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United States

Different approach to renewables support

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A state funded loan program for renewable energy developers in California can keep wind alive in the competitive market by reducing its costs by 40%, a new study has found. By increasing the debt maturity, lowering interest rates and reducing risk, a large scale loan program would cost the state little while providing the greatest support for wind. This "low budget policy packet" has been offered by two academics from the University of California-Irvine (UCI) as the best option for renewables after the four year transitional support program -- a $540 million "trust fund" to ease renewables into the free market -- expires in March 2001.

The report, by Peter Navarro and Frank Harris, has been delivered to legislators and Governor Gray Davis as an early entrant in the debate on the future renewables market. The authors call for increased support of wind, backing up arguments with figures to show how wind has benefited the state. The industry now provides 5500 jobs directly and indirectly state-wide and California's 4600 wind turbines offset more than three million pounds of smog causing pollutants a year. The state is home to seven of the ten smoggiest cities in America. Every additional 500 MW of wind capacity would reduce carbon dioxide emissions by 588,697 tons, according to the report.

In their financial analysis, Navarro and Harris propose a large scale state aid package that includes loans with a maturity of 18 to 20 years, an interest rate close to the Treasury Bill rate and a debt service coverage ratio of 1.25. Combined and applied to the levelised cost of wind power during a plant's lifetime of 30 years, these options cut costs 22% -- from $0.0681/kWh to $0.0528/kWh -- at a minimal cost to taxpayers. When the federal production tax credit of $0.017/kWh is added over ten years, the cost falls to $0.0405/kWh, or a 40% reduction.

Only new renewable projects should be eligible for such a program, the report warns. "Any renewable programs that allow existing renewable producers to benefit from new subsidies will simply provide a financial windfall rather than an increase in renewable energy production," Navarro writes. Other policy options, such as a direct subsidy of $0.01/kWh, would have substantial effect as well, but at a higher cost to the state, says the report.

In addition to a loan program, Navarro and Harris argue that government purchase of wind power is "perhaps the most important single action that the governor and legislature can take at this time to boost renewable energy demand." They recommend that 10% of the state government's power come from new renewables by 2002. According to the state General Services Administration, this would amount to 133 MW of new wind capacity. A number of state agencies, including 38 cities and school districts in the San Diego Regional Power Pool, have already switched to green power.

The report downplays the importance of a Renewables Portfolio Standard (RPS) to fix the amount of green power in a supply mix -- a policy mechanism that has failed to get through California legislature so far (Windpower Monthly, April 1998). "The problem is that an RPS faces strong opposition by many large utilities and major fossil fuel interests, as well as by ideological conservatives who oppose any such intrusions into the free market," Navarro writes. "Accordingly, the promotion of an RPS in California is likely to entail the most controversy as well as the most political risk." Also difficult to pass, although recommended by Navarro and Harris, would be a continuation of subsidies for green power marketing and a revision of transmission access and pricing rules.

The report recommends extending the $540 million California Renewable Energy Trust Fund, the four year transitional support for new and existing renewables. Governor Davis has even announced his support for this option at a recent dedication ceremony for SeaWest Windpower's 43 MW Westwind II repowering project near Palm Springs. Davis plans to release details this month. "With wind power at our back, California's future is looking very bright indeed," Davis said at the ceremony.

Critical feedback

Navarro and Harris are criticised for falling short in some areas of their analysis, especially concerning the California Independent Systems Operator (Cal-ISO). They write that power generators producing either too much or too little for the grid are penalised significantly. "For intermittent resources such as wind, this protocol basically shifts risk from the Cal-ISO to the generator. In doing so, it acts to discourage the development of intermittent sources."

Not so, says Jim Detmers of the Cal-ISO. "It's not a penalty per se," Detmers says. "It's not a sanction." If a wind farm delivers 10 MW instead of the 20 MW that was scheduled at a given hour, the ISO buys the missing power from the spot market and sends the bill to the wind farm operator. The wind operator has to pay for the 10 MW, but since the power was already sold, the only cost penalty is the price difference between the wind operator's power and the spot market power. Since the spot market fluctuates constantly, the price difference could be positive or negative, large or small, Detmers says. Conversely, when a wind farm produces more than was bid, the extra is sold on the spot market. "That's what the imbalance market is for," Detmers says. "We have to mitigate [imbalances] by some means, and we do that by making up the power from another source. The market wasn't intended to discourage intermittent sources."

Besides, he adds, the Cal-ISO market is just one avenue for wind sales. Wind can also get onto the market through the Power Exchange, the Automated Power Exchange and bilateral contracts. In addition, many existing California wind turbines are still covered by their Public Utility Regulatory Policy Act contracts dating from the 1980s; since they are considered "regulatory, must-take sources," Detmers says, they are not bid into the Cal-ISO.

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