Utility wind rush set to strengthen as low prices allow resource to spread across nation
IOUs, co-ops and munis alike are turning to wind for economics, not just mandates, but transmission remains a major constraint
Wind’s growth has been so rapid and its price has dropped so fast that a more important long term trend is often missed: It is quickly expanding its addressable marketplace.
Deployed wind energy capacity grew almost 19% in 2016, to 5.53% of total U.S. generating capacity, according to the U.S. Energy Information Administration (EIA). By year’s end, it was the nation’s most plentiful renewable resource by capacity, surpassing hydropower. There is now wind generation in 41 states. In the fourth quarter alone, 19 states brought new projects online.
Momentum for that wind construction came not just from utilities aiming to meet renewable energy mandates, but because power companies saw economic reasons to invest in wind.
“It is a buyer’s market for utilities in wind right now,” said Tammie McGee, spokesperson at Duke Energy Renewables, a wind and solar developer. “They can still get 80% of the production tax credit [PTC] benefit before it is stepped down to 60% at the end of this year. And power purchase agreement [PPA] prices are now in many places competitive with fossil fuel generation, so it is a cost-effective way to diversify an energy portfolio.”
Total investments in U.S. wind deployments hit $13.8 billion last year, according to Hannah Hunt, senior analyst at the American Energy Wind Association (AWEA), the wind trade group. They came from a “diverse geography of investor-owned utilities, public power utilities, electric cooperatives, and private sector off-takers,” she added.
Utilities and cooperatives, according to Hunt, took 56% of the new capacity contracted for in 2016. That was up from 50% in 2015 and 40% in 2014. Non-utility off-takers, meanwhile, accounted for 39% of new PPA capacity last year, while the remaining 11% of capacity was merchant wind generation.
Regulated and unregulated utilities also played an important role in project development and operation in 2016, Hunt said holding at least partial ownership in an estimated 50% of the projects that went into service last year.
That trend is expected to continue into 2017, with utilities of all types expanding their investments in wind energy through PPAs or direct ownership. Meanwhile, the steady decline in PPA prices is allowing utilities in new regions of the U.S. take advantage of the wind boom. Transmission capacity, however, remains a major constraint.
Wind’s 2016 numbers
In the fourth quarter of 2016 alone, the U.S. wind industry added 6,478 MW, bringing the 2016 installed capacity to 8,203 MW. In the U.S. alone, installed capacity topped 82,000 MW, according to AWEA’s U.S. Wind Industry Fourth Quarter 2016 Market Report.
PPAs were executed for 4,040 MW of capacity during 2016 — 2,266 MW with utilities and co-ops and 1,574 MW with non-utility off-takers.
There were 18,344 MW of wind capacity in 130 projects under construction (10,432 MW) or in advanced development (7,913 MW) at the end of 2016. This capacity, expected online in the near term, was spread across all across the country in 31 states from California and Oregon on the West Coast to Vermont, New Hampshire, and Massachusetts in New England.
In Q4, there were announcements for 3,793 MW new construction and 2,552 MW of new advanced development. An estimated 52% of this capacity is directly owned by utilities.
Texas added 2,611 MW in 2016 to bring its nation-leading total installed capacity to 20,321 MW. It is the only state with over 20 GW of wind and has more installed capacity than second place Iowa (6,917 MW) and third place Oklahoma (6,645 MW) combined. California (5,662 MW) and Kansas (4,451 MW) complete the top five states.
Following Texas in the top five states for new capacity were Oklahoma (1,462 MW), Iowa (707 MW), Kansas (687 MW), and North Dakota (603 MW).
Texas has 52% of current construction activity, while 15% is in the Midwest, and 13% is in Colorado and New Mexico, according to AWEA.
What utilities see in wind
Warren Buffett’s energy companies continued to be bullish on wind in 2016, embodying a nationwide trend for the sector.
Buffett’s Berkshire Hathaway Energy Renewables, a developer, brought a 400 MW project online in Nebraska for Omaha Public Power District (OPPD) and began construction on a 224 MW project in Illinois, according to MidAmerican Energy Spokesperson Debora K. Blume.
Meanwhile, Buffett’s MidAmerican Energy, a regulated utility in the central U.S., brought 551 MW of wind online in Iowa in 2016 and announced plans for the Wind XI project, which could mean a $3.6 billion investment in up to 2,000 MW of Iowa capacity between 2017 and 2019.
BHE Renewables and MidAmerican see any project under consideration “through the lens of customer benefit,” Blume said. “If customer benefit isn’t there, we won’t pursue a project.”
First among the wind energy benefits that attract BHE is the price stability in long-term contracts.
“Renewable generation protects our customers and their rates from volatility in fuel costs, like natural gas or coal,” Blume said. It also brings jobs and other economic benefits where it is built and makes clear the Buffett company’s commitment to the environment, she added.
The long-term extension of the production tax credit (PTC) stirred utility enthusiasm for wind, AWEA’s Hunt said, because it offered increased stability to the market.
Enacted by Congress in 2015, the five-year extension and phase-down of the tax credit allowed projects that began construction in 2016 to qualify for a $0.023/kWh PTC for the first 10 years of their operation. The credits decrease in value by 20% a year until phasing out at the end of 2019.
Steadily declining prices for wind and the availability of new transmission mean that the benefits of wind are not limited to utilities in the blustery states of the Great Plains, Hunt said.
Gulf Power was the first Florida utility to sign a wind PPA and added to its wind portfolio with a 94 MW PPA for Oklahoma wind.
In the windy regions of the U.S. interior, the average PPA price for wind in 2015 was just above $20/MWh, according to Lawrence Berkeley National Laboratory data, a precipitous drop from the $55/MWh average in 2009.
For utilities like Gulf Power and Southern California Edison, which signed a PPA in 2016 for wind from New Mexico, the low price allows imported wind to be “a very smart economic deal that provides savings for their customers,” Hunt said.
The premium for transmission is approximately 10%, which is "a relatively low factor in the overall cost," she added.
The long-term extension of the PTC also drove a “wave” of new utility project ownership, Hunt said, noting the BHE projects as an example. Other instances in 2016 included a 600 MW Xcel Energy-owned project in Colorado and four Xcel-owned North Dakota and Minnesota projects totaling 750 MW.
The utility push for wind investments involves more than just investor-owned utilities, however.
“Public power utilities are increasingly getting into the wind game by entering into power purchase agreements,” said Paul Zummo, director of policy research at the American Public Power Association.
The increasingly competitive price of wind is as attractive to public power utilities as to other off-takers but, as units of state or municipal governments, they cannot monetize the tax credit themselves, he said.
A PPA allows the third-party wind developer to take advantage of the tax benefit and pass some of the savings along to the utility, Zummo said.
The nation’s electric cooperatives, meanwhile, have seen a “four-fold increase in wind,” from 1.4 GW to almost 6 GW since 2012, said Jim Matheson, CEO of the National Rural Electric Cooperative Association (NRECA)
“This phenomenal growth is nation-wide," he said. "561 cooperatives in 37 states have either developed wind resources themselves or are purchasing wind capacity.”
NRECA's 2016 survey asked its co-op members why they offer renewables programs. The top respondent answers were “consumer satisfaction” (59%) and “decreasing costs” (43%). Those trends correspond to what Duke’s McGee has seen from the developer side.
“There are not one or two factors that attract customers; it is the wind market as a whole,” McGee said. “But the big drop in prices over the last five years has been an important part of the story because it is driving more potential buyers to think about wind as a way to meet several of their needs.”
“Utilities may have a state renewable portfolio standard to meet,” she went on, “but we have been very successful in Texas where the renewables mandate has already been met. Other utilities, munis, and co-ops are looking for the certainty in a PPA's long term fixed price.”
The transmission factor
Arizona utility Tucson Electric Power (TEP) issued a request for proposals (RFP) from wind developers for 100 MW of wind in 2016.
The RFP came as a unit of the coal-fueled San Juan Generating Station was shuttered, opening crucial transmission capacity for wind.
“The primary driver for the availability to take any wind is transmission,” said Carmine Tilghman, director for energy supply at TEP’s parent company, UNS Energy. That consideration comes ahead of price and generation profile, he added.
TEP expects further traditional generation retirements, he said. “As available transmission capacity becomes available, we will procure additional wind resources to help maintain a balanced wind and solar portfolio.”
The availability of transmission capacity continues to be a key facilitator for wind deployments, developers say.
Duke’s McGee said the $7 billion Texas Competitive Renewable Energy Zone (CREZ) transmission expansion “has been incredibly important in bringing West Texas wind to load centers like Dallas and Houston.”
Duke's two West Texas wind projects are interconnected with CREZ but most of its capacity in the state is in South Texas, McGee said. Austin Energy, a key Texas customer for Duke, was one of the first U.S. municipal utilities to expand its renewables portfolio.
“We began building in South Texas because the winds off the Gulf of Mexico coincide with utilities’ peak demand,” McGee said. “We saw the synergy early on and there was transmission to take advantage of it. We brought a couple of projects online in 2012 and we have built three more since for a total of about 900 MW.”
AWEA’s Hunt agreed the CREZ transmission made the Texas boom possible. But transmission is a relatively lowmcost public good, whether within or between states, she added. “Electricity can also be a regional opportunity.”
Former Federal Energy Regulatory Commission (FERC) Chair James Hoecker recently told Utility Dive that wind and other renewables can allow other utilities to follow TEP’s lead and use the transmission capacity increasingly available due to coal plant retirements.
“Coal plants are being retired at an historic rate,” said Hoecker, who is currently counsel to WIRES, a transmission advocacy group. “Economics, especially low natural gas prices and the high cost of upgrading decades-old coal plants to meet federal pollution regulations, is driving the retirements.”
Just as transmission capacity can be a wind enabler, the lack of it can be an impediment to deployment.
Any new transmission capacity that becomes available today is contracted for quickly, Hunt said. Already, she noted, there is more “more interest than capacity” in the recently-approved Plains & Eastern transmission project that will deliver Midwest wind generation to Southeastern utilities like Gulf Power.
“We need more,” Hunt said.
The 2016 trends are carrying over into the first quarter of 2017, Hunt said. The New York’s Long Island Power Authority, North Dakota’s Great River Energy, and Denton Municipal Electric in Texas have announced new PPAs.
Great River Energy’s contract with NextEra Energy Resources will deliver 300 MW of North Dakota wind to the Minnesota co-op beginning in 2019. The deal raises the co-op’s installed wind capacity to over 700 MW and makes it compliant with Minnesota’s 26.5% renewables by 2025 mandate.
AWEA reported RFPs were issued by 23 electric utilities in 2016 that will allow bids from wind providers. Ten of those, like TEP’s, specified only wind.
“The RFPs are an indication that those utilities have looked at their options and approved wind as a potential investment,” Hunt said.
There was also a noticeable “uptick” in utilities’ including wind in their long-term integrated resource plans (IRPs) in 2015 and 2016, Hunt said. The Xcel Energy IRP that was the basis for its 2016 wind investments calls for a total 1800 MW of wind additions, she added.
New advances in turbine technologies are expected to continue driving down costs and opening new regions to development, Hunt said. An example is Amazon’s 208 MW North Carolina project that went online in February. It is the first utility-scale wind installation built in the Southeast.
Amazon's project was made possible by lower costs that come from increased tower height, blade length, generator power, and siting precision, Hunt added. And lower costs are also in part because the stability of the PTC is allowing manufacturers and their supply chains to avoid boom-bust cycles.
“When there was uncertainty about the tax credit’s extension, the market flagged and those businesses were shuttered,” she said. Instead, 2016 saw manufacturing and supply chain expansions and new facility openings. “That drives down the logistics costs for components that factor into PPA prices.”
Duke’s McGee said her company completed “a pretty aggressive build cycle” in 2016 and is now “transitioning back into a development stage.”
It has “a number of wind projects in various stages of development and, as off-take agreements are secured for them, we will move forward on construction,” McGee said.
“We have been greening our portfolio and finding ways to move to clean energy for some time,” she added. “Despite the way the policy pendulum swings in Washington, D.C., our focus is unlikely to change.”