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Risk of failure high for large projects -- Power purchase contracts

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The failure rate for renewable energy power purchase agreements worldwide is significant and it is not clear what utilities can do to make sure they actually get the power they contract for, says a new study prepared for the California Energy Commission (CEC).

In a recently released 49-page report, Building a Margin of Safety Into Renewable Energy Procurements: A Review of Experience with Contract Failure, researchers look at more than 21,500 MW of renewable energy contracts signed in California, across the rest of North American and in Europe. Although they find considerable variation among utilities -- and were limited somewhat by spotty data -- the study's authors conclude that 20-30% should be considered "the minimum level of expected failure" for large renewable energy solicitations. "In fact, failure rates much higher than these levels are supported by historical experience," the report says.

There are a variety of reasons why projects with signed power purchase agreements fail to get built, but among the top causes are siting and permitting issues, developer financing troubles, capital cost increases, and transmission and interconnection issues. "Many respondents specifically commented on the recent rise in wind turbine costs as being particularly problematic," the researchers note.

The failure causes are often interrelated. Legislative delays, particularly on extensions of wind's production tax credit in the United States, or permitting or grid connection hiccups, can leave developers facing higher wind turbine prices, rendering projects uneconomic. "The most unusual anecdote was of a Midwest wind farm that had experienced delays due to PTC and turbine availability but ultimately failed because the project's funding dried up when its Japanese investor became spooked by possible bat deaths."


The study found utilities are using a variety of strategies to try and reduce the risk of contract failure, including requiring developers to demonstrate their qualifications before being allowed to bid, ensuring bidders can demonstrate things like site control and wind turbine availability in their proposals, asking for operational performance guarantees, or charging bid submission fees to ensure only serious proposals come forward.

The relative success of these strategies, however, is not clear. "Given the scope of this project, we were unable to link specific mitigation strategies with lower failure rates, to separate the influences of solicitation design and overall market conditions on failure rates, or to provide specific recommendations on which of the mitigation approaches might be most effective."

California should try to get a better understanding of what can be done by "more carefully" scrutinizing what utilities in the state are doing to minimize contract failure and compare them to approaches used elsewhere. "It may also be helpful to evaluate the causes of contract failure in California and analyze the extent to which those failures could have been cost-effectively reduced through procurement design," the report says.

But it also cautions that setting requirements to reduce risk in renewable energy procurement could be a delicate balancing act. "Because measures to combat contract failure may have the unfortunate effect of restricting competition and raising bid prices, such analyses should take care to evaluate the advantages and disadvantages of these various procurement strategies."

The report was prepared by KEMA Inc, a consulting firm based in the Netherlands with subsidiaries and offices worldwide.

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