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.

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.

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.


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