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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Windfall?* – Wind Energy in New Hampshire

In March last year I went skiing at Crotched Mountain, near Bennington, NH, with my son. It was a perfect day for skiing – the weather was mild, the sun was shining and, most importantly, the lift lines were short. A couple of times that day we took a breather at the top of the mountain to admire the view and we briefly considered the wind power potential of the site but I had no idea at that time that I was skiing at the site that was the birthplace of the wind energy industry.

In 1980 a company by the name of U.S. Windpower established the first wind farm in the world by erecting twenty 30 kW wind turbines on Crotched Mountain. The design was based on research and development work conducted by Professor William Heronemus at the University of Massachusetts, Amherst. For a variety of reasons, including unreliable equipment and poorly understood wind resources, the project was not a commercial success and was dismantled after a year, but the developer went on to set up wind farms in California which were not a commercial success either. Nevertheless, a lot was learned from these projects and failures and these early efforts were the genesis of the wind energy industry as we know it today. It is quite remarkable to consider, that starting with establishment of the Crotched Mountain operation in 1980, we have moved from an installed wind energy capacity of 0.6 MW from 20 turbines to approximately 282,000 MW of worldwide capacity from over 200,000 turbines in the space of about 30 years. In the process we have gone from wind turbines with 15 ft long blades powering 20 kW units to turbines with blades longer than 200 ft powering 7.5 MW units. This is an impressive advance in engineering technology and a testament to what we can accomplish when incentives and subsidies are available. As my students in the Franklin Pierce MBA in Energy and Sustainability Studies learn, successful energy development requires the combination of correct government policies, the correct technology and financial incentives.

After the Crotched Mountain project not much happened in NH wind-wise until 2008 when Iberdrola, the large renewable energy company based in Spain, established their first NH-based wind farm on the hilltop ridges near Lempster. Since then we have had two other wind farms established near Groton and Dixville Notch and there are a bunch more seeking permitting or in development.

The key reason that wind development has not taken off in a bigger way in New Hampshire is that we simply do not have the wind power potential that is present in other parts of the US. As you can see from the US 50 meter (165ft.) wind resource map below, most of the US wind resources lie in the center of the country, from Texas up to North Dakota. This is where the wind blows the hardest and most consistently and these are the choice areas for the establishment of large land-based wind farms.

 If we take a closer look at NH, we can use the 50 meter wind resource map shown below to examine where our winds blow the hardest. The areas of most interest are those highlighted in purple, red and blue. The high wind resources are towards the western side of the State and increase in power as we curve over to the north in the White Mountains area.

I have overlaid on this map the locations of the operating and proposed wind projects in New Hampshire so you can gauge where these operations are relative to the high wind resources and you can also assess where future projects might be sited. The table that follows provides the key for the locations shown on the map as well as information about the various operations.

The challenge with wind energy in NH is that, in order to harness the wind resources, we are forced to put wind turbines up at high elevations on mountain ridges. As a result there are wind turbines – 70 at last count - popping up on hilltops in New Hampshire which, according to your perspective (and location relative to the turbines), can either be the worst thing that ever happened to the wilderness of NH or part of necessary transition as we begin our move away from our dependence on fossil fuels. I do appreciate the argument that, because wind does not blow all the time, we always need a fossil fuel backup for these turbines. However, we should take into account that we are not breaking new ground and building new coal or natural gas power plants every time we put up a wind farm in the USA. What is happening is that, in the developed world, we are slowly ratcheting down the output from existing fossil fuel plants and reducing our output of greenhouse gases and other pollutants from these operations. Every ton of carbon dioxide that we do not emit is, to my mind, a good ton of carbon dioxide. By my estimate, the 282,000 MW of worldwide installed wind capacity led to ~740 million tonnes of carbon dioxide that we did not emit. I know this pales in comparison to the ~33 billion tonnes we likely emitted in 2012, but this is a start and every bit does help.

I also did some research at the Federal Electricity Regulatory Commission (FERC) website to see exactly how much power the three operating wind facilities are actually generating compared to their proposed output. One frequent condemnation of wind power is that the operations don't often measure up to their proposed output and therefore they are a waste of money and tax payer dollars created by subsidies and incentives. I wanted to see if that was the case and how the NH wind farms performed compared to their projections. One way of doing so is calculating the capacity factor, which is what I have done based on the FERC reports of energy sold by the various NH wind operations in 2012. If you recall from the I've Got the Power! post, the capacity factor is the ratio of the actual energy produced by a power plant to the theoretical amount that would have been produced over a year if the plant was operated 24 hours and 365 days of the year. The 2011 data from that post indicated that for the single wind farm in that set of data, the Lempster project owned by Iberdrola, the capacity factor was 0.314 (31.4%). In New England capacity factors for large-scale wind farms range from 0.15 to 0.35 with averages around 0.25.

The only two wind farms that operated throughout 2012 were the Lempster operation and the Granite Reliable Power facility near Dixville. The other operating plant, the Iberdrola Groton Wind facility, only started up in about October last year so there were very few energy sales and, as such, there were insufficient data to calculate capacity factors.
The table below shows their actual electricity production and the calculated capacity factors. I have also included the average prices for their electricity sales.

As you will note, the Lempster operation has a relatively good capacity factor compared to most NE wind projects but the Granite Reliable Power facility only has a capacity factor of 0.15 which is rather low, as is the price it is getting for its electricity.

The low output from the Granite Reliable Power wind farm is a bit of a puzzle. Based on the NH wind resource map I would have expected the higher wind speeds in the northern part of the State to translate into higher capacity factors. There are a number of reasons that energy generation numbers would be lower than expected, including

• Lower than estimated wind speeds
• Turbulent wind conditions
• Wind turbine mechanical problems
• Deliberate output reductions due to lack of demand for produced electricity

I have not been able to determine the actual cause for the low output but, considering that Granite Reliable Power sells directly into the ISO-New England electricity pool, demand, as well as the price for its generated electricity, are dependant on what other power plants are bidding. However, the wind farm has very low operating costs as they have no fuel costs, so I would have expected that they would always make the choice to deliver into the pool even at the lowest clearing price. Perhaps my understanding of the electrical markets is not clear and I look forward to being set straight by someone with a better knowledge of these markets. Regardless, if I was owner of this operation, I would be somewhat grumpy about this situation and envious of the performance and higher prices obtained by the Lempster operation which has a power purchase agreement with Public Services of New Hampshire to purchase all its output.

At the end of this year it will be interesting to compare the output and capacity factors of all three operating wind farms and particularly to compare the operations of the two Iberdola facilities. If I were the developer of the large North County Wind facility planned for Coos County, I would be taking a very careful look at the performance of the Granite Reliable wind project and double checking my energy and revenue projections.

The importance of wind energy in New Hampshire is growing as are the objections against further development. I am not sure how this will all shake out, but it is clear that wind energy in New Hampshire will not be a windfall* for all developers.

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

Mike Mooiman
Franklin Pierce University
mooimanm@franklinpierce.edu
6/2/13

(*Windfall – A fabulous tune by the group Son Volt which was a spinoff of the group Uncle Tupelo. The other Uncle Tupelo spin off was Wilco. Quite the pedigree. This week's challenge was picking the right "wind" song as there are so many to choose from - Dylan's "Blowin' in the Wind" was simply too obvious. Here is the link for Windfall – a song that makes you sad and hopeful all at the same time.)

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