"Our business model has changed," says Horizon's Michael Skelly. "We used to be a pure developer and up until the time Goldman bought us we needed to develop a project and then sell down our interests, mainly for reasons involving production tax credits. But now we plan to maintain ownership in the projects we build."
The new strategy will be applied to the 200 MW initial phase of the Lone Star Wind Farm (formerly known as Cross Timbers) being built near Abilene, Texas. It could eventually result in two more phases and a grand total of 600 MW. RES America Developments, the American division of Britain's Renewable Energy Systems, is building the first phase using 100 turbines from Gamesa of Spain, scheduled for July delivery. Interconnection, road making and design work are already in process. "We're calling it a 2006 project, although it could possibly go into next year," says Skelly.
Dodging PTC restriction
Under the new business model, instead of selling the wind project, Horizon will own and operate it. The new approach is made possible because Goldman Sachs is able to access wind's federal production tax credit (PTC), where Zilkha -- owned by father-and-son team Selim and Michael Zilkha -- could not. The Zilkhas, after starting an oil and gas exploration company in 1986 and selling it a dozen years later, started up Zilkha Renewable Energy shortly before the turn of the century.
"In the past, we couldn't use the PTC because it's not meant for individuals," says Skelly. "Basically, individuals are in an alternative tax situation and that's just the way it works. It's all related to why you don't see public ownership in wind projects and why you can't buy stock in a wind farm."
Horizon's 220 MW of total development in 2005 ranked the Houston-based company as the third biggest developer in the US in a record setting year of more than 2400 MW of wind development nationwide. Even then the independent company was dwarfed by the utility majors -- FPL Energy posted more than 500 MW of wind development and PPM Energy charted nearly 400 MW, leaving Horizon a distant third.
Horizon and RES are also building the 229 MW Wild Horse project in Washington state, which should also be completed this year. But it will be owned by Puget Sound Energy. Most other projects following the Goldman Sachs acquisition, however, will be owned all or in part by Horizon, including a pair of large developments completed last year -- the first 137 MW stage of the 320 MW Maple Ridge project in New York and the 151 MW Blue Canyon II project in Oklahoma.
With long term arrangements for delivery of a total of 1200 MW of wind turbines from Gamesa and Vestas in place through 2008, Horizon has sidestepped the wind industry's supply line crunch. "The only problem is that you have to pay a lot of money to get them, although that's the same for everyone," says Skelly with a laugh. "But we do have plenty of turbines for projects whose details we haven't yet announced and there's a lot of work ahead of us in terms of building projects this year and next. We and others in the industry have lots of work to do to get these projects in the ground before the end of the PTC."
Skelly is not certain that a long term PTC, instead of the on-off pattern of two year extensions seen to date, is the right way to create a stable US market. "Will we get a longer extension? I don't know," he says. "And in some respects things could go crazy if we would get a longer extension. But one effect of the on-again, off-again PTC is that some customers, like utilities, go ahead and lock projects down and, instead of waiting around, they accelerate their plans to beat the end of the credit. A longer term extension would mean they could wait around."
For at least the next several years he sees bright prospects for the market as Horizon works toward developing a portfolio of more than 5000 MW. "This year and next year are going to be big," Skelly says. "Beyond that, I think it's safe to say with confidence that there will be some level of federal support for the industry in the future and it will likely take the form of a tax credit. But maybe the current PTC needs to be killed and buried with something new in its place."