June 15, 2013

How wind energy gets paid for

On his blog Energy in New Hampshire, Mike Mooiman of Franklin Pierce University in Rindge, N.H., has written an informative piece about wind energy revenues, which is excerpted below.

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 (8.2¢/kWh):
  • 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.
([T]he 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.)

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 [now, for new facilities] $23.00 for every MWh [2.3¢/kWh] 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 [3.6¢/kWh] for a company with a 35% federal tax rate.

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).

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. ... Subsidies [which we pay for in our tax bills] generated by the RECs and PTCs provide 50% or more of the revenue equivalents for these operations. [And the relatively high prices of PPAs are driven by state renewables portfolio standards (RPS’s) which create an artificial demand for such sources.]

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