U.S. Market Has Strong Outlook But Faces Risks
The wind power industry responded in record fashion to the Internal Revenue Service’s (IRS) 2013 “under construction” deadline for production tax credit (PTC) eligibility.
Developers in the U.S. had started construction on 13 GW of wind projects and had contracted 7 GW of firm turbine orders through the end of January of this year. MAKE Consulting estimates nearly 19 GW of wind projects are in active development as a result of these IRS guidelines, demonstrating yet again the tight linkage between U.S. wind market activity and the undulations of PTC policy.
Despite the impressive development numbers, MAKE considers realization of the full 19 GW of development dubious and is forecasting approximately 16.4 GW of grid-connected capacity from 2014 to 2016.
The primary driver behind this demand shortfall is MAKE’s estimate of over 7 GW of projects under development that have claimed PTC eligibility without an offtake agreement in place. These projects face the greatest execution risk due to a myriad of factors, including the following:
- More than 5 GW of these at-risk projects are in Texas, where power pricing remains below $30/MWh;
- Aggressive wind development is rapidly consuming additional transmission resources provided by the Competitive Renewable Energy Zone initiative in Texas;
- Minimal load growth in the U.S. is further reducing the need for new power purchase agreements (PPAs) in the near term; and
- There is a lack of alternative project financing options for developers not able to obtain a PPA.
The low cost and scarcity of PPAs has prompted a great deal of attention to alternative finance structures, namely so-called “synthetic PPAs.”
These financial hedging instruments provide independent power producers (IPPs) a stable power offtake price while participating as a merchant IPP in regional power markets. IPPs need long-term offtakes from creditworthy counterparties to obtain project finance, however, and there are few large-scale power traders directly engaged in wind hedging products.
JP Morgan is divesting its physical commodities operations, and companies such as Citigroup and Morgan Stanley are already contributing to an estimated 1 GW of “Texas hedge”-type project structures.
Furthermore, these financial instruments are often short term in nature and may not cover the full output of the wind farm, forcing the IPP to maintain some of its capacity in an unhedged merchant arrangement. This introduces a great deal of risk to the wind farm’s revenue-generating capabilities and may preclude the developer from obtaining the bank financing it needs to build the project.
MAKE estimates nearly 3 GW of hedged projects will come to fruition during our forecast period, with developers that are unable to obtain a PPA or access alternative finance arrangements being forced to cancel development plans or sell their assets to larger IPPs with greater financial capabilities.
The window of opportunity for these stressed developers will not be open indefinitely. There are developers within the at-risk pool claiming PTC eligibility by demonstrating “continuous efforts” via their search for offtake agreements. This strategy may allow for project construction post-2016, but it runs the risk of an IRS audit and elevates the finance risk of the project.
In order to avoid this audit, IPPs must begin commercial operations by the end of 2015 per IRS guidelines. Industry stakeholders have voiced their concerns on the ability of a diminished U.S. turbine supply chain to cope with yet another compressed build schedule between 2014 and 2015, especially as 92% of the firm and conditional orders volume is concentrated among the Big Three turbine suppliers: GE, Siemens and Vestas.
MAKE does not believe that nacelle production is a limiting factor. However, the mass exodus of many domestic tower original equipment manufacturers (OEMs) from the U.S. wind market, coupled with import duties on towers originating from China and South Korea, has placed a premium on tower supply. Aggressive turbine pricing among the Big Three is likely to abate as those manufacturers approach capacity limits, driving asset owners to source turbine supply from alternate vendors.
In this circumstance, lead times for turbine supply may be much longer, as nacelles and blades sourced from the European Union carry much longer lead times (some estimates as long as 10 months).
The concerns associated with obtaining offtake agreements and obtaining turbine supply in a timely manner are driving more attention to a potential extension of the recently expired PTC as part of a tax extenders package this year. The potential for more far-reaching tax reform this year is limited, and as such, a single-year extension is looked upon as a much-needed bridge to longer-term energy policy initiatives such as those sponsored by Sen. Max Baucus, D-Mont.
The Baucus legislation envisions a Clean Energy Tax that seeks to reduce the greenhouse gas (GHG) emissions of the U.S. power generation fleet by 25%, rewarding tax incentives similar to the PTC to technologies on a scale determined by their CO2 emissions. The legislation is in its early stages, and key items such as defining the baseline from which the GHG reductions are measured need to be defined.
In the interim, the extenders package is expected to allow for a one-year extension of both the “under construction” deadline and the “commercial operation date” deadline required to avoid “continuous efforts” at the end of 2015.
Given the current state of development activity and likelihood that approval of the extenders legislation would be later in the year, the emphasis for developers will remain on executing their existing backlog and acquiring distressed project assets. MAKE’s baseline forecast does not include a PTC extension.
The U.S. wind market remains healthy despite its current set of challenges. There are nearly 5 GW of new orders required to meet MAKE’s current 2014-2016 forecast estimates of 16.4 GW, with additional demand upside in the event of a PTC extension.
PTC-qualified developers with turbine agreements in place are busy with project construction and preparing to execute the second and third phases of those under-construction projects in the 2015-2016 timeframe. PTC-qualified developers in need of offtake agreements will be scrambling to find financing that allows them to partake in the U.S. wind industry’s latest bubble.
Luke Lewandowski is research manager and Dan Shreve is partner at MAKE Consulting. Lewandowski can be reached at (312) 441-9590 or ll©consultmake.com. Shreve can be reached at (978) 448-3186 or ds©consultmake.com.
N.J., DOE Decide
New Jersey-based Fishermen’s Energy is awaiting a New Jersey Board of Public Utilities (BPU) decision on whether it can use renewable energy certificates to finance its pilot project. Speaking on a conference call, Fishermen’s CEO Chris Wissemann explains the developer must receive an affirmative response from the BPU to continue developing the offshore wind project.
“We are nearing the end of the review process,” Wissemann says, noting that Fishermen’s completed oral arguments to the BPU on Dec. 20.
The BPU’s approval would allow Fishermen’s to use New Jersey’s offshore renewable energy certificates (ORECs) as part of the Offshore Wind Energy Development Act (OWEDA) to support the financing and construction of the Fishermen’s Atlantic Wind Farm, a $200 million demonstration project located three miles off the coast of Atlantic City, N.J.
According to Wissemann, the Fishermen’s application has been under review by the BPU for more than 990 days. During the lengthy review process, the regulators raised questions on the Fishermen’s application, including its choice of turbine supplier XEMC and the impact to state ratepayers if federal tax credits and U.S. Department of Energy (DOE) grants do not materialize.
In July 2013, Fishermen’s thought it had reached a deal with the New Jersey Division of Rate Counsel (DRC), which represents ratepayers in the setting of electricity rates. Although the DRC initially opposed the Fishermen’s project, saying it was too costly, the two parties reached a settlement that featured a reduction in the wind farm’s projected rates, thus lowering costs and lessening potential impact to ratepayers.
However, the BPU rejected the settlement agreement, fearing that New Jersey ratepayers would be unduly forced to shoulder too much risk if federal incentives were not included.
One encouraging aspect, Wissemann notes, is that the offshore wind project provides net economic benefits for New Jersey – a key requirement of New Jersey’s OWEDA. According to the DRC, the wind farm will create $33 million in net benefits.
Admittedly, Fishermen’s finds itself in uncharted waters, as no offshore wind developer has yet to receive financing under a state-run model based on ORECs like the ones being tried in New Jersey and Maryland.
Each of the three U.S. offshore wind power purchase agreements signed to date has been executed under the traditional model, wherein a utility agrees to buy all – or a portion – of a project’s output.
“No one else has financed against this particular mechanism,” Wissemann explains, noting that Maryland enacted similar OREC-based legislation in 2013.
Complicating matters is that the BPU has a new president. In January, Dianne Solomon replaced former president Robert Hanna. Therefore, Solomon may require additional time to familiarize herself with the Fishermen’s case. Though she has little relevant experience, she has plenty of name recognition: She is the wife of former BPU president Lee Solomon, who was Hanna’s predecessor.
A BPU decision is expected by June. An affirmative response would allow Fishermen’s to begin construction and become operational in 2016, notes Wissemann.
A second – and equally important – hurdle for the developer is a selection by the DOE. In December 2012, the company was one of seven developers to receive a $4 million grant. The companies are now competing with each other to be one of three developers to receive $47 million for four years in the next round of federal grants. According to the DOE, selections will be based on siting, construction and installation for projects reaching commercial operation by 2017. Wissemann expects a decision from the DOE by June.
However, if the DOE does not select Fishermen’s, it is doubtful that the project will get built.
“We are relying on the DOE,” Wissemann says, adding that if Fishermen’s is not selected, “it would make the economics that much harder.”
Alstom To Supply
Block Island Turbines
Deepwater Wind has signed an agreement for Alstom to supply the Block Island Wind Farm with five Haliade 150-6 MW offshore wind turbines. Deepwater says the deal represents a pivotal point in the development of the 30 MW demonstration project, located off the coast of Block Island, R.I.
Originally, however, Deepwater Wind had signed a preferred-supplier contract with Siemens in 2011 for five of its 6 MW direct-drive machines. The agreement provided a window of exclusivity for the two parties to hammer out a deal. However, one did not materialize, and the agreement expired at the end of 2012.
Jeff Grybowski, Deepwater’s CEO, notes it was important that the developer signed with a provider of direct-drive turbine technology.
“We think direct-drive is where the U.S. offshore wind industry is headed,” he explains.
Under the new supply contract, Deepwater Wind says it made an initial multimillion-dollar payment in December 2013 that allowed Alstom to begin the manufacturing process for the turbines. Grybowski adds that most of the blade units have already been manufactured. Deepwater expects all of the blades to be completed and delivered to the company at a warehouse in Europe in April.
“This agreement represents a giant leap forward for the Block Island Wind Farm, and the start of turbine construction [in January] marked a major project milestone,” says Grybowski. “We’re thrilled to have a company as renowned as Alstom as our turbine partner.”
He adds, “When combined with engineering and permitting work we already completed, we’re confident this payment puts us significantly over the required five percent ‘safe harbor’ for the [federal investment tax credit].”
The Haliade 150-6 MW turbine features Alstom’s Pure Torque design and a 150-meter-diameter rotor. According to Deepwater, Alstom’s technology will provide a greater energy output than the developer had earlier anticipated. The companies expect the project’s capacity factor to exceed 47%, compared to initial projections of 40%. In addition, Deepwater says that, at 589 feet tall, the Haliade turbines will be about 10% – or roughly 70 feet – shorter than the developer’s maximum height allowance provided for in its permit filings. Moreover, the rotors and nacelles of the turbines will be smaller than the permitted maximums.
“We are pleased to be able to provide Deepwater Wind an efficient and powerful turbine that is an ideal match for their exciting project,” says Andy Geissbuehler, general manager of Alstom Wind North America. “We look forward to continuing to participate in the development of the offshore wind industry in the U.S. by working with visionary companies like Deepwater Wind.” Under a separate agreement, Alstom will also provide long-term service and maintenance responsibilities for the turbines.
Deepwater says its partnership with Alstom will create a number of local jobs and boost economic activity in Rhode Island. In addition to operations and management positions the developer will fill to support the project, Alstom intends to base its long-term service operations in the state and to perform pre-installation work in a local harbor. Furthermore, Alstom will investigate opportunities to execute assembly activities in Rhode Island.
However, an Alstom representative declined to give specifics.
“At this point, there is no firm timeframe and/or locations in mind,” says an Alstom spokesperson. “Those issues will come together as the project advances.”
The Block Island project could help Deepwater realize plans for a much larger offshore wind farm. Having won the U.S.’ first-ever competitive lease auction for renewable energy development in federal waters last year, Deepwater is working to develop the Deepwater Wind Energy Center, a wind project with up to 1 GW of capacity, off the coasts of Rhode Island and Massachusetts.
AWEA: Wind Lowers
Wind power is keeping electricity bills low for U.S. homes and businesses, thanks to plummeting wind energy costs driven by technological improvements, finds a new white paper from the American Wind Energy Association (AWEA). The group says the report uses publicly available data and more than a dozen studies from government, utility and other independent sources to explore how wind energy affects consumers’ energy bills.
A highlight of the report is DOE data showing that consumers in the states that use the most wind energy have fared much better than consumers in states that use less wind energy. In fact, AWEA says consumers in the top wind-energy-producing states have seen their electricity prices actually decrease by 0.37% over the last five years, while all other states have seen their electricity prices increase by 7.79% over that time period.
“During [January’s] cold snaps, we saw very high wind energy output play a critical role in protecting consumers across the country from skyrocketing energy prices. This study confirms that wind energy is providing that benefit every day,” comments Michael Goggin, AWEA’s senior electric industry analyst.
Citing the DOE data, AWEA notes wind energy costs have fallen by 43% over the last four years.
“With the drastic cost declines over the last few years, wind energy offers consumers a great deal today,” says Goggin. “That deal will only get better with time because that low price is locked in for the life of the wind project, as the fuel will always be free. No other major source of energy can offer that kind of price stability. Diversifying our energy mix with zero-fuel-cost, zero-emission wind energy is a win-win for consumers and the environment.”
Wind Power Aids
Mich. RPS Efforts
Thanks to a surge in wind power development, Michigan’s utilities are on track to meeting the state’s 10% by 2015 renewable portfolio standard (RPS), finds a new report issued by the Michigan Public Service Commission (MPSC).
For 2012, the estimated renewable energy percentage reached 5.4%, up from 4.4% the previous year. For 2013, renewables are expected to have reached 6.9%.
“The year 2012 marked the first time that Michigan utilities were mandated to meet an interim compliance requirement, and all of them succeeded,” notes MPSC Chairman John D. Quackenbush. “Progress toward Michigan’s 10-percent-by-2015 renewable energy standard is going smoothly, and since the standard has been in effect, over 1,100 MW of new renewable energy projects have become commercially operational.”
The new report offers findings similar to a previous study the MPSC and Michigan Energy Office issued to Gov. Rick Snyder in November 2013. Both studies highlight that wind energy has been the primary source of new renewable energy in Michigan because of its low cost, and the state’s wind
generation is expected to increase to over 1.4 GW by the end of this year. The November report also suggested that 15% by 2020 and 30% by 2035 RPS targets are achievable for Michigan.
Dominion Sets Sights
On Offshore WEA
Virginia-based Dominion has announced it has filed with federal regulators to be among the bidders seeking to develop wind turbines on nearly 80,000 acres off the coast of Maryland.
In December 2013, the U.S. Department of the Interior (DOI) revealed plans to auction two separate leases for the designated Maryland Wind Energy Area (WEA) later this year. Dominion’s filing and those of other interested bidders will be reviewed by the Bureau of Ocean Energy Management (BOEM) to determine which are financially qualified to participate in the auction. According to the DOI, the leased area could support up to 1.45 GW of commercial wind generation.
Notably, Dominion was the successful bidder in BOEM’s September 2013 auction for a WEA offshore Virginia. That leased area has the potential to support 2 GW of wind generation.
“Offshore wind shows the most promise for building utility-sized renewable energy projects in the Mid-Atlantic region,” says Mary Doswell, senior vice president for Dominion’s Alternative Energy Solutions unit. “The bureau’s Wind Energy Areas offer both the consistent winds and the acreage to develop these large-scale projects. Given the proximity to our leased area off of Virginia and the excellent port in Hampton Roads, there should be economies of scale that could benefit both regions.”
Dominion has also received two offshore wind energy technology awards from the DOE. The company says the first is a $500,000 grant with a goal to find ways to reduce the cost of offshore wind generation by 25%, and the second is a $4 million cost share for the initial development of an offshore wind turbine demonstration project.
Dominion has completed the initial development of its demonstration project for the Virginia Offshore Wind Technology Advancement Program. The company is now one of six firms being considered for a $47 million follow-up DOE grant to complete development of their demonstration projects. If successful, the company says it would continue advancing its plan to build two 6 MW wind turbines off the Virginia coast, adjacent to the area it has leased from BOEM for commercial development.
Beothuk Energy Inc. has announced its preferred site for a proposed demonstration offshore wind farm in Canada.
Beothuk wants to build and operate the project in St. George’s Bay in the province of Newfoundland and Labrador (NL). The developer, which is based in the province, says the wind farm would consist of up to 30 turbines generating 180 MW, cost approximately C$400 million and be fully funded through private investment.
If successful, the project would be among the first generation of North American offshore wind farms. Offshore wind is being proposed in other Canadian provinces such as British Columbia and Ontario. However, the Ontario government issued a moratorium on offshore wind development in 2011, citing the need to further study the technology.
According to the company, the St. George’s Bay site has shallow water depths of less than 50 meters, offers world-class winds, is outside major shipping lanes and bird migration routes, and would be close to the company’s proposed Corner Brook manufacturing facilities and proposed service port at Port Harmon, Stephenville, NL.
The company claims that the project fits in with a 2012 NL government resolution to grant and provide open access to the province’s energy corridors. The proposed wind farm must undergo various assessments and evaluations by government departments and agencies before start-up operations can begin, Beothuk notes. The company has requested an investigative permit from the provincial government for the proposed offshore location.
“Beothuk looks forward to working with all interest groups and regulatory agencies to develop this exciting new green industry,” says Kirby Mercer, president and CEO of Beothuk. “Our intention is to make western NL a North American Center of Excellence for offshore wind manufacturing, staging and servicing. With political will and regional cooperation, we expect to create up to 600 direct jobs in western NL, and there will be substantial business opportunities for local companies at all tiers of the supply chain.”
DOI Issues Maps
For Public Use
The DOI’s U.S. Geological Survey (USGS) has released the first publicly available interactive map and geo-dataset showing more than 47,000 onshore wind turbine locations and related information across the entire U.S.
According to the DOI, the new tool is consistent with the goals of Interior Secretary Sally Jewell’s Order No. 3330, which was released in October 2013 to incorporate a landscape-level approach to development on public lands.
“In making this critical information available to the public, the USGS has provided public agencies and private companies with a new tool to help guide smart landscape-level planning decisions that support domestic energy production while minimizing conflicts,” says Jewell. “The data will help improve the siting of future wind energy projects, as well as aid land managers in devising more up-to-date land-use and multiple-use plans.”
The wind turbine map, which includes turbines installed as of July 2013, was created by combining publicly available datasets from the Federal Aviation Administration, the U.S. Energy Information Administration and the Oak Ridge National Laboratory, as well as other federal, state and local sources. USGS researchers also identified additional turbines not in those pre-existing databases and added them to the dataset and map.
The DOI notes that before this new release, some individual state maps with turbine information and national maps of facility information existed, but there were no national maps with turbine-specific information and verified locations.
“In addition to informing siting decisions for future wind energy projects, this fundamental, nationwide data will support research on wind generation efficiency, economic impacts and applied science for reducing wildlife impacts,” says Assistant Secretary for Water and Science Anne Castle. “Just as we need basic information about stream flows to support good water administration decisions, we must have accurate data on wind generation to better understand and support this important source of renewable energy.”
Kahuku Back Online
After 2012 Fire
Boston-based First Wind has announced that the Kahuku Wind project in Oahu is again operating at full capacity. Following an energy-storage facility fire that suspended the wind farm’s operations since August 2012, First Wind says it worked with Hawaiian Electric Co. (HECO) and other experts to bring the Kahuku project back online.
“We sincerely appreciate the support and patience of the Kahuku community during this period and are happy to announce that the project is back online at full capacity,” says Ryan Pierce, operations manager for First Wind’s Hawaii projects.
According to First Wind spokesperson John Lamontagne, three total fires occurred at the project’s energy-storage facility since April 2011. Texas-based Xtreme Power supplied the battery-based system.
“Unfortunately, because of the extensive damage to the entire facility, a cause of the fire has not ultimately been determined,” Lamontagne says.
Because the wind farm feeds into the Oahu electrical grid, he says HECO had recommended a battery at the project. “The battery was needed to smooth out voltage fluctuations that occur due to the varying nature of wind power,” Lamontagne explains. “As such, after the battery fire, it was necessary to install some sort of voltage-regulation equipment.”
Ultimately, an updated interconnection requirements study was conducted, and it determined that a Dynamic Volt-Amp Reactive (DVAR) system from American Superconductor could replace the need for a battery system at the site.
“We’re thrilled to utilize this new technology to safely generate clean, renewable energy for the island of Oahu,” adds Pierce.
First Wind says the Kahuku Wind project’s 12 wind turbines have been fully maintained since the shutdown in 2012, and testing of turbines and new DVAR technology began in September 2013. The project returned to service, but in a limited capacity of 5 MW. In late January, HECO gave the go-ahead for the project to return to full service.
1.6 GW Last Year
Canada recorded exceptionally strong growth in 2013 with a record of close to 1.6 GW of new wind energy capacity installed, placing it fifth globally, according to the Canadian Wind Energy Association (CanWEA).
The association says Canada sustains its position as a global wind energy leader, today ranking ninth in the world in total installed capacity with more than 7.8 GW of wind energy in operation – providing enough power to meet the annual needs of approximately 2 million Canadian homes.
“Many provincial governments are on the threshold of meeting their initial commitments to wind energy development,” explains CanWEA President Robert Hornung. “This wide support presents new opportunities to create stable and sustainable markets in Canada for future wind energy development.”
“Most notably, the governments of Ontario and Quebec made commitments in 2013 to secure a combined 1,400 MW of new wind energy capacity over the next few years, which is the first step in building the foundation for robust, long-term markets for wind energy in Canada,” Hornung adds.
This year, CanWEA says it expects Canada to see a new record for annual installations of wind energy, as new projects are under construction across the country.
Agency Says Wind
Has No Health Risks
Australia’s National Health and Medical Research Council (NHMRC) has released a draft information paper concluding that “there is no reliable or consistent evidence that wind farms directly cause adverse health effects in humans.”
Quoting the paper, NHMRC CEO Professor Warwick Anderson says, “There is some consistent but poor-quality evidence that proximity to wind farms is associated with annoyance and, less consistently, with sleep disturbance and poorer quality of life. However, it is unknown whether these effects are caused by the wind turbines themselves, or by other related factors.”
This newest paper follows a 2010 NHMRC study finding no scientific evidence that links wind turbines to adverse health effects. The draft paper is based on the findings of an independent literature review commissioned by NHMRC, which says it used internationally recognized methods to select and analyze all available evidence.
“When Australian communities are genuinely concerned about the quality of their health, it is essential they have access to reliable advice based on the best-available evidence,” says Anderson, who has invited public comments on the document and submissions of any additional evidence for consideration. w
New & Noteworthy
U.S. Market Has Strong Outlook But Faces Risks
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