Reliability is not threatened
The argument that the utility needs a hard and fast COD deadline to satisfy its capacity needs is overstated and misconstrues the overriding objective of renewable power. The specter that a utility with supply resources in the 10,000s of megawatts would be unable to serve its load or would be economically damaged by a few weeks’ delay in a 30- or 40-MW biomass project—or even a 100-MW intermittent wind project—is just that: a specter. “Just in time” inventory programs promote efficiency for grocery chains, but they are a nonproductive distraction in promoting renewable generation. The capacity renewable projects offer is beneficial, but the overriding attractions of such projects are the displacement of fossil fuel generation and reduction in carbon emissions.
Project sponsors have strong incentives to achieve COD
The claim that utilities must resort to economic sanctions to incentivize projects to achieve contracted-for COD evidences a lack of understanding of the economics motivating independent power producers. Renewable projects have compelling economic incentives, independent of utility threats, to achieve COD as quickly as possible. In stark contrast to regulated utilities, which “earn” AFUDC (allowance for funds used during construction) “income” during a project’s precommercial period, for the independent producer, each day preceding COD accrues additional and nonrecoverable expenditures. The price at which the renewable producer commits to deliver power to the purchasing utility reflects an assumed COD and associated commencement of any return on investment; if COD is missed, project economics necessarily suffer—there is no backstopping by ratepayers.
The simple reality is that in many instances the schedule on which a renewable project can achieve COD is outside of the project’s control. Additional economic incentives do not enhance the sponsor’s ability to prevent delays caused by administrative and judicial challenges to necessary permits or by the purchasing utility being unable to obtain requisite regulatory approvals. In fact, when presented with the facts, in most instances, utilities and regulators excuse the delay in a project’s COD.
Proposed solution
The goal of utility procurement should be to enable the project sponsor to achieve the earliest COD at the least cost. Contract provisions imposing punitive measures for a late COD are more likely to result in later CODs and escalating prices. Utilities and regulators who are committed to advancing renewable power must recognize that firm schedules that may be appropriate for utility-owned or fossil fuel projects should not be assumed to work for renewable projects. One size does not fit all. Sincere proponents of renewable power should be receptive to flexible COD deadlines based on the project sponsor contractually committing to commercially reasonable measures to achieve a targeted date and to objective and nonpunitive standards by which the date can be advanced or deferred.
—Steven F. Greenwald (stevegreenwald@dwt.com) leads Davis Wright Tremaine’s Energy Practice Group. Jeffrey P. Gray (jeffgray@dwt.com) is a partner in the firm’s Energy Practice Group.
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