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United States

Major US utility facilitates citizen wind power -- European development model finds a role in booming market

In an American twist to the European model of community scale wind power development, huge Midwest utility Xcel Energy is facilitating the birth of a broad popular movement in local ownership of small scale wind projects. By accelerating its plans to buy electricity from 500 MW of projects now being built or planned by local citizens in Minnesota, Xcel has given wings to a state legislative initiative aimed at reaching 800 MW of community-based energy development by 2010.

"We're going to see a lot of growth in wind in the next two years in Minnesota," says the utility's Karen Hyde. "We'll be involved with wind power in a lot of places that it hasn't been installed before." The state currently ranks fourth nationally in installed wind power with close to 750 MW in operation.

Of Xcel's 500 MW commitment, wind projects tallying 300 MW are already under way in 15 counties -- and all are expected online before the end of next year. "Those are the projects we're feverishly trying to finish up," says Hyde. "We're negotiating with quite a few of them but have not yet signed with any."

Minnesota's Community-Based Energy Development (C-BED) program was passed into law in 2005 after years of talks between the legislature, the environmental lobby, local wind power entrepreneurs and utilities. To qualify for C-BED, a project must be locally owned by Minnesota residents and have the support of the county board in which it is located. The initiative is part of Governor Tim Pawlenty's goal of reaching 25% of the state's energy needs from renewables by 2025. The current level is 11%. But the initiative's primary purpose is to promote wind energy development at the local level.

"C-BED is about ownership structure, not size," says Beth Soholt of Wind on the Wires, a Minnesota advocacy group. "The projects are to be owned by co-ops or partnerships of farmers and landowners. Xcel has a need for new resources and the initiative goes along with the legislature wanting to see local economic development and significant projects owned by local folks. And there's an interesting variety of local ownership models out there."

How it works

The aim of C-BED is to create an attractive market structure for citizen development of power generation while avoiding additional costs for taxpayers and electricity customers. The result is a creative piece of legislation which protects consumers by effectively capping the power purchase price, while at the same time allowing the seller and buyer flexibility to financially engineer a contract satisfactory to all sides.

"The true challenge was to come up with a way to get these community wind projects to a point where the power purchase agreements would work and to get more community wind projects built without costing the state or the ratepayers any money," says Lisa Daniels of Windustry, a Minnesota non-profit organisation promoting wind energy development.

C-BED creates a structure for electric utility payments that allows statewide community wind projects to receive a higher tariff in early years when they are paying off the cost of project equity and debt in exchange for a lower tariff in later years. By the end of the project's life, however, the net present value of the power purchase price at a utility's discount rate must not have exceeded $27/MWh over the 20-year life of the contract. Net present value (NPV) is a financial tool for assessing the future return on investments in real terms and is influenced by the discount rate used to calculate it. The discount rate currenty used by Xcel is 7.95%.

All utilities are required to establish a C-BED tariff with the Minnesota Public Utilities Commission, although none are required to use it. "The utilities won that piece of the argument, but in the grand scheme of things the key piece is that the state government is saying we need this to get done," says Daniels.

In practice, under C-BED a wind plant owner might get $46.5/MWh for the first ten years and $35/MWh for the second ten years, explains Daniels. By using an 8% discount rate it comes out to less than $27/MWh net present value, the maximum allowed under the C-BED statute. "The numbers only work as long as the two rates added together over the 20 years come to less than the net present value of $27 a megawatt hour," she says.

Up to Canada

Xcel will not have a financial stake in the C-BED developments and the various ownership structures will vary, according to Hyde. "But we're seeing projects between one megawatt and fifty megawatt," she says. "We'd like to get 300 megawatt online by the end of 2007 and 200 megawatt more by 2010. We're looking at it as two phases." The projects will blanket much of Minnesota, Xcel's home state. "One unusual thing this initiative might accomplish is that these projects will go from the southernmost sections of the state to right up against the Canadian border," says Hyde.

A problem with the community initiatives, says Soholt, is that the people driving a project often have no knowledge about wind farm construction. "So while the legislature sees the value of that kind of local development and ownership, the legislature is also interested in making sure that the projects are getting done. But you can have local folks organise the land component and then get the bigger players involved in construction."

Hyde also sees partnerships between local people and commercial wind project developers as a way of moving projects along, particularly in a world of constrained wind turbine supply. "We expect that there will be a wide range of turbine manufacturers involved, although we seem to be seeing a lot from Suzlon," she says. "But what's been happening is that the local developers are partnering with larger companies that already have turbine arrangements."

As for reaching transmission lines, the C-BED projects will connect through a variety of utilities, according to Hyde, not just Xcel. "But the developers are responsible for the interconnection," she adds.

Until now Xcel's main focus has been on buying wind power in large blocks from utility-scale wind developments. In embracing the community wind power concept, Xcel is bowing to the wishes of Minnesota's political leaders before those wishes become orders. In a regulated US industry, electric utilities are aware that keeping the government happy is in their own best interests.

As well as buying wind power through C-BED, Xcel is negotiating to buy the output from 450 MW of utility scale projects in Minnesota with the aim of pushing its wind purchases in the state to more than 1000 MW by the end of next year. The 450 MW is spread over three projects unrelated to C-BED. Two are in south-western Minnesota: Enxco's 200 MW Fenton project and PPM Energy's 150 MW MinnDakota project. The third, a 100 MW FPL Energy project named FPL Mower County, is being built in south-central Minnesota near the Iowa border. Xcel serves 3.3 million electricity customers in ten states.

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