If the Trump administration is serious about rebuilding U.S. infrastructure, it needs to take a good look at the nation’s electron superhighway, say advocates for the country’s wind industry.
Thanks to declining prices and federal incentives, wind builders appear to be entering a boom that could last into the 2020s. Wind projects currently under construction or in advanced development represent 20,280 MW of new capacity in the U.S. New construction has averaged 15% quarter-over-quarter growth since the extension of the federal production tax credit (PTC) at the end of 2015.
The boom is also supported by technology advances that have driven the levelized cost of wind energy-generated electricity down. New grid integration techniques have allowed U.S. system operators to achieve record wind penetration levels throughout 2016.
With all this in place, one of the few doubts is whether transmission will be adequate to deliver electricity generated at remote windy locations to where the demand is.
“An exciting emerging trend is the buildout that is taking advantage of transmission upgrades put in place over the last two years and that has been a key growth driver,” said American Wind Energy Association (AWEA) Research Director Michael Goggin.
The third quarter of 2016 continued “a very busy time in the industry," he added. "We are hearing from investors and utilities who think it is a very good time to buy wind."
At the end of Q3, Texas's 18,531 MW of installed wind capacity led the nation and total U.S. installed capacity reached 75,716 MW.
Texas also added more wind than any other state in the third quarter, at 620 MW. That accounted for nearly three quarters of the nation’s 895 MW of new installed capacity for the quarter, bringing the U.S. total to 1,725 MW so far in 2016.
With 13,563 MW of installed capacity now under construction, 6,717 MW in advanced development, and over 3,700 MW of new development announced in Q3, the industry’s future has rarely looked brighter.
There have been wind-eligible requests for proposals (RFPs) from 20 electric utilities in 2016, and nine specifically for wind. Three utilities are currently seeking up to 1,800 MW of wind capacity
The potential of wind to reliably deliver ample supplies of low cost electricity was demonstrated by the records set on the ERCOT and SPP systems in November and on other regional systems throughout 2016, Goggin said.
New transmission will be key to delivering that potential, he added. "Those records should prove to transmission builders that ‘if you build it, they will come.’"
The case for transmission
The readiness of wind and other utility-scale renewables to replace coal is increasingly clear, former Federal Energy Regulatory Commission (FERC) Chair James Hoecker told Utility Dive. Hoecker is currently counsel to WIRES, a transmission advocacy group.
“Coal plants are being retired at an historic rate,” Hoecker said. “Economics, especially low natural gas prices and the high cost of upgrading decades-old plants to meet federal pollution regulations, is driving the retirements.”
President-elect Trump has indicated three major priorities, repealing Obamacare, tax reform, and rebuilding the nation’s infrastructure, Hoecker said. Tax reform and infrastructure will be related because the new administration wants to use tax credit incentives to drive the infrastructure build, he added.
The administration’s statements so far suggest a conventional "roads and bridges" definition of infrastructure, Hoeker said, but transmission is also an important component. "It anticipates emerging basic changes in the energy economy toward renewables and natural gas."
Goggin agreed transmission is “squarely” within the definition of an infrastructure improvement that would benefit the nation. Because it has endured a long period of under-investment, “there is a lot of opportunity for cost-effective investment to improve reliable access to first class wind resources.”
Hoecker said getting transmission on the Trump administration’s agenda may require education.
“For the average American, and Congress is made up of average Americans, infrastructure does not mean transmission,” he said, “but it is the most extensive privately owned public service asset in the U.S.”
Congress can fund the interstate highway system through the appropriations process, he explained. The challenges for transmission are different because it is funded by ratepayers through public utility commissions and regional system operators. “It is not a bright shiny object that lawmakers can use taxpayer dollars for.”
With interest rates low, tax credits are also not the best solution for getting transmission built because access to capital is not the primary hurdle, Hoecker said. “The barriers have to do with how the grid is regulated and how long it takes to plan, site, and build transmission.”
The Perry factor
On Dec. 13, news broke that Trump is expected to tap former Texas Gov. Rick Perry to head the Department of Energy. Speaking to Utility Dive before, Hoecker said the two-time presidential candidate could be a good fit for the department — and the wind industry.
“He would understand the need for transmission to support renewables because Texas built so much transmission during his tenure and that has been very instructive,” Hoecker said.
There are enormous natural gas and renewable resources in West Texas and the Panhandle, but most of the power-hungry urban centers lie to the south and east. In 2005, stakeholders in the wind industry and state regulators collaborated to plan and complete the $7 billion Competitive Renewable Energy Zone (CREZ) transmission system that connects the supply with the demand.
Perry supported the project when it went before the state legislature, recalled Mike Sloan, president of renewable energy developer Virtus Energy, and commitment from his administration kept the project on track with siting and permits after its approval. Sloan was an early advocate of the CREZ proceeding and was involved in the process throughout.
Today, CREZ is seen as a model, but “there were so many times this thing could have crashed and burned that it is almost a miracle it actually happened,” Sloan told Utility Dive in June.
Though CREZ is “atypical,” Hoecker said, “it shows what can be done, and Rick Perry would understand that.”
Utilities out front
Some of the nation’s biggest power providers say they are already investing to help capture the potential of wind and other resources.
American Electric Power (AEP), the biggest owner-operator of transmission in North America, plans a $17.9 billion total capital expenditure over the coming three years and $9 billion of that will be put into new transmission, Director of External Communications Melissa McHenry told Utility Dive.
AEP has moved from investing in power plants to reduce emissions to investments in transmission and distribution system infrastructure, she said. “To support new cleaner generation resources, including renewables like wind and solar and distributed generation, you need a resilient, robust transmission system to manage the intermittency.”
Coal was 71% of AEP’s generation capacity in 2005 but will be 47% in 2017 and 42% or less in 2030, McHenry said. “That has changed how electricity is flowing on the grid and significant investment is needed to make the system more robust.”
Increasingly, renewables are “the economic choice,” she added. Battery systems are an effective alternative to grid infrastructure investment but, until there is a cost breakthrough, a robust grid is critical to support renewables.
There has been a deficit of investment in recent decades to the 40,000 miles of transmission and support infrastructure AEP built from the 1950s to the 1970s, McHenry said. The company’s $3 billion per year investment for the next three years is just the beginning of “at least a decade of refurbishment and upgrades.”
AEP also has a pipeline of new development. It includes transmission to deliver renewables, wind in particular, and transmission to manage the variable flow of electricity generated by wind and solar.
“We think the President-elect’s recent commitment to infrastructure investment is positive,” McHenry said. “But before he was elected, AEP had plans to upgrade its existing infrastructure and build new infrastructure.”
AEP will continue to diversify its generation portfolio under the new administration, McHenry said. “We hope that in regions of the country dependent on coal the new administration will be able to find new opportunities for economic growth but we don’t have any plans to build new coal generation.”
Reports from the field
From the wind industry’s perspective, where transmission is built often helps determine where to locate projects.
There is “a flurry of activity” as wind developers race to qualify projects for 100% of the $0.023/kWh PTC, AWEA's Goggin said.
With the five year extension and phase-down of the tax credit and a subsequent IRS determination, developers have until the end of 2016 to demonstrate, through a 5% project investment, that project construction has "commenced." They then have until the end of 2020 to bring the project online.
Projects that qualify as commenced in 2017 will have until the end of 2021 to get 80% of the current PTC benefit, those that qualify in 2018 will have until end of 2022 to get 60% of the benefit, and those that qualify in 2019 will have until the end of 2023 to get 40% of the tax credit.
The PTC continues to have value at the 80% level, but most developers are pushing to qualify as much capacity as possible this year to get the full PTC, Goggin said. “If you can get 100%, why would you take 80%?”
Because the tax credit is production-based, developers with projects in stronger wind regions or where transmission is already certain will be the ones pushing hardest to qualify projects for the 100% PTC, he added. “With transmission, the MWh will get to market and with the 100% PTC, each MWh is worth 20% more.”
Where a weaker wind resource makes the capacity factor lower, a decrease in the PTC value has less of an impact on project economics than the price of electricity, Goggin said.
There have been no 80% projects yet so all expectations are “theoretical,” but projects might be cost-effective with a reduced PTC where the electricity price is high because in those markets wind's low cost still provides the developer a good margin, Goggin explained.
With the PTC at 60% and 40%, wind's economic viability depends on how much farther down technology advances can bring wind’s cost, he added. Tax equity investors might be less interested but institutional investors and wind developers might have use for the tax credits. And a utility might be interested in owning wind and using the tax credit themselves.
Duke Energy Renewables brought its 200 MW Los Vientos IV project online for Austin Energy this year, said Spokesperson Tammie McGee. “We have about 1,000 MW of wind energy in our near-term pipeline, a portion of which is PTC-qualified.”
The pending PTC step down is a “contributing” factor to Duke’s wind construction activity but not as big a factor as overall project economics, McGee said. “The step downs affect the value proposition but we expect wind technology to get better, the prices to drop further, and customers to demand more renewable energy.”
Duke’s long term strategy is to “not be buffered by external factors,” she added. "As the wind industry continues to mature, the prices will be more and more competitive with standard generation."
Duke is also building wind because its customers want the price certainty that they can get with a long term PPA for wind or solar, a certainty they cannot get from the volatile natural gas-dominated electricity markets, McGee said.
“In the last three years, there has been a much larger demand for renewables-generated electricity from our large corporate customers to meet their sustainability goals and to get that price certainty,” she added.
Xcel Energy benefits from extensive Midwestern transmission development over the last decade by the Midcontinental Independent System Operator (MISO). Much of MISO's new development was to bring new wind onto its system.
The utility sees wind energy as "a low cost and clean part of our energy future," Xcel North Dakota President Chris Clark told Utility Dive. The utility has a 1,500 MW pipeline of wind in the upper Midwest that is far enough along to take 100% of the federal production tax credits available now.
“We believe our wind portfolio can save significant dollars in energy costs for our customers over the next 20 years,” Clark added.