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Colorado’s Cedar Point Wind Farm – Energy Strategy or Corporate Welfare?

“Speaking subjectively, when we provide natural gas, coal, or nuclear with subsidies, we get thousands and thousands of gigawatt-hours of constant, concentrated, and reliable electricity that drives our economy. When we provide solar and wind with subsidies, we do not get enough electricity to pay back even as much as the initial investment; and that electricity is not constant, not concentrated, and not reliable. In fact it has to be continuously backed up by natural gas, or nuclear, or coal just to keep the lights on.”

- Jerry Graf, Energy Subsidies in the USA (March 2013)

Earlier this week, in commentary under an article on a different site, I was informed that my assertions that current wind and solar technologies were less-than-effective alternative-energy sources were “not true.”

I was asked to search for information regarding “Xcel wind & solar”, and also informed that Xcel’s projects were providing energy with competitive Power Purchase Agreements (PPAs) as low as $60MWh.  No additional details regarding any specific projects were provided.

Following up on this, I performed some research regarding Xcel Energy wind projects. I found a specific Xcel wind turbine sample project to analyze, the Cedar Point Wind Farm near Limon, Colorado, east of Denver.  I chose this project for two reasons:

1. I was able to locate the specific project details necessary.

2. It is in mountains in Colorado and therefore should benefit from some of the best wind resources available in the USA (best case scenario).

My Cedar Point Turbine Analysis is linked here.

Employing a realistic analysis using the real average annual wholesale cost of electricity ($50/MWh) and accounting for inflation and O&M costs, a reasonable expectation is that the wind farm can pay back the initial $535,000,000 investment in 20 years; just about at the end of life for the turbines. This is obviously NOT an acceptable business case, but it is about the best performance of a wind turbine project that I have seen (due to the mountain wind speeds).

The question is, “Why would Xcel (and the other energy companies involved) invest $535 million in something that would take 20 years to pay off the initial capital cost, and that would be at end-of-life at about the same time it finally does pay off?”

The answer is in the government grants and subsidies:

 · I could not find specifics regarding the PPA (other than one does exist), but we can take the initial information that they are selling for $60/MWh.

· The federal government is providing a Production Tax Credit of $22/MWh.

· A federal stimulus grant for $145,596,213 was provided, to offset the construction costs.

· Colorado “renewable” energy mandates provided an incentive in driving this project.

· Adding the PPA and the PTC and the grant; and assuming a 20-year lifetime production of 16,943 GWh; the U.S. federal government and the State of Colorado are providing direct subsidies in excess of $40/MWh to this project.

Taking all this corporate welfare into account, the payback for Xcel (and the other energy companies involved) is actually more like 8 years; at which time they start raking in the cash for the next 12 years until the wind turbines reach end-of-life. This is a pretty good deal for everyone except the taxpayers and ratepayers.

Once again, other than the damage to the economy of the waste itself, the real problem with mandating and subsidizing non-viable energy technology projects is that this distracts us and diverts resources from other efforts to improve our energy production strategy. 

The U.S. needs a change in energy strategy.  The change, however, needs to be determined by scientific evaluation of fact and logical analysis of performance and economics; not by emotion, political considerations, and “feel good” methodologies.

14 comments

1 Wayne Lusvardi { 11.20.13 at 1:57 am }

Wind farm energy even at $0.06/kWh is misplaced in rural Colorado or even urban Colorado.

The only justification I can think of for such massive subsidies is that wind farms can provide electricity to cities in air basins where the air is stagnant and there is an inversion layer to cause smog, as can be found in California. But Colorado has three cities ranked with some of the best air quality (Colorado Springs, Ft. Collins, and Pueblo) and no cities ranked in the worst cities for air quality. So there are no positive externalities (or social dividend) to be gained from wind power located in the high elevated and windy area of Limon, Colorado; or for that matter in Boulder or Denver, which do not have significant air quality problems.

Couple this with the fact that wind energy is mainly generated for a few hours at night and wind power at even competitively low prices doesn’t make sense, except possibly for peak load hours. But those hours are not typically at night. If there was just one reform of wind power subsidy policy it would seem to me to be to deny subsidies where there is no positive externality of clean power generated to replace polluting power in urban air basins.

As most readers of this website already know, the $60 per mWh or $0.60 per kWh does not consider the full system cost of 90 miles of new dedicated transmission lines to Denver, new regulation systems to avoid interfering with the larger energy grid, and redundant gas-fired power for backup. Consumers should have disclosed what the full system costs are. Was a new dedicated transmission line needed to link the Cedar Point Wind Farm to the grid? Will the wind machines be abandoned in place at the end of 20 years causing visual blight, as has happened in California?

2 Wayne Lusvardi { 11.20.13 at 3:09 pm }

The renewable energy industry’s solution to the intermittency and unreliability of power when needed is to build out three times the renewable peak power capacity of the grid. Renewable power advocates incredibly claim that overbuilding green power by a factor of 3 would also be cheaper than conventional power. Source: “Another Study Suggest Power Storage Not All That”, Rewire, March 29, 2013.

3 Ray { 11.20.13 at 4:26 pm }

The anticipated 20 year lifespan of the turbines may be a trifle optimistic.
http://www.thecourier.co.uk/news/scotland/wind-turbines-lifespan-far-shorter-than-believed-study-suggests-1.62945

4 Jerry Graf { 11.20.13 at 8:09 pm }

Wayne / Ray –Thank you both for reading and commenting.

I agree that my article and analysis is, in multiple ways, deliberately overly generous to the wind turbines. The point to be made is that, despite this, any attempt at real analysis is highly unfavorable.

In the notes in the analysis I mention that I am not accounting for:
The cost of the backup generation system (probably gas turbines) that will be necessary.
The fact that the wind turbines will probably not last the 20 years planned.
The fact that and expectation of reduced pollution is at least suspect because of the need to operate the back-up and base load system inefficiently.

We could also note that my use of $50/MWh as the annual average weighted wholesale cost of electricity for the ROI analysis is a bit over-generous for Colorado as well.

Ray – Thanks for the additional link. I found information regarding the O&M costs and expected lifespan being less than 20 years (i.e. maybe as low as 10-15 years) at The Wind Operations and Maintenance Report that I link to; but it is good to have additional references.

5 Cedar Point Wind Farm – Colorado | Jerry Graf - Energy Strategy { 11.20.13 at 9:03 pm }
6 Tom Tanton { 11.21.13 at 7:53 am }

Overbulding capacity to compensate for intermittency is a fools errand at best. ZERO percent (capacity value) times any nameplate capacity is still zero MW when you need it.

7 Michael Goggin, AWEA { 11.21.13 at 2:24 pm }

Wow, there are so many factual errors in your “analysis” I don’t know where to begin:
1. When 1603 was available, a wind project could receive only one of the PTC, ITC, or 1603 grant. No project can or has received both the PTC and 1603 grant, so your claim about the size of the incentive is about twice too big.
2. Your PPA price is also about twice too high. FERC 1 forms publicly disclose all PPA data.
3. Your O&M costs are also about twice too high. See pages 38-40 here for real-world data: http://emp.lbl.gov/sites/all/files/lbnl-6356e.pdf
4. Limon is not in the mountains, and the wind speeds and capacity factors there are hardly exceptional when compared to other parts of the Midwest.
5. You don’t account for the hedge value provided by incorporating a zero fuel cost resource into a utility generating portfolio. What if wholesale electricity prices go up, as most expect they will?

Michael Goggin,
American Wind Energy Association

8 Jerry Graf { 11.21.13 at 7:44 pm }

Tom – Thank you also for reading and commenting, you are correct to point out the misdirection involved in siting nameplate capacity as if it were pertinent.

Also, to add to my prior comment, another way my analysis is deliberately overly generous to the wind turbines is that it assumes every MWh produced will actually be used. In other words, the analysis allows the assumption that the only factor reducing the capacity utilization is the availability of the wind; when, in fact, fluctuations in the demand and in other contributors to the supply will cause additional loss of utilization (i.e. lower capacity factor)

9 Jerry Graf { 11.22.13 at 7:26 pm }

Responding to Michael Groggin (AWEA):

I am sorry for the delay. Your comment was posted earlier, but I have been at work and this is my first opportunity to respond.

To your points:

1. You, of course, would be an expert at obtaining taxpayer funds to subsidize wind farm projects and I am not; however, I found that the production tax credit of $22/MWh was referenced in both the Denver Business Journal and the Denver Post.
http://www.bizjournals.com/denver/blog/earth_to_power/2013/09/vestas-lands-order-to-build-610.html
http://blogs.denverpost.com/opinion/2012/11/02/wind-production-tax-credit-critical-colorado-jobs/27817/
The stimulus grant was referenced in the Colorado Observer
http://thecoloradoobserver.com/2012/02/show-me-the-stimulus-part-2-the-1603-program-in-colorado/
If you know of a reference where one can find complete and total accounting of all government grants and subsidies provided to a given project, please let me know. I usually find this information notoriously and mysteriously hard to dredge up.

2. As I indicated clearly in the my article, my information regarding the value of the PPA was provided to me informally; and the references I could find indicated a PPA exists, but were also mysteriously vague regarding the actual terms of the PPA. Frankly, I thought that $60/MWh sounded a bit low, but if you have a source and an explanation as to how the PPA would (could) be less than the average annual wholesale cost of electricity as you have indicated; again, please let me know. Please also refer to the quickly re-calculated ROI in my response, below.

3. I applied O&M costs at a rate of $25 / MWH ($0.025 / KWh). This is actually less than the average figure indicated in The Wind Energy Operations & Maintenance Report clearly referenced in my analysis.
http://www.slideshare.net/WindEnergyReports/summary-the-wind-energy-operations-maintenance-report
The report states: “ O&M costs for wind power are double or triple the figures originally projected, they are particularly high in the U.S. – $0.027/kWh or €0.019/kWh is the average values of O&M costs obtained from report surveys.” Also, as a gut check, $21 million a year to maintain and operate a system costing $535 million (<4%) seems reasonable; especially considering the system in question is 139 units of large rotating electro-mechanical equipment positioned outside in the weather on towers 80 meters high.

4. Limon, Colorado is roughly 60 miles from Denver (the “mile high city”), and Limon’s elevation is 5,377 feet. The average wind speed of 8.5 m/s (19 mph) I credit to this location is significantly better than other land based locations in the USA, and is the best in Colorado, save for the very peaks of the snow caps of the Rockies (see wind map in my analysis). I believe NREL classifies areas with average wind speeds of 8.0 to 8.8 m/s as “outstanding” resources. Also I credit this project with a capacity factor of 38.7% and the US FERC initially estimated a more generous 40%. This is significantly higher than the national average of 31.8% indicated by the EIA for all reporting wind projects in 2012. In addition, I specifically indicated that I was looking for an example of an Xcel Energy project. To my knowledge, Xcel has other projects in TX, MN, and NM, but these locations typically boast lesser capacity factors for wind farms. I picked the best-case Xcel location I could find.

5. I clearly apply an annual inflation rate 2.5% to the value of the electricity in my Real Cash Flow analysis. This is stated up front in the Summary and also evident in the Real Cash Flow analysis. Also note that, when I did the “government assisted” cash flow analysis for comparison, to be very fair I deliberately removed this inflation rate on the value of the electricity because I assumed the PTC and PPA would be a locked-in flat sale price for the electricity for 20 years.

For the sake of argument, we can re-calculate a quick ROI analysis based on the numbers you have proposed. A PPA price of $30/MWh; no PTC; and $10/MWh O&M costs leads to a net return of $20/MWh. The $145 million stimulus grant reduces the net investment to $390 million. The wind turbines provide about 850,000 MWh per year, for an annual return of $17 million. This would allow a payback of the net investment in about 23 years, except turbine life is 20 years (maybe).
It is, therefore, impossible for the wind farm to return even so much as the net investment. These numbers do not make sense. Why would anyone do this? There must be funding coming in from other unidentified sources to offset the losses.

You’ve said nothing to refute the main point of the entire article; that $535 million for a system that provides an arguable and intermittent 850,000 MWh per year is a bad deal. You are critical of my analysis as it reflects unfavorably on your interests in wind energy; but you ignore the many ways in which my analysis is deliberately overly generous to the wind turbines; as noted in the commentary above and in the article itself.

10 AWF { 01.07.14 at 6:52 pm }

Based on your introductory paragraph (“Energy Subsides in the USA”), I thought that you might be suggesting that some energy subsidies are OK and others are not…but, when I read the entire blog post from which you pulled that opening paragraph, you state that you are “very open to getting rid of all subsidies.” Glad to hear that. In order to truly level the playing field and let the market pick a winner, all subsidies need to be eliminated. For example, letting the “temporary” Price-Anderson Act expire would require nuclear energy to pay the true cost for its liability insurance to cover potential exposures from a nuclear disaster from the marketplace…But as of now, the market is unwilling (or unable) to cover a nuclear disaster without Price-Anderson (read: massive government subsidy) as a backstop. By the way, Price-Anderson was passed in 1957 as a “temporary” measure to help the nuclear industry get going but it keeps getting extended (most recently in 2005 until 2025).

Finally, all forms of energy have been subsidized, rightly or wrongly, over our nation’s history. For some interesting analysis on all energy subsidies from the 1800s to the present, take a look at this white paper that can be accessed at this link: http://www.dblinvestors.com/resource/what-would-jefferson-do/

11 AWF { 01.07.14 at 7:18 pm }

And with regards to whether a renewable energy facility such as Cedar Point could take BOTH the cash Grant and the Production Tax Credit, the American Recovery & Reinvestment Act (ARRA), in Section 1104, specifically states that Internal Revenue Code (IRC) Section 48 was amended to specifically state that only the Grant OR the Investment Tax Credit (IRC Section 48) OR the Production Tax Credit (IRC Section 45) can be taken–not all of them. Unfortunately, relying on news reports as a source can be suspect. Although it is tedious, reviewing the source document, such as the ARRA, is preferable. Note that Section 1603 of the ARRA created the cash Grant in lieu of the other tax credits. Here is the exact language from Sec. 1104 of the ARRA:

SEC. 1104. COORDINATION WITH RENEWABLE ENERGY GRANTS.
Section 48 is amended by adding at the end the following
new subsection:
‘‘(d) COORDINATION WITH DEPARTMENT OF TREASURY GRANTS.—
In the case of any property with respect to which the Secretary
makes a grant under section 1603 of the American Recovery and
Reinvestment Tax Act of 2009—
‘‘(1) DENIAL OF PRODUCTION AND INVESTMENT CREDITS.—
No credit shall be determined under this section or section
45 with respect to such property for the taxable year in which
such grant is made or any subsequent taxable year.

12 AWF { 01.10.14 at 5:25 pm }

Given the tone of your post, I thought this news release from a utility in Nebraska might be of interest to you. Contrary to your assertions that wind power has a low energy value, in this case wind power provided about 10% of its record peak demand during a recent cold spell–at a fixed price. Fortunately for these Nebraska consumers, the utility didn’t need to turn on its gas peaking units that would have been about 300% more expensive than usual due to extreme price moves in the spot natural gas market. Wind is simply fuel for electricity production (no different than coal or natural gas) and serves as an excellent hedge against fuel price volatility.

http://www.nppd.com/2014/nebraska-customers-set-time-winter-peak-nppd/

Enjoy!

13 Jerry Graf { 01.11.14 at 4:12 pm }

AWF,

Per the NPPD link you have provided, during the recent record setting cold weather we just experienced (giving us the coldest temperatures in 2 decades in most cases), the power capacity demand in Nebraska peaked at 2256 MW for a one hour period; a new record WINTER peak for them. During this time of record breaking cold, while the wind was also blowing much more than average, wind power contributed slightly less than 10% of this capacity, 216 MW, throughout this particular one-hour period.

There are, however, several other considerations to take into account:
1. The total electricity produced by the wind for this one-hour period during these hugely uncommon and extreme weather conditions was still only 216 MW-hours.
2. The new record WINTER peak capacity demand is dwarfed by the usual SUMMER demand. It is even significantly lower than the annual AVERAGE capacity demand. Per information from the EIA (http://www.eia.gov/state/seds/sep_fuel/html/pdf/fuel_use_es.pdf ), in 2012 NE used an estimated 30,828,000 MW-hours of electricity for the year. This equates to an AVERAGE hourly capacity demand of 3519 MW.
3. How much electricity did the wind turbines produce during the SUMMER peak demand periods, which are much higher than AVERAGE and hugely more significant than the WINTER peak demands, last for far more extended periods of time, are experienced during periods that provide the least amount of consistent wind, and are experience during periods when natural gas demand (and cost) is typically low? The picture would be far different during a one-hour peak period in July or August when there is more demand and less wind.

More important than focusing on any one-hour period of time, the correct questions to ask are:
How much did the wind turbines cost?
Who paid for this?
How much do they cost to operate and maintain?
Who pays for this?
How much real useful electricity do they produce in a one-year period?
How is the electricity generated when the wind is not blowing, and what does this cost?

In the case of the Cedar Point Wind Farm discussed here, there is no way to make $535,000,000 for a system capable of producing only an arguable and intermittent 850,000 MW-hours per year into a good thing.

14 Jim Thorn { 03.28.14 at 7:38 pm }

I have read your 11/13 analysis of Cedar Point wind farm, east of Denver. I have discovered, by watching windmills in my corner of southeast Washington, that Doppler weather radars can see windmills if the windmills are turning. Doppler weather radars in Pueblo, Colorado, and Goodland, Kansas, and Cheyenne, Wyoming, seem to indicate that the Cedar Point windmills are rarely turning. This would mean that average wind speed there is less than the 19 mph claimed in your analysis. Do you know of any published wind speeds (that is, honest-to-goodness measurements, not computer model predictions) that could be used to verify the claims?

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