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A utility view on dealing with wind

With gas prices all over the place, electricity consumers in Colorado have been swapping to wind power as the cheapest option. Utility Xcel Energy says it fully intends to add more wind, but that getting new wind stations up and running is harder than ever. Meantime it is forging ahead with a major new coal facility

Three months ago, Xcel Energy announced a 30% rate hike on electricity rates in Colorado due to the rising cost of natural gas; about half the power the utility generates in the state comes from gas, roughly the other half from coal. Customers of the utility's green power product, Windsource, on the other hand, saw a credit on their bills. Suddenly, wind was not just for the environmentally conscious consumer. It was the cheapest option.

Before November, Windsource customers paid about $1 extra for each 100 kWh block of power generated from 61 MW of wind power capacity. On average, Colorado residential customers consume 625 kWh a month, so average consumers who took all their power from Windsource usually paid about $6 extra a month.

Windsource customers are exempt from the fuel costs levied on Xcel's other customers, so when the overall rate hike of $15.80 a month was announced for residential customers, the waiver on the fossil fuel related fees for full Windsource customers became high enough to become a credit. The usual monthly fee thus turned into an expected $9.74 credit.

This news was enough to attract nearly 3000 new sign-ups -- more than 15 times the normal monthly volume of applications. "We had to caution customers that it was a one year commitment and that the cost of natural gas was in a great deal of flux," says Xcel Energy's Tom Henley.

His point was proved within the month when gas prices went down again and the credit for full Windsource customers was adjusted to $4.11 and then to an expected $0.45 credit by the start of January. But even with just a 45 cent credit, Windsource people were still paying less for their green electricity than Xcel's 1.3 million other Colorado customers were paying for their grey power.

Windsource is now fully subscribed in Colorado with 33,265 customers. More than 1100 people are on the waiting list. Operating in Colorado, Minnesota and New Mexico, it is the largest green power pricing program in the US, according to the National Renewable Energy Laboratory. Xcel expects to have over 46,000 participants by the end of 2005 for the combined program, Henley says. "The increase in sign ups was limited to Colorado because it was the only state with our program where the cost of Windsource was less than fossil-fuelled electricity," he adds.

Across the nation and in cyberspace -- through an uncountable number of renewable energy interest group websites and weblogs -- green advocates hailed this green pricing development (and others like it in Texas and Oklahoma) as the turning point for wind in utilities' resource planning. "Is it possibly a tipping point? Absolutely," Ryan H Wiser, a scientist at the Lawrence Berkeley National Laboratory, told the Los Angeles Times. "We have a circumstance where wind power generation looks pretty competitive."

No WIND turbines

Indeed, the future looks bright for wind at Xcel Energy -- on paper at least. The utility received 4600 MW of wind bids in response to its 2005 all-source request for 2500 MW of new generation resources and expects to award 750 MW of wind contracts. But while Xcel insists it is bullish on wind, it has a hard time getting it, says David Eves, vice president of resource planning and acquisition.

First, wind turbines are hard to secure. The current demand for them in the US, combined with high transportation costs, steel scarcity and an overall turbine supply shortage projected to last until 2008, is pushing up the price of wind generation. "It's frustrating," says Eves. "Gas prices are very high right now, but the cost of the alternative is high. It's not easy to just go forward and do this."

In 2004, for example, Xcel selected three finalists to build up to 500 MW of wind in an all-source bid. In the end, the company signed with two of the companies for just 129 MW. Then another company fell away -- leaving just 60 MW -- when it found it could not get affordable wind turbines (Windpower Monthly, May 2005).

Eves compares the tight wind turbine supply situation to gas turbine equipment shortages around 1999-2000. "We saw the same phenomenon, but wind seems to be suffering from more sustained problems, driven in large part by the inconsistency of the PTC," he adds, referring to the on-again, off-again federal production tax credit (PTC) for wind generation.

The PTC has driven the US wind market in boom or bust years -- depending on the willingness of Congress to renew the incentive or not. It was renewed again this year for a three year period. The effect of this on long term planning is the second barrier Xcel faces in getting hold of wind power, says Eves.

Take a basic all-source competitive bid as an example. "The time that it takes us to evaluate bids, negotiate contracts and obtain approvals from the state regulators doesn't fit well with the current conditions in the wind turbine market," he says. "One of the biggest challenges is acquiring turbines at a known price. We need to have a price to compare with other alternatives and get regulatory approval. By the time that is done, if the developer hasn't already locked in the cost of wind turbines and a delivery date, then he is caught in a risk of schedule and price changes. We've often seen this. The developer must then come back to the utility, which then must go back to the regulators and re-evaluate."

Because transmission rights are granted on a first-come, first-served basis, such projects lose their place in line. "But if the developer does go ahead and buy the turbines before approval, he has speculated on the turbines," says Eves.

All this risk is made worse with looming PTC deadlines, which jeopardise unfinished projects from getting the tax credit altogether. "Some of the projects also require transmission to be constructed, and it's very difficult to have this built in these short periods of time." Domestic wind turbine production would also help, says Eves. "Then we'd get away from the exchange rate risk and a more stable market environment."

And then there is the challenge of meeting state renewable portfolio standards (RPS) -- mandates for utilities to include a certain proportion of renewable energy in their supply portfolios and, in Colorado's case, demanded by citizens in a ballot. Xcel does business in eight states -- Colorado, New Mexico, Texas, Minnesota, Wisconsin, North Dakota, South Dakota and Michigan (Kansas and Oklahoma were dropped last year) -- the first five of which each have an RPS in place.

"The regulations are very different in each state," Eves says. "It's a patchwork of requirements for different resources, penalties, adjustment factors, and so on. In the resource planning process, we have to make sure we're complying in all these things, along with the right timing."

Things get challenging in cross-state operations, such as Minnesota and Wisconsin -- where Xcel operates as two companies but on one power system that includes South Dakota. "Our Wisconsin operating company has significant hydro generation and most of the wind generation is in Minnesota and South Dakota. Each state has different preferences to the degree of how much pre-existing or added generation can count toward their requirements," he says.

"Overlay that with the fact that some states want additional renewables built in their state -- and they're unwilling to count the renewables already on the system from an adjacent state. When you're allocating energy costs to customers, it starts to become inconsistent from where and how much renewable generation is added."

The Colorado RPS

Cost allocation to customers was the main reason Xcel opposed Amendment 37 in Colorado, which citizens used to vote in the state's RPS in 2004. From a utility that had shown interest in wind development -- and had supported two previous RPS bills that had failed -- its opposition to the mandate was confusing to many.

Eves says the new amendment required a portion of the energy to come from solar and Xcel was concerned about the cost ramifications, as well as no cost protection for business or non-residential customers.

Voters approved the RPS, which requires 3% of energy sales from renewables in 2007-2010, 6% in 2011-2014, and 10% in 2015 and thereafter. Four percent of each level must come from solar, with half of that needing to be from on-site customer solar. Most of that is now water under the bridge after another agreement that has basically made much of the mandate redundant. It has to do with a controversial new 750 MW facility going up in Colorado that will run on a non-renewable resource in plentiful supply in the region: coal.

Xcel is breaking ground on a $1.3 billion expansion of its Comanche Steam Electric Generating Station, a coal-fired plant near Pueblo, about 160 kilometres south of Denver. It will more than double the capacity of the plant's two existing boilers.

The company says it is not possible to meet the state's growing power demand without more coal. "Xcel Energy has not added any coal fired base load generation in Colorado since 1981," says Henley. "During that time the company was able to meet customer load growth with new gas fired generation, renewables and demand side management. There is a strong economic need for some additional coal fired generation at this time.

"To keep our generation portfolio balanced and manage risk, we need to maintain a balanced mix of supply. This is not a choice between coal and wind, we need both," he says, adding that more natural gas generation will be needed as well.

Xcel says the coal unit -- funded upfront by ratepayers until it is due online in 2009 -- will save its customers between $500 million and $1.4 billion over the next 30 years, by using coal rather than other resource options. The plant expansion plans caused uproar among national, state and local labour, civic and environmental groups, who filed several objections to the Colorado Public Utilities Commission in 2004 when the development was up for approval. Not only will the Comanche 3 unit spew an estimated 6.5 million tons of carbon dioxide into the atmosphere each year, but the groups also pointed to a decision by the US Environmental Protection Agency (EPA) to issue Xcel with a notice of violation on the existing Comanche plant for violating the federal Clean Air Act in 2002. Xcel denies the allegations.

Pro-wind settlement

Xcel and the opposing groups negotiated a settlement at the end of 2004, shortly after Amendment 37 had been ratified. Among other provisions, Xcel agreed to significantly reduce sulphur dioxide and nitrogen oxide emissions from the two existing Comanche units, which are more than 30 years old. It also committed to investing nearly $200 million in energy-efficiency programs over the next eight years and agreed to build 890 MW of renewable energy plant by 2013 -- nearly double that required under Amendment 37. Of that, Xcel plans to add 750 MW of wind over the next decade -- already earmarked from last year's all-source request for proposals.

The company also agreed to add a "carbon cost adder" to fossil fuel generation of $9 per ton of carbon dioxide emissions when planning any new facilities, starting in 2010 and escalating 2.5% for each subsequent year. The adder factors in the expected social cost of CO2 emissions. At the same time Xcel agreed to award renewable energy an $8.75/MWh green power premium.

The carbon adder means that the most polluting fossil fuel sources, such as coal, are hit harder than those that do not pollute as much, like gas, while the green premium is a flat rate applied to all renewables. The $8.75 value is in anticipation of future renewable energy credit markets driven by RPS mandates, says Eves. Under the coal-for-renewables deal, Xcel is not bound to use the adder and the premium when it evaluates new generation costs in future, but they are applicable to bids in response Xcel's current all-source request for proposals, says Eves.

In return, the environment and civic groups pledge "not to initiate, fund or participate in any formal administrative or legal action to oppose or knowingly impede the permitting or approval of those activities necessary for the construction and operation of Comanche 3," according to the agreement before the Colorado Public Utility Commission. "The agreement is a significant victory for both Colorado's electricity users and the environment and was achieved without costly, wasteful litigation," says Henley

The coast is not clear, however. According to two muckraking newspapers in Colorado, Westword and the High Country News, at least two lawsuits have been filed. The first is from the Rocky Mountain Environmental Labor Coalition of Pueblo, which is suing Xcel. The second is a filing by two local and state citizen groups, which are suing the Colorado Department of Public Health and Environment, claiming the state violated its own laws in approving an air permit for the new unit. Both lawsuits use the EPA's notice of violation charge as the main grounds for action.

Xcel's Mark Stutz told Westword: "There are always going to be some groups that think Xcel doesn't do enough, that don't want to see another coal plant built in the United States -- and who suffer from the misconception that we can meet our growing demand for electricity from renewables. It really takes a combination of a whole bunch of generating sources to make sure we meet demand."

Waiting for credits market

Xcel Energy aims to triple its total wind generation to 2500 MW by 2012 to comply with its own greenhouse gas policy, says Eves. It is working on ways to develop meaningful, tactical solutions that do not exaggerate or minimise the amount of renewables added to the system to meet the demands of state RPS legislation.

"But in the longer term, it would be beneficial to have a national renewable energy credits market and national renewable standards, with consistent criteria across the states that have RPSs," he says.

The utility is part of the Western Renewable Energy Generation Information System (WREGIS) working group, a concerted effort to formulate a common definition and trading platform for renewable energy. WREGIS has met for about a year, but has a way to go until a market is in place, he says. Until then, there is still work to do in understanding wind's impact on power systems.

In Minnesota, Xcel has close to 500 MW of wind online. "It's all physically located in the same place, and so the power comes and goes all at once," says Eves. "We believe that it is important to further analyse the contribution of intermittent wind generation to system reliability and to understand the degree to which it offsets thermal generation capacity," says Eves.

Debunking the myths

"Our technical advisors help us make sure we're studying the right things and making good, informed decisions. We're on the leading edge in the country in the amount of work put into that," he says. "We want to de-mythify the perception that wind is not coincident with our peak load. We see it as really important to debunk the myths of intermittency of renewable energy."

Xcel Energy operates in three electricity reliability council areas and all of them treat wind generation differently when deciding how much conventional generation it replaces on a system. "We are embarking on probabilistic studies to assess the effective load carrying capability of wind generation. I believe these studies will inform parties that have been on both sides of the issue: those who claim that wind has no capacity value as well as those who advocate extremely high capacity values. When you have the high concentrations of wind generation that we are adding to our systems, it is critical to understand the reliability contributions and impacts from these resources."

Overall, Xcel wants to add wind, says Eves. In late November the company signed a power purchase agreement with Enxco, a California-based wind developer, for a 205.5 MW wind farm in Minnesota, the outcome of a 2001 all-source bidding process in the state. The wind project will be constructed in south-western Minnesota and is expected to be online sometime in 2007.

"Wind is a real important part of our supply mix," says Eves. "While the tax credits are in place, we plan to add wind and stay ahead of all the RPSs. Our customers want it. But our federal policy goes in fits and starts.

"Clearly within wind generation there are opportunities to look beyond the expiration of the next PTC," he stresses. "More creativity is needed in contract structures, finance structures, equipment. Our needs for wind energy will increase over time. We're just anxious to see how people can get beyond the near term."

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