Interview: TradeWind's Rob Freeman

Fast-growing developer TradeWind Energy expects record activity in 2014-15 as competitive pricing is driving demand for wind energy in the Southwest Power Pool (SPP) and Texas, chief executive Rob Freeman tells Recharge.

“Between projects we’ve originated and acquired, we’re looking to build on the order of 800MW – far more than we’ve built historically,” he says, adding all of it is qualified for the federal renewable electricity production tax credit (PTC). “The delivered price on wind energy on 20-25 year contracts is the lowest we’ve ever seen.”

In many cases, the wind price level is below the avoided cost for the utility – the cost it escapes (capital and operating) by purchasing the energy instead of building and owning a wind farm.

“When you get below avoided cost, you get a lot of interest from utilities,” Freeman says, noting that those operating in Trade Wind’s market probably surprised themselves coming out of 2013 by contracting for so many megawatts.

The market price for power in the mid-Plains states is below $30 per MWh with the PTC, which pays $23 per MWh, inflation-adjusted, for a project’s first decade in operation. “If you remove the PTC from the economics of these projects, you can’t get the price below avoided cost,” Freeman says. “The PTC is critically important.”

He emphasizes that is a near-term observation.

“On a long-term basis, we’re not fans of the PTC because it is so distortive of the market,” Freeman says. “The key is how to make that transition to other policies that would create a whole lot more stability long-term for the wind industry.”

A drawback of the PTC is that it has created “this incredible amount of market power in a handful of tax equity investors,” says Freeman. Most developers don’t have sufficient tax appetite to consume all the tax credits and require investors who can. But such deals are often complex with high transaction expenses, which drives up the cost of capital significantly - even more so in relation to the risks embedded in those projects, he contends.

“There are a lot of things kicking around out there. Master limited partnership structures, yieldcos, more competition with tax equity, different policies that would change the whole PTC equation. Policy things could ultimately drive down the cost of capital quite a bit in our industry, which is what we are hoping for but difficult to predict,” he says.

The PTC lapsed at the end of 2013 and the industry is furiously lobbying Congress to restore it as soon as possible, although this may not occur until after November national elections – if at all. While Republican governors in the Plains states generally favor PTC renewal, party lawmakers are sharply divided over the issue.

Wind politics blows both ways, he says. “At the consumer level, we continue to see big, big numbers in support of wind power regardless of political stripes. Both regionally and nationally. I think that is essential. If you don’t have that, ultimately I don’t think the future would look very bright. It may be the most important point of all for the industry,” Freeman argues.

But strong public support for wind doesn’t necessarily get through to the politicians. “It has been and continues to be a policy-driven business. The political dysfunction specifically as it relates to the wind power industry is a significant risk. There is no question,” he adds.

The last PTC renewal by Congress gave developers a two-year window through 2015 to build projects and get them into commercial operation to qualify for the incentive. In late April, TradeWind had 150MW under construction and turbine investments for another 650MW.

If avoided cost of wind stays the same in the next few years, improving turbine price performance should enhance developers’ profit margins, he says. As things stand, both turbine vendors and developers/asset owners are having to sacrifice margins to hit the power price that utilities require for avoided cost.

“We’ll continue to see low margin, high volume for transactions for venders, developers and owners. It’s not where we really want to be,” he notes. “Hopefully, the technology can outstrip the avoided cost numbers.”

Aside from price, also helping wind expand in the country’s interior has been the ability of independent system operators such SPP, which serves all or part of nine states, and ERCOT in Texas to incorporate and manage larger amounts of wind into their systems.

This has sharply diminished the “fear factor” among regional utilities over adding renewables to their generation mix, he says. More emphasis on natural gas build has helped in this regard.

“We feel like it is a positive for the industry in the sense that ultimately when you think about the challenges of managing a lot of wind power on big systems, the increased amount of gas you have on there is probably going to help the equation,” Freeman says, as both fuel sources are complimentary.

Transmission constraints remain a significant concern for developers in the Plains states despite recent upgrades by ERCOT and SPP from Kansas southward. This a bottleneck in Kansas and Oklahoma which want to export wind energy to southeastern states where utilities are looking to clean their carbon profile as they close coal-fired power plants. TradeWind has been a leader in doing such transactions.

“Those deals are getting harder and harder to do, primarily because the transmission capacity is starting to fill up,” observes Freeman. “Transmission is affected by policy and really long lead-time type stuff.”

It will be tricky finding political and public support for new transmission when load growth is sluggish, partly because of growing emphasis on energy efficiency and expansion of distributed generation at the local level.

“All of which poses a direct threat to any kind of central power stations including big wind projects. Those are biggies in terms of challenges,” he say.

Based in Lenexa, Kansas, outside Kansas City, TradeWind’s focus has been mainly on its home state, Oklahoma and coastal Texas, where project capacity factors are rarely below 45% and can reach 55%.  Its development pipeline includes projects in Colorado and Michigan.

In 2006, TradeWind formed a strategic alliance with Enel North America, a wholly-owned subsidiary of Italy’s Enel. 

“They are an investor in TradeWind and have provided a significant amount of development capital. They typically will be the buyer of projects that we complete and get to where they are construction ready. Then they take it from there through construction and into operations,” Freeman says.