For the most part, this year's American Wind Energy Association (AWEA) conference was a reflection of what more than one speaker during the four-day event called a "great year" for the US wind industry. A record 4100 delegates juggled visits to the record 235 exhibitors in the Colorado Convention Center with an intensive schedule of four-track concurrent sessions and back-to-back private meetings in the side rooms radiating off the main conference area. But running just below the getting-down-to-business mood was an undercurrent of frustration about how to get past the challenges that have dogged the US industry for years and bring what should be the world's largest wind power market to a higher level.
Such concerns are not hard to understand. At the same time as AWEA is predicting an unprecedented 2500 MW of new installations in the United States in 2005, PPM Energy's Terry Hudgens estimates only about a third of the customer demand for wind turbines this year is actually going to be satisfied with projects. While the industry is awash in cash from equity and debt players looking to invest, financiers warn there may not be enough good projects at the right stage of development to keep them and investors interested.
To add to the frustration, just as utilities are starting to view wind as a mainstream, and in some cases a least-cost energy source, the industry is increasingly under attack from competing resources worried about losing market share, not-in-my-backyard opponents, and a vocal minority of elected politicians. In fact, just days before the conference started, US Senator Lamar Alexander of Tennessee introduced legislation designed to restrict where wind turbines are built and which receive the federal production tax credit (PTC).
"Well, colleagues in the wind industry, welcome to the big leagues," AWEA's executive director Randy Swisher told the conference's opening plenary session. As the industry grows and the stakes get higher, he said, so do the challenges it faces.
At the heart of many of the most pressing issues confronting the US industry is the inconsistent policy support of the on-again, off-again, PTC. The $0.019/kWh tax credit is set to expire for the fourth time at the end of the year. While AWEA is pushing for a five year extension as a way to bring some stability to the US market, few speakers or delegates seemed to believe a long term PTC is likely. In what Swisher called an "increasingly dysfunctional" Congress unable to agree on contentious tax and energy policy, there is now a growing unease over the country's soaring budget deficit that has politicians looking for ways to cut costs. One of the ways they may do that is to extend expiring tax credits, including the PTC, over a shorter term. "They know that this is no way to launch a new industry, that this is no way to attract investment. But they seem to be caught in this spiral of ineffective policy," said Swisher.
The domino effect of that policy became clear this year. By the time the PTC was extended in September 2004 after a nine month lapse, said Thomas Carbone of Vestas, turbine manufacturing capacity had already been deployed elsewhere. Vestas is the world's largest turbine production company. The resulting shortage of hardware, combined with a weak US dollar, the rising cost of some raw materials and the laws of supply and demand, have pushed prices up significantly and rendered some power purchase agreements (PPAs) -- that had been negotiated and were awaiting the extension -- uneconomic. As a result, not all projects in the pipeline for this year will be built.
"Customers are frustrated, and that is probably the biggest concern I have in the industry today," said PPM's Hudgens. "Utilities have to know with certainty that wind power is actually going to be there and it is going to meet their requirements going forward. And if it is not, they are going to replace it with something else."
The industry, added FPL Energy's Mike O'Sullivan, should not lose sight of the fact that most customers have a serious price point beyond which they are not interested. The turbine price increases have pushed the cost of US wind installations from $1000-1100/kW to $1300-1500/kW, an increase which, if permanent, could lead to "significant demand destruction," said O'Sullivan. "It could be an interesting year or two ahead of us." FPL is America's largest wind plant operator and developer.
The dynamics of the PTC-dependent market also increase wind's costs, said Hudgens, adding about 20% to a customer's bottom line. "It is the PTC boom-bust cycle that doesn't allow for reasonable planning, doesn't allow for optimization of plant, doesn't allow for manufacturing to come into this country in a major way," he said. "We're fortunate we're living in a high-priced gas environment where our costs are still underneath that. But I don't think we can sit back and depend on natural gas prices to stay high forever."
In fact, delegates heard, wind's advantage may already be starting to erode. "The increase in turbine prices, I think, is going to outstrip the increase in gas prices and go well beyond it," said Virinder Singh of PacifiCorp, whose company put out a request for proposals for 1100 MW of renewables last year and will only see 65 MW of wind built in 2005. "If we didn't have a turbine price increase, frankly I think all of our bidders would be in better shape because of gas price risk. But because of turbine prices, wind is going to be tougher to do next year."
Broadening the debate
Despite the problems with the PTC, few speakers were ready to openly suggest the industry abandon the tax credit, or, at least in public, take Carbone up on his suggestion that AWEA consider accepting a lower credit value in exchange for a longer term extension. "In the short-term, the PTC is essential to this industry and this market," said Swisher, a refrain echoed repeatedly during the conference by developers, manufacturers and utility executives.
While the growing number of state renewable energy mandates is encouraging, several speakers suggested the industry should not look to them as a long term solution, certainly not in their current form. "They are the wind at our back, no pun intended, but at the same time only one or two of them have any teeth," said FPL's O'Sullivan. AWEA is lobbying for a national renewables portfolio standard (RPS) of 10% by 2020, but it faces a lot of opposition, particularly in the Republican-dominated House of Representatives. "I can't tell you with confidence that we will be able to get a good RPS out of Congress this year," said Swisher. The RPS is a mechanism which creates a market for wind plant owners to gain income from sale of green power credits as well as the physical power.
The key to getting the kind of long term policy support the industry needs is to broaden the policy debate to emphasise the contribution wind power can make to energy security, job creation and the environment, said Hudgens. "Right now, when it comes to environmental, energy and economic policy decision making, wind is barely on the agenda."
AWEA's goal of a 100,000 MW wind market will create a new manufacturing sector and the jobs that go with it -- and provide a strong tax base in areas of rural America that can really use it. According to Larry Flowers of the National Renewable Energy Laboratory, a 37.5 MW wind farm creates 180 person-years of work over ten years, while a typical 100 MW wind farm pays $500,000-$1 million in property taxes, depending on the local assessments. In Texas, $1 billion was invested in 2001 to build 912 MW of new wind power creating $13.3 million in tax revenues and $2.5 million in payments to landowners. In Iowa, a 240 MW project created $5.5 million annually in operations and maintenance income. And in Hyde County, South Dakota, residents believe a 40 MW wind project "saved their community," said Flowers. Tapping into US wind's potential would also reduce natural gas imports by $15 billion a year.
"This is some of the best stuff I've ever seen. And yet that message doesn't resonate. It is just not understood. It hasn't been internalized by policy makers," said Hudgens. "Wind has a great story and we need to tell it in a very strong and convincing way. It is going to have to be told by credible leaders. It is going to have to be told by the executives of this industry. The good news is we have some very, very strong companies showing up."
Rebecca Watson, the Bush administration's assistant secretary in the Department of the Interior, said decisions around policy support for wind "come down to dollars." To convince politicians to make the investment, she said, the industry needs to find ways to get them past their perception of wind as the "flower child" of the energy sector. "They need to tell a story. They need to tell a new story. And I think that is important because that changes the paradigm. That turns it around."
The industry is also going to have to make a stronger effort to, as Swisher put it, protect the brand against critics who attack the visual and wildlife impacts of wind turbines. "The future of our technology is, I think, totally wrapped up in our position as an environmental technology. If we lose the brand, if we lose the perception that wind is a technology that really does contribute to the environment in very positive way, then we have really lost the ball game."
One of AWEA's medium-term goals, said Swisher, is to ensure that wind power receives full value for the contribution it makes to clean air and carbon dioxide emission reduction. "It is going to be very important to the future of this industry and something we need to be much more active on," he told delegates.
Although the US has not signed the Kyoto Protocol, utilities are starting to consider the potential cost of future emissions policy in their deliberations on new generation. PacifiCorp, with considerable thermal resources in its mix and an ambitious plan to add 1400 MW of renewables by 2014, already incorporates a carbon cost of about $8/ton into its integrated resource plan. "It makes a lot of sense. Our basic contention is the risk of CO2 regulation is not zero," said Singh. Puget Sound Energy (PSE), a West Coast utility, assumes no value for greenhouse gas and other emissions reductions. But it already sees wind, which comes in at $44-62/MWh with the PTC, as its least-cost resource. "Anything we are able to derive down the road will further reduce our cost," said the utility's Eric Markell. PSE is currently constructing a 150 MW wind plant at Hopkin's Ridge in Washington state and intends to buy the proposed 230 MW Wild Horse wind project in the state's Kittitas county.
This year's conference was notable for its level of utility participation and attention to utility issues, something Xcel Energy CEO Wayne Brunetti said will need to continue if the wind industry and its major customers are to reach their goals. The Colorado utility is the second largest retail provider of wind energy in the US and currently has more than 900 MW of wind online. It expects to add another 300 MW this year on its way to a target of 2500 MW by 2012.
Brunetti referred to the criticism Xcel received from wind power advocates when the utility opposed a Colorado ballot initiative, which eventually passed, calling for a minimum standard of 10% renewable energy in the state by 2015 -- despite the fact that Xcel was on track to voluntarily meet the target already by 2007. Indeed, Xcel had supported two previous attempts to set a Colorado standard. The utility opposed the ballot initiative because it did not have what the company believed were adequate checks and balances on cost. "We believe in wind power. I personally believe in wind power. We see the potential. But I can tell you it is going to be a lot easier to realize for both of us if we work together," said Brunetti.
One area that needs attention, Brunetti continued, is the assessment of the real costs and benefits of adding wind power to the grid. Utilities, he told delegates, are caught between wind advocates who insist the ancillary costs are small and sceptics, including some regulators, who assume they are being underestimated. "We don't need any more rhetoric from wind advocates or from sceptics. Both are counterproductive. What we need is solid research and analysis. Nothing is more powerful than facts."
There have been 11 studies on integrating wind into power systems in the US, and Xcel, he said, has been involved in four. One of these, completed last year, found the biggest cost impact of a 15% penetration of wind capacity, about $4.37/MWh, was on scheduling and unit commitment for the next day. "In other words, how does wind energy showing up impact the economic dispatch of your other units on the system," said WindLogic's Mark Ahlstrom, who headed the research, which was conducted on the Xcel North portion of its system in Minnesota, North Dakota, South Dakota, Wisconsin and Michigan. WindLogic is a company offering wind resource analysis and wind output forecasting services.
Xcel has now launched a two year wind energy forecasting study to look at ways to reduce that impact. "Our goal here is to actually sit down with the system operators, the control room people at Xcel, and say what do you need to see on your control room interface to be totally comfortable with a high penetration of wind," said Ahlstrom. "It is totally from their point of view. We're giving them all the tools they need."
That kind of operator input and training is something the industry needs to spend more time on, agreed Lawrence Jones of Areva T&D, a French supplier of transmission and distribution equipment, systems and services, including integration of wind plant. "There is a need to increase the confidence of system operators and dispatchers in being able to manage the variability of wind. That is very, very important," he said. "Until we cross that barrier we are still going to get negative reactions to bringing wind on the system."
Access to transmission is another significant barrier facing US wind projects, and one not made easier by the inconsistent policy support the industry receives. With the best wind sites often located far from load centres, new grid capacity is essential if the industry is to do more than "work around the edges of the opportunity base," said PPM's Hudgens. But, he added, construction of transmission which also factors wind power's needs into the planning process will not happen automatically. "Without a vision that this business is going to be there and grow over the next five to ten years, people won't even try to do those things."
There is, however, progress being made. In California, Southern California Edison has asked the Federal Energy Regulatory Commission (FERC) to create a new category of grid assets called renewable energy trunk lines, which would allow it to build new transmission out of the Tehachapi region for connection of 4000 MW of potential wind projects -- and roll the cost into the utility's rate base.
Right now, FERC approval for transmission upgrades requires signed interconnection agreements with project developers. But because there is no available transmission capacity in Tehachapi now, said Dave Olsen of California's Center for Energy Efficiency and Renewable Technologies (CEERT), wind developers cannot get the financing they need to bring projects to the point where interconnection is required. Current rules would also force the first projects into the region to shoulder the costs of the upgrades. CEERT is a non profit organisation representing environmental organisations, public interest groups and clean technology companies.
The situation has become a Catch-22 for the state, which is looking at strengthening its already aggressive renewable energy goals. Tehachapi has the largest concentration of wind resources in California, said Olson, enough to supply more than half of new renewables needed to meet the state's target. But there is currently no way to get the wind generated electricity to the customer.
Rob Gramlich, AWEA's policy director, said with more states developing minimum standards for the volume of renewable energy in their supply mix, the work being done in Tehachapi is important. "There are a lot of areas that are wind-rich and are not connected to the rest of the grid. It would be a huge precedent to have this type of planning and pricing implemented."
Just important as new transmission is making more effective use of existing capacity. "At the rate the wind industry is growing we need to have access for thousands of megawatts of interconnection capability right now," said William Whitehead of PJM Interconnection, a regional transmission organisation serving 13 eastern US states. "And if new transmission construction is needed, we need to be able to make the case that we are utilizing all of the existing capacity up to its fullest extent."
On that front, AWEA is working with FERC to develop a conditional firm tariff that would allow wind generators to make use of the unused, but currently unavailable, transfer capability that is available most hours of the year. In California, the state's energy commission has launched what it calls a strategic value assessment that overlays wind resources with transmission availability to find the best places to encourage development. "We are trying to strategically locate renewables and wind to unload the transmission system so we can get benefits to the system," said Ron Davis of Davis Power Consultants in San Jose, California.
While last year's AWEA conference devoted five sessions to the issue of how to attract more capital to the wind industry, this year financiers were focused on how to deal with all those now looking to invest. "For the first time, I think, we are in wind asset shortage when you compare the market to what capital is available. It is a very interesting situation," said Shane Bush of Standard Chartered Bank, which has been involved in the financing of 1000 MW of wind projects. "The challenge I think the industry faces now is, with all this capital around, how do we keep those parties all interested and at the table?" Bush joined Standard Chartered in November as part of its acquisition of ANZ's project and structured finance business, started by Bush after he left Fortis in 2002.
Mike Garland of Babcock and Brown, a London company working on wind equity investment in Australia, Europe and North America, predicted some new investors might be disappointed in what they find. Of the 2500 MW to be installed this year, he said, about two-thirds will be by the big established players, making it still a relatively small market for independent power producers. "They may do a few deals, but then what?"
Ed Feo of the law firm Milbank, Tweed, Haldey and McCloy LLP agreed. "The question is how long are investors going to hang around, given the number of opportunities that are there, given some of the uncertainties in the market, among those the PTC," he said. "There is a world out there of other opportunities for investments that are bigger than the ones here."
The complexity of wind power purchase arrangements, including a growing tendency for buyers to demand more and more onerous terms around issues like performance guarantees and scheduling risk, is requiring a more sophisticated understanding of the business on the part of investors. "It is not a market where equity can just stand there and say, here is the cheque," said Garland.
In fact, said Edward Zaelke, a partner with legal practice Morgan, Lewis and Bockius LLP, many larger players are refusing to participate in requests for proposals for new wind demanding onerous conditions. And where small developers do participate, debt and equity are sometimes finding themselves in a position where they have to renegotiate the terms of the PPA to make it work. Zaelke said there is sense of desperation in the market right now, with people trying to get projects done against the odds. "Cheap and abundant money is like cheap and abundant beer. It makes normally responsible people act like fools."
Despite the challenges, the sheer size of the US wind market commands the attention of potential players in all parts of the industry, both at home and internationally. "I think most of us would agree that the US is probably not going to be as easy, as stable or as consistent as some markets around the world," admitted Swisher. "But it is going to be big, and you need to be here to be a part of it."