ON NOVEMBER 27, 1991, the California-based solar energy firm Luz International Limited announced that it had filed for bankruptcy. Luz, the employer of 1,800 people, designed, financed, constructed and operated the world's nine largest Solar Electric Generating Systems (SEGS), which generated 95 percent of the world's solar electricity.
The news of Luz's failure dismayed many solar advocates, to whom Luz represented a successful merger of business interests and social responsibility. The Luz plants showed that solar thermal and other "alternative" energy sources can provide environmentally sound power. Since going into operation in 1984, Luz's existing nine SEGS, when compared to an oil plant, have displaced 1.2 billion pounds of CO2 (the leading greenhouse gas) and 750,000 pounds of nitrogen oxides (which irritate lungs and promote smog) per year.
According to V. John White, executive director of California's Coalition for Energy Efficiency and Renewable Technologies (CEERT), the founders of the Luz corporation were "very committed" to environmental objectives. "They were almost desperate for environmental considerations to become more important to the public," he says. "They were really almost visionary in that way."
The Luz bankruptcy may be a sign of the times for solar energy. The U.S. market for nonconventional energy opened in the 1970s, when government support for fuel alternatives helped nourish the development of alternative energy technologies. Renewable energy advocates sought to distribute clean power to homes and communities independent of the big energy companies and utility grids. But the Department of Energy (DOE) favored solar projects that were large-scale, high technology and compatible with utilities, and decentralizing solar technologies were underfunded and underdeveloped. Although Luz's SEGS would probably have been greeted warmly by the DOE in the 1970s, the political climate had changed dramatically by the time of their start-up. The Reagan administration slashed research budgets for solar and ended any serious governmental commitment to developing alternative energies. The 1980s and 1990s have been a hostile period for solar development, with even those solar technologies that do not pose a threat to utilities' control of energy distribution suffering.
The alternative energy obstacle course
Luz's collapse reflects the abundance of political, financial and technological problems facing the solar energy industry in the 1990s. Mike Lotker, formerly the vice president of Luz International Limited, points out that, while the company's management made "serious mistakes in managing growth and opportunities," it faced an an extraordinary number of difficulties. "A large number of barriers in the areas of taxation, regulation, policy and the marketplace itself resulted in a situation where Luz management had to perform flawlessly in order to succeed," he says.
One such barrier was the annual expiration of federal energy tax credits which provide tax reimbursements for investments in alternative energy projects. Luz, despite the size and significance of its projects, could not obtain access to long-term financing for relatively low-risk ventures, and was forced to operate like a small business. The corporation functioned on a yearly cycle of lobbying Congress to extend the tax credit, getting site approval from the California energy commission, raising capital from investors, and then building a plant before the year's end, when the tax credit would run out.
In 1989, Luz was forced to complete this process within an even shorter period when the extension on the federal energy tax credit was cut to nine months. Luz was left with seven-and-a-half months to build a $280 million plant. Relying on overtime work and other crash measures, Luz suffered a $30 million cost overrun which swallowed two thirds of its remaining capital.
On November 27, 1991, the same day that Luz announced its bankruptcy, Congress passed HR 3909, a bill which extended a 10 percent tax credit on investments in solar and geothermal from December 31, 1991 to June 30, 1992. But the six-month extension was too little, too late. Investors had been scared off by the on-again, off-again nature of tax incentives for solar projects, and Luz lost its construction financing.
A second barrier which confronted Luz was the size limitations on solar plants imposed by the Public Utilities Regulatory Policies Act (PURPA). PURPA was initially seen as a boon to the renewable industry, because it required resistant utilities to purchase electricity generated by alternative energy sources. But in order to assure conventional fuel producers that solar and other alternative technologies would not take unfair advantage of the guaranteed market created by PURPA, lawmakers set a cap on the amount of energy that a solar plant could generate or sell. The size allotment, first set at 30 megawatts in the late 1970s, was eventually increased to 80 megawatts.
Luz, which had the capacity to build SEGS which would generate 200 megawatts, or enough energy to meet the electricity needs of 200,000 homes daily, was forced to build plants below this optimum usage and incurred losses during the 1980s that it was never able to recover. Luz had to "dump" solar energy rather than harness it so that the company's production would remain within PURPA's boundaries.
Furthermore, in contracting with California utilities, alternative energy producers were bound by California's Energy Pricing Policy, which ties the price of renewable energy to the current price of natural gas or oil, whichever is cheaper. At the time of the Luz bankruptcy, improved technology had lowered the cost of generating solar energy to eight cents per kilowatt-hour, less than a third of its cost in 1984. Yet it still could not compete with gas and oil prices, which dropped steadily throughout the 1980s. In 1991, natural gas was at one fifth of its 1981 price, and, between 1981 and 1989, the price of oil plummeted from $40 a barrel to $18 a barrel, or five cents per kilowatt-hour. As natural gas and oil prices dropped, so did Luz's revenues.
In order to compete with oil and gas, solar power must match the hidden government subsidies to conventional fuels. Oil and gas receive the equivalent of a 25 percent tax credit, according to alternative energy advocates. Among the subsidies are an immediate tax write-off for drilling costs and "percentage depletion" for the cost of the pipes, pumps and tanks to complete a well. These bonuses for conventional fuel "are so ingrained in the system that we don't notice them, but they are already in the budget," says Chip Loeb, vice president of Chronar Solar Corporation in Princeton, New Jersey.
Nuclear power, which receives more than 70 percent of the Department of Energy's funding outlays for technology-specific development, has a similar advantage over solar. According to Peter Grinspoon, an energy campaigner at Greenpeace, it costs almost 13 cents per kilowatt-hour to produce nuclear energy. At this high cost, nuclear energy would be completely priced out of the market; only numerous government subsidies - for waste management, disaster insurance, research and development - make it competitive.
An additional difficulty Luz encountered was the property tax assigned to solar companies, which unlike oil and gas producers, must build their facilities above ground. Former California Governor George Deukmejian is responsible for the veto of a property tax exemption for solar energy projects.
Faced with so many obstacles, Luz found that its solar thermal technology could not compete with fossil fuels and nuclear energy.
While Luz represents but one corporation in the renewable energy industry, its downfall could have a significant impact on the perceived marketability of solar energy. Alexander Ellis, vice president of marketing at U.S. Windpower in San Francisco, is "concerned about Luz's collapse, in that it could affect the public's view of renewables in general."
V. John White of CEERT contends the Luz bankruptcy will deter other companies from investing in solar. "The Luz bankruptcy has caused the elimination of the next 300 megawatts of solar," he says.
The 1970s: solar in the nuclear model
To those who have tracked solar energy's precarious relationship with utilities and the federal government over the last 20 years, the fate of Luz is not surprising.
The origin of national policy interest in renewable energy can be traced to 1973, when a startling rise in oil prices quadrupled the price of oil to $12 a barrel. A similar increase in 1979 brought oil prices to nearly $40 a barrel. Long lines at gas stations, the burden of unprecedented inflation and concern about international trade relations made discussion of developing alternative energy sources unavoidable.
The Carter Administration added energy tax credits to investment tax credits and implemented PURPA. California offered the largest incentives for commercialization of alternative energy, and rapid development of cogeneration and small power production facilities ensued in the state. These policies were primarily motivated by concerns about energy security, not environmentalism.
During the late 1970s, the federal government and large energy corporations sought to keep the development of the solar industry under their control and away from small businesses which were trying to make inexpensive solar power widely available at the community level, according to Ray Reece, author of The Sun Betrayed: A Report on the Corporate Seizure of U.S. Solar Energy Development, published in 1979.
What Reece labeled the "corporate solar strategy" involved the creation of a solar industry in the image of fossil fuel and nuclear energy companies. Centralization was the key goal [see "Citizen Power vs. Big Business Energy"]. Reece argued that solar energy development in the 1970s was largely controlled by government agencies, universities, corporations and utilities that had direct financial and professional interests in creating and funding a successor to the aerospace program. Energy research shored up the defense establishment, as the "federal solar bureaucracy" funnelled millions of dollars to aerospace corporations, corporate think tanks and corporatized universities. Utilities sought to downplay the viability of solar power, but to the extent it was developed, they sought to promote the centralizing technologies which would plug into the grid system.
In 1975, two years after the OPEC boycott which drove up oil prices, Congress created the federal Energy Research and Development Administration (ERDA). ERDA, which later became part of the Department of Energy, solicited grant proposals for solar and other alternative energy projects, but it ignored the committed contingent of scientists, engineers and academics who had researched and developed simple solar systems for individual and community use in the 1960s and 1970s. Instead of funding the projects submitted by this largely counter-culture vanguard, ERDA mainly supported scientific research conducted at large universities or corporations. In 1976, ERDA spent $94 million on solar applications, but small businesses received only $6.7 million of that total. Given the government's definition of a small business as a company with up to 1,000 employees, it is clear that community-based and smaller, non-profit organizations were not the recipients of ERDA's largesse.
In 1977, Science magazine criticized large aerospace companies for "making solar after the nuclear model." It stated that the "massive engineering projects" undertaken by these companies "seem to have in mind the existing utility industry - rather than individuals or communities - as the ultimate consumer of solar equipment."
Solar and the precarious 1990s
The last decade has delivered the earlier prophecies of solar centralization. The Reagan and Bush administrations' hostility to renewable energy development - the federal renewable research and development budget was slashed from $856.9 million in 1979 to less than a tenth that amount in 1990 - fostered insecurity among independent solar companies and intensified their dependence on utilities. Almost all independent solar companies are now oriented toward working with utilities.
What Reece called a multinational and government "conspiracy" to suppress energy decentralization by tying solar to utility grids is now unabashedly acknowledged by those in the existing renewable energy industries as a practical strategy for developing solar in the United States. Many solar thermal, photovoltaic, geothermal and wind companies promote utility involvement as the only way to create a domestic market for alternative energy.
Gilbert Durant, vice president of a photovoltaic company called Utility Power Group, explains, "There should be no fear of the utilities trying to take over technology from smaller companies: that's what we're trying to promote."
"We want the utilities to be good customers," says Mike Lotker, Luz's former vice president and now director of utility business development at Siemens Solar Industries, Inc., a U.S. photovoltaics company that is 51 percent owned by the German Siemens Corporation and 49 percent owned by a German utility.
Alexander Ellis, vice president of marketing for U.S. Windpower, a California subsidiary of Kenetech Corporation, believes that renewables "will have to prove worthy of utility acceptance" if they are to succeed.
These companies are quick to chastise Luz for its expectation that solar technology should receive the same government support as fossil fuels and nuclear energy. James Brown, President of Solar Cells Inc., an Ohio-based company, says, "the greatest need for photovoltaics is a long-term commitment on the part of the utilities to purchase photovoltaic energy. That's what we want, not tax credits."
Edward C. Schmidt, President and CEO of Alpha Solar Company, argues that although his own company does receive government subsidies, "a tax credit is a different matter. I'm amazed that Luz could expect that from the American public."
Direct utility involvement in solar is also increasing. California Edison announced in August 1991 that it will head up a "consortium" of utilities to open a $39 million solar plant in 1994, just over half of which will be financed by the federal Department of Energy. The planned facility, in Daggett, California, is located at the site of Luz's former "Solar One" plant. Jeff Perlman, an Edison engineer with the solar project, believes that their "Solar Two" will be able to compete with conventional power plants "without the help of tax credits or other government support," the initial DOE $20 million notwithstanding.
According to Loeb, among independent solar companies which would like to maintain their independence, "there is a fear that the utilities will swallow them up, like the energy companies did in the eighties."
The future's not so bright
The immediate prospects for solar are not bright, but the enormity of global warming and other environmental problems associated with fossil fuels and nuclear energy is so great that some public and private commitment to solar is almost assured. Several governmental programs, while not panaceas, could encourage some development of solar and other renewable energy forms.
However, unless major changes take place in the renewable industry - through a progressive government purchasing program that encourages the growth of independent companies and investment in decentralizing technologies, for example - the solar industry is likely to be dominated by utilities and solar energy is likely to be distributed through centralized utility grids. Although many environmental benefits might be retained even if solar is distributed in this manner, the hope for community empowerment that would be realized with energy decentralization will be lost. The technology will remain under the control of utilities, alongside conventional fuel and nuclear power. Consumers will not be able to direct technology towards minimum waste of resources, minimum damage to the ecosystem, maximum stimulation of employment opportunities and improved public health.
Virtually all conventional energy systems are regional, national or global in scale; a consumer has little choice but to buy electricity from a utility monopoly or gasoline from the oil oligopoly. The alternative energy movement in the 1970s envisioned alternative energy systems being implemented on a smaller scale, giving citizens direct control over energy production. Today that vision has largely been lost; while retaining its environmental concerns, the mainstream of the alternative energy movement has virtually abandoned its community empowerment agenda.
Despite being relegated to the back burner by both government and industry, small-scale technologies are viable and continue to develop. Small-scale technologies are geared to households, communities and small businesses. They are often owned by the consumers of the energy they produce. Alternative technologies that are appropriate for small-scale use include:
In many cases, these technologies can be used effectively in combination, to make a complete system. Many current small-scale systems use natural gas for emergency backup. As renewable use increases, it should be possible to replace the natural gas with renewably generated methane.
Another advantage of small-scale energy systems is that they can be used for cogeneration. When electricity is produced, about two thirds of the energy input is converted to "waste" heat. In a large power plant, this heat is indeed wasted. Cogeneration technologies, however, put this heat to use. In small-scale systems, electricity is generated near the consumer, which means that excess heat can be used profitably. Virtually any small-scale electric generating system can be used for heating, and in many cases for cooling. Cogeneration greatly increases the overall efficiency of the generating process.
Renewable technologies promoted by the U.S. government and by big business have mostly been large-scale projects, not easily adaptable to community control. Luz International provides an example; its large collectors feed power into a utility grid many miles away from most of its end-users. Other examples include large hydroelectric dams, "farms" of huge windmills designed to feed into electric utility grids and massive geothermal projects which tap the heat deep beneath the earth. Such projects provide greater energy security than conventional energy sources, but they do little to assist community empowerment or self-reliance.
And while large-scale renewable energy projects are environmentally safer than conventional sources, they frequently are environmentally damaging in their own right. Stories of damage done by large dams now come from every corner of the globe. Huge wind farms in California have killed large numbers of birds, including federally protected hawks and eagles; Montana residents are now bracing for a fight to prevent or limit windpower development in their state. Critics say that huge solar projects envisioned by large-scale solar advocates will dramatically alter fragile ecosystems. And on the island of Hawaii, indigenous people recently won a bitter fight against a proposed massive geothermal project which they said would have severely damaged their culture as well as the ecology of the island.
- Jonathan Dushoff
Research on applications of photovoltaics, which have shown potential use for aerospace technology, has been more warmly received - and subsidized - than other renewables. Despite U.S. Agency for International Development and multilateral lending agencies' promotion of fossil fuels and large-scale electrical systems in developing nations, photovoltaic electricity has found a tremendous market in the Third World, in part because of its compatibility with existing power grids. According to Peter Cowles, director of the Solar Energy Industries Association, the national trade organization of the photovoltaics and solar thermal manufacturers and component suppliers, "the U.S. photovoltaics industry sells over $300 million worth of solar technology, half of which is exported to the Third World."
Unfortunately, U.S. corporate control of solar technology exports does not encourage autonomous solar development projects within the countries that receive aid which requires them to purchase goods from U.S. producers. However, Third World access to solar resources is a positive change from the energy projects typically promoted by the lending agencies, including the building of tremendous dams.
Masat Izu, vice president of film technology at the Michigan-based Energy Conversion Devices Inc., says his company is optimistic about the "interest of the government and international funding agencies such as the World Bank" in photovoltaic technology. Energy Conversion Devices has covered all its bases, however, maintaining a contractual partnership with Pacific Gas and Electric and other utilities.