Against the Wind* – Making Money in the Wind Business in New Hampshire – Part 2

Somebody's Backyard - Coal Fired Power Plant and Wind Turbines

Following up on my post Blow Wind Blow, where we took a look at the revenue side of the wind business, this week we take a look at the cost aspects of running a wind farm. One pleasing aspect of the wind business is that there are a lot of organizations promoting wind energy and, as a result, there is a lot of information available about wind and the costs associated with wind projects. The challenge is shifting through this information and pulling out the data relevant to New Hampshire wind projects. I have found the information from the American Wind Energy Association, AWEA, and particularly that from the National Renewable Energy Laboratory, NREL, to be particularly useful.
 
Another challenge associated with working through the wind cost data is that wind project financing is a complicated business. There is equity and debt financing, there are investors who contribute simply to access the tax credits and there are funding and repayment mechanisms that change part way through the life of the project. All of these different mechanisms are used raise funds from different groups of investors and to accelerate returns to the original core group of investors. Wind project financing gets rather involved and it can change considerably on a project-to-project basis, making comparisons difficult. To simplify our analysis, I have found the best basis of comparison, across different wind projects and renewable energy technologies, is to determine the levelized cost of energy, LCOE.

The LCOE is a way of calculating the aggregate costs for an energy project and takes into account the overall capital investment in the project as well as the annual operating and maintenance costs over the life of the project. Using the time value of money, all future costs are discounted, using a minimum desired return, to the present and are then divided by the discounted total of energy produced from the project to provide a single number that is indicative of the all-in cost of electricity from the project. Normally on any energy project, the LCOE is the first calculation performed as it is relatively easy to do. As the project development progresses, the calculations become more involved and sophisticated as different funding mechanisms are considered. Sometimes LCOE calculations include taxes and incentives but I have taken those into account in my revenue calculations in my last post so I have not included them in my calculations. I refer you to this NREL source should you want to learn more about calculating LCOE.
 
Wind projects take a long time to get off the ground. There are years of wind monitoring for a selected site, environmental impact studies, navigating local property tax payments and overcoming local opposition and legal hurdles. In addition, power purchase agreements and transmission line access have to be negotiated. This can sometimes take three to four years and a great deal of investment before ground is broken on a project. Even with years of upfront work, success in not guaranteed, as the NH Site Evaluation Committee recent rejection of the Antrim, NH, wind project has demonstrated.
 
Once all the approvals are obtained then the major expenditures in site preparation, road construction, foundations, turbines, turbine installation and transmissions lines are incurred. The wind business is a capital-intensive business and the installed costs of new wind turbines range from $2 million to $2.5 million per megawatt. Based on published investment costs for the NH wind projects, the costs in NH are of the order of $2.5 million/MW (see table below), most likely due to the local permitting challenges and installing the turbines high up on ridge lines. As a comparison, establishing a gas-fired combined cycle plant costs about $800,000 per megawatt – one third of the cost of a wind energy operation.
 
The other important costs are the annual operating and maintenance costs associated with wind operations. Unlike the gas-fired power plants, the good thing about wind projects is that there no fuel costs. Operating costs for wind energy operations include fixed annual costs, like land lease costs, state and local property tax assessments, maintenance contracts, the operating staffing associated with the wind farm as well as other general administrative costs like insurance. Variable costs include the costs of electricity to power the operation as well as unanticipated maintenance costs which tend to increase over the life time of the operation. Exact costs for all costs components vary from project to project and tend not to be available for specific projects. As a result, one has to rely on published data and industry averages. The table below provides the capital investment, land lease and property tax costs and estimates associated with the various NH wind operations that I have been able to assemble from various publications. The table also shows the calculation of these costs on a per megawatt basis. Overall, the installed capital costs for these projects have been of the order of $2.5 million/MW and the weighted average of the fixed land lease and property tax portion costs are $27,000/MW ($27/kW) per year.
 

The figure below shows the various costs components as well as my estimates of these for the NH wind projects. The cost data reflect averages and my estimates rather than specific costs associated with any particular project. These costs were then used to calculate the LCOE for a typical NH wind operation - which I estimate to be $126/MWh ($0.126/kWh). The operating costs, fixed and variable, when converted to the cost of MW of electricity produced, are of the order of $20/MWh. The annualized capital costs are $106/MWh, demonstrating that the majority of the cost, 84%, of producing electricity from a wind farm is related to the large upfront capital investment.

I will note that my calculated costs are higher than the $71/MWh national average calculated by NREL. The difference is due to the following:

• The capacity factors for NE wind projects – typically 0.30 – are lower than the national average of 0.38;
• The capital costs of $2.5 million per MW I have used are higher than the $2.1 million figure used by NREL;
• The non-capital related operating costs used by NREL are $10/MWh which are lower than my estimate of $20/MWh.

In the figure below I have incorporated my revenue diagram from my last post with the cost diagram above to provide a comparison of the revenue and cost structure on a single figure so you can get a sense of the margins in the wind business. It is important to bear in mind that revenues and costs vary over time and are different for each specific project. Many of the costs are fixed but the revenue that wind farms can obtain from electricity and REC sales can be highly variable and dependant on customer demand and negotiated power purchase agreements. Overall profitability, of course, is also very much dependent on how hard and how often the wind blows.

One might argue about some of the specific details associated with my cost estimates but they do reflect the fact that operating wind farms in NH is rather different to an equivalent (and often much larger) operation on the great plains of Nebraska. It is my assessment that the costs of NH wind electricity are high: the importance of subsidies from the production tax credits and the sales of RECs are therefore very important to the wind industry. The subsidy portion of the revenue stream is 50% or more of the overall revenue. Without these subsidies these wind farms would be under pressure to make money and they would definitely find themselves struggling to make headway against the wind* in a high cost and low subsidy environment.

Until next time, remember to turn off the lights when you leave the room.

Mike Mooiman
Franklin Pierce University
mooimanm@franklinpierce.edu
6/18/13

(*Against the Wind – A 1980 album and tune by Bob Seger. An oldie but goodie suggested by blog reader Laurie Smith from South Africa. Bob Seger had a thing for mid-tempo ballads telling stories of struggle and sometimes redemption. Here is the link – Against the Wind)

 
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Blow Wind Blow* – Making Money in the Wind Business in New Hampshire – Part 1

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.
   

In my last post, I pointed out the poor performance of the Granite Reliable operation, which only had a capacity factor of 0.15 for 2012, and which was half of the expected value of 0.30. During the week, a number of knowledgeable readers pointed out to me that the reason for the low output and capacity factor for the Granite Reliable operation in 2012 was that ISO-NE had put in place curtailment orders for several New England wind farms. This meant that they were required to reduce the amount of electricity they were delivering into the grid even if they could produce more. The curtailment orders included the Granite Reliable operation, which had to ratchet down its output to about 50% of its rated capacity of 99 MW. The reasons behind the curtailment orders appear to be reduced demand for electricity as well as grid load imbalances in certain areas. Wind-based electricity is a challenge for the electrical grid operator, ISO-NE, as electricity production from these operations is highly variable and, with the growing number of wind operations, the variability of electricity supply has increased. At the same time, the grid operator has to manage the output from fossil fuel and nuclear power plants that supply a great deal of our base load power and that cannot rapidly be turned up or down in response to varying output from wind farms. Curtailment orders for these wind farms is one way to manage the variability but that does leave the owners of these operations with unused capacity and lost revenue opportunities.

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.

 

If you are an energy geek like me, you might be interested in tracking prevailing energy prices on the ISO-NE grid. To use a popular phrase in these smart phone days "There's an app for that!" You can download the ISO-NE ISO to Go app at this link. The app shows you local prices for electricity as well as how demand is tracking forecast and the fuels being used in the present generating mix. This morning at 6.45 am as I am writing this blog, the costs of electricity are only $24.68 per MWh. Yesterday at 3 pm when I checked, it was $45.37 per MWh. Typical screen shots you will see on this app are shown below.

 
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.

 

Of course, this is only half of the picture. Establishing wind farms is a capital-intensive and lengthy business and there are a lot of hurdles to overcome. For example, just this week we learned that the small 15 MW Kidder Mountain wind operation in the New Ipswich/Temple region will be scrapped. The developer, Timbertop Wind Energy, could not find a way to deal with the different ordinance issues presented by the two communities. The NH site evaluation committee declined to take jurisdiction of the project as the wind farm development was below 30MW. In my next post, we will take a look at the costs of establishing and running a wind farm.

Until next time, remember to turn off the lights when you leave the room.
 
Mike Mooiman
Franklin Pierce University
mooimanm@franklinpierce.edu
6/9/13
 
(*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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The 25 by ’25 Renewable Energy Initiative for New Hampshire – Can We Do It? – Part 2

In my last post, I wrote that about 15% of our in-state energy use in 2010 came from renewable energy resources and that we are making progress towards reaching the goal of getting 25% of our energy needs from renewable energy by 2025 – the 25 x '25 goal. However, I also showed that our progress towards this goal has been on the back of reduced overall energy consumption rather than increased amounts of renewable energy.
 

This week I want to take a look at what it will take for us to achieve the 25 x '25 goal. We can achieve it in one of three ways. We can:

 

A) Increase the amount of renewable energy we generate and consume in-state.
B) Decrease our in-state energy consumption so that the existing base of  renewable energy becomes a larger fraction of our total energy supply.     
C) Simultaneously increase the amount of renewable energy we generate and reduce our overall statewide consumption of energy.

Before considering these options, it is worth taking a look at the direct use of energy in the state. Below are two pie charts. The one on the left shows the split for in-state energy usage - the net energy usage described in my previous post. I have simplified the available data by rolling residential, commercial and industrial use into a single category of "Buildings". As can be seen, the allocation for in-state direct energy use is 37% electricity, 36% transportation and 27% buildings. The second pie chart to the right shows the renewable energy components of these three main sectors in green. Relatively small proportions of the transportation sector and building sectors utilize renewable energy, 5 and 7%, respectively. However, for in-state electricity production (and as noted in my last post - grabbing all the green electrons for ourselves), we can see that a significant fraction, 29%, comes from renewable resources.

 

Let's take a look at Option A – increasing the amount of renewable energy. My previous post calculated that our in-state energy consumption (using 2010 data from the Energy information Agency) was 295 trillion BTUs. If we assume that our in-state energy consumption remains steady at this level, we would need to increase the renewable energy amount to 74 trillion BTUs. We are presently at 43 trillion BTUs from renewables so we would need to increase this amount by 31 trillion BTUs. We could do this by increasing renewable usage in each of the three main sectors but it is unlikely that this will happen in the transportation sector. We are already at 10% corn ethanol in our gasoline and this is unlikely to increase in the near future. Wood pellet-fueled transportation is unlikely to ever be practical. We could achieve the 31 trillion BTUs of new renewable energy by converting 60% of the present oil-fired building heat in the state to biomass in the form of wood pellets. My concern would be the sustainability of this approach. Can NH forests support this amount of biomass utilization? I suspect a statewide switchover to biomass heating is unlikely to happen in the next 12 years. Instead we will continue the slow substitution of oil furnaces by wood pellet burners that is presently underway. As long as oil prices continue to be high, this changeover will continue, homeowner by homeowner.

The only area where we could see a substantial increase in the amount of renewable energy is in the generation of electricity. However the additional 31 trillion BTUs would be equivalent to 135 25 MW wind plants, like the one in Lempster, or 80 15 MW wood-burning plants, like the one in Bethlehem, or 780 10 MW solar photovoltaic farms, each of which would require 100 acres of cleared land. This level of investment and approval of projects seems highly unlikely if not downright impossible. Based on last week's news of the rejection of the Antrim wind project by the NH Site Evaluation Committee, it is clear that the folks of New Hampshire do not want this level of impact on their environment.
 

In the "what's he been smoking" category of ideas, consider this one. If the Northern Pass project goes through, we could claim all those green hydroelectric electrons from Hydro Quebec for ourselves for our renewable energy accounting purposes. Even though the energy is intended for the rest of New England, they are nice juicy green electrons, they are coming through New Hampshire and they are being converted from DC to AC in Franklin, NH. Is it so unreasonable to claim those green Canadian electrons for our renewable energy goals? In that case, we could meet our renewable goal as the Northern Pass project should bring in the equivalent of 32 trillion BTU of energy, if not more.

Crazy ideas aside, that brings us to Option B - decreasing our in-state energy consumption. To achieve this, we will need to tackle the topic of energy waste. As noted in previous blogs, we waste an inordinate amount of energy. In the pie charts below I again show the in-state split of energy in the three main categories of transportation, electricity and buildings: to the right I show the proportions of energy losses, in grey, for each of the three categories.

 

Overall, our energy losses are 60% of total in-state energy use (the sum of the grey slices above) and this would appear to be a fine place to direct our efforts. However, as noted in a previous post, we need to be realistic about these losses. We can never totally eliminate them due to the nature of energy, materials, electricity and the laws of physics. Nevertheless, there is a lot we can do to reduce our energy losses. Examples abound and I cannot do justice to them in this blog, but they include reducing transportation losses through higher MPG vehicles, improving the efficiency of building heating and HVAC systems, as well as improving the efficiency of electricity generation and transmission operations through new, higher efficiency power plants, equipment upgrades and even the utilization of wasted byproduct heat in district heating applications. Of course, we cannot overlook the fact that energy usage can be reduced by better insulation of our buildings, which, in turn, reduces the buildings slice.
 

It is clear that there is lot we can do in the reduction of waste and energy usage category and we should continue our efforts in these areas but we need to be rather sober minded about where this gets us. To achieve the 25% by 2025 renewable energy goal we would need to reduce in-state energy consumption by 174 trillion BTU, assuming little change in the present level of renewables, or by 60% (!) of our present usage. To put this into context, bear in mind that we have only reduced our energy consumption by 9% over the 2005 to 2010 six-year period. Frankly and pragmatically speaking, a 60% reduction in our energy usage is unlikely to happen in the next 12 years.
 

Perhaps we can consider Option C, which involves a combination of increased amounts of renewable energy and reductions in energy consumption and losses. In many respects this is the road we are presently on, with the slow introduction (and even slower approval) of wind projects and the gradual substitution of wood for oil in building heating applications as well as the usage reductions I noted in my previous blog. However, even a 20% increase in renewable energy will require us to reduce energy consumption by 50% to reach 25% renewable energy by 2025. It will take enormous amounts of money, political will, bipartisan agreement, coordinated effort, and goodwill - as well as an updated State energy plan to achieve this. All of these factors are in short supply – the State energy plan is dated "2002". My opinion is that the 25 by '25 goal has little chance of being achieved. I simply don't see it happening. Maybe we need to rethink our goal - perhaps we can achieve 25% by 2050 or 20% by 2035.
 

Or am I wrong? What do you think? And what about those green Canadian electrons - should we count them?

Until next time, remember to turn off those lights when you leave the room.

Mike Mooiman

Franklin Pierce University

mooimanm@franklinpierce.edu

2/17/13

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Renewable Energy in New Hampshire – Part 2

In my last post, we took a first look at the renewable energy portfolio for New Hampshire and we examined the pie chart below.

In this post, I am going to step back in time and see what progress we have made in the last 50 years. The figure below shows what we have achieved in terms of renewable energy.

 It is clear we have made progress on the renewables front. Since 1960 we have gone from 26 trillion BTU to 43 trillion BTU from renewable energy sources in 2009 – a 65% increase. However, for the last fifty years, hydroelectric and wood have been the largest components of the renewable energy supply. In fact, from 1960 to 2000 they were the only relevant components and most of the renewable energy increases were done on the back of increased wood burning. It was only in the 21^st century,  with federal mandates for ethanol in gasoline, that ethanol began to feature. Technological advances and federal subsidies have helped spur advances in wind energy and it is now beginning to feature, albeit to a limited degree, in the NH's renewable energy equation. What is intriguing to me is that, in 1990, there seemed to be a significant surge in renewable energy, particularly from hydroelectric generation. A closer examination of data indicated that this was a one-year surge only and, in the years before and after 1990, the numbers were more in line with the longer term averages. The reasons for this one-year surge are most likely due a year of high rainfall which filled up dams and rivers, that, in turn, led to the generation of larger than usual amounts of hydroelectric energy. According to the National Climate Data Center, 1990 was indeed a high rainfall year in New Hampshire. In a future post on hydroelectric power in NH we will be taking a look at the correlation of rainfall and hydropower.

Except for the addition of ethanol into the renewables mix and a tiny bit of wind energy, it is my assessment that we have not made much progress, at least on the large statewide scale, in terms of renewable energy generation and, to be frank, considering our overall energy requirements, there is not a whole lot we can do.

For the moment, cheap natural gas has hammered at the viability of almost all other modes of generating electricity, including coal, nuclear and wood, but, interestingly, there has been the statewide growth of use of wood pellet-based heat for homes, schools and commercial operations where wood offers a competitive advantage over oil. The limited infiltration of natural gas supply into NH has made wood even more competitive in most communities.

Large-scale solar here in New Hampshire is unlikely to be competitive in the near term. More wind plants will make some difference: again this will be a relatively small fraction of our renewable energy. Permitting and local approval are challenging and I am not sure if we want to plant wind turbines on every available hill and ridge in NH. Hydroelectric power is a good energy source, especially here in the Northeast where water is plentiful, but frankly I do not believe there is the appetite for developing more large-scale hydroelectric operations. They inundate large swaths of land and, if wind farm opposition is anything to go by, establishing a hydro facility to drown thousands of acres of land is simply not going to happen.

What is more likely to happen is the continuation of the small-scale fuel switching from oil to wood and the slow roll-out of small-scale residential and commercial solar photovoltaic devices. Photovoltaic panels, while perhaps not the best investment (demand reduction is a better way to go), are becoming more affordable and downright fashionable.

This is a good place to circle back to the point I made two weeks ago. Yes, renewables are important, but what is more valuable is reducing the 65% of energy we waste. Our focus should be improving energy efficiency and reducing our energy demand. As we reduce our demand, we can ratchet back our need for fossil fuels and then renewables will, by default, become a more prominent proportion of our energy portfolio. If I were to be investing State dollars on energy programs in the State, I would be investing the large part of our time and money in demand reduction rather than in renewable energy sources. That is, at least, the opinion of this writer. Let me know what you think we should be doing?

Until next time, remember to turn off those lights when you leave the room.
 

Mike Mooiman

Franklin Pierce University

mooimanm@franklinpierce.edu

2/3/13

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