Overhead View of Lempster Wind Farm Taken by Author
In my post Windfall, I briefly discussed some of the business aspects of New Hampshire wind farms and some of the challenges they might face. There is a lot more to the wind business here in New England, and I thought it would be interesting to take a deeper look at some of the revenue and cost considerations these operations face over my next two posts. This week we take a close look at some of the revenue aspects of these wind operations.
Let's start with the recent performance data from FERC for these wind farms. The table below shows the summarized first quarter of 2013 results for the three operating wind farms in New Hampshire, the two Iberdrola operations – Lempster and Groton – and the large Granite Reliable operation located near Dixville.
It is clear that they did well in the first quarter. A few points of note:
- The Lempster operation output was remarkably high, particularly for the month of January, and they are showing capacity factors for the quarter of 0.42 which is surprisingly large. The average price they received for their electricity was $77.17 and, at times, it was as high as $102.99 /MWh. Clearly they have an attractive power purchase agreement with PSNH.
- After a miserable year last year, the Granite Reliable operation did much better with a first quarter capacity factor at 0.29 which is up from last year's value of 0.15. The bulk, 83%, of their sales went to the two Vermont utilities at rates averaging $96.57/MWh. However, there were times they were selling into the ISO-NE electricity pool at rates as low as $0.66/MWh.
- The Groton Wind operation is now up and running and all their sales went to NSTAR Electric at $51.65. Their overall capacity factor for the first quarter was 0.25.
Wind farms get revenue from a number of sources. The first is from the sales of electricity, which could be via a power purchase agreement (PPA), such as the one the Groton operation has with NSTAR, that sets a fixed price for the price of generated electricity, or if could be by direct sales into the ISO-NE electricity pool where prices are set by supply of and demand for electricity. Prices for electricity sold into the ISO-NE pool can be highly variable over time as I noted in It Don't Come Easy and there are considerable price swings, even over a day, as shown by the chart below which provides 5 minute electricity prices for last Thursday, June 2, 2013. In the first quarter of 2013, the three NH wind farms earned almost $9.2 million dollars on total electricity sales of 112,084 MWh to earn an average of $82/MWh.
The other source of revenue for wind farms is from sales of Renewable Energy Credits (RECs) – the so-called green tags which I discussed in It Don't Come Easy - which allow generators of renewable energy to sell the renewable energy attributes separately from the underlying electricity. The pricing for Class 1 RECs, which is the class that wind generated electricity falls into, is also variable but prices are presently high due to elevated demand. In fact, the prices are bumping up against the alternative compliance payments for the Class 1 RECs of $65/MWh. Alternative compliance payments are the fines that state-regulated utilities have to pay if they do not meet their renewable energy quotas and they set a cap on the REC market. Class 1 NH wind REC prices have risen from their lows of $15 in 2010 to their present value of about $62/MWh. Here is a link to a great article on recent Class 1 REC pricing.
Another revenue source for wind operations, albeit an indirect one, is that associated with production tax credits (PTCs) for wind generation. The PTC is a federal incentive program for the wind industry that provides producers of wind-generated electricity a tax credit of $23.00 for every MWh of produced electricity for the first 10 years of the project. I know the PTC is a tax credit and not a revenue item, but for the purposes of my analysis this week, I am including the revenue category. But to do so, I must calculate its before tax equivalent. A tax credit of $23/MWh is equivalent to a revenue item of $35.38 MWh for a company with a 35% federal tax rate. (This might not apply to a tax-evading company like Apple - but that is an axe to grind another day). The lower the tax rate, the lower will be the revenue equivalent.
In some cases, wind operations that sell electricity into the ISO-NE pool might receive payments for holding capacity available should demand increase and ISO-NE needs to draw on more generators. These payments can be considerable and for the Granite Reliable operation they are of the order of $151,000 per month. These are fixed payments but for the basis of my comparison, I have, on the basis of the Granite Reliable capacity payments, calculated them to be equivalent to $8.30/MWh (assuming a capacity factor of 0.25).
In summary here are the four main revenue components for the wind farms:
- Electricity Sales - Presently these average about $82/MWh (2013 first quarter weighted average) but can range from $25 to $100/ MWh depending if sales are through a power purchase agreement or delivery into the ISO-NE electrical pool.
- Sales of RECs – Presently about $62/MWh.
- Revenue equivalent of production tax credits - $35/MW (dependent on federal tax rate).
- Capacity payments – these are of the order of $8/MWh if a wind farm participates in the ISO-NE forward capacity market. Not all wind farms do.
The figure below summarizes the revenue flows.
These four revenue items total $187/MWh, which is equivalent to $0.187/kWh. Compare this to the ~$0.08/kWh we typically pay for energy portion of our electricity bills at our homes. I don't know about you, but I am impressed at the revenues the wind farms are earning. With this sort of revenue stream, wind operators clearly start each day with the prayer, "Blow Wind Blow"*. Needless to say, not all wind farms earn these revenue streams all the time but these numbers do indicate that wind farm revenue is a whole lot more than just the sale of electricity. Subsidies generated by the RECs and PTCs provide 50% or more of the revenue equivalents for these operations.
Until next time, remember to turn off the lights when you leave the room.
Franklin Pierce University
(*Blow Wind Blow – A classic Muddy Waters blues tune covered by a bunch of artists. Here it is by Eric Clapton. Enjoy.)
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