Even though wind power construction in 2003 is down by nearly a third of pre-year projections in the United States, interest in the huge potential of the country's wind generation continues to rise. Nowhere was that more evident than at this year's American Wind Energy Association (AWEA) conference, held May 18-21 in Austin, Texas. Just ten days after AWEA downgraded its projections for new installed capacity for the second time since the start of the year, a record-shattering 3451 delegates -- 50% more than last year's record -- and 166 exhibitors, up from 90 in 2002, flooded the Austin Convention Center to meet, greet, make deals and mull over the industry's most pressing issues.
The disconnect between AWEA's lower expectations and its largest-ever conference can be explained in the context of the electric industry as a whole, says the association's executive director, Randy Swisher. A glut in generation capacity has reduced demand for new projects of any kind, while the financial implosion suffered by merchant power plant developers in the US has made project financing more difficult and expensive to arrange. But at the same time, the gas crash is also bringing new entrants from the thermal side of the generation business over to wind, looking for opportunities they believe will only increase over time, Swisher said. In addition, volatile natural gas prices are helping to underscore the stability wind can bring to electricity markets.
"In a depression for the electric industry at large, the wind industry is a bright spot and will continue to be," he told delegates packed into the opening session. "At the same time, we know we face challenges. The wind industry has never been an easy place to do business."
lack of stability
The list of wind's challenges, tackled in an intense schedule of three-track, concurrent sessions running over three full days, is a familiar one. And right at the top is the lack of stable, consistent policy. The on-again, off-again federal production tax credit (PTC) is set to expire at the end of this year. An attempt by the Senate to include a one-year extension in a tax package passed by Congress in late May failed. And while both legislative bodies have included a three-year extension in their own energy policy legislation, there is no guarantee they will able to reach agreement on a final package in time for the industry to keep working.
"Our political system, in many ways, is dysfunctional," said Swisher. Although the PTC has strong support in both the House and Senate, and among both Republicans and Democrats, the wind industry is left hanging while legislators on Capitol Hill battle over more contentious issues. "On things like energy policy, on which there is great disagreement, and around tax policy, some of the most fundamental economic issues facing the country, it takes time. We have been, as one person on the Hill said, the innocent victims of a drive by shooting."
Like most drive by shootings, this one hurts. The boom and bust cycles caused when the tax credit expires without an extension is helping keep "literally billions of dollars" of potential investment on the shelf waiting for the right policy signal, said Swisher. A high powered panel of industry executives agreed. "I'm convinced the US will be the biggest market, but it first has to have a long term stable legal framework," said Torben Bjerre-Madsen, CEO of NEG Micon A/S.
A multi-year PTC extension should be part of that framework, said E. Linn Draper, CEO of American Electric Power (AEP), the nation's largest generator. "Even better is to make it permanent. The uncertainty is causing a decided pause." AEP ranks fourth among US utilities owning wind projects, at 310 MW. Draper was enthusiastically upbeat: "At AEP we count ourselves among the true believers in wind energy," he said. But the boss of the biggest burner of coal in the Western hemisphere later refused to be pinned down on when and by how much AEP wants its wind portfolio to grow.
Although the PTC is important, neither AWEA nor many industry leaders see it as a panacea. GE Wind Energy's CEO Steve Zwolinski told delegates the wind industry needs to achieve cost-competitiveness through technology improvements and through the establishment of a renewable energy credit (REC) trading system that will allow developers to actually use the green value of their projects to get financing. "Until we get a liquid, financeable trading system then we'll have to have subsidies, or some kind of artificial structure that is subject to this one or two or three year cycle."
Right now, the market for RECs is a piecemeal of state mandates and voluntary green purchases. With prices that swing on a wide arc between $0.45/MWh and $40/MWh and purchase contracts rarely extending out beyond three years, said Natsource's Matt Williamson, the credits are not yet something developers can take to the bank.
A pro-market approach
One mechanism that would provide a liquid and long term market for RECs is a national renewables portfolio standard -- a mandate on all sellers of power to demonstrate, though the ownership of tradable RECs, that their supply portfolios conform to a minimum standard of renewables content. Although neither the Senate nor the House have included an RPS in their current energy bills, Shirley Neff, a former senior economist for the Senate Energy Committee, believes there's still a slight chance one could be added during the Senate floor debate this month. Whether it is finally accepted by the Bush Administration and the Republican majority, both of which oppose an RPS, will depend on how effectively the wind industry can convince politicians it is the right policy, said Neff.
Last year, Senate legislation calling for a 10% standard by 2020 died when Congress could not reach final agreement before adjourning in December. During the debate, said Neff, it became obvious that perception was a problem. "The RPS was generally viewed as being an environmental initiative, not an energy initiative focused on creating greater diversity in the power supply," she explained. Opponents also dismissed it as a mechanism to force utilities to accept high-priced renewable energy contracts. "That is not the case," stressed Neff. "It is very much pro-market. It should be totally consistent with where this administration and the Republican majority in Congress are trying to go. You have to emphasise that."
While the lack of consistent policy support makes it difficult for the wind industry to attract the kind of investment it needs to sustain long term growth, difficulty in arranging financing is proving to be one of the key stumbling blocks to getting new projects built this year. From earlier predictions that 2003 would see a record-setting 2000 MW built, AWEA has cut its forecast for new installed capacity to 1100-1400 MW.
Much of the problem can be traced to the financial crisis in the US electricity sector, brought on by a fatal combination of "system flaws, greed, politics, fear and overcapacity," explained Ed Feo, a partner in the law firm Milbank, Tweed, Hadley & McCloy LLP.
Bank debt in the US power business grew from $5.6 billion in 1998 to $28.5 billion in 2001, with the vast majority of the money put into building thermal capacity. When the collapse came, the impact on wind was twofold. "One thing that happened initially was that banks got a lot more interested in this sector," said Feo. But even with this new interest, he added, there were still a limited number of wind financings. "What happened this last year is that the cancer over on the thermal side started to affect the ability to participate on the renewables side," he explained. "We had transactions where banks had to drop out. The credit issues on the thermal side clearly had come over and were affecting the decisions being made on the acceptance of credit on the renewables side."
A federal transmission policy that gives wind generators fair and equal access to the nation's transmission system may be nearly as important to the industry as a long term energy policy. The Federal Energy Regulatory Commission (FERC) may have taken a step backwards from achieving that goal in April, when it succumbed to state, utility and congressional pressure and exchanged its plan for standard market rules for one that gives regional transmission organisations (RTOs) and state regulators the discretion to voluntarily adopt new transmission policies.
FERC's original Standard Market Design proposal, released last year, removed imbalance penalties from intermittent resources, such as wind generators, and laid out rules for scheduling and bidding that would allow wind to compete on an equal footing with conventional, dispatchable technologies. FERC's revised policy changes very little for wind, said FERC Commissioner William Massey. "Our goal remains the same," he told delegates. "An independent grid and market is essential to create a level playing field for all resources," he added. "We understand and recognise that our market rules must recognise wind as an intermittent resource." His remarks were enthusiastically received by delegates. "We are federal bureaucrats," said a slightly discomforted Massey. "We aren't used to applause."
The pressure on FERC to push policy decisions out to regions and give states a voice could result in the same patchwork of policies the wind industry has today. Whether such a voluntary piecemeal approach proves successful will depend on how states step up to the challenge, said Bob Harms of the National Governors Association. For one thing, to minimise confusion, states will have to sign co-ordination agreements among themselves to build needed interstate transmission, he said. It will also take time, he warned, predicting it could take another year to 18 months before federal and state policy differences can be resolved.
While policymakers work to get the transmission rules right, physical access to the grid continues to be a challenge. Where lines are congested, developers can agree on curtailments, spend the money to add transmission, which raises project costs considerably, or they can build closer to available transmission lines and closer to population centres, but further from the best wind sites. The market should force developers to do that, said Alison Silverstein, advisor to FERC chair Pat Wood.
That is what is happening this year in West Texas, where the best wind is near McCamey, but transmission congestion is causing projects to curtail their output. Although it has yet to announce the projects, TXU will build 200 MW of wind projects this year, all nearer to less constrained transmission lines. "Texas will need an additional 1000 MW [to fulfil its state RPS requirements] by 2008, but significant transmission development is needed if development continues to be focused on the McCamey area," said TXU's John Spicer. "However, most of the new projects are not at McCamey, so the market must be working."
As projects move closer to population centres, however, new opposition is growing to the impact wind turbines have on the so-called "viewscape." Aesthetics is the only remaining environmental issue that dominates the siting process, said Fred Sellars of TRC Environmental Corp. Larger projects placed in less remote locations are now attracting more sophisticated opposition, meaning a wind project can no longer be just a business decision. It must also follow good public policy, Sellars said, otherwise the "issue of aesthetics can overpower the project." That requires developers to collaborate with the public early on in the design process. It also requires convincing people to balance the visual issue with the need for sustainable energy development, said Mark Rodgers of Cape Wind, whose proposal to install a 468 MW project off Cape Cod and Martha's Vineyard, within view of the summer homes of some of America's richest and most powerful families, is running into some very influential opposition.
The results of a study released at the conference give developers some ammunition to counter claims that wind power development lowers the value of property within view of the turbines. The study analysed more than 25,000 property transactions in communities near wind plant and in comparable communities with no projects. "What we were trying to find out, fundamentally, was whether there was any statistical, empirical basis to claim that these projects will hurt property values. We found nothing to support that," said George Sterzinger of the Renewable Energy Policy Project. In fact, the study found that property values mostly rose more quickly in the turbine viewshed than in the comparable community.
Despite the persistence of energy and transmission policy problems, as well as the drop off in financing and expected development this year, there is also a sense that the industry is making progress on nearly all fronts. Although the issues haven't changed much over the past few years, wind power's visibility as an important source of new energy in the US has. The industry, regulators and lawmakers are working through the issues, just not as quickly, it seems, as interest grows.
At the very least, the sheer size of this year's conference can be taken as an indicator of the US wind industry's health. "The trends for this industry are extremely positive," said Swisher. "You can see it in this room, you can see it in the exhibit hall, you can see it in the new entrants we have to this industry."