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United States

Northwest utilities fronting new trend -- Advantages of owning the asset catching on fast

The growing trend in US utilities becoming wind farm owners ra-ther than merely buy-ing the end product is seeing massive amounts of development in the Pacific Northwest. Three of the area's investor-owned power companies, Puget Sound Energy (PSE), PacifiCorp and Portland General Electric (PGE), have lined up wind projects ranging from 100 MW to 450 MW with no slowdown in sight.

A variety of factors are in play, including the rising relative costs of other generation sources, the development of state legislation setting minimum standards for renewables in supply portfolios, and the window of opportunity offered by the federal tax credit for wind power production that will last at least through the end of next year. The particular spur for utilities, however, is that wind farm ownership gets counted among assets for calculating a permanent rate base, whereas utility spot purchases of wind power are an expense that cannot be depreciated as an owned asset. Utilities also arrive at a shareholder rate-of-return based on asset calculations.

"Utilities earn a return on dollars invested and that puts a thumb on the scale in favour of ownership," says Rachel Shimshak of Renewable Northwest Project. "If the utility owns the asset, they get to put it in their rate base. That means more money."

Driven by economics

PSE in Washington kicked off the area's utility-owned movement in earnest last year when it bought a pair of in-state wind developments. The 150 MW Hopkins Ridge facility came online in 2005 and the 230 MW Wild Horse project should be up and running before this year ends. The company expects to add more. Both projects use Vestas 1.8 MW turbines.

"We're currently evaluating our plans and wind is a big part of that," says PSE's Roger Garratt. "We take a number of factors into account and, while wind projects have environmental advantages that look good, the real driver is economics."

Garratt does not disagree with Shimshak's assessment. "That is certainly a part of it," he says of the rate base and shareholder concerns. "But for us it really comes down to costs for end users. We began looking at wind in earnest in the 2002-2003 timeframe and that's when we started to get comfortable with the technology and the players involved. What we found is that wind farm ownership is much more economical than purchasing the power -- by something like 20%."

Back in April, Portland-based PGE announced plans to buy the development rights for Biglow Canyon, an Oregon project that could eventually produce up to 450 MW. A first phase is expected to be completed by the end of next year, pending turbine availability. "What we're seeing is that our loads are growing and the hydro system is not," says PGE's Steve Corson. "We've got a strong and well-developed hydro system but it's eventually not going to be able to handle all our needs. Beyond that, renewables are an area of particular interest and wind is the primary source we're interested in. It's also something our customers are very interested in."

Most recently, Portland-based PacifiCorp announced the purchase of Leaning Juniper, a 100.5 MW Oregon development built by PPM Energy that went online last month. The deal, which is PacifiCorp's first wholly owned wind farm, satisfies the company's promise to add 100 MW of renewables to its portfolio within a year of the transaction that saw Mid-American Holdings buy PacifiCorp from the UK's ScottishPower. PacifiCorp also agreed to add another 300 MW of renewables by the end of 2007 as part of the deal. MidAmerican, based in Iowa, is controlled by billionaire investor Warren Buffett.

"With the federal production tax credit you've got the option of an affordable resource to help diversify future portfolios and mitigate future risk," says PacifiCorp's Dave Kvamme. "And companies have the desire to find renewable resources for customers because customers are asking for them. It's a happy convergence."

Ratepayer risk

Yet for all the talk about saving the environment and pleasing customers, lack of risk makes wind farm ownership an easy decision for utilities. "When a utility purchases wind energy from a producer, that producer has assumed all the risk," says Shimshak. "But when a utility owns a wind project, the ratepayers take on that risk."

As of early last month, Washington, at 390 MW of installed wind power capacity and Oregon with 337 MW, stand in seventh and eighth spots in US wind development rankings, according to the American Wind Energy Association. Texas and California lead the way.

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