Market Brief

North America Wind Energy Advisory

ID# NAW 925-100802

Utility Ownership and Procurement Strategies in the US Wind Sector

2 August 2010

Tim Stephure +1 617 551 8586 timothy.stephure@ihs.com

2010 EMERGING ENERGY RESEARCH, LLC. All rights reserved. Reproduction of this publication in any form without prior written permission is strictly forbidden. The information contained herein is from sources considered reliable but its accuracy and completeness are not warranted, nor are the opinions and analyses which are based upon it. Photo Source

Utility Ownership and Procurement Strategies in the US Wind Sector

Summary
Utilities are taking an increasingly proactive approach to developing and owning wind assets to diversify their power mix
Approximately 14% of 2009 US wind additions were utility-owned, a slight decrease in percentage terms from 16% in 2008 In contrast to 2008, when MidAmerican dominated the utility wind ownership market with 73% of utility additions, a diverse group of 15 utilities contributed to 2009 additions, with continued diversity expected over the near term Partnerships with developers and independent power producers (IPPs) have given utilities the experience and confidence to own, and in some cases develop, wind assets independently Falling turbine prices combined with a buyers market for some services, including engineering, procurement, and construction (EPC), has dramatically reduced development risk for some utilities who have chosen to develop their own wind projects

Power purchase agreement (PPA) market weakness asserts influence on both utility and IPP positioning
Weak PPA demand by utilities nationally is driving wind development to more challenging markets, including California and New England, where renewable portfolio standard (RPS) supply is significantly below mandated levels
A slowdown in power demand is delaying PPA contracts as utilities re-evaluate long-term generation requirements and move more cautiously on renewables procurement Slow economic recovery is also driving strong resistance to rate increases, which is further inhibiting wind procurement

Utility willingness to adopt the IPP business model is leading to disputes that have thus far ruled in favor of utilities
Western utilities capitalize on strong wind demand in California by inking short-term PPAs, as renewable generation is not needed over the near term to meet RPS compliance in their home markets IPPs focused on turnkey projects including enXco and RES Americas have had to forge new partnerships as their key utility partners including MidAmerican and Puget Sound Energy have moved to develop and own wind independently
North America Wind Energy Advisory NAW 925-100802 Page 2

Utility Ownership and Procurement Strategies in the US Wind Sector

Cumulative Wind Ownership Ranking by Owner Type

Cumulative Wind Ownership: 2009 vs. 2008
8,000
6%

Analysis
MidAmerican maintains considerable lead despite slower 2009
International IPP

7,000

YE 2009

YE 2008
14%

Utility wind owner

6,000

41%

Domestic IPP

Following a breakout year where MidAmerican installed over 1 GW of capacity, wind installations in 2009 were just over 20% of 2008 levels MidAmerican subsidiary Pacificorp led all utilities in 2009 wind additions with over 220 MW of capacity Increased competition among utility entrants characterizes 2009 In contrast to 2008, when MidAmerican claimed over 73% of all utility-owned wind, 2009 saw greater diversity, with no single entity having more than 17% of the annual build Without a viable merchant option, IPPs operations are more greatly affected by utility ownership aspirations Top IPP owners of wind power including NextEra, Iberdrola, and Invenergy have had to shift build strategies in response to utility wind ownership activity in 2009

MW

5,000

9,789 MW

Domestic Utility

4,000
39%

Domestic Developer

3,000

2,000

1,000

Note: Utility wind owner refers only to capacity owned directly by the utility and does not include capacity owned under IPP subsidiaries Source: IHS Emerging Energy Research

While IPPs remain the predominate business model for wind asset ownership, a select group of utilities have made significant gains in 2009
North America Wind Energy Advisory NAW 925-100802 Page 3

Utility Ownership and Procurement Strategies in the US Wind Sector

Utility Wind Ownership Ranking by Owner Type: Year-end 2009

Utility Wind Ownership Ranking by Owner Type: Year-end 2009
3,500

Analysis
MidAmerican is positioned to challenge Xcel Energys leading position through in-house wind development and ownership

Top 10 2009 Utility Wind Ownership Additions (MW)

PacifiCorp (MidAmerican) Portland General Electric Basin Electric Power Coop Oklahoma Gas & Electric Wisconsin Public Service Alliant Energy Turlock Irrigation District Los Angeles Department of Water & Power Westar Energy Otter Tail Power Company

Cumulative Installed/Contracted Capacity (MW)

3,000

2,500 0 200 400 600 800 1,000 1,200 1,400

MidAmerican has regulatory approval to bring 1,001 MW of additional wind capacity online in Iowa by 2012
Xcel is moving to a more balanced approach, with over 500 MW of PPAs inked in 2010, as well as plans to own an additional 351 MW by the end of 2011 Rural electric co-ops make impact, adding large, utility-scale projects After several years of focusing primarily on community-scale projects, rural electric co-ops are scaling to enhance the economic benefits of wind power for their communities. Several projects exceeding 100 MW in size were energized in 2009, including Basin Electrics 115.5 Prairie Winds project and Turlock Irrigation Districts 128.5 MW Windy Point facility; its first foray into wind ownership

2,000

Investor Owned Utility

1,500

Municipal Utility Rural Electric Co-op

1,000

Procured Wind

Owned Wind
500

Source: IHS Emerging Energy Research

Investor-owned utilities (IOUs) maintain status as primary target for PPAs and lead utility wind ownership, while a number of rural co-ops are buying utility-scale wind projects
North America Wind Energy Advisory NAW 925-100802 Page 4

Utility Ownership and Procurement Strategies in the US Wind Sector

Regional Off-Take Trends

Cumulative US Wind Installations by Offtake Type
537 1,753
1,539

Analysis
Utility ownerships appeal expanding regionally

4 584
Pacific Northwest

61
New York

New England

2,490

1,600
2,219 5,509

1,213

17 297
2,440
Rocky Mountains Midwest

63
245 545
1,024

Although represent in 19 US states, utility ownership has traditionally been most prevalent in the Pacific Northwest and the Midwest. However, states including Oklahoma, Indiana, and Wyoming were major rate-based hubs in 2009 Merchant offtake increased in 2009 despite electricity price declines of over 50% in most of the country Bolstered by gas prices averaging US$8.86/MMBtu in 2008, merchant wind made up nearly one-third of all wind additions in 2008. In 2009, approximately 40% of wind capacity sold power into the merchant market despite a more than 50% decline in average gas prices Texas, the most substantial merchant wind power market in the US, will experience considerable declines in wind additions over the near term, with NextEra, a historically Texas-heavy developer, having no plans for nearterm Texas wind build

California

1,816
Mid-Atlantic

683
Desert Southwest

Great Plains

27
5,119

4,189
South

PPA Utility Owned

Merchant
Texas

129

Source: IHS Emerging Energy Research

Utility ownership has contributed to a significant drop in PPA demand, which has forced a large group of generators to sell wind power at unsustainably low prices on the merchant market
North America Wind Energy Advisory NAW 925-100802 Page 5

Utility Ownership and Procurement Strategies in the US Wind Sector

Utility Positioning in the US Wind Market

Development
1 2

Finance

Ownership

Offtake

Renewable Transmission

Analysis
MidAmericans integrated positioning eyed by ownership-focused competitors Puget Sound Energys move to purchase its development partner RES Americas stake in the Lower Snake River project signals greater comfort in the development risks associated with wind project development

Develop-to-Own Projects with Renewable Transmission Partner with Established Renewables Developer / IPP
3

Turnkey Ownership
4

Long-Term PPA

5 REC Purchasing 6 RE Transmission

Utility Example
Utility Asset Ownership
1 MidAmerican

Business Model
Develop-to-own

Comments
MidAmerican has quickly developed capability across the value chain and has become a leading player in the industry, and one of very few companies with experience in each segment Partnering with established renewable IPPs such as enXco, NextEra, and Renewable Energy Systems (RES) has helped mitigate development risks and has given Puget Sound Energy confidence to move toward developing projects independently Utilities able to tap lower costs of capital can take advantage of the benefits of wind ownership, including lower costs and stronger balance sheet positioning, without assuming development risk The traditional utility role in the wind industry. Regulated utilities facing rate pressures have slowed their procurement of PPAs after a dramatic drop in power demand made predicting future renewables needs for RPS compliance difficult Limited by transmission or local resources, tapping REC purchase as lowestcost option for near-term compliance, mainly focused on short-term needs Transmission development and energy storage investments to facilitate renewables up-take to bolster compliance objectives

Xcels move to purchase turnkey projects from its IPP partner enXco in March 2010 marks a clear shift from its PPA-focused strategy. Xcel has allocated over US$900 million to purchase 351 MW of wind capacity through 2011 PG&E leverages its unsatisfied RPS demand to move toward wind ownership PG&E leads the US for projected RPS demand, making it a key target for IPPs in a tight off-take market. Iberdrolas decision to sell its 246 MW Manzana project turnkey to PG&E, an out of character strategy for Iberdrola, reflects the utilitys ability to assert its influence in the market

Xcel, Puget Sound Energy, Ottertail Power

Partner with established renewables developer / IPP to own

Xcel, PG&E, LADWP

Turnkey plant purchase

Procurement

AEP, NV Energy, PG&E, SCE, SDG&E

Long-term PPA

5 6

National Grid, PECO, PPL, Northeast utilities SDG&E, Xcel, SCE, LADWP

REC purchasing from utility-scale projects Renewable transmission and storage investment

Source: IHS Emerging Energy Research

Utilities already established in the ownership segment are increasingly looking toward development to drive down costs, while more risk-averse utilities are sticking with PPA procurement
North America Wind Energy Advisory NAW 925-100802 Page 6

Utility Ownership and Procurement Strategies in the US Wind Sector

RFP Activity Shifts to Load Centers

V2
PSE RFP for 1 GW of generation, including renewables, due to be in service by 2016
Avista postponed its 24 September 2009 RFP, including development of its Reardan wind project, until 20142015

2010 Wind RFP Activity

On 8 April 2010, Nebraska Public Power District launched an RFP for wind projects between 50 MW and 300 MW in size On 15 February 2010, WE Energies issued an RFP for up to 150,000 MWh of annual renewable energy including RECs for up to five-year terms

Analysis
RFP activity shifting toward load on East and West coasts Difficult wind development conditions have limited existing RPS-eligible build, while larger electricity loads have created ample unfilled RPS demand in California and New England Utilities without near-term demand continue to issue RFPs for 2015 and beyond to tap lower wind component prices RFPs by Puget Sound Energy and El Paso Electric Co. are for generation online by 2015 and 2016, reflecting a lack of nearterm wind demand

NV Energy RFP for renewables capacity over 1 MW or the sale of turnkey facilities of over 1 MW

APS is seeking competitive proposals for 15 MW to 100 MW of wind capacity located in Arizona though either PPA or turnkey ownership PNM is seeking to purchase RECs equivalent to a minimum of 50,000 MWhs and a maximum of 450,000 MWhs El Paso Electric Co. is seeking seeking up to 300 MW of eligible supply-side, including all-in renewable energy, and/or demand-side resources by 2015

PPL RFP for up to 850,000 MWh of RECs from Tier 1 renewables, including wind PPL RFP for up 850,000 MWh of RECs from Tier 1 renewables, including wind

Utilities in Midwest states that have nearterm RPS demand covered are reluctant to attempt to push through additional ratebased wind
MPUC RFP for long-term conventional and renewables with the T&D utilities. Total capacity not disclosed

NYPA is seeking 25 MW of renewable RECs on behalf of the Port Authority of New York and New Jersey NYPA is also seeking bids for up to 500 MW of offshore wind in the Great Lakes region

KCP&L RFP to construct 100.5 MW Spearville II wind farm, as well as purchase the 32 turbines, land rights, and project assets currently under ownership by KCP&L for the project KCP&L is also accepting bids for up to 200 MW of wind capacity via both PPAs or the sale of turnkey facilities in commercial operation by 1 October 2011

AEP has been forced to reduce its nearterm wind procurement expectations due primarily to resistance to rate-based wind. On 3 June 2010, the Virginia PUC rejected a 201 MW PPA that AEP had signed with Invenergy for the output from the Beech Ridge and Grand Ridge projects

Source: IHS Emerging Energy Research

Citing both lack of need and excess cost, Kentucky regulators rejected AEP subsidiary Kentucky Powers PPA with NextEra for its 217 MW Lee-DeKalb project at the proposed price of US$43/MWh

North America Wind Energy Advisory NAW 925-100802

Page 7

Utility Ownership and Procurement Strategies in the US Wind Sector

Regional PPA Trends in 2010

1,000

Announced PPAs Finalized in 2010 Analysis

Niche markets and states with significant development barriers lead to 2010 PPA activity Markets with more limited potential to scale, such as Vermont, Nevada, and Hawaii, have rewarded developers with PPA rates far above merchant levels in the Midwest and Texas Slow RFP activity through the first quarter of 2010 points to a slow recovery for PPA demand

900

800

700

600

MW

500

400

2010 is a key year for US offshore contracts

National Grids two-part PPA for the output of Cape Winds 462 MW offshore wind facility is one of only two active offshore PPAs in the US The proposed agreement is awaiting final approval from the Massachusetts Department of Public Utilities

300

200

100

0 Tennessee Colorado Vermont Nevada California Nebraska North Dakota Wisconsin Hawaii

Note: Graph represents publically-announced PPAs signed in 2010 and may not be comprehensive Source: IHS Emerging Energy Research

Niche opportunities near load centers and states without large wind portfolios have comprised the majority of inked contracts in 2010
North America Wind Energy Advisory NAW 925-100802 Page 8

Utility Ownership and Procurement Strategies in the US Wind Sector

2010 PPA Focus Shifts To Niche Markets

900

TVA NV Energy Basin Electric SDG&E

Omaha Public Power District Xcel Central Vermont Public Service HECO

Nebraska Public Power District WE Energies Green Mountain Power

Analysis
Tennessee Valley Electric Authority leads the charge in signing PPAs, with over one-third of all capacity contracted in 2010 The government-owned utility has signed over 900 MW in 2010 from Midwest-based projects from a variety of developers, including Horizon, Iberdrola, Invenergy, and CPV Renewable Energy to meet an internally driven renewables target Xcel continues to procure wind via PPA as it gains experience in wind ownership Although Xcel has allocated over US$900 million to near-term wind ownership, the company continues to look to PPAs to supplement its wind requirements, signing 500 MW in 2010 Recent surge in Nebraska PPAs unlikely to maintain momentum Without an RPS mandate and an excess of baseload capacity over the near term, Nebraska PPAs from NPPD and OPPD will likely continue to be sporadic and more about supporting domestic sources than energy needs. However, recent RFP bids under US$40/MWh could make wind a valuable commodity hedge, especially with recent changes to facilitate power export

800

4% 4% 4% 5%

2% 1% 2%

700

42% 2,220 MW

600

6%
500

MW

7%

400

23%
300

200

100

0 January February March April May

Note: Includes only publically-announced, finalized PPAs Source: IHS Emerging Energy Research

Only three of the top 25 utility procurers of wind at year-end 2009 have signed PPAs in 2010
North America Wind Energy Advisory NAW 925-100802 Page 9

Utility Ownership and Procurement Strategies in the US Wind Sector

Utilities Front Load Wind Build to Tap California Opportunity

Utility Owned Wind Actively Selling into California (MW)

WASHINGTON
0 200 400 600 800 1,000 MW

WYOMING
1,200 1,400

OREGON
1,600 1,800 2,000

Analysis
Northwest utilities tap higher California energy prices until local RPS compliance takes effect in 2011 2012 in Washington and Oregon As evidence of utility strategies converging with IPPs, five Wyoming, Washington, and Oregon utilities have signed PPAs with California utilities facing compliance in 2010. The shortterm agreements range from three months to over three years and allow utility wind owners to benefit from the pricing premium in California versus their home markets MidAmericans renewables portfolio is estimated to meet 2020 level of RPS requirement The utilitys northwest subsidiary, Pacificorp, is selling over 1 GW of wind capacity via 14 facilities in Washington, Wyoming, and Oregon. Similarly, Puget Sound Energy continues to aggressively build and procure new wind even as the utility exceeds its 2020 RPS needs

Utility

Project Nine Canyon, WA High Plains, WY

McFadden Ridge, WY Combine Hills, OR Foote Creek I, WY Glenrock I, WY Glenrock III, WY

MW 32.2 MW 99 MW
28.5 MW 41 MW 41.4 MW 99 MW 39 MW

18 17 20 16 1 8 1011 9 19 4

1 2 3 4
5 6 7

Energy Northwest PacifiCorp PacifiCorp PacifiCorp

PacifiCorp PacifiCorp PacifiCorp PacifiCorp

2 3 5 14 12 6 7 15 13

Goodnoe Hills, WA Leaning Juniper, OR Marengo, WA Marengo II, WA Rock River I, WY

Rolling Hills, WY Seven Mile Hill I, WY Seven Mile Hill II, WY Biglow Canyon, OR

94 MW 100.5 MW 140.4 MW 70.2 MW 50 MW

99 MW 99 MW 19.5 MW 274.9 MW

9 10 11 12 13

PacifiCorp PacifiCorp PacifiCorp PacifiCorp PacifiCorp PacifiCorp

PacifiCorp Portland General Electric

RPS Demand

14
15

16 17 18 19 20

Puget Sound Energy Puget Sound Energy Puget Sound Energy

Turlock Irrigation District

Hopkins Ridge, WA Wild Horse, WA

Klondike III, OR

156.6 MW 272.6 MW
50 MW

Tuolumne, WA

136.6 MW

Source: IHS Emerging Energy Research

Utilities have successfully imitated the IPP business model to generate profits within their wind portfolio that can mitigate the need for rate increases to meet RPS mandates
North America Wind Energy Advisory NAW 925-100802 Page 10

Utility Ownership and Procurement Strategies in the US Wind Sector

Utilities and IPPs Jostle for Position

Key Utility/IPP Interaction in the US Wind Market
1 3 5

Analysis
IPPs turn to markets with less utility competition Although the Midwest remains a key market for NextEra, with 20% of capacity additions in 20102011, markets including Canada and California (which only amount to a combined 12% of existing installations) will make up over 50% over the next two years

Summary

1 2 3 4

Puget Sound Energy takes 100% ownership of the 1,432 MW Lower Snake River series of projects, demonstrating its confidence in wind Iberdrola uncharacteristically sold its 246 MW Manzana project under development in California for US$900 million. It is the first project the company has sold turnkey in the US

Iberdrolas near-term portfolio has shifted significantly to the Northeast US, while Ontario has become a strategic priority for NextEra and Invenergy
IPPs unable to prove cost savings argument in rate cases Invenergy unsuccessfully argued that its Ledge Wind project would save rate payers up to US$50 million over a 30year PPA versus the cost for WE Energies to develop its own Glacier Hills project

NextEra, the largest owner of wind in the US, sold stakes in its Ashtabula and Luverne wind farms to utility Ottertail Power
In December 2009, the Iowa Utilities Board ruled in favor of MidAmerican to allow the utility to build up to 1 GW of wind by 2012 rather than purchase wind from IPPs including NextEra In January 2010, the Wisconsin PUC rejected Invenergys request to only allow utility WE Energies to build its Glacier Hills wind farm contingent on the utility executing a PPA for its Ledge wind farm

5
Source: IHS Emerging Energy Research

Utilities and IPPs that have traditionally worked collaboratively are increasingly competing for market share, with utilities winning recent cost rulings
North America Wind Energy Advisory NAW 925-100802 Page 11

IHS Emerging Energy Research

IHS Emerging Energy Research provides analyst-directed advisory services on an annual subscription basis, providing market intelligence, competitive analysis and strategy advice in response to the specific needs of our clients. These services provide value-added support of clients competitive and market strategies, and are intended to be interactive, offering clients direct access to EER experts. Advisory service clients receive a stream of market and company briefs, ongoing market data and forecast support, telephone inquiry privileges, and regular analyst briefings. While much of the content is syndicated, clients also receive ongoing individual support of market assessment and strategy development needs. For more information on EERs advisory services, please contact: US Office
700 Technology Square Cambridge, Massachusetts, US 02139 Whitney Van Horne Sales Support Manager Email: whitney.vanhorne@ihs.com Phone: +1 617 551 8580 Fax: +1 617 551 8481

Spain Office
Paseo de Gracia 47, Planta 2 Barcelona, Spain 08007 Paola Alcala Sales Support Manager Email: paola.alcala@ihs.com Phone: +34 932 726 777 Fax: +34 93 467 6754

2010 EMERGING ENERGY RESEARCH, LLC. All rights reserved. Reproduction of this publication in any form without prior written permission is strictly forbidden. The information contained herein is from sources considered reliable but its accuracy and completeness are not warranted, nor are the opinions and analyses which are based upon it.

North America Wind Energy Advisory NAW 925-100802

Page 12