There are no simple, or easy, answers. The main reason for the dramatic shift in focus is the great uncertainty surrounding proposals for deregulation of the power market that are now being considered in at least 30 states in the US. As fate would have it, these are the same states, more or less, that have an abundance of wind and other renewable resources and which pioneered many of the policies aimed at improving the environment through use of clean power sources.
Instead of prompting utilities to abandon higher cost nuclear and replace it with more cost effective and cleaner wind power, deregulation has taken the wind out of the sails of what was becoming a renewed and exciting market. There is no doubt that the long term picture for wind remains bright. What AWEA members need to do, while pushing for longer-term reforms, is keep some momentum going in the short term.
The industry is scrambling to protect what laws are on the books in order to make sure that the 3153 MW of project commitments identified by AWEA in the US actually grow into wind farms. But other possible allies, including both environmentalists and forward looking utilities, could be enlisted to protect federal laws such as the Public Utilities Regulatory Policies Act (PURPA) that specifically promote renewables.
Though there were continued gestures at the Washington conference to the growing acceptance of wind technology -- including the addition of the Edison Electric Institute as a co-sponsor -- the event reflected the tension between the Clinton administration's professed support for wind and the attempts to slash spending on "social" programmes, such as support for renewables, by House Speaker Newt Gingrich and his Republican cronies.
Even the ringing endorsement of wind from the energetic Hazel O'Leary, secretary of the Department of Energy, didn't seem too comforting. Perhaps the reality that her agency, which is now finally winning some praise from the wind industry after years of bitter complaints, may be eliminated by the Republican controlled Congress explains the lack of excitement.
Ensuring fair competition
The key panel of the conference focused on electric utility restructuring. Though the details of such regulatory tinkering puts many to sleep, these are the nitty gritty items which could make or break future wind projects in the US. Nancy Rader, an AWEA consultant, has developed a strategy for wind development under a deregulated, more competitive regime. "Instead of tax/subsidy schemes and bureaucratic implementation, a renewable portfolio standard would rely on the market to ensure that renewables are developed in the most economical way," explained Rader, linking the concept to mutual fund investment strategies.
The strategy has a fundamental sales pitch: in a deregulated market, dominated by institutional private financiers, the appeal of wind is that it is a hedge against the economic costs associated with unexpected fuel price spikes. This is not a new argument, but an attempt to address concerns about fuel prices in a competitive market place without the red flags associated with direct federal or state subsidies.
Under the strategy, every power supplier -- whether a utility, power broker or direct industrial supplier -- would be required to purchase a percentage of its energy needs from renewable resources such as wind. The exact amount would be based upon a state's resource diversity, environmental protection and economic development goals. "The percentage could start low and increase over time," said Rader, noting this would allow markets "to gear up." Individual state requirements would be tradable, so that every power supplier need not become a renewable energy developer. This, like air emission trades under the US Clean Air Act, would allow the standard to be met in the most cost effective way. Utilities or other power suppliers in the South, a region with little wind resources, could redeem their renewable commitment with a power supplier in Minnesota or elsewhere in the Midwest that had superior and therefore more cost effective wind power. The southern utility would fulfil its commitment by financing the Midwest development.
According to Rader, this approach ensures fair competition by imposing public policy requirements on all power suppliers. Another prime attraction is that it could be applied to today's utility monopolies or the envisioned retail market served by the deregulated distribution utilities of the future. This feature is critical during this time of transition because utilities are currently resisting any type of obligation that could place them even at a slight disadvantage in short term markets.
Hot button issues
Others on the panel -- representing developers, environmentalists and utilities, touched upon the other hot button issues that are dominating deregulation discussions: California's Biennial Resource Plan Update (BRPU), with 1500 MW of wind contracts on hold; large scale non-utility markets for wind; and utility worries about stranded investments in both nuclear and independent power plants. Jerry Bloom, an attorney with the Los Angeles office of Morrison & Foerster, tried to put a broad perspective on the decision by the Federal Energy Regulatory Commission (FERC) to block the BRPU auction of renewables contracts. There was little good news.
On top of the "direct negative impact on winning bidders that invested significant resources in the BRPU process," FERC's actions have had spillover effects on states outside California. Even if the BRPU is ultimately upheld, increased regulatory uncertainty is damaging to the industry, said Bloom. Impacts beyond California include questions about state regulatory authority over renewable energy programmes and increased sentiment among utilities and the public that PURPA fulfilled its objectives and should be repealed -- even though less than 2% of the US's current capacity is independent renewable projects. The most disturbing impact for wind developers, nevertheless, is increasing uncertainty about the sanctity of existing contracts between utilities and independents. "The worst case scenario is that renewables costing more than the cheapest available resource will never get developed," was Bloom's final and gloomy assessment.
Dan Watkiss, a consultant with Bracewell & Patterson in Washington DC, responded to Bloom's negativity with a vision of how wind could be developed in the near future without the legal quagmire of PURPA and the unco-operation of utilities. Opportunities for "merchant power plants," facilities which could market wind power to any willing buyer, could provide near term sales for wind developers. Such an approach could work for wind power, he claimed, provided that power aggregators coupled this renewable capacity with other services, such as demand-side management. It would be up to power aggregators to "package and match these new products with customer needs."
At least one wind company, Kenetech, is already aware of this merchant option if retail wheeling is implemented. Kenetech "will be looking at end-users. We won't put up a turbine in your backyard, but if you are an aluminium manufacturer -- or another industrial concern -- that has tremendous power needs and is located in an area with a tremendous wind resource, we can put something together," says the company's Bud Grebey. He notes that since Kenetech is already involved with industrial clients through sales of small cogeneration systems and demand-side management services, it could offer comprehensive energy management packages that include wind power.
The dangers of murky power pools
According to Watkiss, though, what is most important in a deregulated world is that "products can come to the market with contracts well into the future with absolutely transparent prices." Sending such clear pricing signals "lowers costs for capital investment" because it provides some certainty to investors. They can see the prices being paid, know the length of contract commitments and can therefore make independent assessments of market risks.
Unfortunately, utility restructuring proposals put forth by a group of California utilities dubbed "PoolCo," (referred to by Watkiss as British style pool structures) turns these competition fundamentals "on their head." PoolCo's mandated pools focus on the "short term, half-hourly market" when long term pricing signals are what is needed to make true competition work -- allowing renewables to thrive. While some claim such pools "will be good for renewables," Watkiss argued this was hogwash. "You have friends like that, you don't need enemies," he said. What Watkiss did not say is that the reason why utilities such as Southern California Edison and San Diego Gas & Electric are pushing such pools is that it is a way for utilities to dominate the power market with their own generation units.
The problems with the PoolCo proposal were neatly summarised at a legislative hearing held in Sacramento earlier this year. Eugene Coyle, representing Toward Utility Rate Normalisation (TURN), a ratepayer rights advocacy group, described PoolCo as an opportunity for "collusion and price-fixing." Such a system would allow "the electric utilities to dominate the market" because they would still own the majority of power plants and could therefore "fix prices." One scenario outlined had utilities bidding a "zero" price for all of its power, which would result in the utility plants being dispatched before all others since they were low bidder while being paid the price of highest winning bidder.
Another critic, Karen Edson, a consultant with Sacramento-based Edson+Modisette and representing the Independent Energy Producers, charged that the proposed pool model for California failed to capture the efficiencies of truly unregulated competition and would be an even more complex undertaking than the BRPU bidding process which Edison has repeatedly bashed. "I see PoolCo as increasing costs to industry by increasing government. It creates a role for 'stranded regulators.' It gives them something to do," she said.
A particularly American problem
Perhaps the most difficult issues facing regulators as they deregulate are "stranded assets." These are issues which the UK, and other nations which formerly had government owned electricity providers, have not had to face, at least not in terms of vastly different ownership concerns in different parts of the country. The reason why deregulation is screwing up the wind market is that in many cases utilities are trying to protect their existing high cost power plants, most notably nuclear facilities, from the free market economics they expect renewables to contend with. In California, nuclear power is currently priced between 8-12 cents a kilowatt hour. If utilities only get market prices for these plants, something they propose for wind and other renewables, they could go bankrupt or, at the very least, suffer huge losses.
This is the reason why most utilities in California, and elsewhere, give only lip service to competition. Private investor shareholders of California utilities have already lost 20-30% of stock value when the deregulation proposal was released last year. Utility managers want to protect what assets they can.
Ironically, the solution to this financial dilemma has been proposed by environmentalists. Armond Cohen, executive director of the Conservation Law Foundation, was among the panellists at the deregulation session. He described negotiations the foundation has held with utility New England Electric System (NEES) to develop a model utility restructuring proposal. The concept, also floated in California, could be replicated throughout the rest of New England and perhaps the country. The principal problem facing the industry, from Cohen's point of view, is how to pay for old, expensive nuclear power plants while making the transition to a competitive market. Under Cohen's model for New England, the proceeds from the sale of the existing undervalued utility transmission system to a new distribution utility is used to cover market liabilities such as nuclear decommissioning costs as well as some independent power contracts. Whatever debt balance remains is then recovered through an extra charge on transmission access contracts which all consumers must pay. The key environmental component of the plan is that all existing fossil fuel plants must be brought up to modern air pollution control standards. Some of these plants, built during the Korean War of the 1950s, provide 40-50% of the power used in NEES's area. The "dirty dozen," the 12 most polluting facilities in New England, contribute over 75% of the region's air pollution. Many of these could be retired and replaced with renewables such as wind.
But more explicit policies will also be needed. Cohen fingered the UK, struggling with the inequities of its power pool system, as proof of the need to do more. "Even in the most pro-market, Thatcher-like deregulation effort in the UK, there was recognition that renewables would not do well under a very near term driven market and therefore one had to create mechanisms to bring wind technology to market." Under his "grand bargain" approach, the distribution utility would be the key. Set-aside funding similar to the UK Non-Fossil Fuel Obligation (NFFO) could be pursued, but another option would the use of "green access" tariffs where a portion of the transmission access fee could be waived if customers wanted to directly purchase wind power, said Cohen.
While Cohen's comments, and sophisticated proposal, demonstrated that environmentalists and utilities can work together to develop competitive markets that could boost wind power, Mike Oldak, an analyst with the Edison Electric Institute, made a few of the panellists, as well as the audience, squirm. His unpopular remarks included the statement that current PURPA contract costs would total $38 billion above utility avoided costs between 1994 and the year 2000. "Central Maine Power's payments above current market costs are two and half times the market value of the company itself," he claimed. He did not seem to agree that consumers should pay the real cost of a sustainable energy supply. "We just can't pass these costs through anymore . . . especially in the emerging competitive era. Competition has provided us with a hard lesson that we all must learn. Those costs which exceed alternatives will not win contracts or keep customers," he said. Much of the rest of his comments criticised the large industrial customers behind the push for "direct access" to power supplies, noting that many of these entities were also independent power producers who were responsible for high electric rates in the first place.
What now?
While the panel provided a good snapshot of the various points of view of the issues of the day -- and maybe some solutions for America's vast electricity market -- there was little talk of a transitional strategy for wind developers except in the form of lobbying Congress to preserve PURPA. Some wind companies, however, are already looking at ways of bridging the gap. As well as looking directly at end users, Kenetech's Bud Grebey assures that the company "has already been pursuing strategies that don't rely on PURPA, such as utility ownership options, features of our deals with the Sacramento Municipal Utility District and PacifiCorp."
Other major developers were less optimistic, many claiming that they would just concentrate their efforts overseas. But ignoring the political winds today could well mean there will be no opportunity for wind in the US tomorrow. Some thought, though, was given to various of these opportunities at AWEA's conference.
Michael Jacobs, representing the Conservation Consortium of Yarmouth Port, Massachusetts, delivered a paper entitled "Market Conditions in the Northeast," part of which addressed the possibilities for customer-side generation. He noted that large industrial customers pay as high as eight or nine cents per kilowatt hour for electricity. "These prices should create an incentive for developers and marketers to be creative in providing clean, renewable energy at competitive prices," he said, noting that domestic customers pay even higher rates -- as much as 13 cents/kWh. Furthermore, in states such as New Hampshire a law that has never been used would allow transmission wheeling of power directly to as many as three customers -- large or small -- for wind projects totalling 20 MW or less.
RENEW Wisconsin, in a paper presented by consultant Robert Owen, is considering building a 20 MW wind/hybrid facility in lieu of a 138,000 volt transmission line proposed by Wisconsin Electric Power Co. But the scheme has attracted opposition from landowners. The project would rely on 40, 500 kW German Enercon E-40 wind turbines to be located on the Niagara Escarpment in Dodge and Fond du Lac counties. The estimated cost of the transmission line is $5 million; the hybrid wind system would be less and would, according to the paper, offer not only air quality benefits but would "solve the voltage problem for the near term future and could be expanded if necessary to address future load growth."
These papers represent the types of creative thinking needed by the US wind industry in this period of political flux and market transition -- proposals that highlight the unique contributions wind power can make to utilities or industrial or residential customers -- regardless of what form the various deregulation reforms take. Moving beyond the traditional role of supplying new capacity to meet a demand determined by state regulators in long, complicated proceedings is the challenge for the industry over the next few years. Without creative thinking, what seemed only yesterday to be a golden opportunity may only turn out to be yet another story of unfulfilled expectations.
.png)
.png)
