The wind energy industry breathed a welcomed sigh of relief as Congress enacted a one-year extension of the production tax credit (PTC) as part of the "fiscal cliff" deal. But even with a liberal "begin construction" rule that will allow projects to qualify for the PTC if not completed by the end of 2013, the industry faces significant challenges in availing itself of the economic benefit of this PTC extension. The crux of the matter lies in the relative scarcity of power purchase agreements (PPAs) for utility-scale wind projects.
Last year saw very few utility-scale wind PPAs awarded, as many utilities had no pressing need for renewable energy for purposes of renewable portfolio standard compliance and hence decided to await the outcome of the PTC extension before deciding whether to procure more wind and other renewable resources. At the time this article is being written, it is too early to tell whether utilities will re-enter the procurement market in a significant way.
Several sizable wind project RFPs were issued in December 2012, which might be taken as a hopeful indicator that activity will pick up. But those RFPs were, in many instances, driven by concerns over meeting load requirements as utilities continue to shut down coal-fired plants or are otherwise attempting to reduce their carbon exposure in light of renewed concerns over climate change and potentially onerous carbon regulation. To that extent, these RFPs do not seem importantly driven by the anticipation of a PTC extension. (Here's a link to a list of recent renewables RFPs maintained by the U.S. Department of Energy; while not complete, it is fairly representative of the type and scope of recent RFPs for renewable energy and RECs: http://apps3.eere.energy.gov/greenpower/financial/.)
Given that there are not a large number of PPAs "in the can" waiting for the PTC extension so that construction can proceed in 2013, the first big challenge for wind project developers this year will be securing PPAs that provide the revenue stream that enables the projects to be financed. With "merchant" wind plants (i.e., those that sell their energy and RECs into the local market without a long-term PPA providing an assured off-taker) being almost nonexistent due to the considerable financial risks involved, very few – if any – developers will be willing to proceed with construction in the absence of a financeable PPA.
That raises the issue of the time needed to put a PPA in place in order to begin construction and secure the PTCs. A typical procurement process for a utility-scale wind project starts with the issuance of an RFP – itself generally the result of several weeks (or months) of internal work by the issuing utility. Proposers are usually given several weeks to prepare and submit a response. So, unless a utility already has an RFP in the hopper ready to be issued, we are talking about a one- to two-month time frame for issuing the RFP and getting back responsive bids. That puts us into March 2013. It then takes at least several weeks for the proposals to be evaluated and a short list selected. Now we're into April. Once the short-listed proposers sit down to negotiate the terms of a financeable PPA, it is a rare PPA that takes less than two or three months to finalize and get signed. So that puts us into June or July. If the utility is an investor-owned utility as opposed to a municipal utility, the next step will be approval of the PPA by the state public utilities commission (PUC) so that the utility can get assurance on rate recovery and minimize the chances of a disallowance down the road in a subsequent prudency review. While it can be done quickly in some instances, securing PUC approval is more often a three- to six-month process.
Assuming a short PUC process, that puts the developer into September or October before it has a financeable PPA, as financing parties are generally not willing to commit on a firm basis until the PUC approval has been secured. That can leave enough time to begin construction by year-end, but only if the turbine supply agreement and engineering, procurement and construction contract are already in place. And if, as can often be the case, any key time frame for the PPA process slips, the result can easily erode into not having enough time to proceed within the time frame required by the PTC extension.
These are challenging issues that the industry faces right now as it contemplates trying to proceed with wind project construction in 2013. Addressing these issues will take coordinated action on a variety of fronts:
- Utilities seeking to procure wind projects will need to move quickly to commence their procurement process, and shorten the process as much as possible.
- To avoid protracted PPA negotiations, it will be necessary to start with a balanced PPA form, as opposed to some of the very one-sided (and challenging to finance) PPA forms that are sometimes offered in the RFP process. Fortunately, we have a good stock of experience in the industry now and many utilities use the more balanced and financeable forms that can help move the PPA to closure in a shortened time frame.
- Utilities will need to work with their state PUC to expedite as much as possible the review and approval of the PPA.
- Developers will need to spend the time and effort needed to get turbine supply agreements and balance of plant contracts in place well before PPA success is assured. The disruptions of 2012 have already diminished the capacity of many turbine manufacturers. As a result, developers may well need to commence these negotiations now if they want to be in a position to proceed with project construction in 2013.
In short, the PTC extension is both a boon and a serious challenge for the wind industry. From the development side, wind projects have always importantly been about managing risk. The PTC extension has significantly added to the risks that must be successfully managed in 2013 in order to secure the benefits of the extension.