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Analysis - Questions over BP's projects and pipeline

UNITED STATES: Following the surprising announcement that BP, the US's eighth largest wind owner, is selling its 2.6GW US wind portfolio, sources suggest that buyers are already weighing up the assets on offer. However, enquires are different to actual acquisitions, and there are questions about how the market will view the 16 wind farms and 2GW pipeline.

Clipper's Liberty wind turbines at BP's Fowler Ridge wind farm
Clipper's Liberty wind turbines at BP's Fowler Ridge wind farm

One issue is that more than a quarter of BP's fleet runs on Clipper Windpower's troubled Liberty 2.5MW turbines, which have a record of gearbox failures. Moreover, four of BP's plants — totalling 585MW — are also merchant projects, which face unfavourable market conditions.

The multinational's US wind assets are estimated to be worth just over $2 billion — or potentially up to $2.9 billion — said Bloomberg New Energy Finance. BP outright owns 1.6GW of the 2.6GW in which it has interests. America represents the lion's share of BP's wind business.

BP said it has invested $7.6billion in alternative energy, with much of this going to wind. One major aspect of its wind strategy was a supply deal with Clipper. In July 2006, shortly after entering the US wind market, BP formed a strategic alliance with Clipper for up to 4.25GW of turbines over five years. The oil company's first American wind farm came online in 2007. In 2008, BP agreed to pay Clipper $31.9 million for a 50% share in the 5GW Titan development in South Dakota — even though little transmission capacity was nearby. Only 25MW was built, and the project has effectively been cancelled. BP refused to say whether Titan has been included in its pipeline.

BP's 680MW of installed Liberty turbines comprises more than one third all of deployed Clipper turbines. The Liberty's operations and maintenance (O&M) costs have been a heated issue, especially with the winding down of Clipper's manufacturing by current owner Platinum Equity. BP's seven Clipper projects may fetch a lower price than those with GE, Vestas, Nordex or Mitsubishi machines. More worryingly, according to a former Clipper executive, when United Technologies Corp. did due diligence before buying Clipper in 2010, it estimated a massive 25% lifetime failure rate for Liberty gearboxes.

According to insiders, repair of Clipper's "integrated" gearbox can cost twice as much as another model. The round trip cost of a fix — including cranes and labour — can be as much as $700,000. If the core is damaged and a replacement needed, the price might reach an astonishing $900,000. "I expect they're going to bleed profusely because of the Clippers," said one source. BP would not comment on the gearbox estimates.

Its newest Clipper project started operating in February 2012, long after Liberty's problems emerged. But BP confirmed it has settled with Clipper regarding O&M and warranties. "Since the middle of February, BP has been transitioning to a "self-perform" model for [O&M] services for most of its sites with Clipper turbines," said BP spokesman Hartwig. The terms are confidential.

The timing of BP's sale of operating assets is good enough, said Ed Zaelke, co-chair of law firm Akin Gump's global project-finance practice. Projects with secure long-term power purchase agreements (PPAs) are increasingly seen as a safe investment. BP is also the operational owner of most of its projects. The merchant plants are all in Texas, a healthy market for power demand. But to be as saleable as plants with conventional PPAs, they must have "synthetic" PPAs with a hedge provider, who shoulders the risk of power prices dropping but, in return, may take an equity stake. It is not clear that they do.

Purchasers of BP's operating assets might be banks or pension funds, but only a strategic player — such as a major utility — would also buy the undeveloped assets. An overseas suitor is a "distinct possibility" if they can monetise the production tax credit (PTC), said Zaelke.

As the moment, it appears the questions outweigh the answers. Crucial for buyers of BP's pipeline is whether construction can begin before the PTC expires in December. BP describes the projects as "nearly shovel ready" but refused to say how many could make the deadline.

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