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benefit of counsel: success of wind energy requires immediate changes in federal policies

Issue 2 and Volume 83.

Larry F. Eisenstat, Michael J. Rustum
& Maria Farinella, Dickstein Shapiro Morin & Oshinsky LLP

To meet the demands for reliable energy sources, increased fuel diversity, reduced dependence on foreign oil and an improved environment, existing policies that hamper wind development must be changed. Without immediate action, calls for renewable energy portfolio standards (RPS), requiring that a given percentage of retail power sales come from renewable energy sources, could be little more than hot air.

The American Wind Energy Association (AWEA) reports that there is 6,740 MW of wind energy installed in the United States, and that with the one-year extension of the federal wind energy production tax credit (PTC), new capacity installations likely will exceed 2,500 MW in 2005 alone. An increasing number of states have established RPS requirements which, to a large extent, will be met by new wind generation. Unfortunately, not knowing whether the PTC will be reinstated after December 2005 creates enormous uncertainty as to projected revenue streams and, therefore, significantly hinders the ability of wind power developers to secure financing. A long-term extension of the PTC is necessary to further wind development. But, wholly aside from the PTC issue, further construction of wind projects also is being hampered by outdated federal policies that neglect to accommodate the operating characteristics of renewable resources and fail to create long-term meaningful and reliable incentives for creating a stable wind energy market.

One significant impediment to wind development is that the Federal Energy Regulatory Commission’s (FERC) Order No. 888 transmission tariff is outdated and was not written to accommodate the unique characteristics of wind generation. Wind resources are not able to control the circumstances affecting their output with the certainty required to maintain output schedules and thereby avoid imbalance penalties. These penalties were designed to remove any incentive that generators might have to unduly lean on the system; so, it makes little sense to penalize wind resources for conduct that they have little or no ability to control. Indeed, in certain regions, wind resources are simply exempted from imbalance penalties in recognition of this fact. Wind projects, though, are now being sited in regions that have neither a generic exemption for wind nor any market mechanism by which wind generators could net, pool or trade their imbalances. Wind projects should be exempted from undergeneration penalties at least until adequate market mechanisms are in place to allow wind generators to manage this risk.

Two other significant impediments to wind development are the persistent inability of many transmission providers, including certain regional transmission organizations (RTOs), to complete transmission studies within a reasonable time frame, and the lack of comprehensive regional planning. To a large extent, these impediments stem from the fact that FERC’s transmission policies were designed when relatively little wind generation was forecast, and without much, if any, input from wind developers. But improved economics and technological advances have resulted in significantly more wind energy development than was anticipated at that time. Many also assumed that the creation of RTOs would foster regional planning to address the need for system upgrades to relieve transmission bottlenecks. For the most part, though, that simply hasn’t happened, at least with respect to designing and allocating the cost of system improvements to accommodate wind development.

If the state-sponsored RPS goals are to be realized, further regulatory action is required. Specifically, FERC and the states immediately should require comprehensive regional planning that is open to market participants to ensure that transmission expansion projects are identified and construction commences with sufficient lead time to accommodate deliveries from new wind farms. Additionally, FERC should (1) establish hard time frames for transmission providers to either finish their own transmission studies or complete a review of, and adopt with necessary modifications, third-party transmission studies; and (2) require transmission providers to make their study models available so that developers can independently perform studies when the providers are unable to complete them on a schedule commensurate with project development.

While it is reasonable for developers to assume transmission risk, it is not reasonable to expect developers to make investment decisions with little or no information regarding transmission because the transmission provider has not acted on a transmission study request. To the extent that further resources must be expended by transmission providers to do so, they should be required to “staff up” to timely complete their transmission studies and system expansion projects; but they also should be permitted to fully recover their costs.

In short, FERC must periodically evaluate its transmission policies in light of evolving market conditions, consider whether certain existing policies are unduly burdensome on relatively new market entrants, and change its policies accordingly. Such action is essential if we are serious about promoting renewable energy and eliminating America’s overdependence on foreign oil.