Wind developers in Texas are grappling with supply-chain constraints, reticent lenders in some cases and grid issues as they race to complete projects this year to obtain the federal production tax credit (PTC) at full value.
Rising interest rates are also increasing borrowing costs and tariffs on steel have made turbine towers more expensive – adding downward pressure on developers’ margins.
“The name of the game now is to get all contracts and financing in place to beat the rush,” Ward Marshall, senior director, business development, at Pattern Development, told an Infocast renewables conference here.
“It’s critical you anticipate a platform for labor, equipment and installation,” he said.
Developers report shortages of large cranes required to lift increasingly heavier tower segments, larger rotors and longer blades as projects employ bigger turbines in the 2.75-3.6MW capacity range in ERCOT, the grid operator supplying 90% of the state’s electric load that is located entirely within Texas.
Logistics are typically 9% to 12% of capex cost of a project in ERCOT or in the northern Texas Panhandle region served by the adjacent multi-state Southwest Power Pool grid. Cranes are among the biggest cost items for wind farm construction.
Getting massive cranes and their support equipment to remote job sites is expensive to begin with. Having to do so, when they become available, under ever-tighter project completion deadlines for 100% PTC eligibility is going to raise their logistical and rental costs.
There is also supply tightness for qualified construction crews given the US wind industry’s record PTC-driven expansion with 10GW of new capacity or more likely this year versus 7.6GW in 2018, and perhaps 12GW in 2020, according to private consultants. Some contractors are rushing in crews from other states to keep projects on-track.
Turbine contracts should have already been signed for delivery this year with OEMs’ plants working flat-out, especially GE and Vestas, developers said. Many developers stockpiled turbines to qualify projects for 100% PTC, but some are in other states – another cost as they must be brought by rail into ERCOT’s service territory.
Enacted in 1992 under former Republican President George HW Bush, the 10-year PTC has underpinned the industry’s growth from several hundred megawatts then to 96.5GW on 1 January this year.
The Joint Committee on Taxation (JCT), a congressional committee, estimates the PTC reduced potential federal government tax revenue by $4.3bn in 2018 and will do so by $4.7bn in each of the next two years.
In 2015, Congress approved a phase-out of the PTC, worth $24/MWh, on a 100%-80%-60%-40% schedule starting in 2016. It can be claimed once a project is place in service.
Once qualified at a given level, developers have four years to complete a project without needing to provide the US tax authority with evidence of continuous work – a cumbersome and potentially contentious exercise.
That may be what developers in Texas who can’t get their projects done this year will face if they want full PTC value. In Texas, projects are PTC-qualified by incurring 5% of the project’s total cost – often through purchases of large turbine components or onsite generators.
Developers noted that ERCOT usually accounts for at least 20% of nationwide wind power installations each year and Texas 25%. That would equate to 2GW this year in ERCOT if 10GW is completed nationwide.
Yet, about 31.7GW of wind projects are under study by ERCOT and 7.4GW of those have signed interconnection (IC) agreements, normally the final milestone before construction begins. Clearly, even if 3GW were installed this year, which is unlikely, much of that IC-ready capacity will not be in commercial operation to obtain 100% PTC, developers noted.
American Wind Energy Association data shows that 5.32GW of capacity was under construction at the end of last year in Texas but did not give a number for ERCOT or when projects could go online.
Financing and grid issues
Congestion in parts of the ERCOT grid – the industry and ERCOT differ over its severity – has also led lenders to be more cautious in their due diligence for certain projects, and this has delayed or even stymied financing for certain IC-ready projects hoping to benefit from the full PTC.
With traditional power purchase agreements (PPAs) hard to come by in ERCOT, hedge arrangements for off-take pose basis and volume risks for both the developer and lenders. Revenue certainty is critical and increasingly project owners are having to assume more but not all basis risk - the difference in market pricing between the busbar and hub.
Importantly, most hedges do not excuse the delivery obligation of power from the wind farm if curtailment events such as transmission congestion occur. If the project doesn’t generate or can’t deliver to meet a fixed obligation, the owner must find the electricity elsewhere at prevailing prices. That’s volume risk.
For those reasons, lenders are likely to remain conservative with project financing regardless of PTC eligibility - at least in ERCOT regions experiencing grid congestion, especially West Texas, developers said.
