Renewable energy generation projects are viable when the revenue generated from selling the power is sufficient to cover the initial cost of the project development. Typically, the only place to sell power is to the electric utility that buys the power at their incremental cost of producing power, and then sells it at their standard retail rates.
Renewable energy producers could make significantly more revenue by instead selling their power directly to an energy consumer. In a deregulated environment, the energy is transported on the utility’s transmission facilities and the producer is required to pay transmission costs. This is possible in a few states where energy is still deregulated. However, in the vast majority of states, this is not possible.
As an alternative, one can co-locate the energy consumer with the energy producer. Here, the utility is completely removed from the equation. The two entities can both benefit from the lack of regulation, overhead and third party profits that the utility represents. In general, states have provided utilities with a monopoly on selling power on a kwh basis from one independent entity to another, regardless of co-location however, this rule has been circumvented for years by either 1) selling the power as part of a larger package that does not include a per-kwh rate or 2) the parties taking a financial stake in one-another sufficient to be considered an “internal” transfer of energy from different parts of the entity.
By using these techniques, renewable energy producers can see much higher profits, and projects that previously were not viable can now be considered.
There is a current “distortion” in the market in some states, where renewable energy credits are given to new producers of renewable power. These credits can be so lavish that the revenue from selling the power to the utilites is actually greater than the retail utility rates. Clearly in the short term, it is simply better in those cases to simply sell to the utility, however it is generally recognized that this is a short-term phenomenon – having a local retail customer insulates you from the vagaries of government incentives and provides a long-term revenue stream
For more information contact steven <dot> warwick <at> innovationscommercialization <dot> com