Charged up

FROM THE JULY ISSUE: Is it the right time for ethanol producers to consider going solar?
By Patrick C. Miller | June 19, 2017

From an economic perspective, now might be the time for ethanol producers to consider installing a solar array to generate electricity for their operations. But from a technical perspective, producers also should be aware of the challenges.

Nicholas Franco is the director of sustainability for the Kinect Energy Group in Plymouth, Minnesota. The company serves about 40 percent of the U.S. ethanol industry by assisting producers in obtaining electricity and natural gas at the lowest prices possible.

Kinect Energy has conducted studies and financial modeling for some of its ethanol clients on how they could use adjacent land to build a solar array for electrical generation. Based on his company’s work, Franco sees a number of motivations for producers to take a serious look at solar energy, ranging from reduced solar equipment costs to regulatory changes to tax incentives to hedging against future power cost increases.

“I don’t see anything on the horizon that’s a big negative for the ethanol industry for solar,” he says. “You can approach solar from a number of perspectives: It’s helping you lower your carbon intensity and it’s helping reduce your input price volatility on the electricity side. Prices are going to keep falling because it’s an international market, not a U.S. market in terms of the prices of the components that go into it.”

Lyle Olson, a retired mechanical engineer in Le Sueur, Minnesota, has an MBA and more than 50 years of experience in helping industrial and commercial clients improve their manufacturing processes. He’s currently working as a consultant with a Minnesota ethanol producer studying whether solar energy makes sense for its plant. Olson believes ethanol producers should consider solar energy for another reason.

“If you really believe in renewable energy, why aren’t you using renewable energy to make renewable energy?” he asks. “If you really want to have an environment for future generations to live in, the ethanol industry should look at everything it does and ask whether we’re doing it the best way.”

But Olson also firmly believes ethanol producers who want to incorporate solar energy into their operations should fully understand the technical issues involved and potential problems. They also need to understand the difference between what solar vendors want to sell and their plants’ needs, he says.

Economic Incentives
On the economic side of the equation, Franco says two regulatory standards should make solar energy more attractive to ethanol producers.

“California has a low-carbon fuel standard that’s based on the carbon intensity of the ethanol you produce,” he explains. “The lower the carbon intensity of your ethanol, the higher premium you can get for selling into that market.”

For ethanol producers that want to sell in the California market, the financial incentive is to earn a lower carbon intensity score. Franco says the key questions are: how much does each megawatt of solar energy generated reduce a plant’s carbon intensity; and how does this translate in terms of a premium for ethanol sold in California?

“Over the past year or year and a half, we’ve had maybe five or six clients who have been serious in terms of investigating solar and paying us to do a study for them,” he says. “We did some modeling for one about the carbon benefit. We showed them the payback just for power price and for the carbon reduction benefit, as well.”

The other incentive is the Renewable Fuel Standard, which initially set a carbon intensity level while grandfathering in existing ethanol plants. Franco says that if those plants can use solar energy to show they’ve reduced their carbon intensity to meet the current standard, they can produce RINs above their grandfathered level—the renewable identification numbers used by obligated parties to demonstrate compliance with the RFS.

“The difference between the two programs is that in California, it’s a sliding scale in terms of carbon intensity reductions,” he notes. “In the Renewable Fuels Standard, there are step reductions. If you’re 20 percent below the standard, that’s the first step. The next (for advanced biofuels) is 30 percent and then 50 percent. You don’t get any benefit at being between 30 and 50 percent. If you’re 40 percent, you haven’t hit that next threshold and there’s not a lot of financial value. You need to move those step changes to increase the value in terms of your product.”

Ethanol producers also are looking at solar energy as a hedge against rising electricity prices because all the costs are upfront.

“Once you’ve paid for it, there are ongoing [operation and maintenance] costs, but they’re very small,” Franco explains. “You’re essentially generating electricity with no fuel cost. You’ve locked in a fixed price for your power now. As utility power prices increase, you have a hedge against those rising prices. You’re not experiencing as much volatility as you otherwise would.”

Another economic factor Franco says producers should consider is the large federal tax incentive for solar energy, which is currently 30 percent until 2019. In 2020, it will drop to 26 percent, 22 percent in 2021 and then 10 percent in 2022.

“The other big incentive is accelerated depreciation,” Franco notes. “Solar’s a 25- to 30-year asset. Right now, you can depreciate it in five years. You can get a huge chunk of money back upfront with a 30 percent tax credit and that accelerated depreciation. In 2017, not only can you depreciate it over five years. There’s currently a bonus depreciation. You can write off 50 percent of that in the first year.”
Because of international competition in the solar energy marketplace, Franco says the cost to install solar energy is falling. “Technology is marching on and the panels themselves are about 40 percent of the cost,” he explains. “What’s been driving them down is just a huge oversupply of the market. China, at one point, had been subsidizing the development of their industry. A couple years ago, the statistic was that there’s three times as much manufacturing capacity as there was demand. With that kind of oversupply, you’re seeing incredible price pressure.”

The payback time on the capital investment for solar energy is an aspect of concern to the ethanol industry, but Franco says the industry’s expectations are more reasonable than others.

“Some of our manufacturing and commercial and industrial clients want to see paybacks in two years or a year and a half, which is really hard to do for almost anything,” he says. “Ethanol plants are usually okay with five, six or seven year paybacks.”

But Olson says he has found payback and financing to be major issues. “Ethanol plants, if they’re well-managed, like to get their investment capital back in three years or less, and it’s pretty hard to do that with solar power,” he says. “It makes it a tougher sell.”

Franco and Olson agree that when it comes to solar energy, one advantage the ethanol industry has is a plant’s electrical demand is relatively flat compared with other commercial and industrial operations. Solar’s ability to produce power during an ethanol plant’s peak electrical demand also makes it an attractive option.

“I’ve done studies on a couple of ethanol plants that looked at their demand history,” Olson says. “There’s usually a peak sometime around midday, which is ideal for solar production. In the summertime, you can have solar production starting as early as 6 o’clock in the morning and go to as late as 8 at night. In wintertime, your solar production goes from 9 in the morning and to 3 or 4 in the afternoon.

“Regardless of the time of year, the solar production should coincide with the peak consumption period,” he adds. “You have to confirm that to make sure you’re going to get the right benefit from solar.”

Integration Education
In advising ethanol plant managers, Olson says it’s important for them to understand in detail all aspects of their plant’s power consumption and the potential pitfalls of adding a new electrical source to their facility. He refers to it as an educational process.

“Solar generation has to be looked at very specifically as to how it’s going to be connected into the plant without a disruption of the plant and a loss of production, and that’s not the way solar developers like to look at things,” he cautions.

Before deciding to incorporate solar energy into their operations, Olson says ethanol plant managers should understand the difference between what they need and what solar vendors want to sell them. He compared it to buying a car.

“You know what you want, but the sales person knows what he wants to sell you,” Olson laughs. “The car dealership’s philosophy is that we have to sell what we have to sell. My philosophy in doing 50-plus years of process modifications and changes is that I will buy what we know works best for us.

“The experience I’ve had with solar generators is that they’ll say, ‘We’ll just plug it in.’ Well you just don’t plug it in,” he continues. “If you have a big solar array, you can’t generate a couple of megawatts of 480-volt power and find a place to connect it. That kind of connection requires the plant to be shut down for a day or two to make it happen.”

Olson also understands that ethanol plants are designed to operate like finely tuned machines. Introducing a new element such as solar generation sometimes means the plant has to be re-tuned or it might create new problems. For example, there can be issues with software or with harmonics in the variable frequency drives (VFD) of large electric motors, causing them to overheat or short out. “What can solar generation do to harm harmonics?” Olson asks. “I’ve talked to electric professors and electrical engineers. Everybody has a guess and a comfort zone with what should happen, but we don’t know.”

For these reasons, Olson advocates starting small with solar power and scaling up to larger operations over time. “You don’t have to swim the English Channel to prove you can swim,” he notes. “There’s a certain amount of merit to looking at a small-scale installation. Let’s take the first step, learn from it and then we’ll be a lot smarter in planning the next steps.”

In addition, Olson believes adding solar generation over a period of time can fit in with an ethanol plant’s normal operations. “A well-run plant has at least a five-year capital plan to keep updated,” Olson says. “As plants age, equipment needs to be replaced, but they also have to look for ways to reduce manufacturing costs or to get more product out for the same cost. Good business folks are going to buy what they need when they need it, see how it works out and see if they want to buy more.”

Olson is optimistic about the future of solar power in the ethanol industry, although he believes it could take years to realize its potential. “I think the solar field is where ethanol was years ago,” he explains. “Henry Ford once said, ‘You can have any car you want as long as it’s black and it’s one I make.’ Solar power is that way now. We’re getting into an interesting part of the learning curve. We need to see a few ethanol plants have some success with them and some good PR coming from them. Then the merits and the economics will prove themselves and people will be doing it.”


Author: Patrick C. Miller
BBI International Staff Writer
701-738-4923
pmiller@bbiinternational.com