California Wind Producers Enjoy High Prices but aren’t Paid

Wind power producers in California were blown away when after years of struggling to turn a tiny profit, the price of their energy quadrupled late last year and they were making huge profits.

But in the midst of California’s severe energy crisis, a time you would think they would be most needed, their elation has quickly died down as near bankrupt customers refused to pay them. Utility Southern California Edison earlier this month suspended payments to “qualifying facilities,” which include wind power producers. They have yet to pay even for energy produced last November. Another utility, Pacific Gas & Electric, has also halted payments. The two companies want to renegotiate contracts at a much lower price, industry sources said. “We had a couple of profitable months after 10 years of being very marginal,” said Bob Gates, senior vice president for Enron Wind Corp., a unit of Houston-based energy giant Enron Corp.. Jan Paulin, president of SeaWest Power, which develops wind power projects, said after years of struggling to survive with prices around three to four cents a kilowatt hour, the industry suddenly became extremely profitable as the state’s chronic electricity shortage helped prices soar to about 17 cents. The state’s power shortage has its roots both in insufficient supply and in a credit crisis caused by the financial woes of its two leading utilities. To meet demand, California utilities have been forced to pay skyrocketing prices for wholesale electricity on the spot market. But they are not permitted to pass through their full costs to consumers under the state’s 1996 deregulation law. The burden has taken San Francisco-based Pacific Gas & Electric, a unit of PG&E Corp., and Edison International unit Southern California Edison, which is based just outside Los Angeles, to the brink of bankruptcy. Prices paid for wind power are based on an “avoided cost” formula set on the basis of the cost of producing electricity by the most likely alternative method – which in California means natural gas. Consequently, as natural gas prices soared late last year so did prices for wind power. This produced windfall profits until the utilities stopped paying. Enron’s Gates said wind power producers are willing to renegotiate their contracts with the utilities, many of which run for 30 years. They are discussing a revision which would significantly reduce prices. “I think we are going to cut the price in half and fix it for five years,” Gates said, noting that wind producers may receive about eight cents a kilowatt hour, down from around 17 to 19 cents at the moment. California currently receives less than one percent of its electricity from wind power with development curtailed by competition from seemingly cheaper natural gas-fired plants. Wind, however, has one major advantage over its main rival – the cost of its input never changes in contrast to natural gas-fired plants, which have seen their running costs soar during the last few months. This means it is ideally suited to providing supplies at long-term fixed rates, something California has been seeking to secure recently. Yet, wind producers were not able to bid during California’s auction this week for long-term supplies as the state was seeking “firm” supplies, bringing attention to wind’s great weakness or design fault – sometimes it does not blow. In the mid 1990s, California abandoned plans to invest in wind plants, under pressure from utilities such as Southern California Edison who believed cheaper alternatives were available. At the time, the state didn’t need the power. This has diminished the sympathy some in the industry may feel toward the financial plight of the embattled utilities. “I think in the wind community there is some residual irritation because Edison has not been all that cooperative with wind,” said Enron’s Gates. He also said that if wind producers continue to not be paid, they will stop supplying electricity. “You come to a point where you will have to stop because you can’t pay people (your employees). If they won’t pay, we will have to walk out of the contract,” he said.

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