A significant issue for wind may well be maintaining its price competitiveness vis-a-vis solar as the PTC amount goes down over the next five years while the ITC used by solar will remain at 30% through 2020

Windpower Finance and Investment Summit

Ed Einowski | Stoel Rives LLP


What were the wind power agreement market drivers in 2015?  What influence did the expiring PTCs have on the market?  What impact is the rise in competitively priced solar having on the wind market?

First, it is important to understand that speaking of “wind” PPA market drivers is misleading because wind is just a part of the resource mix that power purchasers have available when they consider procurements. So purchasers generally evaluate wind along with solar, biomass, natural gas, etc.  If meeting an RPS or “greening” their portfolio is a primary objective, then non-renewables such as natural gas fired plants will be off the table.  In some such cases, wind may have a local advantage over other renewables  - for example, if the purchaser is located in the wind belt in the Midwest, it may prefer wind resources to support local construction and infrastructure build out with the resulting perceived benefits.  But a purchaser in Arizona may be focused on solar given prevalent sunshine and wind regimes that are not as robust as elsewhere.  On the other hand, if the primary objective is to meet expected load demand, then all available resources will likely be evaluated whether or not renewable, although even in such procurements there may well be “bonus points” for non-emitting resources such as wind and solar. 

Aside from the drivers that are peculiar to particular purchasers (e.g., the need to meet an RPS), the main PPA market drivers have been the expiring PTCs, the appetite among yeildcos for projects to put in their portfolios, and the rise of solar power that is increasingly cost competitive with wind and other resources. 

The expiring PTCs naturally caused wind developers to hotly pursue all PPA opportunities in order to take advantage of the power price the PTC makes possible.  And it also caused a number of purchasers to enter the market when they might otherwise have waited, all in order to secure the lower price for wind that PTCs make possible.  In fact, some purchasers procured wind in circumstances where they will not begin taking the power for several years after the project is completed, all so that the project could beat the PTC deadline and preserve the PTC price benefit.  In short, the fact that PTCs were set to expire at the end of 2015 was an incentive for both developers and power purchasers to move forward with PPAs in 2015.

The appetite of yieldcos for projects has both assisted wind developers and also created issues for them.  The benefit to developers is that yieldcos have provided a ready source of financing needed to construct the projects, something that many developers lack on the equity side.  The wind project development business being a capital intensive undertaking, a new source of capital is always welcomed.  The yieldco demand also benefitted developers by tending to bid up the asset prices as different yeildcos pursued the available projects.

The yieldco demand also created problems for developers in that yieldcos tend to be “resource agnostic”, meaning that so long as the resource is a renewable resource, it generally doesn’t matter whether it is wind or solar.  As a result, the same benefit wind developers reaped from having the yieldco financing available also drove solar developers to frantically pursue PPAs. 

Solar has some advantages over wind notwithstanding that the typical capacity factor of a solar project is significantly lower than wind and that solar has higher capital costs than wind on a per MW basis, resulting in a higher price for solar power.   For one thing, solar produces energy during on-peak demand hours whereas in most parts of the country wind tends to produce more energy at night during off-peak demand hours.  That in itself makes solar power more valuable than wind.  In addition, solar projects tend to be significantly smaller than wind projects (a 20 MW solar project is considered a sizable project, with many be far smaller than that, whereas few wind projects are built these days that are smaller than 75 MW and most are much larger).  As a result, solar projects can be built in urban areas and on distribution systems.  This means that the power purchaser does not have transmission issues and transmission costs to deal with as does wind.  It also provides some modest PR benefit in that the purchasing utility’s customers can drive by the project and see green energy at work - something that is usually quite difficult to do given the remote locations of most wind projects.

The bottom line is that solar power is giving wind a run for its money in ways that it did not several years ago.  The competition for PPAs is such that power purchasers have been able to demand more favorable PPA terms than would have been available in past years, resulting in greater risk for developers and more issues to be addressed in the financing process.


What will be the consequence of the PTC extension on wind power agreements moving forward?

The trend of the last several years in rushing to get projects done so as to qualify for the PTC before it expires is likely to continue.  But given the step-down in the PTC amount over the next five years, the push will be to preserve the higher PTC amount before it is lowered each year.  A significant issue for wind may well be maintaining its price competitiveness vis-a-vis solar as the PTC amount goes down over the next five years while the ITC used by solar will remain at 30% through 2020.  This fact alone will drive the price of wind and solar closer.  Given what has been said about some of the advantages solar already enjoys over wind, wind may find it increasingly difficult to compete with solar on a price basis.   On the plus side is, of course, the fact that the PTC is assured to be available at some level in the coming years.  But in addition, without the benefit conferred by the PTC and ITC extensions, it is likely that the primary path forward on the Clean Power Plan would be to shift from coal to natural gas.  The price competitiveness that the PTC and ITC bring is likely to make natural gas less of a player in the CPP implementation than would have been the case.


Are you surprised about the number of PPAs by non-utilities?

The commercial and industrial “off-taker” market (often referred to as “C&I”) has been growing over the last several years.  While many developers are hopeful that it will become a significant source of new customers, it is yet unclear how deep this market will become.  For one thing, many, if not most, of the C&I deals do not involve the actual purchase of power by the C&I customer (which is why I put “off-taker” in quotes above).  Rather, instead of a PPA, the parties enter into a contract for differences that operates like an interest rate swap (except that in lieu of swapping to an interest rate index, the parties set strike price that is measured against the prices obtained for the power in the marketplace).  These arrangements are purely financial arrangements where the C&I customer does not take the energy (though it usually does take the RECs or green tags associated with the energy).  Rather, the energy is sold into the local market at prevailing spot prices, and it is the difference between the strike price and the market price that is used for the financial settlements between the parties (if the strike price is higher than the market price, the C&I customer pays the shortfall to the developer; if the strike price is lower than the market price, the developer pays the excess to the C&I customer).  This being the case, one limiting factor on the growth of the C&I market is the availability of liquid markets into which the energy will be sold.  Furthermore, liquid markets work to produce acceptable prices only when, over time, the energy being sold into the market is roughly equal to the demand.  If a significant amount of energy is continually sold into the markets due to contracts for differences (i.e., where the energy does not have a dedicated “sink” in the form of an off-taker who will use the energy to serve load), the result could be an over-saturation of the market causing prices to drop below what is needed to maintain the operations.

Perhaps the most interesting development in this regard is that some C&I customers have entered into arrangements where they do take the power, but not for purposes of serving their own load but rather so that they can play the arbitrage game in the liquid markets.  It will be interesting to see over time if these players, whose primary business is not electricity, have the institutional dedication to stomach  the ups and downs of the electricity markets.


Is there a market for small wind projects or is the focus on large utility level projects only?

In recent years, wind projects have tended to be utility scale - the smallest wind project I have done in recent years was 75 MW.  That is, in part, due to the need to take advantage of economies of scale, in part because wind tends to need to be located in remote areas away from load - these combine so that the cost is prohibitive for most off-takers as compared with alternatives.  Solar, on the other hand, can be built in urban areas, and doesn't have the same economies of scale, in part because solar equipment manufacturers have small roof top installations as a major part of their market, whereas the wind turbines are more complicated and not as scalable and thus need the economies of scale.  Aside from demo projects of one or twoMW, small wind tends to be used in off-grid applications (think pumping water on a ranch in the West, just like the old windmills of yore).

What other key issues will be driving the wind market in 2016 and beyond?

The success in the courts and in the implementation of the President’s Clean Power Plan will be a key driver, as State RPS and green power programs have been over the past decade.  Increases in State RPS requirements like those recently enacted in California will be a part of the mix and will help even if the Clean Power Plan encounters unexpected difficulties.    We seem to go through cycles in this country where concern for climate change periodically ebbs and flows.  Recall that President George W. Bush campaigned by supporting the Kyoto Accords, only to abandon them once elected, thus bringing to an end the last round of enthusiastic support for anti-emission actions.  The weather events of recent years and the overwhelming scientific data that has accumulated despite the efforts of the  deniers seems to be heading the nation back into a period of public support for changing the carbon regime.  If this trend continues, we could see enormous benefit in the renewables area notwithstanding the Tea Party driven political deadlock, which would not appear to have the broad support needed to defeat anti-carbon actions in the coming decade.  Finally, the blow-back by utilities on net-metered solar may have some benefit with respect to the demand for wind if it results in less rooftop solar, but it may be difficult to quantify any direct connection there. 


About Edward D. Einowski
Edward D. Einowski is a partner at Stoel Rives LLP where he specializes in renewable energy project finance and development. He represents developers (including biomass, wind, solar, hydro and geothermal), primary investors, tax-equity investors, biofuel producers, investment banking firms, commercial banks and other financial institutions. He has handled project financings and related work throughout the United States, from West Virginia to California.

Ed has handled a number of highly specialized project-related transactions, including tax-advantaged U.S. leveraged leases, cross-border leases and public-private partnerships for the joint development and financing of major infrastructure projects.

The content & opinions in this article are the author’s and do not necessarily represent the views of AltEnergyMag

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