Is California’s wind energy market waning? Despite the fact that wind energy has accounted for 75% of the state’s new renewable energy capacity since 2002 – built to meet California’s near-term renewable portfolio standard (RPS) benchmark – the state’s major investor-owned utilities (IOUs) have been scurrying to take advantage of falling solar photovoltaic (PV) prices and a global PV supply glut. Therefore, solar PV projects, both central and distributed, account for most of the renewable energy contracts more recently signed with IOUs. In fact, PV is expected to account for most of the balance of development required to meet an interim 25% by 2016 RPS compliance target and a 33% by 2020 RPS mandate.
IOUs are expected to exceed their RPS requirements over the next few years and, therefore, will acquire excess renewables to bank for use in the 2018-to-2020 time frame. However, there remains market opportunity for wind.
The publicly owned utilities (POUs) and unregulated retail energy service providers (ESPs) serve about one-third of California’s retail load and, therefore, account for that fraction of the RPS market.
POUs, on the whole, appear to be lagging in their RPS requirements, while unregulated ESPs will need to procure more short-term supplies (possibly from IOUs) to match their customer needs. Together, over the next several years, these RPS needs may represent a market opportunity equivalent to 5 GW of wind. To date, the POUs and ESPs have relied far more heavily on wind than the IOUs have.
Additional market opportunity may be found if historical RPS contract failure rates persist. With the IOUs, these rates have historically been 25% for wind and solar PV contracts and over 50% for solar thermal and geothermal contracts. Further out, with banked renewables used up and load growing, California is likely to see a post-2020 market boom to maintain compliance at 33% levels, with a potential market requirement on the order of 2.5 GW of wind by 2021 and 9 GW of wind by 2024.
Meanwhile, several important regulatory processes are under way whose outcomes will influence wind energy’s position in the market, both in achieving the 33% target and in laying the foundation for higher targets that likely lie ahead.
Among the most important are the RPS procurement reform process at the California Public Utilities Commission (CPUC) and an ambitious state-federal desert land-use planning effort that could dramatically limit wind development areas.
RPS procurement reform
Given the aforementioned historical contract failure rates, more near-term market opportunity for wind developers could arise. However, this will require the IOUs and the CPUC to curb their historical inclination to enable material contract amendments – as opposed to disallowing them – letting the contract fail and returning to the market to fill the need.
The California Wind Energy Association (CalWEA) has repeatedly urged the CPUC not to encourage the practice of speculative bidding by granting major contract amendments that, had they been part of the original bid, could have rendered the contract uncompetitive.
Once the “foot is in the door” with a contract, developers in many instances have sought more favorable terms. Approving such amendments is particularly unjustified when – as independent evaluators required by the CPUC have often found – the amended contract is distinctly uncompetitive when compared to current market prices.
Recognizing the problem, Commissioner Mark Ferron issued proposed procurement reforms in an October 2012 ruling, including “standards of review” for contract amendments that substantially modify a contract. Many types of amendments – such as changes in price or technology, new interconnection points and/or project locations or online dates – could trigger a comparison to current market prices that could doom their approval. These reforms could discourage speculative bidding, as well as open up new market opportunities.
The Ferron ruling addresses another problem that has worked against wind developers in recent years: assumed grid-integration costs and capacity values that have supported the acquisition of otherwise-uncompetitive solar thermal contracts.
In one case, solar thermal contracts totaling 400 MW were approved based on the presumption that the technology’s lower grid-integration costs and capacity value provided by added storage capability were sufficient to justify a price that the independent evaluator deemed “highly uncompetitive.”
The Ferron ruling would refine California’s “least cost, best fit” bid-evaluation process by identifying and quantifying each of the products and benefits, and the associated cost, for various types of projects. These values were set forth in an “Adjusted Net Market Value” equation, with some important variables slated for updating. Among them is the current “integration cost adder,” currently pegged at zero, but ignored by the CPUC since it has not been updated since 2004. CalWEA has put forth evidence that the value should remain at zero.
The formula has a separate component for capacity value, which CalWEA has argued should be known in advance and based on market values, so that bidders can make more efficient decisions about whether to incur transmission costs associated with providing capacity, and to ensure that capacity will not be overvalued in subjective utility decisions. This reform would address the commission’s stated concern that the high cost of transmission upgrades associated with delivering capacity from renewables facilities may not be worth the value.
Finally, the CPUC has indicated that it is interested in revisiting “time of delivery” pricing factors that, for some utilities, strongly favor on-peak deliveries. This inquiry stems, at least in part, from a report by the Lawrence Berkeley National Laboratory indicating that the net economic value of each renewable technology changes significantly as its market penetration increases, with solar declining far more markedly than does wind energy as penetration approaches 10%. With the recent rush in solar contracting, California could approach this level by 2020. A proposed decision on these issues is expected soon.
California desert planning
An initiative of potentially much more significant short- and long-term importance is the Desert Renewable Energy Conservation Plan (DRECP). In many ways, this high-priority effort of the California Gov. Jerry Brown and Obama administrations poses a significant threat to California’s wind energy resources, which are concentrated in the southern desert region.
Since 2008, a collection of state and federal agencies – the California Energy Commission, California Department of Fish and Wildlife, Bureau of Land Management (BLM) and U.S. Fish and Wildlife Service (FWS) – have been conducting a land-planning effort covering more than 22 million acres of the California desert.
The stated purpose of the DRECP is to facilitate the permitting of renewable energy projects on private and public lands in the desert while establishing a structure for the conservation of a broad array of species of concern. Although the DRECP will cover a variety of terrestrial species that have not presented serious obstacles to wind development, such as the desert tortoise and Mohave ground squirrel, the DRECP will also address impacts to two avian species that have become of great concern to wind: the California condor and the golden eagle.
Both of these species enjoy the protection of several state and federal wildlife statutes. For instance, the federal Migratory Bird Treaty Act and California’s “fully protected” statutes prevent the issuance of permits for the incidental take of these birds except under extremely limited circumstances. The condor is listed as endangered under the California and Federal Endangered Species Act, and the golden eagle is protected under the federal Bald and Golden Eagle Protection Act (BGEPA).
Finally, the BLM has obligations under the Federal Land Policy and Management Act to establish protections for these species. These statutes have been particularly difficult for the wind industry to navigate for a variety of reasons, not the least of which are the various conflicting permitting and mitigation standards and the multiple agencies that administer them. Therefore, the potential for a “one-stop shop” for permitting under the DRECP has made the planning effort potentially very attractive to wind.
However, serious obstacles must be overcome if the DRECP is to provide net benefits for wind energy. At present, the threats loom much larger.
Permitting structure for eagles. Until quite recently, BGEPA contained no mechanism to permit the incidental take of eagles. In 2009, the FWS promulgated rules to allow the issuance of five-year “programmatic” take permits for ongoing activities such as wind farms.
Under this rule and subsequent field guidance issued by the FWS, permits are theoretically available, but the standards imposed by the FWS continue to change rapidly as the migratory birds division of that agency – new to the world of environmental permitting – continues to develop its regulatory sea legs.
Although several eagle take permits are in the works for wind energy facilities, not one has yet been issued since the adoption of the 2009 regulations. The agency, industry and environmental interests are hopeful that the DRECP can provide a stable and long-term permitting mechanism for eagle take and that it will satisfy the requirements of BGEPA, state and federal endangered species laws, and the California “fully protected” statute.
Land available for wind development. In early and more recent DRECP proposals, the state and federal agencies managing the DRECP process (known as the “REAT” agencies) included maps that, if adopted, would restrict wind development to very limited development focus areas (DFAs). Not only were the proposed DFAs limited in scale (about 588,000 acres), but also most of the areas included were less than ideal for wind development and coincided with only 8% of acres that currently host proposed wind projects within the DRECP.
Similarly, the proposed DFAs largely fail to coincide with other areas that the wind industry has identified as promising for development. In fact, the DFAs were designed without any serious investigation by the agencies as to which areas would be suitable for wind.
In response to strong objections from the wind industry, the REAT agencies report that the DRECP structure will be modified to permit wind projects in “some” areas outside the DFAs, provided those projects meet certain criteria, including compliance with BGEPA and state and federal wildlife laws. At press time, we are awaiting the agencies’ written proposal along these lines.
Tolerance for take. There remains a big question as to the extent of incidental take of condors and eagles to be permitted under the DRECP.
Although California condors are not known to frequent the southern-most Tehachapi mountains or other areas likely to see wind development under the DRECP, the agencies are hopeful that their captive breeding program and other efforts to recover condors will result in a range expansion into the DRECP area. Although such a result is extremely speculative, the agencies are reluctant to authorize the development of wind projects in areas that they would like to reserve for future condor use. And, given the very small size of the condor population in California (about 127 individuals), it is unclear whether the potential take of even a single condor would be acceptable to the agencies.
With respect to golden eagles, BGEPA imposes a “no net loss” standard, which suggests that wind development can proceed as long as any take is mitigated by providing a “new eagle” for every eagle taken.
However, the REAT agencies are reluctant to abide by this standard, citing the uncertainty surrounding the efficacy of power pole retrofits and other compensatory mechanisms. Instead, the REAT agencies are proposing to impose both the no net loss standard and a severe overall cap on the number of eagles taken, whether mitigated or not. This essentially means that even though the agencies will require compensatory mitigation for eagles, wind developers will get zero credit for those measures under the overall take limit. w
California Wind Forecast: Marketplace Uncertain
By Nancy Rader & Clark Morrison
With several key proposals important to the wind sector under review, the importance of regulatory decision-making has never loomed larger for the future of wind energy in California.
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