Wind Goes Hollywood

Deck: 

The spotlight is on. But true stardom will require more direction from utilities.

Fortnightly Magazine - July 2007

It’s the story of a once scrappy, underappreciated technology—the ignored younger sibling that must fight hard for respect from its older brother, the traditional utility industry. Wind has become today’s hit—a potential blockbuster, even—but still needing that one big break.

That’s why it was fitting that the American Wind Energy Association (AWEA) would hold its annual conference in Los Angeles, a place where thousands of aspiring stars flock each year, in hopes of being discovered.

The recent June conference, “Growing the Wind Business,” attracted some 7,000 attendees and nearly 420 exhibitors. Many were seeking fame and fortune in the burgeoning wind business, said by AWEA to be growing at an annual rate of 25 percent to 30 percent. Heady stuff, even for a starlet.

Moreover, with President Bush’s declaration in the 2006 State of the Union address that wind could provide 20 percent of electricity in the United States (versus today’s share of 1 percent), the wind industry might be forgiven for believing it has arrived. Clearly, 20 percent is practically on par with other major energy technologies. In fact, preliminary results released at the conference from an AWEA draft report said that the 20-fold increase in wind power (the equivalent of between 300 and 320 GW) could be reached by 2030. This figure was repeated often throughout the conference—more of a chant than mere statistic.

Meanwhile, Congress is trying to hash out an energy bill that extends the production tax credit or imposes a national renewable standard that would require utilities to obtain at least 15 percent of their electricity from renewable resources—wind, solar, or geothermal—by 2020. At press time the debate still raged between Sens. Pete Domenici and Jeff Bingaman on how high to set the standard and whether electricity from nuclear power plants, hydropower, and electricity saved through conservation could also be considered as part of meeting the standard.

Whether such legislation would be passed this year or next—some expect climate legislation in the next few years—utilities will have to contemplate becoming major operators of wind power in a way that would be unprecedented, even by current standards. But making the challenge even greater, many conference speakers acknowledged, is that wind power is anything but ready for a 20-fold increase. Super-stardom of that caliber will prove elusive, they say, until transmission integration and policy issues are resolved, as well as utility balance-sheet issues.

Ownership Has Its Privileges

For wind power to make it big, utilities will have to lead the charge as owners. That will force utilities to consider and evaluate the significant credit implications that can arise when signing a power purchase agreement (PPA) with developers that lack deep pockets, or implement fly- by-night schemes.

As many recall and would like to forget, during the credit crises of the early 2000s, utilities signed PPAs with energy traders that eventually went bankrupt, causing downgrades for some utility bond ratings and major disruptions to normal utility operations when counterparties failed to fulfill their obligations. Suddenly, as recited in dozens of cases, utilities had to go out on to the open market and pay the spot price for power, which often was many times the contracted price, causing customer rates to rise. In fact, just two years ago, a California utility executive, on the condition of anonymity, recounted how his company’s CEO was worrying about how the state’s renewable mandates were attracting all kinds of get-rich-quick schemes. One strategy called for the utility to agree and sign the PPA first. That way, the project developer could take the agreement to the bank in search of financing—seed money that would not have been forthcoming otherwise.

“It got so bad that we would not allow people into the building unless they had a project that was already built or they had a project with its own separate financing and independent proof of the project’s viability,” the utility executive said.

Paul J. Bonavia, president of utilities group of Xcel Energy Inc., at an AWEA press conference, explained the problem further.

“The issue for us,” he noted, “is when we enter into long-term [PPAs], ratings agencies typically attribute a portion of that commitment as debt on our balance sheet. That winds up increasing our cost of capital, and ultimately affecting our financial health.”

Bonavia added that Xcel Energy was trying to achieve the right balance between ownership and contracting of wind power. Of course, as a utility owner/developer, and given Xcel Energy’s sizeable balance sheet, the utility would be a more attractive counterpart to other utilities that may want to contract for wind power.

Moreover, credit issues may be but one reason why utilities have not become more involved with wind energy. The industry’s main focus as of late has been on larger base-load projects. To date, FPL Energy, Xcel Energy and Mid-American have become the major wind players among utilities. But if a national renewable standard or climate legislation were passed, the list would lengthen quickly.

In fact, climate-change proponent Duke Energy in late May acquired the wind-power development business of Texas-based Tierra Energy. The purchase includes more than 1,000 MW of wind assets under development in the Western and Southwestern United States. But inadequate or unavailable transmission to integrate wind remains a problem with no quick solutions. And to make things worse, the aggressive policies favoring renewables in some states (such as California) may actually hinder greater regional transmission development, as states fear losing control of their green resources.

The Wires Wars

On May 30, the Arizona Corporation Commission stunned many industry watchers when it rejected a plan by Southern California Edison to build a high-power transmission line from a switch yard near the Palo Verde Nuclear Generating Station west of Phoenix to a switch yard near Palm Springs, Calif. The project was intended to bring electricity produced at natural-gas-fueled power plants near Palo Verde to Southern California. An attorney familiar with the proposal said the rejection was a surprise, as only a small portion of the line passed through Arizona. But Arizona commissioners believe this was a “power grab” on California’s part. “We don’t want any process leading to Arizona becoming an energy farm for other states,” said Commissioner Kris Mayes, in press reports.

In fact, Walter M. Higgins, chairman and CEO of Sierra Pacific Resources, expressed his concern over California’s renewable-transmission tariff policies a few months ago at a conference on mergers. “In Nevada,” he warned, “we are particularly scared.

“Like the scene in Men in Black where the wicked witch is sending tentacles out into neighboring areas to hurt things, we are a little worried that California may see this transmission tariff as the way to reach in and grab renewables [from neighboring states].”

In a follow-up e-mail interview, Higgins added: “It seems quite clear that California intends to reach into Nevada to access renewables to meet their lofty targets. The effect of that will undoubtedly be to make renewables more expensive for Nevadans. Already, the costs of new renewable projects are higher than we would have expected. This is true worldwide for wind, but now we are seeing it for upcoming geothermal projects.”

Let us hope the Western states and other parts of the country will be able to settle their renewable differences in an equitable manner. Their efforts will make the difference between wind being a bit player on the energy stage, or the star of the show.