When the energy crisis hit last summer, one Mission Valley-based producer of alternative power was neither helped nor hindered by the skyrocketing energy costs.
Recent developments, however, have led to some changes , some for the better, others for the worse.
SeaWest WindPower’s wind turbines generate “as-available” power, which effectively barred SeaWest from selling its electricity directly into the California Power Exchange (PX) at the height of the energy crisis.
During the crisis, energy producers were charging increasing amounts for electricity sold into the PX. But SeaWest’s electricity was “as-available” , meaning nobody knows exactly when the wind will blow, said Jan Paulin, president and CEO of SeaWest.
Companies committing to provide electricity to the system must deliver on that promise. But if SeaWest had bid into the system and the wind suddenly stopped, the company wouldn’t be able to deliver, he said.
That would have left SeaWest liable for heavy penalties from the California Independent System Operator (ISO), effectively wiping out any potential profits. So SeaWest and other companies like it had to sell their power to larger utilities, which were able to circumvent the problem because they have conventional backup, Paulin said.
However, the prices for selling their power to the utilities were set in 30-year contracts signed in the 1980s , well before deregulation. So SeaWest didn’t see any additional profit for the electricity they sold, even as energy costs were skyrocketing around them, he said.
Now the situation has changed. The privately held company, with 165 employees, 60 of whom work in San Diego, is able to take advantage of some changes implemented as a result of the energy crisis, Paulin said.
Deregulation had initially allowed wind generators to sell their power elsewhere, in addition to the utilities under the 30-year contracts with the utilities.
But it’s only now, as California works to solve its energy crisis by having the state’s Department of Water Resources purchase electricity directly, that wind generators have a ready buyer, he said.
It’s an opportunity for SeaWest, with its capacity of about 400 megawatts, or enough electricity to power about 250,000 homes, of electricity from about 2,500 wind turbines in California and other Western states, Paulin said.
“That’s good news for us. That has now opened up a dialogue between ourselves and the Department of Water Resources to discuss long-term contracts for wind power,” he said.
Although SeaWest now has the ability to enter into long-term contracts, it has not yet done so, since the situation is new. Nonetheless, Paulin is optimistic.
“We’re really back to where we were before deregulation, which is a much better place,” he said. “Because if you have a long-term power purchase contract with a fixed rate, then you have a certain cash flow that you can finance, and therefore you can build and sell wind plants.”
A SeaWest representative met March 5 with water resources officials to discuss the situation. Paulin expects his company will be able to build additional wind farms in the next few years.
However, there have been a few hiccups. For one thing, because of the energy crisis, financial markets are cautious about extending credit to build new plants, he said.
“You have three utilities who have defaulted on hundreds of millions of dollars of obligations,” Paulin said. “It doesn’t create a warm, fuzzy feeling in the mind of a banker when he thinks about lending to a new power project in California, not quite knowing who is buying the power and if it’s a creditworthy entity.”
SeaWest itself has fallen victim to defaults, as Pacific Gas & Electric has curtailed payment for some of the electricity SeaWest provides. That puts the power provider in the unpleasant situation of having to provide its power for free, he said.
SeaWest is in better shape than most. For one thing, other power providers, which run on natural gas, end up having to buy fuel at inflated prices, only to see no payment for the electricity they produce. Also, SeaWest’s contract with PG & E; applies to only 40 megawatts of their total output, so the defaults don’t affect the company as much, Paulin said.
The company has not had to lay off people yet, nor have they had to revise their earnings forecasts, since the company is still accruing receivables. However, the company is in “wait-and-see” mode as it watches the settlement PG & E; is pursuing with the trade association Independent Energy Producers, he said..
“Not getting paid for the power that we have continued to deliver is not going to seriously impact us, but it’s an annoyance,” Paulin said.
Tax Credits Crucial
There’s also the issue of the federal Production Tax Credit, enacted in 1994 and set to expire in December. The credit is a subsidy on renewable power, amounting to 1.7 cents per kilowatt hour of energy produced, he said.
There are various proposals in Congress to extend the credit, or make it permanent. Without that commitment, that makes wind power and other forms of environmentally green energy more expensive, and therefore more difficult to sell, Paulin said.
The subsidy will spur additional investment in renewable energy, including wind power. Due to recent improvements in the design of wind turbines, the cost for wind power is declining to the point where it may soon be able to compete with conventional electricity, while future improvements may reduce the cost still further, he said.
Michael Shames, executive director of the Utility Consumers Action Network, predicted wind power will become an increasingly attractive alternative over time.
“Wind turbines are among the most cost-effective of all the renewable options out there, and I would be very surprised if there weren’t a few energy development companies that weren’t either looking at adding new turbines or replacing existing turbines in California,” he said. “There’s a lot of money to be made.”
Due to the increased cost of natural gas and a number of other factors, the cost of conventionally produced electricity is hovering at about 8 cents a kilowatt hour. That’s the figure Gov. Gray Davis announced for the long-term contracts he recently signed with power providers, Shames said.
Wind generators should be able to provide energy at 4 to 5 cents a kilowatt hour, he said.
“With gas turbines, given what they’re saying it takes to drive those, wind is looking extremely competitive,” he said.