Utilities don’t want to just buy wind power anymore. They want to own it.
Utilities for years were content to buy wind power from independent producers. Now the utilities want more of the windfall from that power themselves.
Utilities are increasingly buying wind-energy plants from independent producers – either paying top dollar for wind farms that are ready to generate power, or purchasing plants under construction or still in the planning stages.
“People who used to buy our power, now they want to buy our project,” said Michael Skelly, speaking at an industry conference in October. Mr. Skelly at the time was chief development officer for Horizon Wind Energy, a unit of Energias de Portugal SA and one of the largest wind developers in the U.S. He has since resigned that post and is running for Congress as a Democrat in the 7th District of Texas.
Wind, one of the cheapest sources of large-scale renewable-source energy, has been the primary choice of alternative energy for utilities. But until recently, utility companies generally have preferred to buy that power through long-term power-purchase agreements rather than take on the risk and expense of building and operating their own wind farms.
Advantages to Utilities
Utilities use several arguments in favor of ownership: that owning wind farms costs just as much per kilowatt hour as buying wind power from independent producers, and provides long-term savings; that the utility companies are better able to manage the mix of power sources on their grids; and that savings will be passed along to consumers in the form of lower rates, and to shareholders in higher earnings.
Critics of ownership, however, include some large independents who aren’t interested in selling, and regulators concerned about rising rates. They argue that when utility companies buy wind farms, their ratepayers have to carry risks and any extra costs – burdens the critics say are better borne by the independent producers. Indeed, some independents insist they can still deliver power more cheaply and reliably than the utilities can generate it themselves.
Wind farms owned by utilities are still just a fraction of total wind-power installations. But in 2007, utilities added about 795 megawatts of new wind power in the U.S., up from 553 megawatts in 2006, according to the American Wind Energy Association, Washington, D.C. Currently, at least 10 utilities own functioning wind farms in the U.S., and at least five others plan to buy wind farms, including Alliant Energy Corp., Xcel Energy Inc. and Westar Energy Inc., which each last year proposed to build their first wind-power projects.
A combination of forces is behind this push by utilities. At least 24 states now require utilities to use a certain amount of renewable sources of energy, and proposals in Washington for caps on carbon emissions are prompting the use of more alternative power sources. Meanwhile, the cost of purchasing wind power from independents is rising. Ownership promises some relief from costs the utilities can’t control.
“The way to absolutely ensure lowest cost is to control the resource,” says Adam Umanoff, a partner at the international law firm of Chadbourne & Parke LLP, which represents investors, developers and utilities.
Alliant, based in Madison, Wis., supplies electricity to customers in Iowa, Minnesota and Wisconsin. Late last year, it bought an undeveloped wind-farm site from Wind Capital Group LLC, an independent producer based in St. Louis. The project, which will go online by 2010, will produce up to 200 megawatts of power a year.
Owning the asset will yield savings for Alliant in several ways, says Michelle Arenson, manager of wind-energy development. There might be times when it is more efficient to draw on coal-fired power than on wind, she says. But if the company has a PPA with a wind farm, it’s locked into buying wind-generated power whenever it’s available. She adds that PPAs are getting shorter and more expensive. When Alliant owns its own plants, she adds, it can also seek to improve their efficiency by using weather forecasting and other technology.
Xcel in December asked developers to build 500 megawatts of wind projects in Minnesota that it promised to buy once construction is finished. The projects are expected to be operating by 2012. Minneapolis-based Xcel figures that owning the projects will reduce its exposure to future price increases and reduce the company’s debt, says Mark Stoering, vice president for portfolio strategy. PPAs are treated as debt, he says, which can lower Xcel’s creditworthiness and increase its financing costs.
The state of Minnesota has been tough with renewable-energy mandates, requiring utilities to get 25% of their power from renewable sources by 2025. But the state also has eased the way to recover costs of wind investments, allowing Xcel, for instance, to pass the cost of buying a project to its ratepayers without following a standard rate-increase procedure, Mr. Stoering says.
Regulators in other states have been more cautious about providing incentives for utilities to own wind power. In Kansas, Topeka-based Westar plans to add about 295 megawatts of wind-generated power this year – about half of it from projects it will own. The Kansas Public Utility Commission approved a standard 8% rate of return on Westar’s investment in the new projects. But it denied an additional 1% rate of return the company had sought as an incentive for investing in newer, higher-risk technology. The utility responded by suspending plans for adding 200 megawatts of wind power by 2010, half of which was likely to have come from plants the utility owned.
David Springe, consumer counsel at the Citizens’ Utility Ratepayer Board in Kansas, says the incentive would have added about $50 million to electric rates over the next 20 years. Further, he says, owning wind assets is too risky for a public utility. With a PPA, he says, the public can be assured of a fixed price over more than a decade. But if a utility owns a wind project, he says, customers would pay the same price whether the project generates energy or not, and they would have to pay for repairs.
Westar calculates that over the 20-year lifetime of its proposal, ratepayers pay about the same for owned or purchased wind power: about $443 million for the former; and $434 million for the latter, according to documents filed with the Kansas Corporation Commission.
Not all independents want to sell their plants, largely because the profit and growth prospects are good. Another motive for not selling: many have investors who like the tax breaks generated by producing alternative energy. If the independent ends up not producing the energy, its investors are likely to lose interest.
Large portfolios of wind farms also give big independent producers a way to balance riskier energy-production with higher returns in one area with more reliable PPA-type deals elsewhere.
Independents insist they offer cost and efficiency advantages, too. A few of the larger producers have wind farms around the country, so if one year isn’t windy enough in one area, the producer can draw power from locations that exceeded expectations. Independents also say most of the best locations are taken, so utilities are paying top dollar to buy them out. Further, in the tight market for wind turbines, they say they can get better prices than utilities due to the long-term purchase contracts independents have.
Utilities argue that PPAs aren’t as secure as the independents claim, and that utilities have their own long-term relationships with turbine makers, who provide them with gas and steam turbines as well.
There are independents happy to sell, especially smaller ones that find it difficult to compete with larger rivals. Wind Capital was pleased with a sale it made to Alliant last year. The price was “very competitive and certainly market price,” says Dean Baumgardner, senior vice president at Wind Capital. Nevertheless, it was a painstaking process. “Utilities have the public and regulators looking over their shoulder,” he says. Alliant has since bought the adjacent site to Wind Capital’s wind farm.
By Yuliya Chernova
–Ms. Chernova is a reporter in Jersey City, N.J., for Clean Technology Investor, a newsletter published by Dow Jones & Co.
11 February 2008
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