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United States

Wind farms not required to prove viability to gain new contracts

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California's independent energy producers can now go in and renegotiate utility contracts with less fear than before. Many have been facing the "year 11 price cliff" when their ten year fixed price contracts for power purchases expire. But a recent decision now means they can renegotiate their contracts to smooth out the drop in utility payments without worrying that the viability of their projects will be scrutinised at the same time.

The drop in payments comes after the tenth year of the Interim Standard Offer 4 contracts. From 1994-1997, as many as 1570 MW of the state's 1800 MW of wind installations face precipitous price cliffs that could mean bankruptcy. However, it appears that a political compromise is emerging and that renegotiation of contracts with utilities is becoming a reasonable option. In a decision that benefits wind, the California Public Utilities Commission (CPUC) says qualifying facilities are not required to prove their viability and utilities are not required to investigate the matter. It had been feared that wind farms, for example, would have been forced to ask to renegotiate and would be investigated because of the request. The CPUC decision, issued on May 4, is the main one so far regarding the price cliff.

At the same time the CPUC also decided that so-called "ratepayer indifference" will be the standard for renegotiation. That means that ratepayers will have no liability in paying off costs when events vary from what is forecast -- and that under renegotiation, money accrued to qualifying facilities will be "smoothed out" and paid later instead of earlier. The CPUC decision thus backed motions brought six months ago by Southern California Edison and the Independent Energy Producers, of which the American Wind Energy Association is a member. In contrast, Pacific Gas & Electric had wanted the commission to adopt a system whereby it would get a reduction in pricing or operational concessions for renegotiation.

Less beneficial for wind operators was the concomitant CPUC decision that the discount rate should be that used by the utility and not the higher rate of the qualifying facility. Qualifying facilities claim they will be at a distinct disadvantage as a result. The different discount rates used will be based upon buy-outs or the utility's cost of capital. The other rate used will be based on payment shifting proposals, which spread payments over time, and which will be 150 basis points above the ten year treasury note rate.

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