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United States

Utility sector seizes leadership role

The wind industry's battle for acceptance as a serious member of the electricity business looks well on the way to being won in America. The country's utilities, demonstrating a new grasp of wind power as an economic and practical provider of large amounts of generation, stole the initiative at last month's American Wind Energy Association conference in arguing the case for a whole new approach to power supply

The penny has dropped for American utilities seeking to expand their generation base. An increasing number are championing wind power as an integral, manageable and economic part of the supply mix. "Across the country the utility embrace of wind power is now a national phenomenon," says Pat Wood, the nation's former top federal energy regulator and now actively involved in the wind business. "It is a seminal moment here."

Among those leading the trend is Xcel Energy, which buys more wind power than any other US utility. "We think it is good business. We believe that the technology and the industry are for real. We believe the problems are manageable, and we believe the time to do this is now. That's where we stand in a nutshell," says Xcel president Paul Bonavia. "People want this. They put a value on it." Xcel, based in Minneapolis, operates in eight states right down the middle of the country.

Utilities are looking to wind to meet the escalating need for new generating resources, says Stephen Wright, administrator of the hydro-dominated Bonneville Power Authority (BPA). Demand is growing 2-3% a year in the Pacific Northwest and even faster in other western states like California and Arizona. Balancing large volumes of wind power with other generation and demand has BPA on a fast learning curve, Wright adds.

His words are echoed by Jan Schori of California's Sacramento Municipal Utility District (SMUD). "Utilities recognise at this point the strong value of wind power and place a lot of importance on the key attributes," she says. "Congress is in the throes of debating what to do about climate change. Wind has a very key role in enabling utilities to meet what is coming down the pike at them -- and it is in the interest of utilities to try and come up with solutions."

Those solutions to relying on wind power for significant proportions of generation while keeping electricity supply stable are rapidly emerging. California's independent power system operator, the Cal ISO, is "reasonably comfortable" about managing the volumes of wind power needed to meet the state's renewable energy target of 20% by 2010, says CEO Yakout Mansour. He concedes, though, that new thinking will be required to get to 33% by 2020. The state's installed wind capacity is expected to rise from about 2000 MW to nearly 7000 MW in the next three years.

The time is right

The traditional power industry's new-found enthusiasm for wind emerged at this year's American Wind Energy Association's annual conference, which attracted more than 40 utilities from across the US, a record high for a group that has, in the words of one major financial player, "typically not had a love for wind." As the four-day event progressed last month, news of the strong utility leadership, demonstrated from various conference platforms and repeated to the press, spread rapidly among the more than 7000 delegates at the Los Angeles Convention Centre.

"We can talk about development of wind farms, the greatest improvements in new turbine technology, transmission policies and what-have-you until we're blue in the face," said Wood, now chair of the US advisory board of Irish wind project development company Airtricity. "But if the utility industry in its many varieties -- public, private, competitive, regulated -- is not engaged in this effort, we aren't going anywhere."

For Wood and his power industry colleagues, the time is right for a variety of reasons. Nearly half of all US states now mandate that utilities have some degree of renewable electricity in their system. Some, like California, are also moving to cap greenhouse gas emissions. Those policies, along with a focus on resource diversification and the need to hedge gas price risk, are turning up wind power as the obvious choice.

Integrating wind

SMUD is studying just how much wind it can accommodate in its control area. "We are working at how to integrate wind from a resource planning perspective for the long haul," Schori said. Part of that is not just looking at the cost, but the benefits as well. "We need to do a better job as a utility of integrating the wind operating data with our utility planning data, so we can make sure we are fully crediting wind for the value that it can deliver, particularly under transmission loss scenarios. Wind can provide benefits that it should receive credit for, such as VAR support," she said, referring to the volts-amps reactive power needed by the grid network, which early wind technology had difficulty providing.

BPA's Wright is also preoccupied with integration. "The load is growing so fast that it is causing concern about our ability to keep up with it. At the same time there are tremendous resource constraints being placed out there, whether it is renewables portfolio standards or limitations on buying or building coal plants," Wright said. "The market for resources is shrinking from what we thought it would be just a year ago. The consequence of that is there is going to be a fierce competition for resources that are out there and a need to integrate resources that we really weren't planning on using to the extent we are now planning on using them."

Wright told delegates his "fundamental fears" for the future are whether there will be enough generating resources that work with existing supply to avoid either a reliability or rates crisis. BPA, which will have 1400 MW of wind on its system by the end of this year, recently completed a study that found integrating 6000 MW over the next 15 years is technically feasible. But Wright told delegates there is "a lot of hard complex work that needs to be done" to make it work, including defining and developing new ancillary service markets, encouraging geographic diversity through transmission construction, and finding ways to get new flexible technologies on line to help deal with wind variability. "We don't believe we have solved the wind integration challenges in the Pacific Northwest. We do believe we're addressing the concerns that must be addressed to move wind from a marginal resource to a mainstream resource."

Think differently

Integrating large amounts of wind and other intermittent generation requires utilities and regulators to let go of the status quo. "We just have to think differently about how we operate compared to the past," said Schori. A case in point is a new tariff under development by the California ISO that will allow it to invest in new transmission for remote generation in advance of new interconnection requests.

Approved by the Federal Energy Regulatory Commission in April, the concept allows the Cal ISO to roll the cost of new lines into the access charges paid by all system users. As new generators connect they will pay their share, a significant departure from the usual approach of requiring the first generator that comes online to pay the full costs of the interconnection.

"We tried to step away from that traditional framing of the issue and recognise that whether people like it or not we have an RPS in this state and we have a lot of resources that need to get to market," said Schori. "Even utilities that are somewhat more wedded to the traditional model recognise that we are operating in a new legal framework. And I think that awareness is going to spread."

For California to go beyond 20% renewables and reach its expanded target for 33% by 2020, a different approach is required, confirmed Cal ISO's Mansour. "The idea of each state trying to satisfy its portfolio target from within the state boundary may work for the earlier targets, but will prove not to be a good strategy for the longer term and higher targets. Geographical and seasonal diversity can provide a significant value in reliability and cost. In this regard, interstate transmission is the next barrier we need to overcome," he said. "The need is the same we have had all along, but the driver, which is renewable resource integration, is new and very powerful. I ask you to join us in forcing the issue on the politicians and the regulators across the region."

Transmission

The job will not be an easy one. Just days before the conference started, the Arizona Public Utilities Commission (PUC) rejected a proposed 500 kV interconnection that would have brought gas fired generation from that state into California. Former US Senator Tom Daschle, who is now special policy advisor for law firm Alston & Bird LLP, told delegates that the current system puts too much authority in the hands of PUCs. "In some respects they are little fiefdoms right now that have far too much control to keep us from getting to the regional approach that we need," he said.

On the same theme, Wood referred to the "unfortunate culture of anti-federalism" as a real impediment to mending America's ailing transmission network and that wind power could catalyse an entire remodelling of the market. "I think renewable energy will be the reason we get organised markets in the West," he said. "We cannot do big ambitious wind with a very tiny market."

Mansour wants the federal government to be able to step in to deal with interstate transmission issues, but Xcel's Bonavia is not holding his breath, saying his company's strategy is to work with the states to get them to co-operate across borders. "Federal backstop authority, I fear, is going to be mired in so many political difficulties that it might be a while before that's effective."

Transmission risk is a significant deterrent for utilities looking to expand their wind portfolio, he added. "We have got committed well over a billion dollars for transmission over the next very few years which is intended to broaden the geographic reach we can draw on to bring wind in the market. And that's tough," he said. "This is where we need to reach out to our friends in the industry because if you love wind, you have to at least like transmission. Those transmission lines might not be loveable, but they are certainly necessary and as a utility that is where we start to see risk. We start to worry that we are going to get bogged down with a big commitment to wind and no way to bring it to market. We get tied up with curtailment charges and things like that."

Offering more

Like Mansour, Bonavia emphasised that a regional approach is key. Xcel reaches up as far as Canada to help integrate wind on its northern system, negotiating what he called a "diversity arrangement" with Manitoba Hydro to use the flexibility of its hydro reservoir storage system. "I think more utility companies would see this a practical resource for their system as we get bigger footprints so the integration problems become more manageable and we start to get some markets created on a broader geographic basis for things like load following services and the various ancillary services we need."

Getting to larger penetrations of wind is also going to require new thinking from wind power developers, said Schori. "I think the industry should think about offering more, because there is more to be offered as a value proposition. I don't think you want to rely, as long-term businesses strategy, on it's the right thing to do or mandating it on customers. We need you to think more like a utility and offer operational value. Availability and intermittency and back up resources are not theoretical problems. We're trying to mix resources and take advantage of their upsides while meeting firm load."

She suggested that developers look at packaging projects in different wind regimes, or combining wind with other renewable resources or technologies like pumped storage to help mitigate its variable supply. "Recognise your utility customers, and especially your municipal utility customers, are in this for the long term. That puts a big premium on maintenance, warranties and a desire by all utilities to capture the resource for the long term by owning the land or coming up with other ownership type rights and structures."

SMUD is in the process of expanding its 39 MW Solano Wind Project. But as a publicly owned utility it cannot use wind's federal production tax credit (PTC), which effectively covers about one-third of the capital cost of a wind project. "As a result, we are looking at new financing structures that hopefully will allow us to take advantage of the PTC by leasing our units to a private company and hopefully getting lower prices back for the power. We're in the process of trying to put together a deal like that on our existing project right now."

SMUD is not alone in its desire to have an ownership stake in wind. Xcel will have 2800 MW of wind power, virtually all of it bought under contract in power purchase agreements (PPAs) with independent producers, in its mix by the end of this year. With plans to increase that 6000 MW by 2020, said Bonavia, the utility wants to have a balance of purchased and owned wind power in its portfolio. "Our investors are looking for us to do it. We get that feedback all the time. We would like that opportunity to grow financially along with the rest of the industry," he said. "Also, 6000 MW is a mighty high wall and we think we need all the tools and all the footholds we can gather to scale that wall. Ownership, along with PPAs, along with whatever structures we can find, is one of the means to get there."

Consolidation craze

Indeed, it is only a matter of time before US utilities get in on the consolidation craze that is sweeping the US wind industry, said Brian Bolster of Goldman Sachs. The market saw moves in that direction just days prior to the conference when Duke Energy announced it had acquired Texas wind project developer Tierra Energy for an undisclosed sum (page 29).

"US utilities have typically not been first adopters and that is the trend they are following here. I think in large part, though, they are starting wake up," said Bolster. "I think it is going to be inevitable, with what is going on around carbon, that we are going to see utilities get some exposure to wind."

To a great extent, it is both the promise and the problems facing wind development that is changing the face of the industry in the US. European power companies have demonstrated a voracious appetite for US wind assets, culminating most dramatically in Energias de Portugal's recent $2.2 billion acquisition of Horizon Wind Energy (Windpower Monthly, May 2007). Included in the purchase price was a whopping $100,000/MW for Horizon's 9000 MW project development pipeline, pointed out Jeffrey Chester from the wind practice at the law firm Kaye Scholer LLP.

"The competition among players who want to enter the market has been driving prices," said Chester. "There have been essentially a number of large strategic players looking to enter the market with scale -- and there are very few opportunities to do that right now."

Their interest in the US market is not hard to understand. Although the United States accounted for nearly one-fifth of the global wind power installations last year, it is still what Bolster calls a "fairly undeveloped" market with lots of room to grow and a diverse range of policy, wind and permitting regimes. "Returns in the industry, I think, are strong. But they have significant upside relative to where they are today," Bolster said.

Legal requirements at state level for minimum standards of green power in electricity portfolios, known generally as renewables portfolio standards (RPS), are just one reason for his optimism for higher returns. "We have a myriad of state RPSs with very little enforcement of those to date. The enactment of a national RPS or even the acceleration of RPS enforcement by the states could add to the return profile of these assets," he said. Furthermore, today's entire energy scenario is good for wind. "You can't open a paper today without reading about carbon cap-and-trade or a carbon tax. Energy independence continues to be a significant conversation. And we have exposure to volatile fossil fuel prices in many markets in the US where natural gas is on the margin."

Helter skelter growth

The situation is attracting not only project development companies, but also wind turbine makers looking for a piece of the action. While the large turbine manufacturers forum at last year's conference had seven participants, this year it had to be split in two to accommodate 13 companies. And even at that, it still did not include all of the manufacturers with booths on the exhibition floor.

"We are following a strategy of entering the market together with our European key customers. To a certain extent our big customers in Europe really put some pressure on us to accompany them to the US," said Matthias Schubert of Germany's Repower Systems AG, now controlled by Indian turbine company Suzlon. "For us, the US is a new but an extremely exciting market. We are now allocating a lot of focus, management attention, and commitment to this entry."

For Spain's Ecotècnia, the drivers are much the same. "Before landing in this country we will have to develop the supply chain, which is a very critical point," said general manager Felix Urrea. "We will have to study the abilities of this country to produce components and we believe by the end of 2009 we should be able to have an industrial base."

For the manufacturers already established in the US market, the challenge has been to meet what has become an insatiable demand for turbines that has pushed order books out to 2009. One of the reasons for the shortfall, said GE Energy's Matt Guyette, is that the market is growing faster than expected. "If you look at last year globally, fifteen gigawatt of wind turbines were installed. Most of the forecasts were in the thirteen gigawatt range." GE, he said, has increased its production capacity from 500 units when it entered the business to more than 2500 this year. "We've been working with our supply chain and investing in our supply chain to grow with us. But even at those growth rates the imbalance still exists."

Solving supply line cramp

A key part of the problem is global competition for the raw materials and component parts that go into the making of a wind turbine. Bearings are a case in point, said Clipper Windpower's Robert Gates. "The same kind of bearings and the same type of forging is used in all construction cranes. So wind turbines are competing with cranes going to the Middle East for the construction boom, going to China for the construction boom," he said. "We are really pushing against the basic industrial capacity of the world."

Bolstering that industrial capacity to serve the wind industry in a market that has been defined historically by its policy instability is difficult, manufacturers agreed. The PTC is set to expire again at the end of 2008 and although few at the conference seemed to doubt it would be extended, "the supply base is still tentative about growing the capacity to levels that the demand is pulling for," said Guyette.

Gamesa's Javier Perea agreed, pointing out that other markets around the world have policy instability issues as well. "This is the reason we need to be conservative. And being conservative, we can grow 30-36% per year, but that is the limit. If we want to grow by a larger amount, then we need to plan six years in advance and that's not possible."

Suzlon has been working to secure component supply through vertical integration, going as far as to invest in its own forging and foundry facilities. "That is the critical thing we need to achieve is that backwards integration into component supply -- and we need to do it as an industry," said CEO Andris Cukers. But not all turbine makers agree with that strategy, a difference that could play itself out in the market over the coming years, said Josh Magee of Emerging Energy Research. "The ability to bring that in-house and move towards that greater vertical integration strategy over the medium to long term may put pressure on those turbine vendors that have a largely outsource strategy, such as GE and Vestas," he said.

A stable market

With long term policy repeatedly touted as the solution to US turbine supply woes, confidence in getting the longed for stable market was running high at this year's conference. The industry is organising its lobbying efforts around a proposed five-year extension of the PTC in the House of Representatives, said AWEA's Randy Swisher. While the estimated $5 billion cost of a longer term PTC is a major hurdle, Daschle believes it is doable. "I think that is well within the realm of budgetary authority and we ought to fight for it."

In the week following the Los Angeles event, the US Senate also began consideration of a measure that will require utilities to generate 15% of their power from renewable sources by 2020. "I am very hopeful that while we have been able to pass it in the Senate on several occasions, this will be the year that we pass it in the House of Representatives too," said Daschle.

For an industry grappling with rising costs, transmission constraints, equipment shortages and permitting challenges, an air of unreserved optimism still permeated this year's industry gathering, from the exhibition hall where a record 419 exhibitors trucked in more than 450 tonnes of display material, to the long list of private meeting rooms where buyers and sellers brokered deals to keep the projects coming. A sizable dose of optimism was even built into the conference program, with AWEA devoting a good part of the first day to a discussion of how the US can respond to President George Bush's suggestion last year that 20% of the country's electricity could come from wind power by 2030. "That's a bold vision. It is not a forecast, but it is a plausible scenario," Swisher told delegates. "Getting from 15 GW, where we will be at the end of this year, to over 300 GW, is not a slam dunk. In fact, it is a major challenge."

BP's Robert Lukefahr took it a step further, saying the target is an impossible one, at least for now. "It requires deploying technology we haven't invented. It requires managing the risks at a scale we've never managed before. It requires managing through political and economic complexity of a scale that this business, indeed the electricity industry in the United States, has not managed through before. It requires a transmission superhighway to unstrand our resources," he said. "But despite the obvious barriers, I am optimistic. I think the history of the energy industry is a history of making impossible things possible."

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