Solar and wind ‘to benefit most’ from California renewables mandate

But the short lifespan of such assets is one risk investors should consider, a report by S&P Global Ratings warns.

Investments in solar and wind in California have the highest growth potential among renewable energy assets after the state’s governor, Jerry Brown, set a 100 percent clean generation mandate for 2045, S&P Global Ratings said in a recent report.

There are going to be winners and losers from that shift, S&P claimed, with mainstay renewables sectors solar and wind poised to benefit the most. The ratings agency found the outlook for those sectors to be “mostly favourable” as the technology to build such assets increases capacity as well as reliability while development costs continue to fall. Project financing is easily attainable for solar and wind projects in California today, the report stated.

However, there are unsettled risks with those sectors as well. According to S&P, one of the biggest decisions asset owners will have to make is whether to repower or replace a solar or wind farm, which typically has a 20-year lifespan. The deployment of battery storage alongside solar and wind could benefit those assets, but S&P finds that unknown factors regarding how those projects are financed and the cost effect on generation creates uncertainty.

“While these two asset classes represent the overwhelming majority of progress in renewable installation in California so far, we believe we’ll need to see further developments in battery storage over the next decade for this progress to continue,” the ratings agency stated in its report.

S&P also noted there is no consensus approach to financing distributed generation, specifically for solar, which could enhance credit risk and hamper investments.

The “most substantial benefits” of California’s renewables-only mandate will affect hydroelectric and geothermal generation. The long lifespan of these assets – some US hydro plants can last more than 80 years – gives them an advantage over solar and wind. What will likely restrict these assets from being California’s main renewables source is the high cost to build them. Hydro, in particular, faces questions about reliability during drought years.

It’s no surprise that the loser in all of this will be gas-fired power plants, which account for 33 percent of California’s generation, according to S&P. While these plants won’t shutter overnight, the ratings agency states “there is near-market consensus that new gas-fired capacity is impracticable at this point”.

Economics and technology are eating away at gas-fired plants’ market share, S&P noted. Falling power prices are making their generation too expensive and batteries are reducing their role as a grid stabiliser. The ratings agency believes gas-fired plants in California will go the way of coal, which hasn’t been used in the state for years, and nuclear, which will be turned off for good in 2024.