Project Development, Wind Power

Beyond the PTC: What will drive future US wind development?

Issue 3 and Volume 10.

While the Production Tax Credit has played a vital role in stimulating the growth of the US wind market, there are an increasingly large number of factors coming into play. Elisa Wood reports on what could be making the sector tick in the coming years.

It goes without saying that the federal Production Tax Credit drives wind industry growth in the United States. In fact, one recent study shows that the incentive accounts for two-thirds of the financial benefits wind investors accrue. State renewable portfolio standards also advance wind development, as does concern about climate change and a push for US energy independence. These factors help smooth the road ahead, as the industry steers toward its goal of making wind energy 20% of the US power portfolio, up from the current 1%.

In addition, new trends are emerging that could accelerate development even more quickly. A combination of new technology and a changed attitude has the country looking at transmission wires, cars and coal in a whole new way – and the turnaround just might offer some surprising benefits for wind power.

Unless you build it, they won’t come

Transmission has long been an issue for the wind industry. The best wind often blows in regions that are far away from energy-hungry US cities. And too often these remote areas lack the wires and poles to move the wind power into load centres. Fortunately for wind power, states have begun to recognize this problem and do something about it.

Rob Gramlich, policy director for the American Wind Energy Association, says that transmission is the ‘biggest long-term constraint’ to wind development. The industry may be able to build about 50 GW of new wind power without significant new transmission, but after that ‘we are going to need a lot of new transmission’.

‘We’re trying to tell the world that this opportunity exists – that the nation is sitting on better wind resources than any other country that currently has wind’, Gramlich added. ‘All that we need to do is build the transmission. Over a long period of time, and spread across many customers, it isn’t that costly’.


Over the last two years the PTC has stimulated the US wind market to become the largest in the world clipper wind power

It seems AWEA’s message is getting across as policymakers and transmission planners begin to rethink the way they approach the relationship between renewable development and transmission. In the past, utilities generally only proposed new transmission when they received an interconnection request or where they saw the threat of congestion. Now utility planners are coming together to take a larger view. Increasingly, across the country, strategies are underway to configure transmission so that it can accommodate and attract desirable new resources.

Indeed, the Federal Energy Regulatory Commission issued a landmark ruling on 19 April that is likely to make such planning more common. FERC approved a California transmission policy that AWEA says helps remove the old ‘chicken and egg’ problem faced by wind power: No wind could be built unless there was transmission, and no transmission was built unless there was a wind farm already in place. FERC corrected this by ruling unanimously that in windy areas where there is no transmission, transmission should be financed and built.

‘All five commissioners demonstrated in their remarks that they grasp the challenges facing renewable energy developers and that they want to help remove roadblocks’, said Gramlich. ‘The passive-reactive transmission system that worked to interconnect gas generation over the last decade simply does not work for wind and some other renewables.’

Before the ruling, FERC had encouraged a generator to locate where interconnection costs were lowest. However, in the California decision, FERC recognized an inherent tension between its old policy and the unique characteristics of renewable energy projects.

As FERC chairman Joseph Kelliher explained following the ruling: ‘Unlike fossil fuel and nuclear generation projects, renewable projects are location-constrained. A fossil fuel generation project can choose more easily a location that minimizes interconnection costs. The location of renewable energy potential is dictated by nature, not by proximity to the transmission grid. A strict application of our current policy will curtail development of our renewable energy potential, by limiting development to those areas where interconnection costs happen to be lowest, not where renewable energy potential is greatest. Many areas of greatest renewable potential are in remote areas, where interconnection costs are relatively high’.

The decision paves the way for Southern California Edison to build the Tehachapi transmission line, a $1.8 billion project expected to accommodate more than 4350 MW of renewable energy by 2013. The FERC ruling also is expected to help states meet renewable portfolio standards, since it will be easier to build renewable energy projects if transmission is available. And finally, wind advocates say the decision will encourage places like Colorado, Texas, and Minnesota to continue their pursuit of transmission innovations similar to those in California.


The Tehachapi wind farm in California, one of a number which will be feeding power into the new Tehachapi transmission lines california edison

One such endeavour being closely watched is the High Plains Express Transmission Project (HPX), which is developing a proactive strategy for grid expansion in Wyoming, Colorado, New Mexico and Arizona. HPX’s goal is to develop a high-voltage, transmission backbone that would increase access to renewables and other diverse generation resources within ‘regional energy resource zones’.

‘In Colorado and New Mexico, these are zones where transmission is constrained. And it just so happens, if you look at National Renewable Energy Laboratory maps, this is where wind has the highest potential to be developed’, said Thomas Green of Xcel Energy, who is managing the project. ‘So as this goes forward, it could be very beneficial for wind, as well as other resources’.

The HPX plan fits well with a new law in Colorado, signed by Gov. Bill Ritter in late March that requires utilities to set up regional energy resource zones. Specifically, utilities must identify high-potential wind-energy locations and establish zones where transmission constraints hinder electric delivery. The utilities must then develop construction plans to improve transmission capacity. In turn, the utilities are allowed to recover costs during construction.

Xcel Energy, which serves Colorado and has more wind power on its system than any other US utility, is among the companies participating in the HPX effort. Others are Colorado Springs Utilities, Platte River Power Authority, Public Service Company of New Mexico, Salt River Project, Trans-Elect Development Company, Tri-State Generation and Transmission Association, Western Area Power Administration. Its first phase, a high view feasibility study, is scheduled to be released in August 2007.

Little state, big plans

The idea of isolating specific zones for wind power also is being considered on the East Coast, in Rhode Island. For the nation’s smallest state, the issue is not so much transmission, but more, where the heck do you fit a wind farm? ‘Little Rhody’ is the second most densely populated state in the nation with 1003.2 people per square mile (384 per km2 – only New Jersey is more densely populated.).

Again, the state is attempting a big picture view that revamps the conventional way of planning for resources. Typically, in liberalized states such as Rhode Island, generation is built by merchant developers who choose a site and then wrangle for the necessary regulatory approvals and financing. This has led to massive project delays in New England, which has a fierce not-in-my-backyard sentiment (NIMBY), especially when it comes to wind farms.


Transmission is one of the major issues which must be addressed for the US to realize its full wind potential california edison

So Rhode Island is looking into a different approach. The state is investigating the possibility of setting up specific zones, possibly in state-controlled areas, where wind farms would be invited to be build. In addition, the state legislature is considering forming a state power authority that would offer developers long-term power purchase contracts, a move expected to help projects secure financing.

Rhode Island is only 37 miles wide and 48 miles long (59 x 77 km). But what the ‘Ocean State’ has in its favour when it comes to wind power is a very windy, 400 mile (643 km) coastline. A study released on 18 April by state Governor Donald L. Carcieri, who is pushing a strong renewable energy agenda, identified 10 possible offshore wind sites in a 98 square-mile area (254 km2) that could generate 6 million megawatt hours of wind energy per year. About 75% of the wind potential is in state-controlled waters.

Marriage of plug-in cars and wind

While new transmission and resource strategies are opening up doors for wind energy, some of the most dramatic changes could be brought about by the plug-in hybrid electric vehicle (PHEV). Indeed, if the PHEV lives up to its hype, it could turn utility resource planning on its head.

The PHEV is creating such a stir that John Rowe, Chairman and CEO of Exelon, described industry interest in the car as nothing less than ‘lust’. Charles Shivery, Chairman, President, and CEO of Northeast Utilities said that of the myriad of weighty issues to keep a utility executive up at night, the plug-in hybrid topped his list.

The plug-in, the next stage in the evolution of the hybrid vehicle, can alternate between liquid fuel and electricity stored in a battery. What’s particularly unique about the PHEV is that it can be recharged by plugging into a 120-volt outlet found in typical household garage.

The battery allows the plug-in to take advantage of low-cost grid power, something the traditional hybrid cannot do. Plug-in proponents herald the car because of its fuel economy and cost-effectiveness – if the battery is charged in an area where electric power costs about 9 cents/kWh, it is the equivalent of spending only 56 cents per gallon on gasoline.

In addition, the plug-in puts the consumer in a unique position because, ideally, the car can be a revenue source. Owners can recharge the battery when electricity is cheap, most probably overnight, and then re-sell any unused power back to the grid when electricity prices are high. This is known as vehicle-to-grid, or V2G, technology. Thus, the plug-in hybrid offers not only the potential to ease foreign oil dependence, but also gives the consumer greater control over costs.

A big advantage for utilities is that the PHEV could significantly increase electricity sales. At the same time, the car may not require large investment in new power plants. This is because car owners are likely to recharge at night when load drops significantly. Thus, the car helps the industry resolve one its costly problems – load fluctuation. (Enough power plants must be built in a region to accommodate days of highest energy use. Thus, thousands of megawatts of generation may be added to a system to serve only a few hot days each year.) Theoretically, the plug-in helps take care of this problem because it will likely use power at night when supply is high and demand low. The cars may then offer power back to the grid during peak afternoon usage. Austin Energy, a strong plug-in proponent, estimates that with little capital investment, it could add $27 million per year in revenue if 100,000 plug-ins come on the road in its service territory.

Since nights can prove particularly windy, the plug-in offers a way to use wind farm generation that would otherwise be lost. In essence, the plug-in battery could serve as storage for nighttime wind energy, according to Austin Energy. Given this storage capability, Austin Energy says it could increase the percentage of wind power that constitutes its portfolio.


In the future, hybrid cars may be able to plug into the grid, effectively acting as storage devices for cheap, off-peak wind power nrel

The PHEV technology is only in prototype phase. But in early April, Pacific Gas and Electric showcased what it described as the first-ever utility V2G technology demonstration in Silicon Valley. PG&E showed how the vehicle could sell back to the grid from an electrical outlet, and ran several lights and appliances in the demonstration.

‘V2G represents the best of these technologies because it intersects the transportation and utility sectors – the nation’s two largest contributors of greenhouse gases – to increase energy reliability and protect the environment’, said Bob Howard, PG&E vice president of gas transmission and distribution.

Like Austin Energy, PG&E sees the technology as a way to bring more renewables into the energy mix. Typically, during peak demand, such as on hot summer days, utilities must buy power from fossil fuel peaking units. If plug-ins come into mainstream use, the utilities instead would buy unused power stored within car batteries. If the car was charged during the night, it is likely much of its power came from renewables, since much of the utility’s night-time power is generated by green sources. When demand is high the next day, instead of turning on a fossil-fuel based generator, PG&E said it can purchase the ‘renewable energy’ stored in the vehicle batteries.

Several plug-in hybrids are now being tested around the country. While the technology holds strong promise, it still has a way to go before it reaches mass market. The US Department of Energy says that the chief obstacle is the high battery cost, which is still nothing less than a ‘show stopper’.

King Coal toppled?

The plug-in car shows promise for renewables. But in reality will the US continue its old ways and use coal-fired generation to power the cars? Coal-fired generation accounts for about 50% of the nation’s electric supply. It is natural to assume that coal’s predominance might slip as climate change concerns grow. But, in fact, use of coal-fired generation increases to 57% by 2030 in the US Energy Information’s Annual Energy Outlook 2007. The report forecasts that coal-fired generation will likely assume a larger role in the US power portfolio as the cost of gas-fired generation increases. Meanwhile, renewable energy continues to be no more than 9% of total share, says the report.

The federal analysis does provide one caveat – changes in environmental regulation could shift the mix away from coal. What the report does not say, perhaps because it is impossible to measure, is that a growing public sentiment for cleaner energy could do the same.

This became apparent in an industry-shaking announcement in February by energy giant TXU Corp. The company struck a deal to be acquired for $45 billion by Kohlberg Kravis Roberts & Co. (KKR) and Texas Pacific Group (TPG), two of the nation’s leading private equity firms, and Goldman Sachs & Co.

What is especially interesting about the proposed merger – besides its whopping price tag – are the terms of the agreement. The new owners of TXU, who will privatize the company, vowed to drop plans to build eight new coal-fired plants. This would prevent 56 million tonnes of annual carbon emissions, and reduce the energy giant’s new coal capacity by 75%. The new TXU also would support a mandatory cap and trade programme to regulate carbon emissions. This from a company whose subsidiary TXU Power has 5800 MW of coal-fired generation.

In announcing the deal, Rich Friedman, Global Head of Goldman Sachs’ Merchant Banking Division, said the transaction ‘serves as a model for long-term environmental stewardship. By investing in new technologies, encouraging conservation and reducing carbon emissions and pollutants, TXU is on the path to being a 21st century power company’.

The merger won immediate endorsement from major environmental organizations, among them Environmental Defence and the Natural Resources Defence Council (NRDC). Fred Krupp, President of Environmental Defense, called the deal ‘one of the most significant developments in America’s fight against global warming’. Frances Beinecke, NDRC President described it as a turnaround that ‘marks the beginning of a new, competitive focus on clean, efficient, renewable energy strategies’.

Given that electric consumption is on the rise, the company will need new supply, which it plans to achieve through innovations. Under the terms of the deal, these will include substantial investment in energy efficiency measures, and a doubling of its wind power purchases to more than 1500 MW. TXU is already the largest wind power buyer in Texas.

Utility merchants tend to face tough regulatory scrutiny, and some recent deals have collapsed before being finalized. So the TXU acquisition is far from a done deal. The company did, however, already suspend efforts to obtain regulatory permits for the eight cancelled coal-fired plants. And the merger weathered a hurdle in April when it ended its ‘go shop’ process, a period where it agreed to accept any offers that might prove superior.

In any case, just the announcement appears to have unsteadied coal’s crown. Environmentalists say the TXU deal could mark the start of a trend as developers of the 93 GW of planned coal in the US realize the financial risk they face because of impending carbon restrictions and the more favourable economic position brought about by ownership of low-carbon resources. Indeed, the TXU proposal appears to have emboldened clean air advocates to renew their fight against the 150 coal-fired plants that remain on the drawing board.

Environmental Defense, which helped negotiate the TXU merger deal, said it has no plans to stop there. ‘The backers of the remaining coal plants should be on notice’, said Environmental Defense regional director Jim Marston. ‘We designated significant resources to the TXU fight and expected it to last longer than it did. And now we’re prepared to focus our attention on the rest of the gang’.

Ceres, a Boston-based organization that directs the $3.7 trillion Investor Network on Climate Risk, said in a February 2007 report that TXU would have faced substantial financial risk had it gone forward with its coal-fired plants. Other coal plant developers face similar peril, brought on by rising construction costs, possible new climate change laws, and increasing competition from wind power.

In fact, the Ceres report said that wind can compete on cost with coal during off-peak hours in Texas: ‘Texas is already the nation’s largest producer of wind power and the state has mandated that wind generation nearly double by 2015 and nearly double again by 2025. With mandates like that and costs that are competitive – $23-$59/MWh for wind vs. $56-$83/MWh for coal (including potential costs for controlling CO2) – wind power is a growth area that could cut into demand for some of TXU’s power’.

Should other utilities heed this warning, and retrench from plans to build coal-fired generation, wind power may be able to significantly expand its position.

Crystal ball?

For the most part, opportunities created by new transmission, plug-in cars, and a toppling of coal’s predominance, remain only future promises. To some degree, they rely on a crystal ball that can be at times hazy. The industry may depend on the Production Tax Credit and other current incentives well into the future to support its growth. But what’s clear – particularly following FERC’s recent California decision and the TXU merger – is that the trend is moving in wind’s favour. Wind power capacity increased by 27% in 2006 and is expected to increase an additional 26% in 2007, according to AWEA. The door, already ajar for wind to become one-fifth of the nation’s power mix, is opening wider.

Elisa Wood is US-based writer on energy issues.
e-mail: [email protected]