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Top Wind Energy Owners in the USA are Farming PTCs, not Just the Wind

The Production Tax Credit (PTC) in the USA has been a powerful tool for asset owners to ensure the favorable financial health of their projects. To date, more than 75% of the 138GW of operational capacity in the United States has taken advantage of the PTC. Historically, it has provided between a US$10.00 – 26.00 per MWhr incentive on top of the power purchase contract price or merchant market rate.   The PTC has a term of 10 years from the date the project is officially commissioned, after which point the asset owner continues to get paid for the megawatt hours they produce at their power purchase contract price, or their merchant market rate without the extra PTC bonus.   But does losing that PTC bonus really signify the end of profitability for a project? Perhaps more importantly, how will the Inflation Reduction Act of 2022, which makes the PTC a permanent subsidy for the first 10 years of a renewable energy asset, influence the trend of wind energy asset repowering which the USA has seen growing since 2017?   In the past, project CapEx was so high, and capacity factors were so low for wind energy projects, that the full net positive return on capital was only achieved very late in the lifetime of the asset. This is despite the fact that a project may have had a net positive cashflow much earlier in its lifetime.   One consequence of the industry becoming more capital efficient over the last few decades is that a lower project CapEx expenditure coupled with a moderate, but still healthy power purchase contract or average merchant market rate meant that the PTC would provide a higher percentage of the contribution to the overall financial performance of an individual project site.   So the expiration of the PTC for a project site after 10 years can necessarily dent the otherwise healthy financial returns for an asset owner, but not entirely destroy them. Nevertheless, the industry has developed clever solutions to both technical and commercial challenges, and in the case of the PTC expiration, we have seen a significant uptick in asset repowering in the USA since 2017, which attempts to extend the benefit gained from the PTC bonus.   Primarily, asset owners have repowered to take advantage of the PTC renewal on a project which is older than 10 years when the previous PTC expired. However, in more recent times, asset repowering has been favored because a new greenfield project site may have a significant amount of proposed capacity in the interconnection queue. The relevant Regional ISO or other authority in charge of the interconnection will require more time than some project developers are willing to wait in order to get the backlog of connection permits cleared.   Through a repowering, some asset owners are also potentially able to take advantage of a refinancing on the remaining debt for the originally installed project, further enhancing their financial position for the repowered asset.   To date, a total of 101 individual project phases have been repowered in the USA, with 10.63GW worth of repowered capacity installed. This replaces a total of 5,855 wind turbines with the latest and greatest models. These repowered projects take advantage of the existing electrical and civil infrastructure for the project site, which provides some leverage for the site owner. In most cases, they even re-use the existing foundation and tower that was installed on the site originally, with the OEMs providing a tower flange adapter to connect their new nacelle to the old tower.   The side-effect of this repowering activity is that a project which has been re-permitted for a higher nameplate capacity and/or turbines with larger rotors will also almost certainly re-qualify for a brand new 10-year PTC.
To some, this may sound like “gaming the system” in order to take advantage of the PTC for a longer term than originally intended when the legislation was passed and subsequently renewed by the US Congress. Nevertheless, the exploitation of this loophole by the more proactive asset owners in the USA has resulted in some extraordinary benefits, and coincides with a shift in the market dynamics. Now, instead of being wind farmers, some wind farm owners in the USA are PTC farmers.   One such example of this is NextEra Energy Resources, who is, to date, singularly the most prolific asset owner to take advantage of the asset repowering trend in the USA. NextEra has several projects across the USA which already operated at or above a 40% lifetime average capacity factor and they were exceeding their P50 energy yield prior to the repowering, but they were repowered anyway to capture a new 10-year PTC cycle.   For instance, the 147MW Weatherford project in Oklahoma, which was originally installed in 2005, had 98 GE 1.5MW SLE (77m rotor) turbines installed. The lifetime average capacity factor for that project site during its 15-year operational life was 43.57% according to net energy production data reported by the US Energy Information Administration (EIA), which was audited and analyzed by IntelStor.
This project was repowered in 2020, uprating the nameplate capacity to 156.8MW, and it now comprises 98 units of GE 1.6MW wind turbines with a 91 meter rotor. Over the past two years since the repowered project has been in operation, the lifetime average capacity factor has been 45.3%, which is an increase of 1.73% over the old, decommissioned asset. NextEra has increased their output, improved their capacity factor and maintained an energy yield above their P50 quotation while taking advantage of a new PTC until 2030 on top of their power purchase contract of $US29.49 with the Southwest Power Pool (SPP). According to IntelStor estimates, this repowered project should achieve a full net positive return on capital by 2026 if they can maintain this same capacity factor and their operational costs do not significantly increase.   But, even if the performance of the newly repowered asset decreases, companies can still benefit from the PTC extension through an asset repowering. Case in point, Berkshire Hathaway Energy (BHE) has also taken advantage of the market trend for ‘early’ asset repowering. BHE has tended to repower assets after 10 – 12 year of operational life instead of the full planned 20 year plus lifetime of the asset, simply because the PTC provides them extra margin.   Their 99MW Victory project in Iowa which was commissioned in 2006 with 66 units of GE 1.5SLE, was repowered in 2017 with 66 units of GE 1.6-87. The decommissioned project had a lifetime average capacity factor of 41.62% with the newly repowered project having a lifetime average capacity factor since 2017 of 38.31%. In these circumstances, why repower the asset only to see the performance potentially degrade? For BHE, the PTC benefit more than makes up for the modest dip in their lifetime average production.   Importantly, for this BHE-owned Victory project, they are also serving as the power offtaker. That means, in order to satisfy the US Federal Energy Regulatory Commission (FERC), an internal power purchase contract technically exists between the SPV company which owns the wind farm and their utility entity which takes the wind farm’s power output and feeds that power to the grid.
BHE benefits from the extended PTC, even with lowered performance of the repowered asset because they make money based on the spread between the generation costs of the SPV company which owns the Victory project, and the sale price of the electricity that the utility company charges to end consumers, whether they are retail or industrial electricity buyers   With a fixed price contract in place for their power offtake between their two BHE-owned entitles, the PTC provides extra revenue to the wind farm SPV company for each MWhr produced. For this type of asset, the generation costs remain relatively fixed since BHE owns the project SPV company and the power offtaker, so they receive an added bonus for the power they were going to produce and offtake anyway to support their electricity retail sales business.   Further encouraging the trend for asset repowering in the USA are the capital costs for repowering a project site compared to a brand-new greenfield site development. Capital costs for asset repowering in the USA have been fairly consistent at just under US$400,000 per MW in the past 3 years. Compared to a US$1.3 – 1.8 million per MW CapEx cost for a greenfield site, the asset repowering looks like a much more efficient use of capital, especially when factoring in the PTC extension and the potential for reduction in the debt service payments on the remaining residual value of the original asset.   With that in mind, it is important to note that by the end of 2022, the USA will have close to 47GW of operational wind energy capacity that is at least 10 years old. Asset performance degradation over time due to mechanical wear and tear as well as other factors typically goes hand in hand with an aging fleet. There is significant potential for more companies to take advantage of this market trend in asset repowering, but a scientific approach can weed through the fleet to find the high probability sites which would benefit the most from asset repowering and the corresponding PTC extension.   IntelStor analysis of the performance of all operational wind energy assets in the USA was also undertaken in order to determine the candidate project sites which should be at the top of the list for asset owners to repower. In order to complete this analysis, it is necessary to understand a bit more about energy yield analysis.   This compares actual power output to the predicted power output of the wind energy park during the pre-construction and project development phases. This type of analysis helps to determine if a project site will produce the necessary energy yield from a specific combination of wind turbine nameplate capacity and rotor size that will provide the asset owner with sufficient financial payback during the planned lifetime of the asset.
At more than 5.2GW, Iberdrola is the owner of the largest portion of the operational asset base in the USA which is older than 10 years since the date of commissioning. They also have the largest proportion of their operational fleet above 10 years of age which is significantly under-performing their P50 energy yield. To date, Iberdrola has only repowered 80MW of capacity in the USA, so they stand to benefit the most from the permanent PTC extension which was part of the Inflation Reduction Act of 2022.
Beyond Iberdrola, asset owners in the USA including NextEra Energy Resources, EDP Renewables, RWE, Clearway Energy Group, Invenergy, BHE, AES, Duke Energy, BP Wind Energy and American Electric Power (AEP) all own or co-own an asset portfolio of more than 1GW worth of onshore wind energy projects which are already 10 years old, or will be by the end of 2022.   While asset age is not the only pre-requisite for an asset owner to decide to repower, the industry can now take full advantage of this proven business model. Repowering and gaining an extension on the PTC provides asset owners and their investors with additional financial security thanks to the pioneering innovation of a few companies like NextEra Energy Resources and Berkshire Hathaway Energy (BHE).   Now that the PTC is permanent thanks to the Inflation Reduction Act, all wind energy asset owners in the USA can ensure everyone else in the industry will capitalize on this trend as well.
IntelStor is at the nexus of technical, legal and market research in order to collate intelligence and convert it into action. Our strategic market analysis has led to the funding justification of over US$600M in R&D investment and the development of multi-million dollar product and service offerings. We have provided legal, technical and commercial due-diligence for over US$1.8B in M&A with clients based throughout the Americas, Europe and Asia. More information is available at www.intelstor.com.