Why do US utilities like to own their own wind farms - and what does it mean for developers?
US utilities are increasingly looking to develop and own wind farms – but what does this mean for the business models of wind developers? Richard Heap reports
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The brewing giants behind those ‘all-American’ brands Budweiser and Jack Daniel’s are among the firms that have bought electricity from wind farms in the last year. But changing demand for power purchase agreements may leave developers needing a stiff drink.
Corporate demand for wind PPAs was strong last year, according to figures from the American Wind Energy Association. It said PPAs totalling 5.5GW were signed for power from US wind farms in 2017, of which 40% were with corporates. Major firms including Amazon, General Motors and Google were all active in the market.
But excitement about these brands masks the fact that developers are now finding it tougher to get privately-owned regulated utilities to agree PPAs. These are the utilities that are owned by private investors but operate under state oversight. Historically, they have dominated wind PPA statistics – and they are still the majority.
Sixty percent of wind PPAs in the US in 2017 were with utilities, but developers are finding that more of these firms prefer to buy and operate wind farms themselves.
For example, last July, American Electric Power agreed to pay $4.5bn for the 2GW Wind Catcher by Invenergy in Oklahoma – although the deal is still struggling to achieve regulatory backing. The likes of MidAmerican, Rocky Mountain and Xcel are now more active in the wind farm development market too.
Historically, only 10% of US wind capacity was held by regulated utilities, but this is far higher – around 30%-40% – for the projects currently being built or in advanced development. This is a major change that must affect developers’ strategies.
There are a couple of key reasons for it. The first is that regulated utilities are able to buy and operate wind farms with very low risk. They are guaranteed to make returns on their capital investments because they can pass on their costs to local ratepayers.
The second is that utilities have seen wind become a mainstream asset class. In the early 2010s, renewables were a small part of the strategies of most US utilities, and so it made sense for them to buy power from wind farms that were built and owned by experienced developers. This enabled utilities to hit state goals for renewables without the risk of operating a wind farm themselves.
But renewables have become more cost-competitive, and become more important for many utilities. This has given more utilities the confidence that they can invest in wind farms and make returns, while gaining the benefits of the production tax credit. This is more sensible for many regulated utilities than buying from a third-party.
The upshot of this is that developers are feeling the squeeze.
We see why developers are keen to build, finance and own wind farms, and then manage them for the long-term. It turns the project into a long-term income stream that could sustain the developer through the ups and downs of the market, particularly pre-2015 when the production tax credit was less stable than it is now.
But selling completed projects, rather than owning them, isn’t a bad strategy either. It means developers can recycle capital for fresh projects. Sure, it puts more onus on them to find sites and develop them, but that's the key part of the developer's job.
We should also remember that there are still huge wind markets where there are no regulated utilities – in Texas, for example. In states like this, regulated utility PPAs can work. The market may be changing but there are still opportunities for developers.
This is not developers' only PPA-related problem. The end of the PTC threatens to make PPAs less attractive for corporates too.
How can developers respond? Well, developers are by nature entrepreneurial, so we are confident most will adapt. It may put more onus on them to work out how they can carve out new markets for PPAs, particularly among small- and medium-sized businesses that want clean energy but don’t want to own a wind farm themselves. That remains a huge untapped market, and you can read more about this in this article by my colleague Alice Jones.
Developers may see the market changing – but the need for their skills will endure.