The Winds of Risk

Political risk may seem an odd concept to apply to the United States. International investment decisions usually weigh it when assessing how likely a government’s collapse may be or how robust various regulatory and legal systems are.

Political risk does exist in the United States and can influence power plant investment decisions.

For example, in November NorthWestern Energy said it plans to double its wind power capacity over the next seven years but expects no new coal plant construction. The reason: political risk.

“Until there is more certainty overall regarding greenhouse gases, carbon taxes — those kinds of issues — we’re just not going to be investing in baseload facilities” such as new coal plants, said a spokeswoman.

The South Dakota-based utility, a unit of NorthWestern Corp., needs at least 150 megawatts (MW) of wind projects to comply with a 2005 Montana law requiring utilities to get at least 15 percent of their energy from renewable sources by 2015.

But the utility’s biennial resource plan shows its power generation capacity will be in a deficit by 2014. With coal out of the picture, company officials expect to buy more power on the open market.

Several weeks after the NorthWestern Energy news, a decision by the Kansas Corporation Commission led Westar Energy to halt plans to develop 200 MW of wind power of all things. The company said it will move forward with a separate plan for 295 MW of wind power. But in a statement, the company said the regulatory order indicated that future wind generation projects could be subject to “undefined operating standards” and “potential financial penalties” not imposed on other forms of generation.

“We are concerned that the…decision introduces uncertainty as to how wind investments might be regulated in the future, increasing their risk and inhibiting such development,” said Bill Moore, Westar Energy president and CEO. “We don’t see the order encouraging the further development of wind energy in Kansas.”

The unresolved issue that raised the level of risk was whether or not Kansas regulators would adopt an “incentive mechanism” for wind power. As the commission explained, under purchased power agreements wind energy sellers are paid when their facilities are available to run and when the wind is blowing. As a wind turbine owner, Westar will place the capacity it owns in its rate base and could potentially recover its capital costs “without regard to the amount of production from the facilities,” according to the commission. The risk, as voiced by the commission’s own staff, is that Westar may have no incentive to keep its wind plants operating at a high level. Staff favored imposing an incentive mechanism for the regulated, utility-owned wind generation.

Uncertain Wind

Westar balked, arguing such an incentive would make the company responsible for ensuring the wind blows. It argued that wind farms typically require high levels of unscheduled maintenance (the nature, it said, of a still-developing technology) and that its ability to control turbine availability would likely be limited at best.

The commission said it shared its staff’s concern that wind generation performance depends heavily on a strong O&M program. “Unless wind turbines are tended and maintained at a high level, their performance and the wind capacity factor will diminish, and as a result the costs of wind energy will rapidly escalate for ratepayers,” the reglatory decision said.

The regulators also said an incentive program could be designed to eliminate the vagaries of wind and to isolate turbine performance and availability. “For example, a program could be designed to operate on an annual ex-post basis comparing wind and performance data from the prior year.”

In the end, the commission gave Westar the benefit of the doubt, for now. Regulators plan to revisit the incentive issue with Westar in two years. In the meantime, they want to collect data regarding O&M and capital costs for major component failure, capacity factor, turbine availability, wind velocity and “other information the Commission may deem useful.”

A seemingly simple decision to collect data, but one that raised the political risk so high that Westar shelved plans for 200 MW of renewable energy. With coal under attack in Kansas during 2007, natural gas-fired generation may again come out a winner to meet demand growth. Or, perhaps the state’s power generators will take a cue from NorthWestern Energy and conclude that spot market price volatility is better than the regulatory risk being thrown at fossil fuels and — improbable as it seems — renewable energy resources.

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