National Grid (an American electric utility) recently released their highly progressive “Northeast 80×50 Pathway.” It’s a blueprint that will dramatically reduce greenhouse gas emissions. This is the first such initiative announced by a utility in the Northeast United States and demonstrates the company’s commitment to a clean energy future. The plan will slash greenhouse gas emissions to a level that will be 80% below 1990 emissions by the year 2050. How will they achieve this objective? There are three key measures: adding renewable power generation capacity such as solar, improving energy efficiency by converting buildings away from oil heat and promoting the expansion of the electric vehicle market. These three measures executed together will help win the fight against climate change and should serve as an example for other utilities that have not yet devised a plan to cut carbon emissions.
What does National Grid’s 80×50 Pathway mean for the renewable energy sector? It’s definitely good news because more projects will be developed in the Northeast. Note that state governments in the territories where National Grid operates are also pushing for a major increase in renewable energy capacity by increasing their Renewable Portfolio Standards.
Is solar investment in the Northeast region of the United States profitable? The short answer is – yes, it’s the most profitable solar market in America. The main reason for this is the fact that states such as Connecticut and Rhode Island have the highest electricity rates in the continental United States – and that means that the rates at which investors bid for Power Purchase Agreements (PPA’s) with electric utilities in the Northeast are generally higher than other regions, such as the Southwest. For example, a 20-megawatt PPA in Connecticut might get $.07 per kilowatt hour, vs. $.03 per kilowatt hour in Arizona. Even after adjusting for higher land and labor costs, the Internal Rate o Return (IRR) of the Connecticut project beats low-electricity rate states such as Arizona by a wide margin.
The gargantuan task of cutting carbon emissions to fight climate change will require action on multiple fronts. Electric utilities like National Grid are stepping up with plans such as their recently announced 80×50 Pathway. Some state governments are also taking initiative by requiring more renewable energy to be built in their respective locales. Institutional investors are providing ever-increasing amounts of capital as the economics of solar and wind investment continue to improve. Investing in utility-scale renewable energy projects is very similar to investing in fixed income securities. Most solar projects are backed by “credit offtakers.” That means that electric utilities, which generally have a Moody’s rating of Baa1 or higher, are buying the electricity under a fixed 20-year contract. As investors realize that the return on solar can be 200-300 basis points higher than U.S. corporate bonds of similar duration and risk, we should expect to see increasing demand for solar investments.
The current environment will promote a virtuous cycle of investment in renewable energy, where the interests of electric utilities, state governments and institutional investors are fully aligned. Hats off to National Grid for helping to lead the American renewable energy revolution!