Amid a confluence of supportive state and federal policies and incentives, utilities are moving to add rate-based wind generation to their fleets through self-build projects and acquisitions.
The federal wind production tax credit, or PTC, through which utilities can offset project costs to ratepayers, had long been the driving factor behind utilities' push toward rate-based wind, versus traditional power purchase agreements with third-party developers and independent power producers. Projects under construction prior to December 31, 2016, qualify for 100% of the tax credit ($24/MWh generated as of April 2017), before the tax benefit drops 20% for projects starting construction in 2017, 40% by 2018 and 60% by 2019, after which the PTC expires.
Utilities including American Electric Power Co. Inc., Xcel Energy Inc., and Alliant Energy Corp., with utility operations in wind resource-rich regions, have entered into build-own-transfer agreements with project developers and/or turbine supply agreements for self-build projects that qualify under Internal Revenue Service safe harbor guidelines.
In the utility industry's ongoing pursuit of CapEx projects to sustain rate base and EPS growth, these projects represent an attractive incremental earnings stream, and, with no fuel costs, a long-term hedge against potential commodity price volatility, which benefits ratepayers.According to the U.S. Department of Energy's August "Wind Technologies Market Report," IPPs owned 83% of U.S. wind capacity and utilities owned 15% at year-end 2016. We view this proportional mix unlikely to change meaningfully in the coming years given the substantial wind development and repowering pipelines at independent project developers, including NextEra Energy Resources LLC and Avangrid Renewables LLC, among others, which typically seek to contract the output of their projects under long-term power purchase agreements with utilities and other offtakers.
AEP's July 26 announcement that it will purchase Invenergy LLC's planned 2,000-MW Wind Catcher Energy Connection project and in the Oklahoma panhandle marked one of the largest efforts to date in the U.S. utility industry to add rate-based wind generation to their portfolio. The project is expected to become part of AEP's regulated portfolio (70% Southwestern Electric Power Co./30% Public Service Co. of Oklahoma), pending regulatory approvals in Arkansas, Louisiana, Oklahoma, and Texas.
AEP also plans to build a 350- to 380-mile generation tie line to move energy generated by the project into the AEP load zone. AEP management notes that the $4.5 billion project will not result in customer rate increases and will result in approximately $7 billion in customer savings over the 25-year life of the project due to the PTC, as well as energy and fuel cost reductions.