The risks in renewable portfolio standards.
State-mandated renewable portfolio standards (RPS)-which set measurable requirements for regulated investor-owned utilities to include renewable energy projects in their portfolio-are being adopted across the country to facilitate the development of renewable energy projects. Nineteen states have enacted renewable portfolio standards (), but significant barriers remain to fulfill the potential of RPS. The U.S. Department of Energy estimates that up to 100,000 MW of wind power-about six percent of the U.S. electricity supply-could be running by 2020.1 Note that FERC Order No. 2003 addresses needed changes in wholesale market rules to accommodate the interconnection needs of wind generation. But will RPS actually result in a substantial amount of new project construction?
Challenges to Realizing RPS Objectives
In its technical conference on impediments to wind development, FERC staff outlined some of the key challenges facing wind development within the context of RPS.
RPS and production tax credits are driving the development of wind energy. The primary drivers for wind development today are the regulatory and tax credit policies adopted by the states and federal government. Whether those policies are sufficient to realize the potential of wind energy depends upon working through the technical, operational, logistical, and practical issues associated with integrating non-dispatchable wind energy and other renewables into a regional or utility resource portfolio. State RPS and state renewable energy credits require load-serving entities to purchase defined target amounts of energy from renewable resources. But making the projects viable, reliable, and economic is a key challenge. Will wind projects be "in the money"? To get financing, any project, including wind development, must be able to demonstrate that the project is viable and will produce revenue sufficient to cover its costs and earn an acceptable return. Projecting revenues for wind generation is more difficult than for typical generation sources, due to higher variability of production. Financings typically have required power purchase agreements for the full output of the facilities. Overlooked in most early power-project finance deals, transmission issues (, the intermittent nature and distance from load) have become a focus as investors recognize the importance of locational factors (such as transmission service ) in completing a project "in the money" (). The hassles of connecting to the grid. Regional transmission grids were developed largely to accommodate generators that are dispatchable and to improve grid reliability. In addition, the locational factors associated with wind projects (good wind is not found everywhere) means that often the best locations for wind generation have limits on available transmission, face pancaked rates to get the energy to market, and don't receive any capacity value recognition because of the lack of dispatchability under traditional grid rules. Wind generation never will be able to maximize its use of reserved transmission capacity due to its intermittent nature. To realize the potential of wind energy, wind will have to be treated differently under grid rules. The cost of being different. When a wind generator in a "good wind" location needs to move that energy to utilities eager to buy renewable energy, the wind generator often pays more to buy firm transmission (on a per-unit basis) because of the low capacity factor typically found in wind projects. The project may incur multiple transmission charges when delivering to load. These added costs of delivering wind energy are further complicated by pricing formulae that affords no capacity value to the wind generator because the unit is not dispatchable. open access tariffs limit wind generation's ability to compete in electricity markets. Industry norms for calculating transmission losses, scheduling imbalance penalties, and reservation requirements for transmission service conspire against wind projects and limit their competitiveness under traditional grid rules. Will RTOs treat wind energy differently? Organized markets operating under RTOs have the opportunity to create a more hospitable environment for renewable energy-especially wind-by removing some of these impediments to wind development. When combined with the obligations of RPS from the states, we will see some changes in grid rules to accommodate and facilitate wind development and other renewables. RTOs and ISOs can remove pancaked rates, allow scheduling flexibility, and create real-time imbalance markets to realize the desired results. FERC hopes these organized transmission markets optimize the potential for renewable energy's access to transmission capability and facilitate rules and other changes to enable renewables to be in the money. Without an RTO or ISO, state pressure is required. Outside of RTOs and ISOs, renewable projects must find an accommodation with the regional utility players and help them achieve their RPS or other objectives. If the local utility is not interested in the project, getting the cooperation needed to enable it will require substantial pressure from the state regulators. Nonetheless, when the parties are willing to deal, the local utility can offer transmission and other services such as conditional firm, curtailable firm, priority non-firm, and hourly firm to enable wind generators to improve their opportunity for access to the grid. Utilities also can help reduce imbalance penalties and find ways to allow wind resources to contribute to regional reserve requirements and capacity markets ().
RPS, when combined with federal and state tax credits, has created a powerful driver for renewable energy, even in today's overbuilt power generation market. Whether wind generators and other renewable developers can overcome the practical, logistical, and regulatory impediments to getting their projects built and in the money remains a challenge.
Understanding the regulatory rules and expectations in a given utility market is the surest way to a satisfactory outcome.
RPS are all crafted as compromises in their applicable states, so wind developers need to be as skilled as their local utility in understanding and adapting their plans, project characteristics, and business relationships to optimize the chance for success under the RPS and state and federal credit programs.
1. Presentation of Deputy Secretary of Energy, Kyle McSlarrow, at Global Windpower 2004, Chicago, March 24, 2004.
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