Renewable Energy Projects in New Mexico: A “Historical” Perspective

State of the State. Renewable energy projects in New Mexico: a “historical” perspective…if one can call 5 years “historical”.

History of renewable energy projects in New MexicoIn 2008, I founded 310 Solar with Glenn Gallipoli, a veteran of the last “boom” in solar back in the 1980’s. At the time we launched 310 Solar, there were a few key players in this market, most of whom had been around for a decade or more, but the future was a giant question mark, albeit with plenty of reason for optimism. Glenn had the unique background of also owning a radiant company and possessing the know-how and licenses to install solar thermal systems as well as solar electric (photovoltaic) systems, so we felt confident about our ability to grab up significant market share, but more importantly, we felt the entire tide would soon be rising, increasing the New Mexico solar installation market by 100% or more that year.  If I had submitted my business plan to one of the professors at the Anderson School of Business, it probably would have received an A+ for formatting, content, and completeness, but an F in terms of the risky assumptions it made.  Turns out we were right, but not in the ways we thought we would be!

It is somewhat amazing to see the changes that have occurred in New Mexico in the past five years. Some for better, some for worse.

Oil was spiking at well over $100/barrel (albeit somewhat irrelevant to a sound analysis of the solar market, but it did create some buzz). Although the Solar Market had been pretty tame to that point, by no means “main-stream,” developing a business plan for a solar company offering photovoltaic (electric) systems, as well as thermal systems, wasn’t totally insane. The price of natural gas in 2008 rose above $1.50/therm in the summer of 2008. Propane was over $4.00 a gallon so the phone calls from Paako, the East Mountains, and Placitas came pouring in after the first wave of marketing.   Some homeowners were spending $7,000 per year or more on their combined energy costs, making at $30,000 (after tax credits) procurement sound reasonable.  Some guy named Barack Obama was campaigning for President on the promise of renewable energy (while others angrily chanted “Drill, Baby, Drill”).

In New Mexico, the legislature’s Renewable Energy Act was starting to gain some traction.

According to PNM testimony in that year’s PRC Procurement Plan case (an annual filing that the large investor-owned utilities have to file every year to state how much renewable energy has been deployed and what their plan is to meet the mandated goals set by the PRC), only about 500 subscribers to their “small” PV program (typically residential users, under 10 KW arrays).

The cost of installed solar was as much as $9.00/watt, so about $25,000 (before tax rebates) for a decent sized residential system (about 3 KW, enough to provide about 50-75% of the energy needs for a very efficient, average sized home… in very round numbers). PNM’s program offered $0.13 for renewable energy certificates (REC’s – one kilowatt hour of electricity generated and metered, which under the current program is only 4 cents).

The economics were not yet compelling, but with energy rates starting to climb, they were getting there. PNM proposed, for the first time, a program for systems larger than 10 KW and up to 1 megawatt, or 1,000 kilowatts.

Want to know what a megawatt looks like?  Tennis anyone?  Below  is an aerial photo of the 1 MW system at the Albuquerque Academy for a frame of reference:

1 Megawatt Solar System at the Albuquerque Acedemy

( image credit: http://www.gocstsolar.com/blog/construction-has-begun-albuquerque-acade/)

PNM was offering an astounding 15 cent REC rate, probably on the assumption that not many systems would be built.

In 2009 several big things happened on the policy front, some of which have now been rendered moot by subsequent developments.

At that time, I was an officer of the Renewable Energy Industries Association (REIA-NM) as well as their attorney. We had intervened in the 2008 Procurement Plan case mainly for the purposes of defending the REC rate of $0.13 because businesses like mine, 310 Solar, as well as some of the more established players like Positive Energy in Santa Fe and Direct Power and Water in Albuquerque were finally starting to get some traction.

In that year’s legislative session, REIA worked tirelessly, attending dozens of hearings and working hard to pass legislation creating special finance districts for residential solar, a finance model that had worked in places like Berkeley California and Boulder, Colorado to provide a low-cost finance vehicle for residential solar. We were successful in passing those bills, and counties such as Santa Fe were aggressively planning the launch of their programs and issuance of the bonds to finance them. Solar Assessment districts, or “PACE” programs (Property Assessment Clean Energy) bond programs were poised to change the New Mexico market from a few million dollars in total annual market activity into years and years of total market revenue exceeding 10 million dollars.  The large out-of-state players were lining up to stage their assault on New Mexico, a threat we hadn’t been thinking about even a year earlier.

Albuquerque was a bit slower to move as powerful banking and development groups were spooked by the prospect enough by the special assessment  laws to scare both the City and Bernalillo County into inaction.

At that time, I had moved to Consolidated Solar Technology as general manager to launch this Sun Power dealer, and can remember that our sales team had pre-sold dozens and dozens of systems under the new program. The Association of Counties had developed model programs, but all came to a grinding halt nationally when Fannie and Freddie unilaterally canned the approach by declaring they would not buy or back mortgages on which such assessments had been attached, Joe Biden’s pleading notwithstanding.

Also in 2009, several local installers like Affordable Solar and Consolidated Solar Tech were able to offer financing on systems, something that, strangely enough, had never occurred in the industry. This, combined with high REC rates and declining installation costs, combined to largely overcome economic fears and resulted in hundreds of new systems being sold in New Mexico in that time-frame.

Another 2009 policy “victory” was the success of a PRC case in 2009 which had been opened to determine whether or not third-party financed energy systems (often called power purchase agreements, PPA’s or SPPA for solar installations using that approach) were legal under New Mexico law. Such an arrangement is available to private property owners, but is especially useful for government buildings, tribal properties, or other entities who cannot monetize the 30% federal tax credit. In those instances, the “host” agrees to buy all of the power generated over at least a 20 year time-period at fixed, agreed rates and signs a contract for that period. The owner/developer can either use its own capital to build the system, or take the PPA to a lender in order to finances the system. The owner takes the tax credit, keeps the REC payments from the utility, and recoups the metered cost of electricity from the host. At 15 cents per KWH at that time, and installation costs at $4-$5 per watt, it was economically feasible, if not compelling.

PNM argued that such installations constituted private utilities and were therefore disallowed under New Mexico’s Public Utility Act. The PRC’s hearing officer disagreed, and the PRC adopted her recommended decision by a 4 to 1 vote. I was counsel for REIA and fully expected to lose that vote, and I think Jason Marks probably expected the same thing. His prepared dissent, in a very strange turn of events, became the resolution itself. When Jerome Block pulled Carol Sloan aside, the two returned to their seats and voted for Commissioner Marks’ amendment, Commissioner King joined, and suddenly Sandy Jones was the one vote disagreeing with the decision. We were elated and thought that the future of solar was so bright, we’d all need to wear shades.

We weren’t necessarily wrong about our outlook, but things turned out a little differently than expected. PPA’s were legal, REC’s for large commercial systems were still 15 cents, but in the meantime, the world was plunged into the “Great Recession” and banks weren’t lending… at all. I can recall dozens of project applications that I was aware of for 1 MW systems being submitted, but none of those projects went forward. Now, commercial REC rates are 2-3 cents and despite a precipitous plunge in the cost of solar panels for those large systems, they are still largely impossible to finance, mostly for economic reasons, and with a few legal snags also causing problems.

Today in New Mexico, REC rates for residential users is 4 cents.

The cost of installing solar has also plunged, so the economics are still feasible, if not compelling. There was a period of time in 2010 and 2011 where the regulatory wheels were slow to react to the market, and REC rates were still high in the PNM service territory, but the price of installation was plummeting even faster. Property owners who were lucky enough to get into the game at that time are likely doing quite well with their systems, financially. The margins have probably gotten very tight for residential solar installation companies in New Mexico, and many have folded. But there are still hundreds, if not thousands, of systems going up every year, including solar thermal systems.

Systems located at the property where they are used fall into a category called “distributed generation,” which is the opposite of large, centrally located installations. There are, of course, pros and cons to both. But the reality is that while residential systems continue to be contacted in large numbers every day in New Mexico, systems larger than 100 KW or so are becoming rarer and rarer as distributed generation. The more recent trend is toward larger, utility-owned systems.

In 2012’s Procurement Plan case before the PRC, where I represented First Solar, the PRC approved 20 MW’s of new, utility-owned solar to be installed by First Solar. This was done at a cost for energy over 20 years (called “levelized” cost of energy) that was certainly the lowest cost for solar energy in New Mexico history.

While I still root for (and often represent) the “little guy,” and while there are manifold economic advantages to distributed generation for the New Mexico economy, this large-scale procurement by PNM is also great for consumers, great for our state, and boost for the health of the renewable energy industry broadly.

Reminiscing on the past 5 years sometimes seems like looking back decades – it has all changed so much and so fast. Old enemies are now side-by-side as co-counsel for big-scale procurement projects, and the economic and policy paradigms that we expected to be the lasting models for the 21st Century have been replaced by economic and policy phenomena that few would have anticipated, but which still seem to be propelling a healthy solar industry in New Mexico for residential and light commercial projects, state and local government projects, and large utility-scale projects alike.

I can hardly wait to see what the next five years will bring.

Albuquerque Business Law, P.C.
1803 Rio Grande Boulevard Northwest AlbuquerqueNM87104 USA 
 • 505-246-2880

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About James T. Burns

Prior to the practice of law, James was a corporate manager with a large market research firm. Like many of our clients, James has started and successfully managed businesses of his own, primarily in the area of technology start-ups. James was also a prize winner in the UNM Business Plan Competition and has completed numerous consulting projects to help clients achieve their legal and business goals.