When the wind blows, not every wind turbine in West Texas will spin to generate electricity.
Electricity grid operators may order some wind farms not to contribute to the power network overseen by the Electric Reliability Council of Texas.
Reasons for doing so include congestion of transmission lines, with the massive transmission line networks being built in West Texas designed to reduce congestion and allow more power from wind farms to be delivered to the most urban areas in the state.
“We don’t curtail wind on the basis of price,” said Kent Saathoff, vice president of grid operations and system planning for ERCOT.
But the lower price of natural gas has led to a decline in wholesale prices for electricity – which can reduce wind farm revenue.
“I think it probably inhibits wind power development,” Saathoff said, noting that natural gas prices have dropped by more than 50 percent since 2008. “The wind generators would make more money if natural gas prices were higher.”
The market value of the wind farms and their tax contributions to local economies have declined recently, but the transmission line upgrade could change things, said Greg Wortham, mayor of Sweetwater and executive director of the Texas Wind Energy Clearinghouse.
Market values of wind farms in Nolan County zoomed from zero in 2001 to more than $1.9 billion in 2009, though tax abatement agreements put the taxable value at about $831 million.
With no new wind farms built recently, however, the county has seen those values decline by about 19 percent over the past two years.
“We’ve got both forces working. We’ve got normal depreciation, but we’ve also got a temporary situation where wind is less valuable. Once the transmission lines are finished … those projects are more valuable,” Wortham said.
The new transmission lines are expected to be completed by 2014 as part of the Competitive Renewable Energy Zone program.
Wortham said he expects existing wind farms to swell, explaining that stimulus funds are available if wind construction projects begin before the end of this year.
“It’s not conjecture,” Wortham said, though he declined to name specific projects that may be expanding.
As far as royalties, Wortham in 2008 estimated that Nolan County landowners receive nearly $12.3 million in royalty payments from wind energy operations.
Wortham said that he’s not sure how curtailment affects that estimate, noting that ERCOT officials with systemwide numbers and individual wind operations sometimes have curtailment estimates that can differ substantially.
He said he’s heard that a few landowners have received dramatically lower compensation than in years past. However, Wortham said he believes their concerns are tied to a single wind producer that sells power on a “merchant” basis.
Sellers can enter long-term power purchase agreements or take their chances on the wholesale electricity market without such an agreement.
During times of peak demand, prices can soar. But the yearly trend has been downward since 2008, falling on average to $34.03 per megawatt hour in 2009 from $77.19 per megawatt hour the year before. In 2010, prices remained low, at $39.40 per megawatt hour, according to information provided by ERCOT.
About so-called “merchant” plants, “at the beginning, they were making a lot of money,” Wortham said.
Now, he said the landowners receiving dramatically reduced payments appear to be an anomaly.
“Everybody else is just off a little bit. It’s going to get better,” Wortham said.
John Rutledge, a valuation consultant with Fort Worth-based Pritchard and Abbott, Inc., works with Nolan County appraisal officials to determine the market values of wind farms.
Wind operators rely on time-limited production tax credits and a five-year, producer-friendly depreciation schedule for their cash flow, along with the market value of the electricity produced.
“If you want to put it in a nutshell, it’s a third, a third and a third,” Rutledge said, adding, “Two-thirds of this is subsidized by the federal government in order for them to be competitive with fossil fuels.”
More transmission lines will help, but it’s “not the golden thumb” that will boost revenues dramatically as long as wholesale electricity prices remain low Rutledge said, estimating that production may rise by only 5 percent or 6 percent with CREZ lines in place.
As far as a link affecting royalty payments, Susan Williams Sloan, director of state relations for the American Wind Energy Association, a trade organization, pointed to the diversity of agreements between land owners and wind operators.
“I’m not sure you can make a blanket statement about how those (royalty payments) are going to be affected by higher or lower energy prices,” Sloan said.
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