Wind Power for the Washington, D.C Government: An Appraisal of Options

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1 Wind Power for the Washington, D.C Government: An Appraisal of Options April 2011 Authors: Michael Philips Charlie Fitzgerald Jon Miles Energy Ventures International P.O. Box 5844 Takoma Park, Maryland (301) P age

2 Abbreviations and Acronyms CREB DSC EPC IRR KW kwh LCW LMP MW MWh NOL NPV PJM PPA PTC REC RPS T&D TE WACC WGES Clean Renewable Energy Bond debt service coverage engineering, procurement and construction internal rate of return Kilowatt kilowatt hour levelized cost of wind locational marginal pricing megawatt (1,000 kilowatts) megawatt hour (1,000 kilowatt hours) net operating losses net present value Pennsylvania Jersey Maryland grid, the regional transmission organization serving a number of mid Atlantic and Midwest states, including DC. power purchase agreement production tax credit renewable energy credit or certificate Renewable energy Portfolio Standard transmission and distribution tax equity weighted average cost of capital Washington Gas Energy Services 2 P age

3 Table of Contents Introduction 4 I. US Wind Background 6 II. Acquiring Wind Generation 7 III. Siting and Size 10 IV. General Legal Issues 27 V. Cost 27 VI. Potential Project Revenues 35 VII. Development Timeline 37 VIII. Financing 38 IX. Transaction Structuring Options 53 X. Financial Feasibility Analysis 56 XI. Risk Analysis Rating Underwriting Criteria 90 XII. Sensitivity Analysis Testing Key Assumptions 91 XIII. Summary of all Financial Results 97 XIV. Preliminary Findings and Recommendations 105 Appendix A: Planned & Existing Wind Farm on the PJM Grid 3 P age

4 Introduction The purpose of this report, commissioned by the Government of Washington, D.C. s District Department of the Environment (DDOE), is to identify ways for the DC government to acquire the wind power for its own facilities in a way that allows it come out ahead financially that is, to pay less for wind power than it now pays for its conventional electricity. To do this, the report seeks to determine whether it makes financial sense for the District to add direct generation wind energy to its electricity portfolio, and how it would go about doing so. Adding direct generation means that the District would acquire the electricity produced by a wind farm located on the local PJM grid at the marginal cost of producing a unit 1 of that electricity in other words, the District would effectively own, or take an equity position in, a wind farm and then either offtake the power produced by the farm or sell the generated electricity and use the income to offset its electric bill. Essentially, this report asks the question: Does it make economic sense for the DC government to take an ownership position in a wind farm and then supply its own facilities with the electricity at a lower price than it now pays for its electricity? The short answer to this question is yes. The fundamental analysis to perform when assessing financial feasibility of such a project is to compare the average per unit cost of wind production over the lifetime of the project (or levelized cost 2 ) to the per unit price the District would otherwise pay for energy over the same time period. The result is a stream of cash flows from the savings margin achieved between the cost of producing (and delivering) wind energy directly compared to what the District would otherwise have paid for that portion of its electricity bill. After taking all development costs into consideration, if the project can provide a reasonable financial return within acceptable bounds of risk from those savings, it will be deemed financially feasible. In addition to the determination of financial feasibility, this report also reviews the technical aspects of how the District might add wind generation to its portfolio, scenarios under which such a project could be viable, and the risks and challenges that might be involved in each. It also identifies some upcoming wind projects in the region in which the DC government could potentially participate from an equity standpoint or from a special wind power offtaking arrangement. The DC government already buys wind energy. But it buys it in the form of renewable energy credits (RECs). RECs are purchased separately from electricity and are bought at a premium above and beyond what the 1 A unit of electrical energy is typically expressed in terms of a kilowatt hour (kwh) or Megawatt hour (MWh) where one kwh is produced by a 1,000 w generator operating continuously for one hour. 2 Levelized cost is an industry term used to compare the aggregate power delivery costs from direct wind generation to the cost of power in the market with which it must compete over a specified time frame. In such an analysis, costs are levelized by discounting all future costs to the present using an appropriate discount factor, adding that to present costs, and dividing by total energy expected to be produced over the project lifetime. 4 P age

5 government pays for electricity. The RECs allow the government to claim it is purchasing green power, but they are not a good deal for the government economically. First, they are an extra expense. Second, they don t even provide the government with a hedge against rising conventional electricity prices. That is, even if the government were to purchase wind RECs equivalent to 100 percent of its electricity consumption, higher coal or natural gas prices would still result in electricity bill increases. We therefore sought to find a way for the DC government to purchase wind power in a way that would provide not just environmental benefits but economic benefits as well. We examined a range of options. First, we examined the possibility of the DC government finding a suitable windy location within the PJM grid, hiring an EPC contractor to build the wind farm, and hiring an operator to run it. This is a viable option, but also a risky one. The DC government has no experience managing a project of this kind and it would face many project risks as well as taking on the full brunt of the financial risk. The second option we examined was the possibility of the DC government buying a share of an existing wind farm. Some wind farms on the PJM grid are already either ten years old or close to it. Many of the original investors were motivated by the tax benefits, and we reasoned they would be looking to exit their investment because the federal wind production tax credit is only good for ten years. However, where a tax motivated investor is exiting, it appears the other partners are simply buying the tax investor s share and would not welcome a new investor. This option may still be viable, but it will take further contacting of ownership groups. Also, buying into an aging wind farm would involve some additional O&M risk and would not be as satisfying as buying into a new one employing the latest technologies. The third option we examined the DC government joining an ownership group for a new wind farm. DC would take a minority position and leave the major decision making on siting, technology choice, permitting, etc. to an experienced senior partner/developer. Pursuing such an option would mean finding such a senior partner. Most wind farms are built by owner/developers such as FPL Energy or Iberdrola, who raise the capital, build the wind farm, and operate it without any outside partners. There is no opportunity for the DC government to gain a stake in these wind farms. However, we identified some experienced wind developers, particularly in Virginia, that are looking for additional equity partners and are open to the idea of a municipal government such as Washington, D.C. playing that role and bringing tax exempt financing to the deal. We think this is the best option for the DC government. In taking an ownership position in a wind farm under any of the three options, the DC government would not actually receive the electricity from the wind farm. The electricity would simply be fed into the grid and be bought by a utility such as Pepco or Allegheny or one of the other distribution utilities operating on the PJM grid. Owners of wind farms want to sell their electricity at the highest price they can get. They also want to sell the RECs. As an owner, the DC government would get a share of the income from the electricity and REC sales. While there s a possibility DC could work out a deal whereby its income could be in the form of taking a portion of the electricity at cost, this could be complicated and would involve the other partners 5 P age

6 agreeing to the extra complication. A more straightforward approach would be for the DC government to simply take its share of the income and then use it to offset its electricity bill. For many wind farm investors, the main benefit to investing in wind farms is the tax benefit chiefly, the federal production tax credit and accelerated depreciation. Because the DC government is not a tax paying entity, it cannot benefit from the tax incentives. However, as a government entity, it can sell tax exempt bonds and thus bring low cost financing to the project. In exchange for bringing in low cost debt, it could potentially negotiate a larger ownership share of the wind farm. The main obstacle to the DC government taking an ownership position in a wind farm is the capital cost. Ownership of say, a 50 MW share of a new wind farm, representing somewhat less than half the DC government s electric bill, will cost $90 million or more. There are various sources of grants and loan guarantees to help defray the cost, but ultimately the government will need to sell municipal bonds to cover most of the cost. The DC government is currently at its bonding limit, so the question of financing a wind farm at this point in time is academic. When bonds can once again be issued, the wind farm will face the politics of being in competition with other uses of bond proceeds. But unlike the other uses, the wind farm investment will generate tangible cash income for the city. The income can be used to repay bondholders and reduce the government s electric bill. A revenue generating project like a wind firm can be financed with revenue bonds in other jurisdictions. That is, the security for the bondholders is the revenue from the sales of the wind generated electricity and RECs. There is no need to encumber the tax base of the City. Non revenue generating activities like building schools or repairing streets, are typically financed with general obligation bonds, which obligate a portion of the jurisdiction s tax base to repaying the bonds. There is a finite amount of tax revenue and thus a finite amount of bonds that can be sold and repaid with that tax revenue. Although a wind farm would not have to rely on the tax base to repay the bonds, all bonds sold by the City of Washington, D.C. encumber the tax base. Thus, according to City officials, revenue bonds are not a financing option for the wind farm. I. US Wind Background Wind energy in recent years has become a critical part of America s clean energy future. Wind energy is consistently one of the most cost effective and proven renewable energy sources for producing utility scale electricity. Recent developments in the financial sector and policy arena have brought renewable energy options into the main stream, and in some cases have made renewable energy cost competitive with traditional technologies Wind energy projects can vary in size from single units sized for residences or small businesses, to mid size projects known as distributed wind power systems that might serve a small community, to larger projects 6 P age

7 that are often characterized as commercial or utility scale projects, or wind farms, and are designed to provide wholesale electricity to utilities or to an electricity market. Large wind energy projects can be built on land or offshore. However, to date, wind projects in the United States have been built only on land. The wind industry, as well as state and federal agencies, conventionally discuss wind turbines in terms of the power generating capacity of a single turbine: small turbines are those with a generating capacity of less than 100 KW, and large turbines are those with a capacity greater than 100 KW. From the perspective of the public, the physical size of a turbine, the number of turbines at a specific site, the land area of the wind farm, and the broad purpose of the installation (for example onsite versus utility scale) are key considerations in determining their support or opposition. The emphasis of this report is on large, utility scale, commercial wind power projects. Typically, a utility scale project is designed and financed by one or more companies experienced with large scale energy projects, and is usually owned and operated by a for profit corporation or independent power producer. Large wind power facilities in general comprise a network of individual wind turbines that are connected to one another and to a substation by way of an underground electrical connection, and subsequently to the electrical transmission system. Typical projects range in generating capacity from around 5 to several hundred megawatts (MW), where small projects may involve only a few turbines, but hundreds in the case of larger projects. The largest U.S. wind farm is Shepherd s Flat, an 845 MW project under construction in North Central Oregon that will generate enough electricity to power 235,000 homes. II. Acquiring Wind Generation There are three broad options for the District to acquire wind energy. Two of the ways generate net electricity expenditure savings over time for the District compared to its current energy expenditures. The third option, included in the list below, is the business as usual strategy and involves a continuation of the District s current strategy of purchasing retail wind RECs. A brief description of each option follows. 1) Owner of a wind project This is the option of primary focus in this report. It represents the District s specific desire to understand the feasibility of owning or co owning a wind farm and directly offtaking wind energy as close to the marginal cost of production as possible. This may be done in three ways: A) Directly, through construction and outright ownership of the project entity which owns the asset. The District would construct a new wind farm by contracting with a private developer under a build transfer (BT) or build operate transfer (BOT) relationship. ; B) Indirectly through a private partnership, such as a lease or pre paid PPA; and 7 P age

8 C) Purchase a portion of an existing wind farm that is already operational. The least risk option from a development perspective, such a transaction would thus theoretically require the highest acquisition premium. Under all three options, the District could offtake the electricity, but would more likely sell the electricity and use the income to offset its electricity bills. Under the offtaking option, the District would not be literally offtaking the electrons generated by the wind project. Rather, the power generated would be fed into the grid and the District would take out the same amount of power at the other end (possibly minus transmission losses). In our opinion, the most viable ownership option is to take a minority equity position in a wind farm that sells its power under a PPA to a large 3 rd party offtaker such as an energy supplier or traditional utility. Net profits from operating the wind farm would then be used to directly off set the District s current electricity bills in proportion to the District s ownership stake in the project. In this scenario the District would approach a developer of a wind project and either: a. negotiate an ownership stake in a larger project based on a percentage of the wind power desired; or b. strategically partner with the developer during financing period using a tax efficient indirect ownership structure, such as a lease. 2) Offtaker of a commercial wind project This option involves purchasing power directly from a wind farm. It would be conducted by requesting specific wind power delivery price bids from developers and owners of wind projects under either a standard or pre paid PPA contract. If there were a bid that achieved electricity savings in an amount that compensates the District for any attendant risk, this could prove a financially feasible option. It could possibly be handled as part of an energy delivery contract with the District s contracted scheduler 3, currently Washington Gas Energy Services (WGES). This may be a suitable strategy for the District, but it involves paying an equity premium or fee to the project owner/developer and thus it may be more difficult to achieve the high level of cost savings normally associated with a direct offtake scenario. However, this option also comes with less risk and should be evaluated to see if it presents the best option from a risk return perspective. A) Standard consumption based (pay as you go) PPA with a private wind farm owner/developer 3 A scheduler is an entity, often a for profit company that is responsible for acquiring and delivering power from multiple energy generation sources and suppliers. The District s current scheduler, responsible for supplying 100% of the District s electricity requirements, is Washington Gas and Energy Services (WGES). 8 P age

9 The District could seek price bids in a competitive process with a private wind farm owner/developer for a specified amount of wind under a PPA. The PPA could take various structures each with potentially different economic return and risk profiles, including: long term (20 years), pay as you go medium term (10 years) pay as you go w/ option to purchase at end of term If financially attractive this would allow the District to achieve its cost savings goals while eliminates all upfront capital requirements and development risk for the District, a large plus from the perspective of the District. B) Pre paid PPA with a private wind farm owner/developer The District could seek price bids in a competitive process with a private wind farm owner/developer for a specified amount of wind, pre paying for a guaranteed amount (over a specified time frame) at some discount relative to the consumption based PPA price: long term (20 years), greatest discount medium term (10 years), lesser discount, but option to purchase at end of term This would still require the District to come up with some type of up front finance arrangement, but may prove more cost effective and generate even more savings than a standard PPA over the course of project life. 3) Buyer of Renewable Energy Credits (RECs) only Adding RECs is included as an option in this report because RECs are already included in the District s generation portfolio and are therefore already accounted for in the baseline of the business as usual scenario to which any other potential option must be compared. The other options above will allow the District to discontinue REC purchases once the REC purchase contract ends, thereby providing a cost savings to the District. Each of the above options and sub options has its own risk profile, transaction challenges, and general advantages and disadvantages in relation to the goal of the District generating savings through the direct offtake of electricity from wind. These issues are summarized in Table 1 below: 9 P age

10 Option Project Risk Key Challenges Profile 1. Direct ownership High Maximizing available subsidies given tax exempt status of District Structuring a public private partnership that shares risks evenly Farm yet to be built and therefore output completely unproven District taking on majority of development risk may be possible to manage through minimum performance guarantees with EPC contractors 2. Partnership Medium Negotiating a partnership that gives District enough control Structuring a public private partnership that shares risks evenly, maintains access to private sector subsidies Wind farm output still unproven 3. Existing Farm Medium Wind farm output proven, but likely structured under a PPA likely requires a renegotiation of PPA with current off taker, a potentially complex undertaking The facility is older and maintenance costs may be higher than expected Identifying an existing facility that matches the needs of the District May be a need to re power the site with capital expenditure for major equipment replacement needed 4. Standard PPA Low Eliminates all development risk to the District Allows firming and shaping of wind resource embedded in price Eliminates upfront capital expenditures from the project May be higher cost compared to other options, but could be managed through competitive and non binding bid option 5. Pre paid PPA Medium Low Exposes District to some development risk, but most can be mitigated under PPA contract Does not eliminate upfront capital expenditures May achieve greater discount compared to standard PPA Table 1: Direct Offtake Options 10 P age

11 III. Siting and Size One of the first issues the District will face is deciding where the wind farm will be and how large it will be in terms of electric generating capacity (in megawatts MW). Wind is an energy resource that occurs at non uniform times, speeds and directions it is thus termed an intermittent resource. Wind can generally be predicted using a combination of knowledge of localized meteorological conditions and scientific observations of historical wind data, but it cannot be known with absolute certainty ahead of time. Different locations have different wind profiles, or patterns in how (direction and strength) and when during a given day, month, or season the wind blows. Some locations have more predictable wind patterns than others. The greater the consistency and strength of the wind resource, the better the economics a given project will be and the greater an economic case could be made to add such a resource directly to the District s electricity profile. Thus, the location of a wind farm, the design of the facility, and the size of the project will play a large role in the ultimate feasibility of adding direct offtake wind to the District s energy portfolio. Location influences the quality of the wind resource available. Wind facility design and engineering quality will directly affect conversion efficiency and thus overall performance. The total installed capacity will impact economies of scale achieved and the parameters for incorporating the resource directly into the District s electricity generation portfolio. A. Land Based Locations The wind resource across the United States varies significantly by region and on every scale. The wind resource map released recently by the U.S. Department of Energy and shown in Figure 1 describes the average wind speed occurring throughout the year at 80 meters above ground level (agl) throughout the U.S. One can see by examination of this map that the strongest winds nationally occur in the Midwest, extending north from Texas into the Dakotas and Montana. This phenomenon has led to one school of thought promulgated by Mr. T. Boone Pickens that the focus of U.S. wind power development should be on the center of the U.S. However, this notion overlooks the very important point that the majority of our load centers in the U.S. are stationed along large bodies of water, especially along either coast, and the transmission infrastructure in the U.S. is not capable of moving large quantities of wind energy from the middle of the country to the regions where electrical energy is in greatest demand. There is a significant wind resource over water in the U.S., with four distinct regions specified and currently under consideration: East Coast, West Coast, Gulf Coast, and the Great Lakes. The U.S. Bureau of Energy Management and Regulation (formerly Minerals Management Service) holds the permitting authority for wind power projects in federal waters and released in June 2009 its final rules in this regard. In September 2010 the U.S. Department of Energy announced its five year strategic plan and the formation of a new program for offshore wind. There is no installed wind capacity to date over water in the U.S.; however, it is projected that projects that are now in development of the coasts of New England and the mid Atlantic 11 P age

12 could go online as early as A distinct advantage to offshore wind is the proximity of such projects to the large load centers along both coasts. Figure 1: United States 80 meter wind resource map. This report considers only the region of the U.S. that is served by PJM. PJM Interconnect is a Regional Transmission Organization (RTO) that coordinates the movement of wholesale electricity in all or parts of 13 states and the District of Columbia. The following states are included in PJM s service area: Delaware, Illinois, Indiana, Ohio, Kentucky, Maryland, Michigan, New Jersey North Carolina, Pennsylvania, Virginia, West Virginia, and the District of Columbia, as shown in Figure 2. PJM regulates and manages the generation and movement of power, but does not generate or transmit power themselves. PJM helps power companies provide service to approximately 51 million people in the network, with 163,500 megawatts of generating capacity available each day. PJM headquarters are centrally located in Valley Forge, PA and is the largest centrally dispatched grid in North America. 12 P age

13 Figure 2: PJM territory broken down by individual service territories. PJM uses a two tier governance structure to run the network. The top tier is run by an independent board of 10 members that are unbiased and unassociated with any companies under the PJM umbrella. These ten members are responsible for maintaining PJM s independence and ensuring that PJM maintains the reliability of the power grid. The second tier is made up of the member representatives participating in the PJM network. Each member or customer in the PJM network can have a representative on the members committee and they are able to propose and vote on changes and programs within PJM. There are five voting sectors that a member of the committee could be on, but they may only be on one. The sectors are: power generators, transmission owners, electric distributors, power marketers, and consumers. In order to be certain that the independent board is aware of the most salient issues a liaison committee meets with the board regularly comprises representatives from each of the five member sectors. The power companies listed in Figure 2 are the primary recipients of the power managed by PJM. When individual power generating assets are added to the PJM network the power is distributed to the entire PJM region. In the eastern United States, commercial wind projects are most likely to be found along mountain ridgelines and in open spaces in rural areas. In general, the economic feasibility of wind developments at different scales is determined by (i) quality of the wind resource; (ii) ease of access to transmission; and (iii) wholesale price of electricity. Figure 1 illustrates the variability of wind resources in the United States. Green and yellow shades suggest a more modest wind resource, while shades of orange, red and blue 13 P age

14 suggest stronger resources. The most generous wind resources tend to coincide with mountain ranges and within the central plains. There is a clear and well understood relationship between the average wind speed at a particular site and the economic potential of wind power development at that location. While a measure of the average wind speed provides only a gross approximation of the quality of the wind resource at a site, it is more typical to find utility scale wind power projects in areas where the annual average wind speed is 7.0 to 7.5 m/s or higher. It should be noted that the nameplate capacity of a wind turbine is a rating of the power it produces only when the wind conditions are ideal. Since wind speeds vary constantly, a wind turbine produces power at its optimum rate only during a small fraction of the time. The average amount of energy produced by a wind turbine over an extended period is on the order of one third of its nameplate capacity, depending upon location, design, and size of the turbine. This fraction of nameplate capacity is referred to as its capacity factor. For instance, a 2 MW wind turbine operating at a capacity factor of 35% during one year will produce 2,000 kw 8,760 hr/yr 0.35 = 6,132,000 kwh or 6,132 MWh in that year. B. Offshore Locations Offshore wind has been recognized for some time as an expensive yet promising alternative to wind energy on land. There are numerous advantages to developing wind offshore the wind resource tends to be stronger and more steady than on land; the visual impacts associated with wind on land can in cases be averted; the developable offshore wind resources in the U.S. are to a great extent located close to major load centers as opposed to land based wind resources which are greater in the more rural parts of the country. To date, offshore wind projects have been built in northern Europe and more recently in China. The Obama administration, however, has indicated a strong interest in developing offshore wind in the U.S. and has requested for nearly $50 million to be spent in FY 2011 to advance the technology and deployment. The figure below illustrates the sheer magnitude of the winds off the east and west coasts, off the Gulf coast, and in the Great Lakes. 14 P age

15 Figure 3: Composite wind map of the U.S. As part of the Energy Policy Act of 2005, Congress authorized the Minerals Management Service (MMS) within the U.S. Department of Interior to grant easements in federal waters on the Outer Continental Shelf to commercial offshore wind energy developments. MMS took over the review from the U.S. Army Corps of Engineers and designed a lease structure for offshore wind projects. In June 2009 the MMS, recently renamed the Bureau of Energy Management, Regulation and Enforcement (BOEMRE), announced the final rules for assigning lease blocks and permitting offshore wind projects. In September 2009 two unsolicited bids for offshore lease blocks were submitted to the MMS by Seawind Renewable Energy and Apex Wind Energy, both Virginia based companies. To date, these are the only two projects submitted to MMS under the rules promulgated in 2009 although a number of offshore projects were already in development. The Cape Wind project off the coast of Massachusetts is the only project approved so far by Interior. The figure below illustrates the significant level of activity that has developed in recent years with respect to offshore wind, the two projects for which applications were submitted under the new federal rules are not depicted in this map. 15 P age

16 Figure 4: Proposed offshore wind projects along eastern seaboard ( The Virginia General Assembly passed in 2006 the Virginia Energy Plan in which the Virginia Coastal Energy Research Consortium (VCERC) was established and subsequently charged to bring coastal energies from research and development to commercial interest. VCERC was funded between 2007 and 2009 at a level of $3.1 million and issues its final report in Spring 2010 that presented extensive findings pertaining to the economic feasibility of offshore wind in federal waters off Virginia; detailed maps that recognize specific areas that are better or not as well suited for wind development; and specific opportunities and challenges related to economic development and the supply chain. In 2009, at the request of Governor Tim Kaine, the MMS established a federal state local task force to engage in the offshore wind leasing process in federal waters off of Virginia, including coordination between federal, state, and local governments. This provided the forum to engage the Department of Defense on possible conflicting uses of the offshore waters. Also in 2009 the Virginia Offshore Wind Coalition, an industry group comprised of developers, supply chain companies, localities, and utilities, was formed and subsequently a legislative agenda was developed and bills were carried to successful passage in the General Assembly. Virginia, Maryland and Delaware formed the mid Atlantic Offshore Wind cooperative agreement as well. 16 P age

17 Figure 5: VCERC identified 25 MMS lease blocks that appeared to have minimal conflict with existing uses by the Navy, NASA Wallops, commercial shipping, or commercial fishing. These are all beyond 12 nautical miles offshore and in water depths less than 100 ft, and could support 3,200 MW of wind capacity generating 11 kwh/yr. In 2010 the Virginia General Assembly passed legislation creating the Virginia Offshore Wind Development Authority (VOWDA) which creates a body with the authority to manage PPAs, accept contributions, grants, property, etc. Governor McDonnell announced his appointees to the Authority in late October The General Assembly also passed legislation to further incentivize offshore wind within the structure of the state s voluntary renewable energy standard. Also within the past year the Task Force unveiled vetted lease blocks that had been provisionally approved by DOD. Virginia also joined the Atlantic Offshore Wind Energy Consortium which comprises the Governors or their designees from each of the following states: Maine, New Hampshire, Massachusetts, Rhode Island, New York, New Jersey, Delaware, Maryland, Virginia and North Carolina. One of the main goals for the Consortium is to work to reduce the permitting timeline for approval of offshore wind projects. DOI s Secretary Salazar agreed to work with the Consortium and pledged reductions in the timeline. In October of this year The Virginia submitted its vetted lease blocks to BOEMRE for preparation of the RFI for Virginia lease blocks for consideration by offshore wind developers (a required step in the process triggered by the two applications submitted by Seawind and Apex). In June 2010 the U.S. Department of Energy (DOE) released an RFI for offshore wind stakeholders to provide information to DOE as they begin to develop their strategic plan for offshore wind in the U.S. In September the DOE released its Draft Strategic Plan for Offshore Wind in the U.S. DOE and hosted a webinar and breakout sessions in Washington D.C., with a request for feedback on the plan from 17 P age

18 stakeholders by the end of October The three major target areas within the DOE Draft Strategic Plan are Market Barrier Removal, Technology Development, and Advanced Technology Demonstration Projects. During the American Wind Energy Association (AWEA) Offshore Wind Conference in Atlantic City, NJ in October and announcement was made by Gamesa and Northrop Grumman announcement of a partnership they had formed to develop a new 5 MW offshore wind turbine, with development based in Virginia and the possibility that testing of the new turbine would occur in Virginia as well. At this time Google made an announcement as well that they would provide major funding toward the development of an offshore transmission backbone that would extend from southeastern Virginia to New York, this infrastructure would serve a major role in terms of attracting offshore wind developers, with a secondary benefit of reducing transmission congestion along the northeast corridor. There has been a very abrupt shift in attention toward offshore wind within the last several years, driven by a number of forces ranging from the availability of new studies that describe the feasibility of offshore wind deployed in a cost effective manner, to new state and federal policies that mandate the procurement of electricity from clean and renewable energy sources. Among the states that are engaging within PJM, Virginia would appear to be one of the most aggressive, and is likely to be one of the first to build out. Virginia has an excellent offshore wind resource with sufficiently shallow waters extending a great distance out across the Outer Continental Shelf; is fairly well insulated from extreme wind conditions that are more likely to occur off the coasts to the north and south as well as in the Gulf; and made the strategic decision in 2006 to invest in scientific studies in order to gain understanding of the potential, rather than to set policies designed attract, or even mandate, industry engagement before sufficient information became available to estimate the cost of electricity in a reliable fashion. The VCERC report estimates that for investor owned utilities in Virginia, balance sheet financing of new generation projects having an in service date of 2012 and an installed capacity just under 600 MW yields the following levelized cost of energy (LCOE) estimates, in constant March 2008 dollars: $ per megawatt hour (MWh) for an offshore wind farm; $ per MWh for a coal fired plant; $ per MWh for a combined cycle gas turbine (CCGT) plant. These estimates do not include carbon capture and sequestration (CCS) as potential added costs for fossil fuel projects. Assuming that CCS has a levelized cost of $50 per ton of carbon dioxide (tco2) over the service life of a generation project commissioned in 2012, with emission rates of 1.0 tco2 per MWh for a coal fired project and 0.4 tco2 per MWh for a CCGT project, then levelized electricity costs would increase to $ per MWh for coal fired generation and $ per MWh for CCGT generation. Thus, when CCS has a levelized cost of $50 per tco2, utilities can anticipate that a new offshore wind project will yield a lower energy cost than a new coal fired project, and may be marginally competitive with a new CCGT project. The offshore opportunity is an intriguing one in the mid Atlantic region of the U.S. The federal government has begun to move aggressively in order to streamline the review process for new projects and is establishing a new program at the U.S. DOE to support technological advances and increase the competitiveness of offshore wind. The attendance at the AWEA offshore wind conference in October was twice that of the first offshore conference one year ago, suggesting a rapid growth in interest from 18 P age

19 industry. Dominion Power is engaging in a substantive fashion in North Carolina and Virginia and has made clear by its actions its intent to develop offshore wind power. The U.S. Navy is also engaging and views offshore wind as one opportunity to meet its own aggressive goals for procuring electricity derived from clean and renewable sources. And while it is not likely that offshore wind projects will be built until the second half of this decade, the opportunity for the District to engage in a long term commitment to purchase offshore wind is one that should be considered over the short term. The District, while not likely to host or even own an offshore wind project, could initiate or join efforts immediately to establish a consortium of large municipal and/or private customers that would present the appropriate signal to industry that sufficient demand exists for offshore power for development and deployment to proceed. C. Wind farms on the PJM grid [See Appendix A] D. Specific Opportunities Within PJM The development of the database in Appendix A was critical to gaining an understanding of which states within PJM would be most desirable for consideration by the District. The database also provided a means to make a recommendation in terms of which projects already in service, in development, or under study, or what sorts of future opportunities in the region, would be most appropriate for consideration. A summary is provided below which shows by state total installed wind capacity. The data in the second column was acquired from the U.S. DOE Wind Powering America web site. The data in the third column was distilled from PJM data. Total MW in State Total MW in PJM State 12/31/2009 6/23/2010 Delaware Illinois 1, Indiana 1, Maryland Michigan New Jersey North Carolina Ohio Pennsylvania Tennessee Virginia West Virginia Total 3, Table 2: Breakdown by state of installed wind capacity 19 P age

20 20 P age Draft Wind Energy Assessment The following categories were defined in order to provide to the District a set of appropriate and distinct options: Greenfield, Existing Development, Existing Farm, and Long term PPA. For Greenfield, the state within PJM that is most highly recommended is Virginia, an emerging state, for a number of reasons. First Virginia is one of only three states in PJM that is recognized by the U.S. DOE as a high priority state on the basis of its generous wind resource; that it presents appropriate policies and regulatory framework; effective organizations and leadership to support wind development, and to date no commercial wind power has been installed. Further, in January 2011 a new and, by national standards, innovative environmental permitting process will go into effect in the form of a Permit By Rule. This follows from state legislation passed in the 2009 General Assembly intended to streamline the permitting process for projects less than 100 MW, to encourage development of renewable energy projects, and to address concerns for impacts on wildlife and historic resources. As many as one half dozen, likely more, established and reputable wind developers have projects in development in Virginia, it is perceived by many as one of the most promising new wind states in the east. Another consideration that applies in Virginia as well as other states in PJM is development on federal lands. There is one project in Virginia already on the drawing board that would entail the development of new capacity on U.S. Forest Service lands. There are also new siting guidelines that were development by the U.S. Fish and Wildlife Service that reflect federal policies in regard to wind development on federal lands, but to date there is very little precedent in the east (although significant wind development has occurred on Bureau of Land Management lands in the west). The unique opportunity for the District, however, is that a project on federal lands with the District of Columbia, a federal entity, as developer or financing agent could offset the resistance by some member so the public who feel that a private company should not be entitled to profit by development of wind on public lands. There are vast areas in Virginia and other eastern states that present excellent wind resources and could provide significant development opportunities. For Existing Development and Existing Farm, Pennsylvania is the state that is recommended for most serious consideration. Pennsylvania is an established state that has significant installed wind capacity, has demonstrated along with New York the strongest leadership among eastern states in terms of setting appropriate policies and establishing guidelines that support appropriate and responsible wind development, and is the state among those studied that presents the third most installed capacity, the oldest wind power projects in the region, and at least one project that is only partially developed, thus Pennsylvania may be considered for either of the two options stated. For Long term PPA, there are two directions that should be considered by the District. The lower risk, shorter term opportunity resides with projects that are in development or on the drawing board, there are a number of projects that fit this category in Pennsylvania and Virginia. The higher risk, longer term, and potentially higher reward opportunity applies to offshore wind projects, none of which have been constructed yet in the U.S. although many are in development. The first project is expected to be commissioned as early as 2012, but is the more likely target date in the mid Atlantic region. Several states in PJM territory including Delaware, Maryland, New Jersey, and Virginia are active in offshore

21 21 P age Draft Wind Energy Assessment development and engaging with the development community and the Bureau of Energy Management, Regulation and Enforcement (formerly Minerals Management Service) to apply the new regulatory framework announced in 2009 and advance project development. The database developed for this study and presented in this report provides a detailed and cumulative accounting of commercial scale wind power projects across the PJM region that presents a broad overview of regional wind development. This database is intended to provide to the district the means to identify potential projects in which they may consider to engage. However, for the sake of providing more detailed guidance, three separate projects, one commissioned over ten years ago and two in development, are described below. These were chosen to represent the broadest range of project opportunities and reflect, in the opinion of the authors, three of the best opportunities for the District to consider. Solaya Energy, LLC Cow Knob Phase I Virginia is recognized as presenting arguably the best opportunities among emerging states in PJM for new development of commercial wind power. The state is recognized by the DOE as a high priority state because of its generous wind resource, appropriate state policies, and the presence of an effective wind working group. Further, the General Assembly passed in 2009 legislation to create a Permit By Rule (PBR) structure to streamline and expedite environmental review of wind power projects of 100 MW installed capacity or less. At present, there are at least nine experienced and reputable wind developers active in Virginia pursuing projects. In December 2010 the Board of Supervisors of Rockingham County is expected to approve the first large wind ordinance in its history. In January 2011 the state PBR process is expected to go into effect. Thus, from a regulatory perspective, Rockingham County offers an attractive opportunity by virtue of clear and predictable permitting processes available at both local and state levels. The former (Democratic) and current (Republican) governors and their administrations have offered definitive signs of support for commercial wind development in Virginia. There are several ridges that extend along the western border of Virginia and West Virginia through Rockingham County, Virginia, and Hardy and Pendleton Counties, West Virginia. Several companies are actively exploring development opportunities in this region and have already established a presence by installing meteorological masts to assess the wind resource. These companies have also engaged local landowners and participated on the wind working group charged by the county to develop the large wind siting ordinance. One of these companies, Solaya Energy, LLC, based in Boston, Massachusetts, is developing Cow Knob, Phase I, with an intended installed capacity of 54 MW. There are at least two distinguishing characteristics associated with Solaya that differentiate them from other members of the development community active in Virginia. First, they have sought to engage landowners in a non traditional fashion, that is to empower the future hosts of the wind turbines they will install to acquire a majority ownership stake in their project. The more traditional approach is one in which a developer would secure a long term land lease agreements with property owners through which the landowners would collect revenues, but otherwise hold no stake in the project. Second, Solaya prefers to

22 generate its return on investment through the actual development and construction activities, and by contracting over the long term to conduct operations and maintenance of the project, but prefers to retain only a minority stake in the ownership of the project. Given the unique nature of this business model, and the fact that local landowners have very limited financial means, the success of the Cow Know wind project relies significantly on securing equity investors to participate. Cow Know Phase I is intended to comprise MW turbines, each with a hub height of 80 m and rotor diameter of m, for a total installed capacity of 54 MW. Current estimates are for P50 production of 183,673 MWh and P85 production of 165,305 MWh. The estimated total project cost is between $105M and $115M. The second phase of the project would involve the installation of an additional 105 MW. The general area that Solaya and two other developers are considering is shown in Figure 6 with the locations of two meteorological towers indicated. A program of data acquisition and analysis is ongoing. Figure 6: Region along border of Virginia and West Virginia under study for commercial wind development with sites of two existing meteorological towers indicated. A recent study conducted by the National Renewable Energy Laboratory states that the average all in installed costs of wind turbines are $2,120/kW and $2,170/kW respectively for 1.5 MW and 2.5 MW 22 P age

23 machines which represents the nominal range for land based wind power in the U.S. at present; the total operations costs are $45/kW for both turbines. Solaya projects an installed cost for Cow Know Phase 1 within a range of $1,944/kW and $2,091/kW which would appear, without consideration of performance projections, competitive given the current state of the industry. FreedomWorks, LLC Shenandoah As an alternative to developing on private lands a developer may seek to develop a wind power project on public lands. In western states, the U.S. Dept. of the Interior, Bureau of Land Management (BLM) is supporting effort to evaluate new wind development on public lands. 4 The BLM currently administers numerous wind energy right of way authorizations on lands in several western states. The U.S. Army National Guard, Coast Guard, and Navy are also engaging in studies to evaluate the potential for project at their bases. The Searsburg, Vermont wind power facility was commissioned in 1997 and has a capacity of 6 MW. This facility is run by Green Mountain Power. In November 2004, Deerfield Wind asked the U.S. Forest Service for authorization to use federal lands for a new wind project. Any expansion to the Searsburg facility has not yet been realized, but it is widely recognized that there are many federal lands in the east that are under the jurisdiction of the U.S. Dept. of Agriculture, Forest Service that may present opportunities for commercial wind development. In March 2010 the Wind Turbine Guidelines Advisory Committee which was established in 2006 under the Federal Advisory Committee Act submitted to the Secretary of the Interior its final policy recommendations on developing effective measures to avoid or minimize impacts to wildlife and their habitats related to land based wind energy projects. The committee recognized that the environmentally friendly development of wind energy and the protection of the nation s natural resources are priorities for both the administration and the American people. An example cited by the committee was Executive Order 3285 issued by the Secretary in March 2009 make the production and delivery of renewable energy a priority for the Department of Interior. The work of this committee was intended to influence the final guidelines for siting of wind energy facilities put forth by the U.S. Fish & Wildlife Service as well as the corresponding guidelines adopted by the U.S. Forest Service. The Forest Service manual, Chapter 2720 Special Uses Administration addresses Energy Generation and Transmission and considers, in particular, wind energy facilities. The George Washington and Jefferson National Forests stretch across Virginia from one end to the other, and extend into West Virginia as well, along the Appalachian mountains. The management of the national forests occurs at two levels. Long range Forest plans provide broad, general management direction similar to how local land use planning occurs. However, before a project that involves ground disturbance takes place, a more site specific project plan must be completed. 4 Wind Powering America program, U.S. Department of Energy 23 P age