Wind Projects Advance In California

Wind Projects Advance In California

December 01, 2001
As California emerges from the power crisis of the past year, windpower is uniquely positioned to benefit from a new focus on power supply, although some barriers to more widespread development remain.

One significant barrier that is common to all power projects in California is the issue of securing a power purchase agreement with a creditworthy entity. Because California’s financially-crippled investor-owned utilities are unable to provide the necessary level of credit support, the state has stepped into this role. The Department of Water Resources or “DWR” is responsible for procurement, and a new Consumer Power and Conservation Financing Authority has been formed to ensure supply adequacy.

Windpower has proven competitive in recent state solicitations for long-term power supply. The state sees an opportunity to reduce price volatility by including in its supply portfolio renewable energy sources like windpower that have little or no fuel price risk. Somewhat offsetting the fuel price risk mitigation benefits of windpower is the supply uncertainty associated with intermittent renewable resources. Because of the uncertainty associated with the timing of deliveries from wind projects, wind developers typically enter into non-firm, as-available power sales agreements. This has been the case with recent DWR contracts for wind generation.

Even though wind developers can get as-available power sales agreements that have fixed commodity energy prices and no firm power delivery obligations, the owners of these projects may still face price uncertainty. Under current market rules, generators incur imbalance energy charges when their deliveries deviate from scheduled levels. Since wind generators have highly intermittent supply, they can be subjected to significant risks of imbalance energy charges. However, these issues are now being addressed through a collaborative process between the windpower industry and the California Independent System Operator or “ISO.”

DWR: The Only Game In Town

DWR has stepped into the role of procuring power for the investor-owned utilities in California. Among the more than 40 projects with which DWR has executed contracts are three windpower projects with a total capacity of 174.6 megawatts.

A PG&E National Energy Group project, with 66.6 megawatts of installed capacity, began operating in early October. The project’s contract is for a term of 10 years and has a fixed price payment of $58.50 per mWh.

Two Whitewater Energy Corp. projects are scheduled to begin operation by the end of 2001. These projects have contracts for 12 years at a fixed price of $60 per mWh. In each case, DWR takes energy as delivered, with no firm capacity requirements. The sellers retain any state or federal subsidies, including the production tax credit, as well as rights to any “green credits” associated with renewable generation that may be sold in a secondary market. Interestingly, these contracts specifically address the issue of imbalance energy charges, with DWR taking responsibility for paying such charges.

California Power Authority: Major Owner of Wind Projects?

The Consumer Power and Conservation Financing Authority was created last summer under Senate Bill 6X, which passed in direct response to California’s supply adequacy problems of the past year. The power authority is charged with ensuring reasonably priced, long-term availability of reliable supply of electricity and natural gas, promoting environmentally friendly supply and demand solutions, and achieving adequate capacity reserves by 2006. The legislation allows the authority to issue up to $5 billion in revenue bonds to finance projects to be owned and operated by the authority itself. S. David Freeman, former head of the Tennessee Valley Authority, Sacramento Utility District, and Los Angeles Department of Water & Power, was selected as the power authority chairman. Freeman has a long history of promoting and implementing conservation and renewable energy.

The power authority announced a goal of acquiring 1,000 megawatts of renewable energy projects to be part of a total 3,000 megawatt resource portfolio by next summer. Toward this end, the power authority has already signed letters of intent with developers for more than 2,200 megawatts of renewable generation projects. More than 1,700 megawatts are windpower facilities, with all but 300 megawatts to be located in southern California.

The power authority intends to own and operate all non-windpower projects in its supply portfolio; however, for windpower projects, the authority will instead enter into 10-year fixed-price power purchase agreements with the project developers. At the end of the contract period, the power authority would take ownership of the facilities for a negotiated price. The reason for this arrangement is to preserve the federal production tax credit for private owners. The credits, which run for 10 years after a project is first placed in service, are of no value to public agencies. The power authority expects to sell the power from its projects to DWR.

Although no contracts have been executed to date, the power authority has agreed in the letters of intent to prices for power ranging from $40 to $50 per mWh. These prices are competitive with other sources and are well below prices seen in the market during the past year.

Notwithstanding the agreement on prices, it is unclear when, or even whether, actual contracts between the project developers and the power authority will be signed. Since the DWR is supposed to be the purchaser of power from the power authority’s plants, the creditworthiness of DWR must be assured. DWR has yet to issue revenue bonds to back its past and future power purchases. Until the bonds are issued, the power authority’s contracts with DWR will probably have to remain on hold.

Imbalance Energy Charges

Unlike the credit problems, progress has been made in the effort to address another barrier to the project financing of windpower projects in California. The intermittent nature of windpower has made it difficult to participate in ISO markets because of the difficulty in hour-ahead and real-time scheduling. To the extent that actual deliveries deviate from the scheduled amount, generators scheduling through the ISO are responsible for imbalance energy charges. The financial impacts of these charges, and the uncertainty introduced by this issue, have made it difficult for California wind projects to secure project financing.

The operational and cost issues associated with integrating intermittent renewable resources into the ISO grid have been addressed by a consensus proposal developed by an ISO intermittent resources working group. This group held weekly meetings over the summer in an effort to develop a structure through which intermittent resources could participate in ISO markets and, therefore, increase their ability to obtain financing while minimizing costs and impacts on ISO operations.

The consensus proposal establishes a framework for improving real-time windpower forecasting to reduce schedule deviations and a monthly settlement period for netting out schedule deviations for participating wind projects. The forecasting project will be conducted by independent experts and be administered by the ISO, with funding from a wind generator payment of $0.10 per mWh. Forecasts will be developed for day-ahead and hour-ahead scheduling, and the hour-ahead schedule will be updated by a near real-time forecast. The forecasted amounts will be deemed delivered, so intermittent resources will not be charged for replacement reserves and imbalance energy. These costs will instead be assigned to scheduling coordinators with imbalanced load. A forecasting working group will be established to monitor the forecasting effort and determine the impact of windpower on the ISO system.

The ISO board of governors approved the consensus proposal at its September 20 meeting. The consensus proposal requires certain operational and tariff modifications that must be approved prior to implementation. These steps are underway and will be considered by the ISO board in the near future, probably as part of a broader package of tariff amendments.

Hurdles Remain

While progress is being made on resolving issues regarding the integration of intermittent wind resources into the operation of the ISO grid in California, larger hurdles face wind project developers. The Power Authority could contract for about 1,700 megawatts of new wind capacity. However, the power authority must establish offtake agreements with one or more creditworthy entities prior to acquiring these assets. The DWR is, at the moment, the main creditworthy wholesale power buyer in the state. However, DWR will not be able to enter into additional power purchase agreements until it has solved its bond financing issues.