Xcel Energy (NYSE: XEL), which announced April 30 that it wants to take over a 200-MW wind farm project in North Dakota, on April 30 applied with the Minnesota Public Utilities Commission, through subsidiary Northern States Power, for approval of that plan.
The Courtenay Wind Farm was previously identified for acquisition under a power purchase agreement (PPA) through the company’s February 2013 Request for Proposals for additional wind resources. The Minnesota commission approved the PPA in December 2013.
“Due to changed circumstances described in the enclosed Petition, the Company seeks to purchase the Courtenay Project from Courtenay Wind Farm LLC and develop, construct, own, and operate it for the benefit of our customers,” said the April 30 application. “The proposed transaction will be in the form of the acquisition of a limited liability company (Courtenay Wind Farm LLC), the subsidiary of Courtenay Wind LLC that holds all the assets of the facility. The Company then plans to merge the LLC into Northern States Power Company and take over development of the project directly.
“In addition, we will enter into the necessary turbine supply and construction contracts directly with the suppliers, and complete the project and own and operate the facility by December 31, 2016 to take advantage of federal Production Tax Credits (PTCs).
“As discussed in our original petition for acquisition of 600 MW of wind (including the Courtenay Project energy through a PPA), we believe a mix of PPAs and Company ownership of wind resources balances the risks and benefits for the Company and our customers. Overall, the Courtenay Project costs are favorable under the Project’s current structure, and the Project remains a part of meeting our Renewable Energy Standard obligations and improving the environmental performance of our system in a cost-effective manner.”
Xcel estimates that with this 200 MW addition, system costs will be approximately $222 million lower, on a present value of societal cost (PVSC) basis, over the life of the project than they would be if Xcel abandoned it. Moreover, the company’s ownership of the project offers benefits to customers over a longer period than would be available under a shorter term PPA, and at a higher capacity factor than the project was initially bid, now that turbine selection has been made and a detailed wind study has been performed for the project.
The purchase of this 200 MW resource will retain its anticipated contribution to improved environmental performance from Xcel’s generating fleet that has been achieved over the last decade. The project will contribute to the company’s carbon reduction goals with an estimated carbon dioxide emissions reduction of 550,000 tons annually, on average. To achieve these benefits, it is necessary to place the Courtenay Project in service by Dec. 31, 2016, when eligibility for PTCs is set to expire. In turn, this requires the utility to begin pouring foundations in the 2015 construction season to keep the project on track. “We therefore respectfully request that the Commission complete deliberations sometime in August 2015 so we may have sufficient certainty to proceed during this construction season,” the application said.
Xcel noted that project developer Geronimo Energy previously received a Certificate of Site Compatibility for the Courtenay Project from the North Dakota Public Service Commission, and it obtained an Advance Determination of Prudence for the PPA in February 2014. “We anticipate submitting additional filings with the North Dakota Public Service Commission at the same time or soon after this filing,” Xcel wrote. “We are also working with Geronimo to ensure we have updated interconnection approvals needed for the Project.”
In July 2013, Xcel Energy entered into the 20-year PPA for this project, to be located in Stutsman County, North Dakota. This purchase was one part of a larger acquisition of 750 MW of wind resources through a Request for Proposal (RFP) process to provide cost-effective energy to customers in support of the utility’s 2010 Resource Plan.
Two major factors led to the project getting stalled under existing ownership
The Xcel application added: “The Courtenay Project was slated to be developed, constructed, owned and operated by Geronimo Energy, a wind-project developer with whom the Company has transacted on several occasions. Geronimo undertook activities toward the realization of that project, with an initial anticipated in-service date of December 31, 2014. Activities in support of the project included obtaining state and local permits needed to construct the project, purchasing long-lead-time equipment such as the substation transformers and the project transformers, substantially developing the real estate rights necessary to construct the project, undertaking continuous activity on the project sufficient to satisfy the relevant PTC requirements, and entering into a number of contractual relationships designed to facilitate successful development of the project.
“After approval of the PPA and initial Project activities, the Project encountered several delays which adversely impacted the Courtenay Project’s development schedule and caused the Courtenay Project to fail to meet critical milestones and default under the PPA. It appears there were two primary causes for this circumstance: (i) Geronimo priced the PPA assuming it would be able to fully utilize the North Dakota Income Tax Credit; and (ii) the Courtenay Project PPA price turned out to be insufficient to support the construction of the Project and precluded Geronimo from finding another equity partner who could fund the PPA structure on reasonable terms.
“The Company has put Geronimo on notice of default and has taken the steps necessary to terminate the PPA if that becomes the most appropriate outcome. However, there is no assurance the Project will be able to proceed or that the Company will be able to collect full delay damages under the PPA.”
Xcel said various conditions need to be met, like issues with project interconnection and a North Dakota PSC approval, before it will close on its purchase of this project, and that if the deal fails to close, the PPA and the penalties it can demand under it due to the default will still be in place.
Xcel added: “Given the distressed nature of the Project and Geronimo’s investment to date, we concluded that it was important to move forward with the transaction to ensure that the Company could bring its expertise to bear as soon as possible to guide the final development details. By taking ownership of Courtenay Wind Farm LLC early, we are able to influence the development in a way that we could not accomplish by waiting.”
Xcel also wrote: “We have engaged in negotiations with Vestas for a turbine supply agreement for the Courtenay Project. Although no TSA was executed between Geronimo and the turbine supplier, time constraints in selecting vendors and initiating construction required Xcel Energy to effectively step into Geronimo’s shoes and assess the viability of contracting with Geronimo’s selected suppliers. Furthermore, the North Dakota site permit limits the acceptable vendors, and the [Generator Interconnection Agreement] for the Project is specific to Vestas turbines. For these reasons, the Courtenay Project is unlikely to be viable with a different turbine supplier. Fortunately, we have found the selected turbine supplier to be a positive business partner. We have had positive dealings with them in the past, and they have expressed an interest in a longer-term relationship with Xcel Energy and willingly negotiated favorable pricing and other terms with that goal in mind.
“Wanzek Construction, Inc. is the construction company Geronimo selected for the Courtenay Project. Wanzek is one of the few [balance of plant] vendors in the Midwest for a project of this nature, and operates out of Fargo, North Dakota. Working with Wanzek on this project enables us to further diversify our supplier relationships and creates several hundred construction jobs for this North Dakota-based company.”