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United States

Utilities as owners not customers -- Sea change in attitude

Last month's announcement by Mid-American Energy Company that it plans to more than double the amount of electricity it generates from wind reflects a growing interest from US utilities in owning projects rather than buying the power from independent producers. "This is a relatively new trend in wind," says Edward Einowski of law firm Stoel Rives LLP.

Beginning in the late 1990s, when many US electricity markets moved to deregulation and retail competition, vertically integrated utilities were either encouraged or mandated to buy their power from third parties. But as enthusiasm for deregulation began to wane, spurred by the California power crisis and financial meltdown of the merchant gas generation business early this decade, utilities are moving back into the generation business. And many want to own wind.

"What it reflects is a sea change in attitudes about wind farms being part of a resource mix," says Ed Feo, a partner in law firm Milbank, Tweed, Hadley & McCloy LLP. While neither Feo nor Einowski can put a figure on the number of deals that have been done putting outright ownership of wind farms in utility hands, Einowski says there have been more in the last two years than the previous five. Both lawyers were speaking at a recent Wind Project Finance and Investment Workshop organised by the American Wind Energy Associations in Houston, Texas.

The slowing of deregulation has not been the only factor motivating utilities to look at owning and operating their own wind generation. Another is the ability for the utility to earn a rate of return through direct investment in resource ownership, says Einowski, something it cannot do on purchased power. The fact that many utilities can directly use wind's $0.019/kWh production tax credit as they are generated in the US, rather than go through the complex deal structures and third party investment that smaller developers without a PTC appetite depend on to monetize the credit value, creates efficiencies that can reduce the overall cost of the power generated, adds Einowski. Concerns over turbine reliability, which influenced some utilities to avoid the risks of owning wind projects in the late 1990s, are also less of an issue today.

Early mover

MidAmerican, the largest utility in Iowa, with 706,000 electric customers and more than 687,000 natural gas customers in its 10,600 square-mile service territory, is one of the early movers. In 2003, it invested $386 million to build 360.5 MW of wind generation facilities in Iowa. Last month, it received approval from the Iowa Utilities Board to build up to 545 MW more, starting with a 99 MW project in the west central part of the state using 66 GE Energy 1.5 MW turbines that is scheduled to be complete this year. The location and size of additional facilities have not been finalised.

"This project will bring additional renewable energy to Iowans while keeping electric rates stable for our customers," says president Todd Raba. "We are again adding renewable energy to our diversified generation portfolio in a way that makes sense for our customers, our company and the state."

In the same week MidAmerican unveiled its plans, Wisconsin Power and Light Company (WP&L) announced changes to its 2006-2013 supply plan that triples the amount of proposed wind generation to 300 MW. WP&L says it may choose to own the wind and, in fact, has entered into an option-to-purchase agreement with Midwest Wind Energy (MWE) for development rights to the Cedar Ridge Wind Farm, which could be on line by the end of next year and have a capacity of 80-99 MW. "The company is also actively pursuing additional wind purchase power agreements and ownership opportunities in Wisconsin, Iowa and Minnesota," it says.

Texas and Oregon

In Texas, TXU Corporation also announced last month its plans to launch a new company to double its renewable energy portfolio to approximately 1400 MW by 2011. "TXU Renew will focus on the growing renewable energy market by investing in renewable power facilities," the company says. It is currently one of the largest purchasers of wind power in the country, but does not own the generation facilities.

Einowski says the US wind industry is also beginning to see more utility requests for proposals for wind energy that demand project ownership as an option. It is an approach Puget Sound Energy (PSE) took when it released its request for proposals for wind energy in 2003 -- it asked for proposals for either long-term power purchase agreements or PSE ownership of the projects.

The utility opted for ownership and late last year announced completion of its Hopkins Ridge wind station, making it the only Northwest utility to solely own and operate a large wind farm. "This is a milestone for our customers and for our company," said PSE head Steve Reynolds. "Hopkins Ridge marks the beginning of a new era for us, with a clean, cost-effective source of renewable power taking a prominent place in our mix of electricity supply." The utility expects to have its second wind farm, the 229 MW Wild Horse Wind Project, operational late this year.

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