Panelists had a lot to say at the recent AWEA Fall Symposium. The first session dealt with ides for driving demand for wind power, such as lower generation costs, wind power as a natural hedge against rising natural-gas prices, and competition as a way to generate more renewable energy.
The panel chaired by Robert Crowell, Chief Development Officer with OwnEnergy expanded on the ideas. The panelists included Steve Fine, VP ICF International; Susan Innis, Senior Manager with Vestas; Peter Mostow, Partner with Wildon Sonsini Goodrich & Rosati; Duncan McIntyre Managing Director with Altenex; and Frank Prager, VP with Xcel Energy.
This article provides the most salient points, ideas, and comments made during the discussion and to the best of my ability. I have edited for brevity and clarity, and any errors conveying ideas are mine alone.
OwnEnergy’s Bob Crowell began the discussion with: Let’s focus on RES (Renewable Energy Standards) and expanding existing state RPSs, ensuring there are rules in place that allows sufficient duration to build new projects.
Susan, there are RESs in 34 states, and last year there were efforts to repeal them or reduce their requirements. Fortunately we defended against them. Can you share some of those battles?
Vestas’ Susan Innis: In the state legislature sessions, just about every state had a battle of sorts. For instance, one effort was to kill 14,000 MW in Kansas, or stretch out RPS (Renewable portfolio standards) target dates. In many states along the border with Canada, rewrites tried to include Canadian hydro facilities in RES standards. In all cases, there were ways to reduce or weaken RPS standards. So the industry came together with allies and we applied months of effort to ward off or halt the changes.
Crowell: What might happen in the coming year on the RPSs?
Susan Innis: I’d like to say we won but that is not really what happened. In Kansas we can expect to see opponents come back in 2014 with the same reasons, and try to weaken its RPS. We have a battle in Ohio where one lawmaker (Ed. note: State Senator Bob Sietz) has always been against the wind industry, is trying to gut that state’s RPS. The industry’s first hearings this Fall maintained Ohio’s standard.
Crowell: Frank, we heard in a presentation some of the leadership Xcel is providing in wind. Part was a brief notification sent to customers is that Xcel will increase its purchases of renewable energy by 30% for a variety of reasons. Please expand on that.
Xcel’s Frank Prager: Xcel is a public holding company headquartered in Minneapolis that serves Denver and about 50% of Colorado. If you go back 10 years and compare the state of the wind industry to what it is today, it’s remarkable. The growth in wind was not envisioned by utility planners then. Xcel Energy has recently proposed to acquire about 1,900 MW more, about a 40% increase in wind. That will take us up to 6,800 MW of wind, more than we anticipated 10 yrs ago when the RPS passed in Colorado. We’ll do that for three reasons. One, our customers like wind for its zero emissions. Two, because of the RPS, although we are far ahead of it in Colorado and Texas. And three, the best of all, it actually saves customers money. We tell customers that you are getting clean energy and at a price that reduces your overall costs. Some wind power costs $25 to $30/ MWh, which is below the cost associated with generating electricity with natural gas, even at its historic low, the ability of wind to compete is remarkable.
Crowell: Utilities are not known for their support of purchase mandates. An example from last year was that Michigan tried to write a constitutional amendment to increase the RPS to 25% by 2025. The utilities clearly came out against the amendment. A recent report to the governor that says 15% by 2020 and 30% by 2035 are achievable by Michigan. What are your perspectives with regard to Michigan and the positions by the players, and do you have an opinion?
Prager: Sometimes utilities are not seen as the most innovative organizations. But I think that every utility’s circumstance is different, and every community’s circumstance is different, but I will say from a legal perspective putting an RPS into a state constitution strikes me as bad policy. This is a statutory issue. A couple things to keep in mind are the way utilities approach wind. One is that our number-one priority is always to keep the lights on – reliability. We are integrating wind at levels we never anticipated before and yet there are concerns because wind is not a controllable resource. There are costs associated with integrating wind.
Our company is promoting policy, such as a tax credit to utilities, to encourage the integration of higher levels of wind. That is a concern the utilities have: Making sure we can bring on high levels of intermittent resource and not experience significant challenges with reliably.
We opposed a state initiative in Colorado because we were concerned about the reliability issue and the distributed solar mandate is part of the RPS. It’s an issue that really goes to the challenges of the wind industry to increase its market share.
Also, Xcel Energy is blessed by God with tremendous wind resources in our back yard. Our service area has the nation’s best wind resources. We would be fools not to take advantage of it. So it’s easier for us to comply with an RPS.
Our company’s perspective has changed significantly in the last few years. The price of wind has changed our perspective from where we were when the debate began. We are now supporters of getting the right policy that provides balance for customers. The original RPS in Colorado was 10%, but now its 30%.
Vestas’ Innis: I see a common concern that utilities express in that renewables are “too expensive.” But we have also seen a number of states that have an RPS in place for several years, and whether the utility reports to the Public Utility Commission, or back to the state legislature, the RPS is met without increased costs. Union of Concerned Scientists took a look at 14 states, and in 13 of them, consumer costs did not go up by more than 1%. So the RPS’ have been bringing huge amounts of power on line and cost effectively.
Xcel’s Frank Prager: We are retiring coal plants so there is importance for wind. We have an initiative in Colorado to retire coal plants here and Minnesota, and we are replacing that capacity with natural gas and combined cycle. So like a lot of utilities, we are taking advantage of low natural gas prices. And yet, when you look out to 2020, we are not more reliant on natural gas than in the past. In fact, we are looking at an overall reliance on natural gas in 2020 that is lower than today because of wind. It is an excellent natural hedge against natural gas prices increases. So when you think about the debate on price, there is a lot of misunderstanding especially among policy makers, in particular about wind energy.
ICF International’s Steve Fine: EPA regulations and carbon emissions are things that will drive demand for wind energy. When I was doing more traditional fossil-fuel developments, the Kyoto protocol was in the news, and the big fear was that those of us on the fossil fuel side were going to have to figure out how to reduce carbon footprint or sequester carbon. In one project, we planted trees in 10,000 acres in the Mississippi River Valley.
How to reduce carbon emissions is still a big question.
A report referred to as the Sargent Lundy Report called for a 3 to 5% reduction in carbon emission from great effort. If a 3% reduction is required, it is not enough of a push for emission reductions. Others that say the EPA should go beyond that. The President in his address in June mentioned the EPA should use flexible mechanisms to implement regulations. And here you get further away from what is legally known. Organizations such as the Natural Resource Defense Council call for specific limits on coal-fired power plants. For 2020 for example, it called for a rate of 1,500 lb per MWh, 25% below the average 2,000 lb/MWh for a coal plant today. Because the plants can hit the target, they don’t have to shut down. They can set up a crediting mechanism – and here it gets interesting for technology such as wind – where wind generates credits against the states standard which coal units have to buy. So it sets up a credit and debit market where and other renewable energies can take advantage of the credit. The EPA will set the standards that the Clean Air Act is based on the idea of cooperative Federalism. And the EPA leaves it to the states to develop their implementation plans, or SIPs, that will have to be approved by the EPA. This would provide flexibility to the states.
Crowell: How do we create more demand for wind power from the customer side? How are traditional utilities and retail power providers growing demand for more wind power?
Altenex’s Duncan McIntyre: I’ve seen rerate tariff programs work with some levels of success. Those projects tend to be shorter term, one or two years, and in most cases there tends to be a premium to the alternative. We represent large purchasers of electricity such as a big industrial or big tech companies. A couple components include green marketing claims and participating in the renewable-energy industry. These programs tend to do a good job buying RECs as an alternative for big end users. The programs have a couple goals in seeking long term price certainty with the way they buy electricity. For instance, if you are going to build an assembly plant or data center, you want to be sure you have a certain amount of cheap power and labor for a period, but it’s not 20 years. In some places it’s as little as three to four years, maybe five or six if looking at the natural-gas market.
So price certainty is one factor. As Frank noted earlier, wind is a great hedge to gas, and some customers say natural gas is one of their biggest cost components in their business, be it for plastic or to feed a co-gen operation. So when you see this gas (prince) roller coaster from lows in 2001 to highs in 2008 and back down, there is only so much these companies can do to hedge against that exposure. So wind is one of the only great long-term hedges against gas, especially in markets where gas is on margin really the driving component of electric prices. One more observation: Big companies like a direct connection with a project, rather than feel they are on the sidelines. If they can say, ‘This is our project, we signed a long-term agreement for it, and we enable it to exist’, we can make that happen.
Wilson Sonsini Goodrich & Rosati’s Peter Mostow: I think that is right. I represent a lot of data-center clients and work with Google and purchase several hundred MW of power. We just made this announcement with RES and Microsoft for a big data-center purchase of wind. That tends to be what we talk about a lot and what the industry is interest in: How many deals are out there to expand the market?
Large corporate customers tend to be a top stratum. They want a tailored deal, and for regulatory reasons, the utilities cannot provide one. But a next level down, there are companies with a buying model and sustainability plan that drives them to do more than just buy RECs. A Green Tariff program may well be able to meet their needs.
Frank Prager: In the next five years you’ll see an explosion of tariffs for different customer classes, even for residential customers. We see that there is a price advantage associated with wind – also with central solar too, for customers interested in renewable energy.
We also know that those resources such as wind farms and big solar projects, don’t exist in a vacuum. A grid enables them. One thing we will see over the next five years is an explosion of greater green tariff options that will require a lot of work in the regulated utility model for us, or within regulatory structures. In the end, we still see more of that because of price competition. I mentioned earlier one of the big challenges for the wind and utility industries, what happens now with distributed generation and distributed solar?
There is a limited pot on money available for clean energy in those states. Here in Colorado, there is a 2% cap on RPS costs, so much is sucked into distributed solar, which is the least cost effective renewable energy resource out there. How do you make sure there is space for large wind power to come onto the system and at the same time make sure the right policy continues to encourage the right level of development of renewable energy on the distributed level? One way to solve the problem –utilities have to engage on this – is to provide opportunity for customers that want more renewable energy to provide their energy needs, make those options available whereby the clean energy can be streamed to them from a central resource.
Peter Mostow: The genie is out of the bottle with distributed generation, and it is driven more by solar than wind. Being an electric retail customer is a more active role than in the past. And whether the new demand is met by utility tariffs – could be progressive utilities – or met by the development communication, structure ways to make it happen one way or another. You can’t make people go back to thinking they have no choice.
Altenex’s Duncan McIntyre: Absolutely. Competition will be the watch word, even though we won’t see a big push to the restructuring model from the late 90s. Competition and growing competition will be the watch work for the utilities, or they will be called dinosaurs. The key thing is to get the policy right because there are policies in place now that distort the market and they need to be done correctly so customers have choices and understand where the incentives and subsidies are coming from. For example, the net-metering debate is a significant issue. There are two sides to every story so finding the right solution will be important.
Crowell: Microsoft announced a PPA. One of the fascinating things in the articles about it is the concept they have, internal to Microsoft, a tax for their carbon usage. Are there other things that some industrial or commercial customers are using that helps them justify buying RE energy?
McIntyre: So we’ve seen it thought through different way in the corporate landscape. It comes down to internal accounting. These big, long-term commitments won’t pencil out with the average CFO based on sustainability claims alone. They have to be good economic deals to demonstrate a positive NPV and positive hedge value, but every company will look at the opportunity and value the risk different ways. We have seen companies that have a risk group, and they weigh in on their view or value of risk for this 20-year contract and you’ve seen (some value indicators) go to zero, and you have a few million dollars at risk, so you have to be careful how you think of internal accounting. One successful tool is getting individual business units to pony up their own budgets to support these initiatives. I don’t know if we have seen many instances where each business unit is willing to write a check and say, here is the premium we are willing to pay. But are they willing to take that risk onto their internal accounting balance sheet. This has been successful in some cases.
Mostow: These transactions are the first companies doing larger PPAs. Google or Microsoft sized companies that are high margin and able to create internal compliance markets. It’s voluntary but there is internal compliance going on in the company.
Cowell: One more question, PPA, traditional PPA, do we need to think differently about them to work better with this sort of offtaker?
Peter Mostow: From the lawyer perspective, when negotiating a PPA that requires a corporate counter party, you’re in for a new experience. Most corporate customers don’t know the first thing about energy project financing and what the requirements of the financing model are on a PPA. So you could have long negotiations where people are talking past each other because corporate with big balance sheets, ask questions such as: Why make me provide performance assurances I only worry about my balance sheets. There are lender and protective consent provisions in there, curtailment caps, all these things that do not have to be there. This is an educational element that AWEA can get into.
Crowell: One more question. Recently there has been activity in the senate to do a Federal clean energy standard again, as opposed to state RPSs. Does it have a better chance of survival, or how do we encourage it?
Steven Fine: It has come up a number of times, especially with Senator Bingham. He was our champion for renewable energy. But it never went anywhere.
For messaging, as Frank said about natural gas as a hedge, part of the messaging AWEA has around this, that in the case of renewable energy standard, there are the carbon and clean energy benefit and they are important, but what is not hit enough is the resource diversity angle. With the coal retirements from mass regulation, we forecast about 65 GW of coal retirement, and depending on how an RPS is constructed, it will lead to some incremental coal retirement, but the number is unclear. That is pushing the country to natural gas. There is a resource there but there is pushback against fracking. And while the resource will not dry up anytime soon, a lot of lawmakers, even if not sympathetic to the carbon aspect, to some it is a flashpoint, they should lend more of an ear to the resource diversity and national security, and this is a message AWEA can hit home.