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For the last five years, the American Wind Energy Association (AWEA) has tracked the portion of new wind power that is utility owned. The utility-owned share of the market has remained relatively stable, ranging from 14% to 18% from 2005 to 2010. Notably, many utilities have evolved into being full-fledged owners of projects, as opposed to merely serving as the project’s off-taker.

However, utility ownership of new capacity built in 2012 fell to 10% – down from 25% in 2011 and the lowest percentage level since 2003, according to the U.S. Department of Energy’s 2012 Wind Technologies Market Report.

“Before a deeper discussion about utility ownership can begin, it is crucial to understand the various types (and motivations) of investor-owned utilities (IOUs), cooperatives, municipals and government-owned utilities,” explains Kim Zuhlke, a veteran utility executive and wind farm ownership advocate.

“These utilities can be large or small in any of these segments and have a great variation of skills and generation competencies,” he adds. Furthermore, public utilities generally are not concerned about or motivated by a profit or return opportunity. They may also have no way of directly capturing the benefits of tax credits. It is also common to exempt these kinds of utilities from renewable portfolio standard (RPS) requirements.

In some cases, the governing board or city council has established a goal or direction for adopting green energy for such public utilities. This leads to a large number of different RPS requirements across the spectrum of utilities. In addition, some RPS requirements are law, and some are only guidelines.

Typically, the public utilities interested in owning wind assets have already developed in-house capabilities and comfort with operating generation assets.

IOUs, Zuhlke notes, are in a different situation. “In addition to the obligation to serve all customers with the least-cost option, they are seeking a return for their investors,” he says.

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Interest waning?

Does the fact that the utility segment declined in 2012 – a record-breaking year for the U.S. wind market – mean utility interest in wind is slowing down?

Not necessarily, explains Emily Williams, senior policy analyst at AWEA. She says the shift in utility ownership is partially due to events brought on by the looming expiration of the production tax credit.

Simply put, while pending expirations have led to boom periods for independent power producers (IPPs), utilities require the approval of a public utility commission, and as such, they may not be able to move as quickly. And that is precisely what occurred in 2012: IPPs built wind projects in calendar year 2012 that may not have been otherwise built in 2013 or 2014.

“It’s harder for a utility to go to their public utility commission and justify rate-basing a new power plant in 2012 that they don’t need until 2015,” Williams notes.

Such “rate-basing” allows a utility to spread the cost of wind farm ownership across the company’s ratepayers. The rate-basing of wind also allows IOUs to earn a regulated rate of return for shareholders.

Because utilities earn an authorized return on invested capital, owning wind assets represents a potential earnings growth opportunity for the utility investor, which is not possible if a utility signs a power purchase agreement (PPA) with a developer. The phenomenon was partly responsible for the recent rise of utility ownership of wind farms.

Other mitigating factors depend on where the utility is in meeting state RPS mandates or where the utility is with other capital projects, such as transmission enhancements. Another limiting factor, Zuhlke suggests, may be time itself.

“Typically, a utility does not want to own and operate just one wind farm,” he says, meaning for an entity to get maximum benefit, it is more economical to own more than one project. “However, it takes time to build your core competency in operating wind assets.”

Others, such as Sandy Smith, communications coordinator at the Utility Variable-Generation Integration Group, says macroeconomic factors are the more likely culprit.

“When it comes to building new generation, such as wind, it boils down to risk management and the low price of natural gas.” Primarily, according to Smith, “It’s just an easier path of selling a PPA to regulators as opposed to building a wind plant.”

Further, AWEA’s Williams suggests that although there was a decline in the percentage of projects featuring utility ownership, the totals do not tell how active utilities are in the marketplace.

For example, she cites the Sacramento Municipal Utility District’s Solano 3 wind farm, which features a prepaid PPA. “[That wind farm] was essentially a utility project but counts as IPP ownership.”

 

Looking forward

Williams expects that the decline in utility ownership will be short-lived. She says utilities that prefer wind ownership are planning to expand their wind portfolios.

For example, MidAmerican Energy, the No. 1 rate-regulated utility owner of U.S. wind farms, is planning to build approximately 1 GW of installed capacity over the next few years. In addition, Puget Sound Energy expects to build 260 MW of installed capacity, and Minnesota Power anticipates another 200 MW in the near future.

Even Xcel Energy – a utility that generally prefers off-take agreements to ownership – is seeking regulatory approval from the North Dakota Public Service Commission to purchase two wind farms totaling 350 MW that are currently under development in North Dakota.

Utilities are moving forward, Williams says. “They just didn’t necessarily build them last year.” w

Industry At Large: Utility Ownership

Utility Ownership: Data Anomaly Or An Evolving Trend?

By Mark Del Franco

A bright spot for the U.S. wind industry for several years, utility ownership of wind farms slipped last year.

 

 

 

 

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