United States

United States

Wind cannot live by incentives alone -- Report shows demand matters

Financial incentives offered by US states have had varying success in supporting the development of large scale renewable energy, says a new report analysing state clean energy funds. Experience shows that a critical factor in getting projects up and operating is the demand created by government mandates, in the form renewables portfolio standards (RPSs), and green power markets.

"Long term power purchase agreements are critical to project development," says Mark Bolinger, a researcher at California's Lawrence Berkeley National Laboratory and co-author of the study. "State incentives are only part of the equation."

To date, the study says, 15 states have created so-called clean energy funds, most often financed by a small surcharge on electricity bills. In the coming decade, these funds will collect more than $3 billion to support renewables projects. Study researchers focused on eight states offering grants, soft loans and production incentives, the three most common forms of support. Over the past four years, these states have allocated more that $265 million to a potential 1500 MW of new renewable capacity. "So far, however, only a small fraction of this capacity has been built, underscoring the significance of remaining barriers to development," the researchers note.

The report points to California, where 986 MW of wind projects have been awarded incentives in auctions dating back to June 1998 and where only 85 MW had come on line by the end of 2001. "While a few of these projects may have been speculatively bid without strong intentions to develop, the main culprit behind this poor showing is a perverse lack of demand." The state's electricity crisis destroyed its green power market, the report says, while utility bankruptcies and extreme market uncertainty have made it difficult for new developers to secure the long term contracts they need to obtain financing.

California contrast

California's experience stands in stark contrast to Pennsylvania, where all three wind projects receiving support from the state's sustainable energy fund have secured 20 year power purchase agreements with the Exelon Power Team. Two of the three projects, with a combined capacity of 76 MW, came online less than a year after being awarded incentives. Local planning opposition delayed the third.

An important difference between the two states, says the report, is that Pennsylvania's restructured electricity market is relatively stable and its green power market is functional. Renewable energy marketers also have the option of selling into neighbouring New Jersey's RPS market, in which the government has set a standard for the proportion of renewables in the supply portfolio.

"Unlike California, which has no RPS and now no green power market, Pennsylvania offers multiple markets in which to sell wind power, making wholesalers like Exelon comfortable enough to enter into long term power purchase agreements which are critical to the development of wind power," the report says.

New York twist

New York's experience, where two of the three wind projects awarded incentives came on line without power purchase contracts, adds an interesting twist. This early success may be partly due to the novelty of wind in the state, says the report. "In the continued absence of demand, however, further merchant development is unsustainable and unlikely." Recognising this problem, the New York State Energy Research and Development Authority has recently embarked on a major effort to develop New York's green power market.

Managers of state clean energy funds should learn from all this experience, the report says, and structure programs to ensure adequate revenue for worthy projects, either by guaranteeing a minimum green premium or awarding winning bidders a per kWh remuneration which covers the cost of a project.

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