United States

United States

Clear economic gains from wind purchases -- Customers save even after Xcel picks up PTC tab on curtailments

America's largest purchaser of wind power, Xcel Energy, says it is saving customers money by not buying other energy, even when lack of transmission capacity means it has to pay wind power producers to turn off their machines. The explanation lies in the high price of gas and the federal production tax credit (PTC) granted to wind station owners for their wind output.

When the utility buys wind power, the PTC is already covering much of the cost, meaning Xcel has to pay less to generators. As long as projects are built before the credit expires at the end of next year, Xcel says it can charge customers less for wind power than it would charge for fossil fuel based generation. For this reason it is signing up as much wind power as it can while the PTC is in place, well knowing that it does not have enough transmission to always take the output. Even though Xcel compensates owners for lost income, customers still get cheaper electricity than if it was generated by other means.

Xcel paid more than $10 million between February 2004 and May 2005 for wind generated electricity that it could not accept on its under dimensioned transmission system in its home state, according to a public report by the Minnesota Department of Commerce. Costs were passed on to customers and amounted to about $0.20 a month for a typical ratepayer.

Paying the PTC

Not only does Xcel compensate wind station operators for lost income when they are required to idle their machines, under its power purchase agreements (PPAs) with wind generators, it also compensates owners for their lost production tax credit. "The deal is that when a facility is curtailed, Xcel pays them in curtailment payments -- the PPA price for that energy plus whatever they would have earned on the production tax credit incentive," says Edward Garvey of the Minnesota Department of Commerce. "They don't get it from the feds in the terms of the tax credit, but because they lose it as the result of the curtailment, Xcel and the Xcel ratepayers make it up in that curtailment payment to them."

The story of Xcel paying for power it cannot transmit to customers made the front page of the Minneapolis Star Tribune in early June under a banner headline: "Public paid for idled wind farms." A week after the story appeared, Xcel joined with several regional utilities to announce it was building new transmission under a three-phase project called CapX 2020. Construction on the first phase, three 345-kilovolt transmission lines, will begin in 2009 or 2010 and will cost $1.3 billion. The three-phase project is to be complete in 2020.

"We're upgrading the transmission system in south-western Minnesota," says Xcel's Steve Wilson. "But we've installed more wind than transmission and we're trying to coordinate what we have in service with new projects that have to be generating electricity before the PTC expires. That's the big thing that was left out of the Star Tribune article. We're trying to get a cheaper rate for our customers," he adds.

Lisa Daniels of Windustry, a Minnesota-based wind power advocacy group, is critical of Xcel, blaming the PTC for forcing it to buy wind power it cannot yet transmit. "These people at Xcel have known that they've needed to build up transmission lines for ten years and the deadline keeps going out even further," she says. "I would say there have been two or three cycles of PTC and there has been one cycle of transmission upgrade."

The curtailment payments, made under contracts requiring Xcel to buy the power whenever available, were made to five developers that own wind farms in the Buffalo Ridge area of south-western Minnesota. The area was capable of producing more than 450 MW of wind-generated electricity during a period early last year, but the utility could only accept slightly more than 50%, reported the Star Tribune. Generators were asked to turn on and off under a rotation system.

The payments dropped off significantly in the second half of 2005 as the utility upgraded its transmission system, but Xcel estimates it will make payments of about $8.5 million this year and $10 million next year as additional projects come online and again overwhelm the system.

Building transmission

Wilson says that Xcel's target for completing another 825 MW of new transmission lines is the end of 2007. "It takes a long time to justify new transmission and it's almost like a highway," he says. "You don't build a highway until there are houses out there. Transmission is expensive and if we over-build, we'll be criticised for that."

According to Beth Soholt of Wind on the Wires, a Minnesota non-profit group, the utilities are doing what is required by law. "But we're trying to get them to go beyond," she says. "We all need to consider transmission at the same time we're planning the wind projects. And we need to be as aggressive about it as we can."

Wilson notes that a transmission line can take more than seven years to complete, while a wind farm usually takes less than two. "And it isn't just building a line from point A to point B," he says. "Getting the flow from southwest Minnesota to Minneapolis affects the entire region -- even as far away as Omaha, Nebraska. And sometimes you have to upgrade other people's systems as well as your own. This isn't just putting poles in the ground and running wires across country. There are a number of upgrades that have to happen on other systems and those have to all be coordinated," he adds.

He willingly acknowledges the situation is in need of attention. "The transmission pipe isn't big enough," he says. "But the pipe is being made larger and the vast majority of wind that is being produced is getting to the grid. We're doing the best job that we can in a very difficult situation. We are number one in the nation as far as wind energy goes and nobody can question our commitment to wind." Xcel buys electricity from more than 1000 MW of wind power.

Soholt understands why curtailment payments are needed in the short term. "But I'm not the first one to raise the issue that they're not a long term solution," she says. "My point is getting utilities to understand that wind power is going to be big in the Midwest and that we'd like to see them get going with more transmission."

Xcel operates in ten states and provides energy related products and services to 3.3 million electricity customers.

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