Establishing clear, simple and predictable cost recovery mechanisms for utilities and opening the door to merchant players will be key to making the transmission expansions that will allow wind to become a significant part of the US generation mix, says the former chairman of the US Federal Energy Regulatory Commission (FERC). Pat Wood, who held the top job at FERC from 2001 until last June, says the "800-pound gorilla" facing the US electric industry is sufficiency of the power grid.
"Folks, this highway is full," Wood told delegates to a Wind Project Finance and Investment Workshop held by the American Wind Energy Association (AWEA) last month. "I don't care how good your PPA looks on paper, without relatively firm rights to travel on it, those turbines are going to go somewhere else."
A major barrier to investment in new transmission has been the issue of cost recovery. Utilities are reluctant to invest in upgrades without commitments from generators. At the same time, generators -- and their financiers -- are reluctant to move forward without access to transmission.
Part of the solution, says Wood, is to move to regional market structures where the process for recommending new transmission is clear and the cost is shared across a broad customer base. It is the approach that has worked well in the 200,000 square miles covered by the Electric Reliability Council of Texas, which includes about 85% of the state's electrical load.
"No utility in its right mind would build a project if they didn't think they had a good way to get a return on capital. It's not happening and I don't blame them," says Wood. "That is why I don't think you are going to see a whole lot of progress until people get to regional cost recovery tariffs for transmission."
Build own transmission
The wind industry, says Wood, should also push for changes to archaic state laws that only allow utilities to build transmission. It should be made possible for new merchant players to step in and build transmission capacity where they see a need. "There are companies out there that are well-financed and are willing to build and expand transmission."
Wind power companies should be among them. In areas with a good wind resource profile, Wood argues, the economics are such that there is room for wind developers to build the transmission they need and still make money. "I think it is happening. I hear more and more of that question: should we just build it ourselves? I think that is going to have to be a tool in the toolbox for a company that wants to be more than just a niche player."
The energy policy act passed by the US Congress last year provides for the establishment of so-called national interest transmission corridors, within which FERC has the authority to permit and site projects if state regulators fail to do so. AWEA has proposed establishment of nine corridors through wind-rich areas that could provide grid access to as much as 15,000 MW of new wind. But Wood says the plan is too complex to have much of an impact, at least not right away. He contrasts it to the natural gas industry, where FERC has almost total authority to permit and site pipelines. "I think in comparison it is going to be pretty anaemic, but it is better than nothing," he says. "I wouldn't look for any relief in the short term."
Although there has been "a remarkable shift in utility nonsense about accepting wind power" over the decade Wood spend as a regulator, first with the Public Utility Commission of Texas and then with FERC, there are still issues that need to be dealt with. New standardised interconnection rules, issued in December but proposed during Wood's tenure, will help give wind more equitable access to the US electrical grid. Work to broaden the industry's access to customers and establish tariffs that are neutral to wind, instead of penalising its intermittency with onerous imbalance penalties for veering off delivery schedules, is progressing.
"Where you have got organised markets, and that is 70% of the country, that is all worked out. It may need some tweaking, but by and large, they get a B or B+. Where it is not, that is where FERC has got to fix it. That is what we started and I wish I had started earlier so I could have finished it before I left." Last April, FERC proposed a new rule that would eliminate the imbalance barrier, but it has yet, to Wood's frustration, to be finalised. When it is, he said, it will help clarify the economics for investors in the remaining 30% of the country, which includes the wind-rich west and the not-so-rich southeast.
Now back in Texas in the private sector, Wood is involved in energy and infrastructure project development and recently joined the North American advisory board of Irish wind project developer Airtricity, which entered the US market three years ago. The Irish renewable energy company plans to invest $1.5 billion in the North American wind market by 2010, starting with 200 MW this year and another 400 MW in 2007 -- and Wood's enthusiasm for the market is just as strong.
Like his former boss, President George Bush, he believes wind power can eventually supply 20% of US electricity needs. In fact, he thinks it is a given. "You've got one of the more conservative business guys in recent history saying twenty percent. So if anybody wants to argue about seventeen or eighteen percent, I say: out of the classroom you fail. If you want to talk twenty-five or thirty per cent let's have that debate, but Bush has already put twenty per cent as the floor, so I say let's go."
MAKE THIS HAPPEN
With wind power currently supplying less than 1% of US electricity generation, Wood admits the industry has a long way to go. "There are lot of different issues, I think, that are going to be needed to work through. But most people are saying we have got to make this happen." Among those people, he says, are political leaders. "I don't care how under the sway of the monopolies you are, if your governor says I want wind power in this state, then the utilities and the public utility commissions and all the hangers-on make it happen. We had that in Texas."
Back at the workshop, he told workshop participants that the industry is arriving at a point where "infant industry support" like the $0.019/kWh federal production tax credit (PTC) is no longer necessary. He feels that wind power would likely experience stronger, more consistent growth without the notoriously inconsistent PTC, which has come and gone in cycles ever since its inception, pumping blood into the industry one year at a time only for the life support machine to be switched off the next. "It is probably healthier if we got off of it," says Wood.
A smart deal to make, he says, may be to agree to a sunset of the PTC in exchange for a longer extension than the year or two Congress normally grants.