Iberdrola Renewables started construction this week on the El Cabo wind farm in New Mexico, but it’s far from certain when the massive project will be finished.
The design calls for hundreds of turbines that would generate as much as 1,000 megawatts in Torrance County, about 75 miles southeast of Albuquerque, but the company can’t today guarantee it will hit that milestone – with unspecified “late stage development activity” yet to be completed. Nonetheless, construction had to begin this month to keep the project alive.
“The challenge is – as with every big project like this – there’s multiple parallel processes going on,” said Jesse Gronner, the Oregon-based company’s vice president for business development for the western United States. “So we’re left with being in a position of doing things slightly out of order.”
That’s just one consequence of new rules this year to determine eligibility for the production tax credit (PTC), the federal incentive that’s key to determining whether a wind farm can sell electricity at an attractive price. As long as developers begin working on projects by Dec. 31, they’ll have at least two years to remain eligible for the lucrative subsidy.
While the situation has modified the typical development process in many cases, it also has provided some breathing room for an industry facing the loss of its prized incentive – at least in the near term. The industry’s main lobby, the American Wind Energy Association, continues to argue that at least a few more years are required for the PTC, but conservative opponents have equally amped up their efforts to ensure the credit does not return.
Senate Finance Committee Chairman Max Baucus’ impending appointment as U.S. ambassador to China will further focus Congress’ attention on temporary provisions like the PTC, collectively referred to as “tax extenders.” The Montana Democrat had been consumed with his push for comprehensive tax reform – and just yesterday introduced a radical proposal to replace dozens of energy tax breaks with narrower credits promoting clean electricity, transportation fuels, and carbon capture and sequestration (Greenwire, Dec. 18).
That package has some ideas that have been embraced by Baucus’ likely successor atop the Finance Committee, Sen. Ron Wyden (D-Ore.), who currently chairs Energy and Natural Resources. But Wyden has been adamant that an extenders package would be necessary next year if tax reform didn’t happen.
“You’re talking about putting at risk thousands and thousands of energy jobs” if expiring energy incentives are not renewed, Wyden said on the floor this morning, as one of several Democrats who came to the floor to push an extenders bill. “That’s why it’s critical Congress address and extend these key benefits as soon as possible.”
Executives from several wind developers interviewed this month said they were generally confident that the expanded eligibility requirements mean their companies will have plenty of work to do for next year, but they warned that another slowdown is in store without another extension before this Congress adjourns.
The Internal Revenue Service earlier this year established two thresholds for developers to qualify for the PTC. Developers can either begin “physical work of a significant nature” or spend at least 5 percent of a project’s total cost before the end of this year to achieve “safe harbor” status.
In the case of Iberdrola’s El Cabo, beginning actual construction this week keeps open the possibility of ultimately expanding the project to its full potential, as long as the necessary permits, power purchase contracts and other prerequisites are in place in time for the next phase of construction to begin. (Phase I envisions 300 MW, Gronner said.)
“The rules as they currently are do give some flexibility and benefit to expandable sites,” he said in an interview last week.
Other companies are pursuing the safe harbor route, generally by ordering turbines for sites. A good rule of thumb is to purchase enough turbines to supply about 10 percent of a wind farm’s power, enough to provide a bit of a buffer in an industry where turbine purchases generally account for 65 percent or so of a project’s total costs, said Blake Nixon, president of Geronimo Energy.
“That’s been the primary PTC qualification strategy for the majority of players,” Nixon said in a recent interview.
Just this week, utility MidAmerican Energy Co. signed the largest-ever single order for onshore turbines, signing a deal with Siemens AG to supply 448 turbines for more than 1,000 MW worth of projects in the Midwest (ClimateWire, Dec. 17). Also this week, turbine maker Vestas announced it will supply 350 MW of turbines to Enel Green Power North America, with another more than 600 MW in potential orders.
Relatively few projects have been completed so far this year, with less than 70 MW installed through the first nine months of the year, according to AWEA. It’s a scenario the industry blames on uncertainty that persisted throughout 2012, when early-stage activity such as utilities signing future purchase contracts and developers ordering turbines generally ground to a halt. That’s why the industry pushed so hard to switch to a project’s start date – rather than its completion – to determine future eligibility for the credit.
“What that’s done for us is it’s put a lot of opportunity on the table, but that means you have a lot of execution to do,” said Nixon, whose company entered into 1,000 MW worth of power purchase agreements this year, a level he qualified as above average for the midsized company.
In addition to the 1,000 MW for which he has a PPA in hand, Nixon said he has “safe harbored” another 300 MW worth of projects in order to protect their PTC eligibility.
He’s not alone in putting money at risk ahead of the deadline. Other developers said they were moving ahead with construction or turbine purchases even without having a PPA or other necessities in hand.
Companies are spending anywhere from anywhere from $5 million to $50 million per project to maintain eligibility for the credit, which provides developers with $23 for every megawatt-hour of electricity they produce, said Jaime McAlpine, president and CEO of Chermac Energy.
Chermac Energy is developing a 240 MW wind farm in Texas whose electricity is under contract to Google. The company also has an oil and gas services division, which provides a buffer against the uncertainty of the wind business. Still, he said he is working to ensure PTC eligibility for other projects, even without knowing whether they will be able to eventually be brought online.
“It’s a gamble every day,” he said.
“Each one of us takes the dollar risk that we have available to us and decides whether we want to risk that capital there or put it somewhere else.”
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