at level playing field, the cost that you pay in cents per kilowatt hour for a coal plant don’t necessarily reflect the true costs … you’ve got the environmental impacts, you’ve got the water use issues. The same thing is true of nuclear power. You’ve got remediation and storage issues on waste fuel … with all forms of energy you really have to look at the cost impacts and all of the environmental impacts and determine what’s best for society.

So it’s a bit unfair that oil and natural gas and coal and others, not only do you look at the subsidies that they are getting in regard to tax credits and those kinds of things, but you should also look at the environmental impacts which, seemingly, aren’t valued in the current energy structure.

We’ll have to see where this goes going forward. Certainly the rest of the world seems to be focused more on renewable energy and increasing renewable energy activities. The US, right now, seems to be in more of a “drill ourselves out of the energy crisis” mentality. But I’m not sure that’s the way it is going to pan out long terms.

Even if we released a substantial amount of offshore drilling, its going to have almost no impact on oil prices. It’s a world market. It isn’t as if we drill off shore and that oil is dedicated to the US. It goes into world oil market supplies and it affects world oil prices, and whether oil prices go to $100 or $200 or $500 a barrel, doing a bit more offshore oil drilling in the US isn’t going to have an impact on world oil prices. The big oil companies sell into the world markets and demands are going to continue to be placed on the world oil markets from India and China and Southeast Asia and other markets.

What’s the status of the project in Nevada?

We started construction on September 1, even before we got the loan guarantee, because we had some critical windows in terms of weather. We needed to get the tower foundation and the tower up before winter weather sets in. So we did some preliminary releases on construction in September, obviously fully expecting that we’d make it through the DOE loan guarantee program. So the tower foundation is complete and basically we’re ramping up. We gave the contractor full notice to proceed on construction earlier last week. Last Monday. So it is in full construction now, and we’re ramping up activities on site.

The construction period is 28 to 30 months, so we’re looking at commercial operation in December 2013.

It’s seems like it must be a difficult undertaking, to put together a financial package to support a project like this – particularly when there’s an extended time between applying for something like a guaranteed loan from the government and actually receiving it…

This is a $900 million-plus project. In addition to the federal loan guarantee, we put together an additional $260 million of equity, and the loan guarantee, obviously, is in the priority position on repayment.

But we made our first application under the federal DOE program in the fall of 2009, so it took us a full two years to get through the DOE loan guarantee program. It was a pretty intense due diligence, especially over the last 12 months.

The basis of the project and the critical part of the project… there are kind of like two main areas that support the funding activities. One is securing the power sales contract, which is obviously different from the Solyndra situation, which involved a manufacturer and the sale of a product. This is an electricity generating facility and we’ve got a 25-year contract to sell 100 percent of the output of the facility for those 25 years. That certainly was the foundation of the financing package. In addition, we brought ACS Cobras as project contractor, and they provided a fully-wrapped structure for performance, schedule, and a fixed price for the cost of constructing the facility.

So those are kind of the two key issues for the financing activities: There’s a long-term contract for the power purchase, which provides a certain revenue stream and a robust construction contract that provides liquidated damages for any shortfalls in performance or schedule.

Does the power purchase agreement extend beyond the life of the loan guarantee?

Yes. The loan guarantee is a 22-year term and the power contract is 25 years.

The project itself, is it purely CSP, or one of those mixtures of CSP and PV that you were talking about earlier?

It’s a mixture of both. The technology is a molten-salt power tower. It’s different from the Brightsource technology, which utilizes water. Our main collection fluid is molten salt and at temperature in excess of 1,100 degrees, which is what we heat it to, it still maintains a liquid state. And so we can heat molten salt between 6 o’clock in the morning and 5 o’clock in the afternoon, when the sun is shining, and we can store the energy in molten salt and we can operate and generate electricity by putting another heat exchanger and converting water into steam. In Nevada, the utility is looking at its peak period being between noon and even upwards to 10 o’clock at night.

What makes CSP the right technology for this project in Nevada?

NV Energy selected this project from a bunch of different alternatives that were bid to it, and the reason NV Energy liked it was because of the energy storage. They are worried about intermittency issues and disruptions to the transmissions systems and our ability to store solar energy for later use alleviated those concerns.

They really liked the fact that we provide nice, firm, stable power, and secondly, it’s valuable to them because we can provide it exactly on peak for them. That’s the advantage of projects with energy storage – they can exactly meet the peak requirements.

It sounds like this would be a good technology to use to try to expand the solar footprint in the US…

Well, we think so, but the key, in addition to having energy storage, is that we make sure that we are cost-competitive with PV panel prices -- PV panel prices have been dropping pretty quickly over the last year or two.

Now, this is our first large-scale project. As a result, a significant part of our business is dedicated to determining how we make projects number two, three and four more cost-competitive, and that’s really a matter of decreasing capital costs, and increasing project and technology efficiencies.

The other aspect of this, and one I think that sometimes gets obscured, is that we’re not just trying to competitive with PV, but also with natural gas. We believe we are already a better , in terms of cost structure, than either nuclear or clean coal, but we need to be competitive with natural gas, because in reality, that’s what we’re the alternative to; because we can provide firm, reliable power day or night.

So it’s a matter of not only being cost competitive but being more cost competitive as quickly as you can…

Exactly. And we believe that with each project we do – our second large project being in Spain -- we’ll find better and more effective ways to bring down costs. One way to do that will be through reduced capital costs. On top of that, there will be substantial cost savings in some of the efficiency improvement we’re been working on over the past 12 to 18 months. By doing these things, we’re pretty confident that we can stay cost-competitive with the rest of the market.

You mentioned Spain, Saudi Arabia, South Africa. How much more complex do these project get as you do them in different places?

Before I got into renewable energy, I built conventional power projects – largely natural gas – in about a dozen different countries. Plus, our team has a lot of international experience. Now, there are certainly challenging markets, but over my career, I’ve said the place were I’ve had the most problems with political uncertainty has been the US markets. And I think that remains the situation today.

Certainly, dealing with the different issues that go along with building projects internationally remains challenging – there are governmental issues, currency risk issues, but we’ve got a pretty experienced team with international experience and we believe we can meet the different demands that each of those markets requires in order to build those projects internationally as well.

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