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Huge contract kicks Tehachapi awake -- Groundbreaking commitment set to drive new transmission build

Last month brought a milestone in the US wind market with the signing of a 1500 MW power purchase agreement (PPA) between Southern California Edison (SCE) and Alta Windpower, a 50/50 venture between long-time developer and operator Oak Creek Energy Systems and relative newcomer and financial heavyweight Allco Wind Energy of Australia. The contract is not only huge, it also represents an opening volley for vast new development at the existing Tehachapi wind resource area. Any substantive construction, however, can only occur after approval and build out of a transmission expansion that industry watchers expect will unlock as much as 4500 MW of stranded wind potential in the Tehachapi area.

"It's no secret, all you can do right now in Tehachapi is dribs and drabs," says Matthew Freedman of The Utility Reform Network, a watchdog consumer group that scrutinizes utility operations. "The key thing, though, is that this is the big one. This is the project we have been dreaming about for years."

And years it will still take. Although a proposed $1.8 billion transmission project spearheaded by SCE gained a key nod of approval last month from the California Independent System Operator (CAISO), it merely sends the upgrade into the permitting approval process under the California Public Utilities Commission. SCE will pay up front for the line and recover its investment through transmission rates and by spreading the cost across the entire ratepayer base. It can do this because the line is deemed by CAISO to be an overall system upgrade -- beneficial to consumers, multiple generators and the system as a whole -- rather than a mere network link. If a new wire just links a project to the network, the generator has to bear the cost.

The PPA will help drive the approval process, says Freedman. The big barrier to getting any new transmission built is investment risk. What if there are no generators to use and pay for the wires? The PPA reduces that risk, says Freedman. "This gives us a big slug of capacity that's intended to come online as soon as transmission is constructed. It helps promote the rationale for transmission and provides assurances that consumers want it."

SCE, like other public utilities in California, is bound by the state's mandate to procure 20% of its power from renewables by 2010. Freedman thinks the ambitious PPA is driven partly by a first mover mentality. "They want to know they're going to get a big chunk of [wind in Tehachapi]. They probably fear that others might come in and develop those resources and end up selling to other retailers."

Silver bullet

SCE's Stuart Hemphill says that nearly all potential for wind in California is located in the existing wind parks like Tehachapi, Altamont and San Gorgonio Pass. "I struggle to think where the next place is that's full of potential. Those are all three existing areas and we are doing what we can to access that."

Hemphill says that 20% renewables by 2010 will not be reached. "We're at seventeen per cent, but we're real challenged to try and meet that goal. Virtually all renewable energy resources are in distant locations, not where the customer resides. Transmission is the missing link. If there was a way to permit transmission quicker, that might be the silver bullet."

For its first wind energy contract in the US, Allco Wind Energy chose one to be noticed. Together with Oak Creek Energy Systems, it has formed Alta Energy, which holds the 1500 MW contract with SCE. Allco, an Australia-based global investment fund, is a relative newcomer to wind energy, but plans an aggressive push into this market (page 46). From Australia, the company's Steen Stavnsbo says Allco intends to be involved in all stages of the Tehachapi project from initial permitting and development to construction and a substantial ownership interest through its lifespan.

FLEXIBLE PRICING

Stavnsbo is optimistic the transmission upgrade to Tehachapi will be approved and built, allowing the company to begin interconnecting first phases of the overall plan within the next two years. The PPA is designed with considerable flexibility to account for the long term nature of the contract and the underlying transmission component. Freedman says it also includes price indexing to account for fluctuating turbine prices.

"This is an industry in flux right now and costs are all over the map," says Freedman, who calls it a fundamental question of sequencing in these deals -- particularly a deal contingent on new transmission. If the current pricing trend continues, turbine costs may well be higher than they are today by the time construction begins and turbine contracts are inked. But changes in the wind business, manufacturing, or increased policy stability could also bring prices down, in which case, "Shouldn't ratepayers get the benefit of that?" he says.

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