Will taxes halt Calif.'s solar thermal ambitions?

California has been on the forefront in the U.S. for promoting alternative energy, but a tax code provision could put the brakes on a big part of the solar push.

The state gives real estate tax exemptions to companies developing solar thermal power plants, sprawling power plants in the desert that can occupy hundreds of acres. The exemptions end in 2009.

The assembly has already introduced a bill that would extend the exemption through 2016. It is expected to go through the senate and reach the governor's desk next year. Gov. Arnold Schwarzenegger has packaged himself as a green politician--he's even converted one of his Hummers to run on biodiesel.

Eventual approval looks feasible, but the state is stuck in a budget morass and is debating a number of proposals along with the solar property tax exemption. Thus, solar thermal companies are holding their breath.

If the exemption isn't extended, solar thermal companies say they will have to raise the price of electricity they sell to utilities or postpone construction projects. A failure to extend an exemption in the early 1990s killed a budding solar thermal industry in the state.

"For any solar thermal plant, the property tax is in the millions of dollars per year. It could put a project underwater."

--John Woolard, CEO, BrightSource Energy

"For any solar thermal plant, the property tax is in the millions of dollars per year. It could put a project underwater," said John Woolard, CEO of Oakland's BrightSource Energy, a solar thermal company. "It could make a lot of projects unfundable. It could stop everything--or utilities could end up paying different prices. Ratepayers might pay more. Who knows?"

Robert Fishman, CEO of competitor Ausra, estimated that the end of the exemption could add $5 million to $6 million to the company's operating costs.

"It would add to the price of the power we are going to sell," he said.

An even bigger problem lies at the federal level, Fishman added. The House of Representatives passed a bill that would provide $21 billion in tax credits to the renewable industry and require utilities to increase their renewable portfolios to 15 percent. The Senate, however, rejected it, putting the credits in limbo. Ausra is also building a large power plant in Florida.

The controversy comes at a time when California and private investors are actively encouraging solar thermal technology. BrightSource, for instance, is currently in the planning stages for building a 400-megawatt solar thermal plant in central California, while Ausra is building a 177-megawatt solar thermal plant in the state and will expand beyond that. Ausra's 177-megawatt plant will occupy 640 acres. The company wants to build a gigawatt worth of plants across the U.S.

Stirling Energy Systems is also building a solar thermal plant in California. And Solel generates power out of a 354-megawatt solar thermal plant that was installed several years ago in the Mojave Desert and has plans to expand.

Google recently said it will plow money into eSolar, a company founded by Internet entrepreneurs that plans to build a solar plant.

Solar thermal power plants collect heat from the sun with mirrors and channel that heat so that it will ultimately generate electricity. Many venture capitalists, entrepreneurs, and scientists from the national labs believe that solar thermal can generate electricity more economically than solar panels or other alternative energy concepts. In fact, if the solar plants are large enough, the plants can compete with traditional natural gas plants and possibly even coal.

Utilities such as Pacific Gas & Electric are interested in solar thermal because California has mandated that they must get 20 percent of their power from renewable resources (not including hydroelectric). PG&E currently gets 12 percent of its power from renewable resources and has signed contracts to bring the total up to 18 percent. A lot of that power under contract, however, comes from solar thermal. Ausra signed a contract with PG&E, for example.

Although solar thermal is close in cost to some forms of conventional electricity, a bobble in operating expenses could send it the other way. Property taxes would probably add about a penny per kilowatt hour to the cost of solar thermal electricity. Conventionally generated electricity ranges between 5 cents and 18 cents per kilowatt hour (the amount of money to get a kilowatt of power for an hour) but in most places it's below 10 cents, according to the Energy Information Agency. Solar thermal costs around 15 cents to 17 cents a kilowatt hour.

More importantly, the status of the subsidy clouds the economic picture. These plants cost millions of dollars and will run for more than two decades.

"If people aren't sure the exemption is going to be there, they won't finance the plant," BrightSource's Woolard said. "The one thing that is certain is that it would introduce rampant confusion and stop every project for a while."

It's happened in the past. In the '80s and '90s, California was a leader in solar thermal technology. Luz, an Israeli company, was building the existing plants in the Mojave Desert under a state program that granted real estate exemptions. The Senate and Assembly passed an extension in the early '90s, but then-Gov. George Deukmejian vetoed it on his last day in office. Construction halted.

Luz continued to work while the next governor, Pete Wilson, worked on an extension. Luz ran out of money before Wilson's exemptions went into effect. Luz has now been reborn as BrightSource.

Most investors and alternative energy advocates admit that subsidies and exemptions eventually do have to end. "I don't think any one of us has plans for investing in companies that need subsides long term," said Ira Ehrenpreis, a partner at Technology Partners.

Nonetheless, they do help jump-start an industry. Government incentives in Germany, Japan, and some states in the U.S. effectively caused the boom in the solar panel market. (Solar panels also generate electricity from the sun, but in a different way than solar thermal plants.) Oil companies also benefited enormously from credits issued to them in the early 1990s.