United States

United States

Setting the stage for a market renaissance

California, once the world's largest wind market by far, has long been becalmed, scraping an average of less than 150 MW of new development annually for the past five years in a period when others have added ten times that much. Its total today stands at just over 2300 MW. With Governor Arnold Schwarzenegger galvanised into green action, things could be about to change -- but only if the wind blows the right way

At the start of this year, California, the world's fifth largest economy, also ranked fifth in the world in wind generation. A couple of months back, however, it was ignominiously passed by Texas. Before long, the most populous US state will slip even further down the wind ratings as China steams past -- and with only 300 MW of new development set to be added to the state's total in 2006, it is not a year the California wind industry will want highlighted in the history books. It could, however, mark the end of a long dry spell for what was once the world's greatest wind power market by far. New legislation is set to get the ball rolling once again.

Governor Arnold Schwarzenegger has signed into law two policy packages with important implications for wind: a major bill to reduce greenhouse gas (GHG) emissions, which attracted international headlines; and a law strengthening the state's already robust Renewables Portfolio Standard (RPS) legislation, which mandates the inclusion of a rising proportion of green power in electricity portfolios.

The GHG reduction bill, for all its fanfare, will have little near term impact for wind but fits into a larger policy picture for green power. By contrast, the RPS strengthening bill offers some immediate and substantive changes. Taken together, the laws do not portend a new building boom, but they do set the stage for one, according to industry sources. That is, if the wind industry can stay cost competitive with other renewables in the state.

Assembly Bill 32, the Global Warming Solutions Act of 2006, attracted broad international attention -- including live video-link kudos from British Prime Minister Tony Blair -- as the first major policy in the US to curb greenhouse gas emissions. While California might only be a state, it ranks 12th in the world for CO2 emissions. The GHG law requires the California Air Resources Board (CARB) to establish a GHG cap and reduction measures by January 1, 2011, with the aim of reducing the state's CO2 emissions 25% by 2020.

While the policy, to be formed in coming months, does not specifically call for the use of wind power, or any other technology for that matter, CARB's Jerry Martin says increased use of wind power will be one of the agency's preferred approaches and represents "a huge opportunity" for the wind power industry. "One of the first things we'll try to do is to reduce the amount of influence that coal fired power has in California," says Martin. "Now twenty per cent of the state's power comes from Midwest coal. And since the state is not going to need less power in the future, that means replacing this demand, and wind power is one type we prefer."

By July of next year CARB is required to identify the "low-hanging fruit," the immediate or near term solutions to limit GHG emissions in the state. These may not be wind. Energy conservation and energy efficiency will play a key role. Martin assures, however, "for the wind energy businesses, the news has got to be good."

Cost Pressures

Yes, the news is good, says Nancy Rader of the California Wind Energy Association (CalWEA), though she echoes a consensus view that AB 32 on its own will have little immediate impact for wind. Its value, she says, is the platform it presents for help pushing through improvements to California's RPS legislation, passed in 2002. When first proposed, lawmakers demanded the RPS include a cost-cap on the eligible renewable energy sources. To achieve this, the Market Price Referent (MPR) was established. Renewable energy projects are required to hit this target price range to competitively qualify for the RPS.

But today, while wind power enjoys a boom cycle fuelled by a federal production tax credit in much of the US, California remains a relative development backwater. A one-two combination punch of rising wind technology costs and falling gas prices is putting wind power prices "uncomfortably close" to the MPR, says Rader.

Some of the price difference is made up by the state's system benefit charge, a small fee paid by ratepayers to support wind and other renewables. But even with this taxpayer support, the cost margin reflects a wider concern that wind power is fast approaching a point where it is too expensive to be a competitive choice for the RPS -- ironically, the one major statewide policy that forms the backbone of policy support for wind power in California. Rader points to some surprisingly large Power Purchase Agreements (PPAs) signed by state utilities with other renewable energy sources as a sign wind power is loosing its competitive edge with other green power technologies. In one example, all eyes are on Stirling Energy Systems, a concentrated solar power company, to see if it can deliver on the first phases of project PPAs of up to 900 MW with two state utilities.

Her fear is shared by Matt Freedman, an attorney with The Utility Reform Network (TURN). He says rising wind turbine prices are a serious threat to wind power development in California. "Unlike other states, California has a choice between wind, geothermal, solar thermal, biomass and wind can price itself out of the market," warns Freedman.

To mitigate the cost pressures on California wind, Rader's organisation will push for a so-called "GHG-adder" that will have the effect of raising the MPR with respect to wind's role in meeting the RPS.

So while the GHG law may offer no near term benefits for wind power, it may indirectly give California projects some breathing space by increasing the cost cap for eligible projects. "The GHG law will put a cap on carbon and there's going to be a cost associated with this carbon. We want to impute that cost to the MPR, starting in 2012, to give wind a greater margin of comfort," Rader says.

Although CalWEA's approach to integrating wind power into the state's new GHG law reflects concern over high prices, Rader is pleased the law is now in the hands of CARB, which she says has a very good reputation for implementing progressive energy policies. With them, she says, "there are no outs."

Restricting RPS credit trade

While the GHG law garnered all the media attention for its stance on global warming, a second measure, Senate Bill 107, will have an immediate impact on supporting wind energy in the state. Dubbed an "RPS clean up" law, it could soon be intrinsically linked to the GHG law. It includes a number of provisions. First, it codifies into law Schwarzenegger's goal of increasing the RPS requirement from 20% by 2017 to 20% by 2010. Second, it closes the option for out-of-state renewables to qualify for the RPS through Renewable Energy Certificates (RECs) alone.

"It closes a loophole that was not intended," says Rader. "Now, to be eligible, the power associated has to be delivered into the state." She says her members support renewable energy credits and see them as an integral part of supporting long term PPAs, but adds that "our concern was that we might get credits and no power delivered, and California would not see any benefit from that. We saw that as potentially threatening if we were just shopping out to Wyoming and not getting the in-state jobs or air quality benefits."

Vital provisions

While out-of-state credits will only qualify for meeting the RPS if the energy associated with them is delivered to the state, the legislation allows for energy deliveries to occur at a time different than generated. In essence, this means that out-of-state credits can be paired with generic out-of-state power.

The provision is particularly important for wind energy, which cannot schedule deliveries into the state because the California Independent System Operator (CAISO), which operates most of the state's high voltage wholesale power grid, cannot accommodate intermittent out-of-state resources and only accepts energy deliveries from outside California in firm time blocks. Without this legislation, out-of-state wind would not have been able to participate in California's RPS market.

The law, also for the first time, makes in-state RECs eligible to satisfy the RPS. As long as the power is generated in California or delivered to California, the REC can be unbundled and applied toward the RPS requirement.

Lastly, the law makes renewables put online before January 2005 ineligible for compliance with the RPS. Rader says allowing pre-2005 renewables to qualify reflected a "real and present danger because one utility was rumoured to be planning to exploit that loophole."

Still concerned

Richard Ferguson of the Center For Energy Efficiency and Renewable Technologies, an advocacy group, considers the flexible accommodation for out of state wind to be valuable, but says in-state California renewables will still provide for the bulk of what is required under the state's RPS mandate. A sore point for Ferguson on the RPS is he feels the utilities still have too much flexibility to comply. Accommodating intermittent resources from out-of-state and making other transmission related improvements will go a long way to helping the current situation for wind in California, he says. But he does not trust state regulators to adequately administer and enforce the RPS law.

"Up to now the whole procurement process for the RPS has not insisted in energy showing up in the grid," says Ferguson, referring to how the California Public Utilities Commission (PUC) has been, what he describes, "very generous" in allowing Investor Owned Utilities (IOUs) to count PPAs alone towards the RPS goal instead of fostering new renewable energy generation projects.

"The legislature makes the laws but how they are interpreted and enforced is all up to the PUC. It's a very tough market," says Ferguson. "The municipalities are doing a better job on getting more renewable energy than the IOUs, even though we have this [RPS] legislation. The political power IOUs have with power agencies is enormous and they still don't like wind, even though its cheaper than gas."

Freedman of TURN, certainly no great friend to the IOUs in the state, takes a more nuanced position on utilities complying with the RPS in the form of PPAs. He says there is always an inevitable lag time between an RPS law's inception and when utilities fall in line. And, he adds, it takes time to get projects into the ground, especially when there are other challenges facing wind development. Furthermore, he says what is happening with regard to the RPS highlights the hurdles facing wind power development in the state.

"This moves the ball forward, but the problems for wind in California are not connected to this law," Freedman says. "The fundamental problems are transmission, the PTC, developers being spread thin across many states and not being on top of their game, permitting and siting issues and rapidly escalating turbine prices, which threatens to kill the whole industry's future here in California."

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