WUEG September 2015 Newsletter

whartonundergradenergy

September 2015

September 2015 Newsletter

Falling off the Cliff: Solar ITC Expiration

Thomas Lee – Senior Member, Academic Committee

The current US Congress consists mainly of

partisan gridlock, having narrowly avoided a

government shutdown on September 30 by

approving a temporary budget bill just hours

ahead of the deadline. Within this political context

lies the future of the federal investment tax credit

(ITC) for solar energy and American renewables

infrastructure.

Initiated by the 2005 Energy Policy Act, the solar

ITC is a 30% tax credit on installation expenditures

for solar energy projects. It was extended by the

2008 Emergency Economic Stabilization Act to last

until December 31, 2016, at which point the rate

will drop to 10% for business solar investments

(utility and commercial scale) and zero for

residential systems. The 10% rate has no

stipulated expiration.

Historically, favorable tax policies, in the form of

the ITC and MACRS depreciation, were

instrumental in the explosive growth of solar

generation capacity in the US. Based on EIA and

FERC data, US solar PV and thermal generation

capacity increased by a factor of 29 from 2005 (411

MW) to 2015 (12.36 GW). Last year alone, the solar

industry created 31,000 new jobs; this represented

22% growth versus overall US jobs growth of 1.1%.

However, in the absence of the tax credits’

continuation, analysts project a substantial

slowdown in solar build-­‐out. For example,

Bloomberg forecasts that the average annual solar

installation capacity will decrease from 8 GW per

year (over 2014 to 2016) to 6 GW per year (over

2017 to 2022). In particular, a sharp "cliff" occurs

right after expiration: BNEF projects 11.3 GW to be

installed in 2016 versus 3.4 GW in 2017. This cliff

would occur due to both the reduced tax benefits

as well as solar developers rushing to complete

projects before the deadline. While forecasted

installation of utility, commercial, and residential

scale projects all suffer under the expiration, BNEF

projects that utility scale projects would be most

severely affected.

As expected, different interest groups have large

stakes in whether these credits continue. For

example, the Solar Energy Industries Association

(SEIA) is lobbying rigorously to extend the credits.

Perhaps counter-­‐intuitively Camilo Patrignani,

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CEO of Greenwood Energy (an American solar

company), supports eliminating the ITC in a

Greentech Media op-­‐ed, favoring more long term

regulatory certainty. A paper from Stanford's

Steyer-­‐Taylor Center for Energy Policy and

Finance advocates a similar middle path approach.

Rather than the current policy of suddenly slashing

the ITC rate to 10% in 2017 and maintaining it

forever, the paper proposes a tapered extension (a

smoother "glide path") to avoid the solar cliff, with

the political tradeoff of ultimately eliminating the

ITC entirely by 2022.

While the US Congress is now suffering chronic

disagreement and impasse, the 2016 presidential

election discourse is similarly partisan on the topic

of renewable energy tax credits. Almost all major

Republican candidates who have spoken publicly

on this issue support removing all energy subsidies

(maintaining logical consistency by also

advocating removal of all fossil fuel tax benefits),

while almost all Democratic candidates support

extending both solar investment tax credits and

wind production tax credits (PTC). The future of

the solar ITC is highly uncertain. With rapidly-­transitioning

energy infrastructure in an America

flooded with cheap natural gas, this stalemated

political atmosphere on the solar ITC might have

lasting implications for the planet's atmosphere.

Sources:

AP

DOE

EIA

FERC

Utility Dive

Stanford GSB

BNEF

League of Conservation Voters

The Powerwall and the Future of Energy Storage

at Tesla

Connor Lippincott – Senior Member, Academic Committee

Tesla’s announcement of the home energy-­storage

solution, the Powerwall, earlier this

summer made some pretty big waves in the clean

technology sphere. The sleek, wall-­‐mounted

battery comes in two models, 10 kWh and 7 kWh,

for backup and daily cycle applications,

respectively. The battery functions with traditional

lithium-­‐ion technology and is guaranteed for 10

years after purchase. The prices are $3000-­‐$3500

with an additional $500 in installation charges.

Since their announcement, 100,000 Powerwalls

were reserved. Elon Musk, CEO of Tesla and Penn

alumnus, has projected $40 million in sales of

batteries for fourth quarter 2015 with “ten times

that number next year.” And just a few days ago,

the 7kWh batteries began shipping to customers.

So this is a home run, right?

It seems a little more complicated than that. While

the Apple-­‐esque rollout of the Powerwall dazzled

many, there are some significant questions to the

long-­‐term use and effectiveness of the home

storage battery. The primary selling points of the

battery are grid independence and avoiding peak

electricity rates. However, compared to net

metering, the process of selling unused solar

energy back to the grid, the battery storage is a

more expensive option. Instead of making money

from the excess energy, it is simply stored.

Unfortunately, this policy is also one of the reasons

that solar energy is becoming much more

economical, meaning that, to incentivize battery

purchase, solar panels would have to be dis-­incentivized.

This seems counterintuitive.

Avoiding peak electricity rates also does not make

as much impact when investigated. First, less than

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1% of U.S. Households are charged by time-­‐of-­‐use.

Even among the 1% that are, differences in rates

are not large enough to justify battery usage. It

does seem, however, that time-­‐of-­‐use charging is

increasing, so we may see this problem decrease in

regards to the Powerwall.

homeowners will buy this because it is the “next

big thing”, and there is nothing wrong with that.

Additionally, a larger scale version of the

Powerwall for commercial purposes, rolling out in

2016, will be much more effective as an energy

solution. Reservations for those are over $600

million, though it seems the reservations are non-­binding.


While the Powerwall may not be right for the

majority of American consumers, it will probably

still be a good move for Tesla. First, the

introduction, presentation, and marketing of the

technology has been well done. Tesla is making

high technology energy solutions seem, for lack of

a better word, cool. A significant amount of

It will be interesting to see how all of this plays out

in the coming years. A new study at Harvard has

already found an improved energy-­‐storage fluid

compared to the one used in the Powerwall, and

many more technological innovations are surely on

the brink of economic feasibility. While Tesla’s

primary focus will continue to be on its cars, the

increased interest in storage will encourage only

the best solutions.

Sources:

Tesla Motors

Bloomberg

Wharton Energy Group Leads Successful Visit to

Marcellus Shale Drilling Site

Jack Tyree – President, WUEG

On Friday, April 10th, members of the Wharton

Undergraduate Energy Group travelled to

Waynesburg, PA on a full-­‐day field trip to a series

of natural gas drilling and production sites in the

Marcellus Shale. Facilitated by Vantage Energy, a

Denver-­‐based exploration and production

company, the trip consisted of visits to three of

natural gas production locations—one drilling

operation, one flow-­‐back operation, and one

completed producing pad.

The group’s first stop was the “Habe” pad, which is

currently in the drilling phase of production.

Sporting required fires-­‐resistant clothing and hard

hats provided by Vantage, the students had the

opportunity to tour the drilling rig and learn about

operations from on-­‐site employees and

consultants.

One student reflected on the “Measurement While

Drilling” technologies, which use gamma ray

transducers to facilitate point-­‐to-­‐point precision in

guiding the drill bit into the hydrocarbon reservoir

at depths well in excess of a mile below the

surface. Another student inquired about the

company’s water acquisition and flow-­‐back water

disposal policy. The state of Pennsylvania

approves certain points from which production

companies can acquire fresh water for completion

operations. To date, Vantage completion water

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September 2015

has been obtained from the Monongahela River in

Pennsylvania. Following completions, Vantage

recycles the majority of recovered brine water for

other operations.

The group also visited Vantage’s “Good” pad,

which was undergoing flow-­‐back operations. By

employing on-­‐site pressure and temperature

control, the machinery separates the flow-­‐back

contents, which generally include gas, oil, water,

and sand. On location, Vantage’s EH&S Director

fielded questions regarding land acquisition and

property rights. “Oil and gas rights are actually

very convoluted in Pennsylvania. Some

landowners own all of the mineral rights and can

lease those to oil and gas companies. Others sold

off some or all of those mineral rights at some

point in the past.” The latter is often the case with

game lands used for hunting or occupied by

animals. He went on to say, “In some cases,

owners left their property to relatives a long time

ago, so companies need to seek out approval for

the mineral rights lease from dozens of people.

This can really complicate things.”

The group’s final stop was the “Petraitus” pad,

which includes a series of completed wells

currently linked to a gas transportation pipeline.

One of the employees on location described the

gas gathering system that connects all of the

company’s wells. In order to prevent gas and

methane leaks in the well piping, Pennsylvania

requires that gas producers certify their steel

piping on an annual basis. In addition, all joints in

temporary piping must be outfitted with Kevlar

bands, which serve as a secondary restraint to

prevent leakage.

The trip concluded with a dinner during which

students had more opportunities to interact with

the oil and gas drilling and production staff. The

field trip was a great success, and students valued

the opportunity to see first-­‐hand the processes

associated with natural gas production, a growth

sector of Pennsylvania’s economy.

To build on the rig visit experience and as part of

our mission to promote exploration of the energy

industry through experiential learning, on Friday,

October 16th, WUEG will be conducting a site visit

to the Bruce A. Henry solar farm in Delaware. The

field trip will be open to all students interested in

attending. For more information, please visit

whartonenergygroup.com.

Bill Gates’ TerraPower: The Future of Nuclear

Energy?

Charlie Gallagher – Vice President, Academic Committee

Bill Gates doesn’t just pioneer computer operating

systems; his renewable energy company

TerraPower, founded in 2008, recently partnered

with China to build a ground-­‐breaking, next-­‐

generation nuclear reactor – one that is powered

by depleted uranium.

China’s National Nuclear Corporation (CNNC)

agreed on September 22nd to build the first

reactor in China’s Fujian province beginning in

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September 2015

2017. This first plant, a 600 mega-­‐watt prototype,

will test all the necessary componentry and fuel as

well as provide an economic and licensing basis for

commercial viability in the years afterward. The

plan is for 1,150 mega-­‐watt commercial plants to

follow, with operation beginning in the late 2020’s.

The technology, Traveling Wave Reactor (TWR),

relies on the conservation of energy. While existing

nuclear reactors use only 5% of their uranium ‘fuel’

and then dispose it, TWRs use a bit of enriched

uranium to start up then utilize so called depleted

uranium – the toxic waste from today’s nuclear

reactors – as its primary fuel source. The plants can

load up nearly 40 years’ worth of fuel in one fell

swoop, whereas traditional nuclear plants must

conduct the expensive and gritty refueling process

every 18 to 24 months.

The economic and environmental benefits of

nuclear energy are apparent: it is clean, carbon-­free

power that provides base load capacity (24/7

electricity) at a fraction of the cost of wind and

solar. But the TWR technology in particular is

promising because it reduces the need for uranium

mining, enrichment facilities, reprocessing plants

and storage facilities. Instead of burying depleted

(and radioactive) nuclear fuel rods in the ground,

these nuclear reactors recycle that very uranium.

Beyond the cost savings, this method mitigates

the proliferation of nuclear weapons

manufacturing. Since the plant can undergo fission

from this recycled fuel source for decades, the

resulting uranium waste is unusable for weapons

manufacturing and contains lower levels of

radioactivity. In other words, the depleted uranium

these plants will purchase for fuel might otherwise

have been obtained for nuclear weapons.

For those interested in the science and

engineering, TerraPower’s website goes into

further detail:

The TWR is a Generation IV, liquid sodium-­‐cooled

fast reactor based on existing fast reactor

technologies. Innovations in metallic fuel, cladding

materials and engineering allow TWRs to utilize

depleted uranium as their primary fuel. Fissile fuel is

both produced and then consumed in-­‐reactor,

greatly improving the fuel efficiency of the TWR and

resource availability for the reactor. The TWR’s

economic benefits stem from its higher thermal

efficiency and ability to breed and burn metallic fuel

comprised of initial starter fuel of U-­‐235 and U-­‐238.

TerraPower’s ability to develop new fuels and

materials that can breed and burn U-­‐238 could

enable a TWR to get more energy out of every pound

of mined uranium than a conventional light water

reactor.

A new generation of nuclear plants can make for a

cheaper and safer future for the industry.

Sources:

TerraPower

KPLU

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September 2015

Alternative Energy Yield Companies: Gimmick or

Game Changer?

Max Isenberg – Senior Member, Academic Committee

One of the core problems for a capital intensive

and growing industry is financing. In the past 2

years, alternative energy companies have

gravitated towards yield companies (or yieldcos) as

the solution. The first alternative energy yield

company was Brookfield Renewable Energy

Partners, which IPO’d in 2012. By mid 2015, the

number of yieldcos had risen above 15, raising over

$12 billion in capital for their parent companies.

What has been encouraging so many firms to

pursue this new source of capital, and will they

remain the method of choice for the foreseeable

future?

To an investor, a yieldco offers up a similar value

proposition as a real estate trust fund (REIT) or a

master limited partnership (MLP). All three

investment vehicles essentially collect the cash

flows of very stable and highly capital-­‐intensive

assets (either solar modules/wind turbines, large

real estate portfolios, or oil pipelines) and pay cash

flows out in the form of dividends to investors,

with the operations of acquiring and constructing

the assets being left to the parent company. For

the parent companies, the motivations also are

quite similar among all of these types of

subsidiaries. To get the financing for very

expensive projects (be it building solar farms,

buying up lots of property, or laying down an oil

pipeline), existing assets can be “dropped down”

into a subsidiary and subsequently IPO’d to raise

capital off of their existing assets. Yieldcos also

benefit tremendously from tax breaks, as parent

companies can earn significant tax-­‐offsetting net

operating losses (NOLs) via non-­‐cash depreciation

expenses associated with these assets. Thus, firms

can raise capital, pay low-­‐risk dividends, and avoid

taxes.

Up until the summer of 2015, investors

aggressively sought Yieldcos for investment. In a

low interest rate environment, attaining higher

yields is very difficult, and so yieldcos, which pay

the equivalent of 4.5 -­‐ 7.5% annually, are highly

sought after. Energy companies, and in particular

photovoltaics manufacturers like First Solar and

SunEdison, have continued to bundle their assets

for new yieldcos. To these module makers, the

yieldco has enabled them to raise relatively cheap

capital in large quantities with relative ease.

However, after SunEdison’s most recent yieldco

IPO, Terraform Global, the music may have

stopped for the yieldco party. Unlike the other

yield companies that experienced large pops in

their stock price post IPO, Terraform Global

declined 6% on its first day and never returned to

its IPO price. Existing yieldcos have also faced

significant losses. Several theories abound as to

why the good fortune for yield companies has so

suddenly reversed. The Federal Reserve is

expected to begin raising interest rates soon,

making the dividends that yieldcos pay seem less

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September 2015

attractive in the face of rising bond yields. The

rapid series of IPOs may have flooded the market

with these types of securities, oversaturating

demand and reducing investors’ willingness to pay

the high prices that yieldcos were commanding

just a few months previously.

There is hope still for solar companies even if the

yieldcos decline in prominence. The Moody’s

Rating Agency stated in January that solar asset-­backed

securities (with which SolarCity has

experimented) had reached enough scale to come

to market. Rather than bundling alternative energy

assets into new companies, these assets could be

used to back bonds that parent companies issue.

As a backed security, these “solar bonds” would be

less risky to investors and could potentially be

issued more cheaply than by IPO’ing new

subsidiaries. AES Distributed Energy launched the

first solar bond issued by a utility in September

2015, supporting the viability of this security as a

critical way alternative energy gets funded in the

future. It is up to capital markets to decide whether

yieldcos are a gimmick or a game changer.

Sources:

NREL

Cleantechnica

Green Tech Media

Bloomberg

Ukraine’s Energy Crisis: Is Nuclear an Option?

Arnab Sarker – Guest Columnist

Ukraine is currently facing an unprecedented

energy crisis. After rebels declared independence

from Kiev a year ago, military conflict took place

over the Donbass region of Ukraine. Over 300

mines were ruined in the now war-­‐torn area.

According to the Ukraine Ministry of Energy, the

overall production of raw coal in Ukraine fell by

over 20%. However, a significant part of Ukraine’s

energy presently comes from natural gas, so a fall

in coal production itself would not entail a crisis.

Unfortunately, Ukraine’s energy problems are

exacerbated by political tensions with Russia.

Russia is one of the world’s biggest suppliers of

natural gas, and it provides its gas to Eastern

Europe by transporting its gas through pipes that

run through Ukraine. As a result, Ukraine has

become dependent on Russia for imported natural

gas. Yet the Russian annexation of Crimea, a region

south of Ukraine, has given Ukraine the incentive to

seek energy independence from Russia.

Since coal is no longer an option, Ukraine’s energy

independence may be viable if it makes use of

nuclear energy, but Ukraine has had terrible press

regarding nuclear energy, especially because of the

Chernobyl accident. After Unit 4 of Chernobyl’s

reactor failed in 1986, parts of Ukraine, Belarus, and

Russia were left contaminated, and the world was

left in fear of nuclear power. This led to the halt of

nuclear power plant growth in Ukraine. Eventually,

policy began to change, since nuclear energy

actually has one of the lowest death rates per

kilowatt-­‐hour generated. Now there are fifteen

nuclear plants in Ukraine, and this number may

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September 2015

increase as Ukraine hopes to become less

dependent on Russian natural gas. Nearly thirty

years after Chernobyl, a nuclear renaissance may be

Ukraine’s best solution.

Sources

Bulletin of the Atomic Scientists

Euractiv

Event review: Impacts of Fracking

A technical presentation and discussion on policy

Zach Ennis – Vice President, Events Committee

On September 22, the Wharton Undergraduate

Energy Group and Penn Sustainability Review

hosted a presentation and discussion panel on the

topic of hydraulic fracturing, more commonly

known as fracking, in North America.

The event began with an approximately 20 minute

video presentation on exploration, drilling, and

completion. Prior to beginning the presentation,

the audience was cautioned that the video series

was prepared by Chesapeake Energy, one of the

largest natural gas producers in the United States,

and as such could demonstrate the topic in a

biased manner. Overall, the presentation was

objective and mostly technical in nature. After the

video, students asked more critical questions

regarding possible environmental damages to add

an opposing opinion.

A panel followed with a more neutral discussion of

the impacts of fracking that was moderated by

second-­‐year MBA, Pujan Kasaju. Pujan has

extensive experience in the oil and gas financial

sphere – specifically his previous employment was

at the energy private equity giant, Riverstone

Holdings.

The three panelists included: Professor Andrew

Jackson, Dillon Weber, and Sasha Klebnikov.

Professor Jackson previously worked for over two

decades in various fluid sciences with Exxon Mobil

and is now a professor of tribology in the Penn

Engineering School. Dillon is a senior majoring in

Chemical Engineering and Economics. He has

researched gas production and written extensively

on the associated tax policies, especially in the

Marcellus Shale. Lastly, Sasha is pursuing his

Masters in Heat Transfer and Energy Science and

serves as the Editor in Chief of the Penn

Sustainability Review.

The panel started off with questions on the

environmental impacts of fracking, a hot topic in

the media and politics. Professor Jackson prefaced

the discussion by suggesting that students keep in

mind the potential detriments associated with all

energy sources. Panelists then continued to

discuss the impacts of various energy sources and

how fracking compares. The general sentiment

was positive with the rationale that fracking has

the ability to replace coal as a cheaper, less

detrimental power source. Panelists also discussed

and cited statistics about the misconceptions of

methane leakages, possibility for groundwater

contamination, and wastewater disposal. All three

agreed that fracking was definitely a hazard 10 to

15 years ago when regulation was minimal and the

industry was so new, but now the industry has

evolved to improve their techniques to be

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September 2015

relatively safe. In addition, companies now face

steep fines for spills or other human errors.

The conversation expanded to analyze the current

presidential campaign and the candidates’

positions on fracking. This led to a discussion of

the taxes on oil and gas production companies, as

well as the local economic effects caused by the

shale revolution in the United States.

One of the final topics analyzed the potential

impact of the current low oil prices on oil and

energy extraction techniques. Some opinions

included the potential development for longer

laterals, more intense fracks, and an increase in

wells per pad.

We held a 20 minute question and answer session,

where the audience asked engaging questions

clearly highlighting the educational value and

benefit from the event. All in all, it was great to see

everyone leave with a greater understanding of the

technical aspects, regulatory measures, and

economics behind fracking.

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