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The Impact Of The Slowdown In Construction Of Wind Generation

The last few months have seen a significant stalling in plans and proposals to build new wind-based power generation. These delays and cancellations have significant implications for two important components of American energy: (1) the Renewable Portfolio Standards (RPSs) that have been passed in many states and (2) the reliability of the North American electric grid.

In the first case, the ability of respective states to meet their RPS is increasingly in doubt. In the second case, the emerging shortfall in projected wind generation has very real implications for power reliability given the fact that so many coal plants have been canceled and natural gas prices remain highly volatile.

The 2008 report of the North American Electric Reliability Corporation (NERC) takes a relatively optimistic view of the amount of wind generation going forward. Increasing delays and cancellations in wind projects, however, necessitates a second look as to the contribution wind can really be expected to make over the next decade. Natural gas and coal will have to carry the burden of incremental electricity demand. NERC’s 2007 report warned about an over dependence on natural gas generation and the danger of relying on liquefied natural gas imports.

Now, in a special report released in early November, NERC has warned that “increased dependence on natural gas as a fuel for electric generation may impact reliability.” New coal plants have been cancelled or deferred across the nation. As will be discussed here, new wind-based power generation is experiencing delays and cancellations. As NERC’s analyses demonstrate, all of these factors are converging to raise serious questions relating to the reliability of America’s electric power system over the next decade.

Although President Bush recently signed up to $30 billion worth of tax credits for renewable energy, the ongoing credit crisis will hamper financing opportunities for many projects in 2009 and beyond. The collapse of a number of investment banks and equity investors active for years in “green energy” such as Lehman Brothers, Wachovia, AIG, and Merrill Lynch presents a substantial challenge to the industry as a whole. Funds will be harder to come by because of the longer payback periods for renewables.

U.S. wind energy in particular will face a difficult road. There has been a growing worldwide demand for turbines and the high infrastructure needs of wind projects require substantial funding. The implosion of the credit markets has sent the cost of capital soaring and larger projects are now at greater risk because they require the cooperation of multiple lenders. Further, many projects have been canceled because the production tax credit was not renewed until September.

“One of the biggest challenges of 2009 ... is the fact that many companies that were providing tax equity in 2008 will not be in 2009,” says Randall Swisher, executive director of the American Wind Energy Association (AWEA). The AWEA expects a slowdown in 2009, as transmission bottlenecks and escalating costs, among other difficulties, are taking a toll.

Canceled And Delayed Projects

Ventyx, an energy consulting firm based in Atlanta, reports that 66 of the 262 wind projects announced this year have already been canceled or postponed. Even short delays can add millions to the overall cost of a project when equipment orders have been placed and workers are on site. Wind energy equipment and supplies are being stretched thin by the spread of RPSs across the nation.

Texas is one area feeling the added pressure of the credit crisis, as there are expansive plans for wind projects in the western part of the state. The AWEA claims Texas has the fourth highest wind energy capacity in the world – behind Germany, India, and Spain. The state’s electrical grid operator, however, recently reported a number of requests for more wind power capacity could now go unfulfilled.

Two projects in Texas totaling 236 megawatts, for example, were recently delayed beyond 2010. The state’s main problem is the billions of dollars in new transmission lines that must be built to move wind power from western Texas to population centers to the east. According to Jay Apt and his associates, electricity researchers at Carnegie Mellon University, obtaining permission and constructing long distance transmission lines take seven years on average. The cost of delivered power can double in such a circumstance.

T. Boone Pickens is now putting the construction of the world’s largest wind farm on hold. In addition to deteriorating market conditions, Pickens says the currently low cost of natural gas “means there will be no new wind” until prices rebound. Heavy financing is required because Pickens wants to build 170 miles of transmission lines. The Wall Street Journal has reported investors are bailing out of the project. Rising steel costs alone have pushed the price of building one megawatt of wind power up some 30%.

Offshore endeavors are now in even worse shape than before. Projects such as Cape Wind (at a six-year standstill) and LIPA (canceled) illustrate the variety of problems involved with offshore farms, but the credit crisis is making these dreams even less of a reality. Investors have been paying substantial sums for undeveloped offshore sites that hold only planning permission. Unfortunately, there has been a general failure in the industry to take into account the dramatic increase in the cost of turbines and cables. These problems are becoming harder to overcome because funds are quickly drying up.

Impacts On RPSs

Many U.S. states are relying on wind power to meet their Renewable Portfolio Standard (RPS). In fact, the goal of many states, Texas is a prime example, is to go beyond hydropower and diversify their renewable energy portfolio by utilizing wind. Projects must promptly materialize. Along with the very short timeframes associated with meeting most RPSs, the funding problems the credit crunch is causing will make achieving these goals an unrealistic challenge.

Texas’ RPS requires 2,000 megawatts of new renewable generation by 2009 and nearly 6,000 megawatts of new renewable generation must be built by 2015. The growing number of canceled or delayed wind projects in the state may cripple these aggressive efforts. Other states – including Illinois, Pennsylvania, and New Jersey – are relying on substantial increases in renewable power generation based largely on wind.

The researchers at Carnegie Mellon University are part of a growing number of experts who believe the strict deadline of state RPSs could result in higher costs, disputes over land use, and less reliable electricity. The attempt at a rapid and massive deployment of wind and other renewable technologies may create a backlash against these policies. For example, states have a penalty system for power providers unable to meet its RPS regardless of the practicalities involved.

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Jude Clemente is an energy security analyst and technical writer in the Homeland Security Department at San Diego State University. He holds a B.A. in Political Science from Penn State University and an M.S. in Homeland Security from SDSU. He also holds certificates in infrastructure protection and emergency preparedness from the Federal Emergency Management Agency, the American Red Cross, and the U.S. Department of Homeland Security.

Clemente’s research specialization is energy security at the international level. He is a member of the National Defense Transportation Association and energy advisor to B and S Corporation and Penn State’s Research Project on North American Energy Supply. He can be reached at: [email protected]

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