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United States

Sound economics take utility forward

In remarkable contrast to the generally anti-wind power sentiments of electric utilities in most parts of the world where wind power is trying to get a foothold on the market, two American subsidiaries of ScottishPower are expanding their wind portfolios, convinced it makes good business sense and represents sound economics

Last month, no less than 6000 MW of project proposals for new generation -- 85% of them for wind power -- flowed into the offices of PacifiCorp, a United States electric utility already making its mark as a national leader in its advocacy of wind energy as a viable route to supplying customers with electricity. The proposals were in response to a recent PacifiCorp solicitation for 1100 MW of renewable energy generation (Windpower Monthly, March 2004). By 2013, the privately held utility -- a subsidiary of Great Britain's ScottishPower that operates out of the US Northwest -- says it will buy at least 300 MW more.

The regulated retail utility's commitment to wind generation came out of its Integrated Resource Plan (IRP), the result of a formal power generation planning process that prompted the American Wind Energy Association (AWEA) to present PacifiCorp with its Utility Leadership award at the Global Windpower 2004 conference in Chicago in March. ScottishPower's unregulated arm in the US, PPM Energy, is showing a similar commitment. PPM boss Terry Hudgens says the company wants to increase the 725 MW of wind capacity it either buys or owns to 2000 MW by 2010.

PPM's expansion plans exclude additional gas generation, even though it owns 830 MW in natural gas generating plants and considerable gas transmission facilities in addition to its wind generation. And while PPM trails first-place FPL Energy in the size of its wind portfolio, for its 2000 MW goal and quick start in wind development AWEA gave PPM its Market Maker of the Year Award in 2002.

reducing risk

Behind the commitment of both ScottishPower companies lies the fact that wind power is proving to be good business, providing low cost and high value green electricity and reducing risk for both the regulated utility, which provides power to about 1.5 million customers in six Western states, as well as for PPM's merchant business.

ScottishPower has made a similar commitment in Britain. With 130 MW of wind capacity already in the ground, 30 MW nearly complete and over 546 MW awaiting planning consent, the utility is promising to produce 10% of its power from renewables by 2010.

As the potential for deregulation in the United States began to dominate utility discussions in the 1990s, both the "concept and substance" of generation planning fell out of vogue, says Ralph Cavanagh of the Natural Resources Defense Council. He is one of the country's experts in utility resource planning. With the rise of the movement to restructure electricity generation and supply, the industry thought market forces would provide the power demanded by customers when they needed it and dictate how that electricity would be generated.

OUTRAGEOUS MANIPULATION

But California's failed deregulation experiment in 2001-2002, marked by outrageous market manipulation and high prices, curbed consumer and political enthusiasm for allowing market forces rather than regulation to govern the electricity business. The fading influence of deregulation, says Robert Klein, group energy risk director for ScottishPower, means that wind now needs the support of generation planning by retail utilities as much as it needs the regulatory support of a national renewable energy standard if it is to gain a foothold in the US.

The shift to longer term generation planning at a few US utilities, however, is also due to the parallel presence of a deregulated market that has caused some, like PacifiCorp, to become more efficient and competitive, Klein says. People and businesses want the choices that deregulation promises, but it seems that those same customers also want the reliable and relatively cheap electricity service that only regulated utilities can provide.

"Most efforts to provide more choice through competitive mechanisms have been confusing to consumers and the risk and complexity of changing suppliers has been too great to encourage widespread flight from the safety and certainty of the regulated supply," Klein says. In addition, the "stability and credit quality" of unregulated suppliers has some worried. "What is happening is that regulated utilities are becoming more efficient, more customer oriented and responsive."

In its IRP, PacifiCorp portrays wind generation as both cheap and reliable when compared with other resources. To arrive at that conclusion, the utility considered the volatility of gas prices and the current and future environmental risks of the company's considerable thermal resources. It not only looked at the values of nitrous oxide and sulphur oxide, but at a potential carbon dioxide penalty, assigning it a value of about $8/ton of CO2. Even though "dispatchable" resources -- power technologies that can dispatch electricity on demand -- have the highest value for a utility, says Klein, "Wind has no fuel costs and it has these environmental values."

While Pacificorp's IRP is not the only example of integrated resource planning in the US, Cavanagh says it is the most sophisticated of the few utility plans in existence, especially in its recognition of the carbon risk and the way it accommodates that risk and hedges against it.

"This plan does things with risk concepts and risk analysis not present in other plans," Cavanagh says. "It brings the concepts of business portfolio management into the generation side of the business. So, you will see more renewable energy in this plan than any that I know of."

Both Klein and Hudgens, whose presentations at the Global Windpower conference in Chicago were remarkably similar, support public policies such as a federal renewables portfolio standard (RPS) and the $0.018/kWh production tax credit as ways to cut the risk of investing in wind development.

"We're a fairly risk-averse company, which may surprise some of you because we're market makers," Hudgens said at the conference. He added that the federal government needs to support these policies, "So we can move ahead and build a market," but he also pointed to the national risk of continuing to rely on fossil fuels to produce electricity.

"There is a problem with supplying this country's energy with carbon," Hudgens said. "A lot of dollars are sent overseas for gas and oil and that's a lot of dollars that could stay in the US." Wind power provides a "major opportunity for us to drive our own economy and it's good also from an economic point of view," he adds.

In addition to reducing the US reliance on fossil fuel, Klein says a federal RPS, which employs market forces to apply downward pressure on prices through trade, would lower the cost of renewables and minimise a utility's exposure to different state policies. The RPS also would help utilities get approvals from utility commissions to recover the cost of investments in wind generation, he adds.

Yet there is still plenty of work left to truly understand wind power's characteristics in order to cut the risks of bringing more generation online, he adds. While PacifiCorp has tentatively tabbed the costs of integrating wind into a transmission system at $5.50/MWh up to a 20% penetration, other considerations, such as the volume of reserves that may be needed to shore up the intermittent resource and the cost of integration at higher penetration levels must still be understood.

Hudgens is less certain about integration costs than is Klein. He says those costs, which add to the price of getting wind generation from the wind site to market, vary from $2/MWh in California to almost $16/MWh in the Western Area Power Administration's control area -- and that adds a lack of price certainty that is an impediment to wind development. "That's a huge difference," he says. "You need to go to the market to balance and that can drive the price up to $20/MWh."

Also still needed, says Klein, are regional transmission organisations that would be responsible for maximising the use of existing transmission systems and funding grid expansions, clarifying environmental and siting policies and providing fair access to the grid.

The solicitation

Wind generation works particularly well in a "diverse utility with a wide customer base" like PacifiCorp, Klein says. The utility has 8300 MW of generation capacity: 88% of that capacity is coal, 7% is hydroelectric, 4% is natural gas and 1% is wind generation or geothermal. PacifiCorp's current installed wind capacity is 120 MW.

The IRP calls for 4000 MW of new generating resources by 2013. It identified the utility's first priority as a baseload 534 MW generating station in Utah, but also calls for 1400 MW to come from renewables and almost 900 MW from conservation.

According to PacifiCorp's Deston Nokes, the utility received bids from 42 companies proposing 54 projects in response to the 1100 MW request for proposals (RFP) it released in February. The wind proposals it received are spread across the utility's wide-ranging service territory and nearly all are near PacifiCorp transmission.

"The 1100 MW of renewables referenced in our RFP is spread over a seven-year period, says Nokes. But, he adds, the utility has agreed with the Oregon Public Utility Commission that it will acquire those renewables ahead of that schedule "if economic to do so."

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