partial wind farm repowering & tax credit qualification… · most wind companies sign a...
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DNV GL © 2016
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07 November 2016 SAFER, SMARTER, GREENER DNV GL © 2016
07 November 2016
Ungraded
Partial Wind Farm Repowering & Tax Credit Qualification
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Complimentary Webinar November 10, 2016
DNV GL © 2016
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07 November 2016
Today’s Speakers
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Kevin Smith Keith Martin
Director, Asset Management &
Operating Services DNV GL
Partner Chadbourne & Parke
Victoria Richardson
Communications DNV GL
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Today’s Agenda
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Welcome and Introduction
Partial Repowering & the Business Opportunity
Partial Repowering & Key Issues
Tax & Financial Considerations
Ask DNV GL and Chadbourne & Parke
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Partial Repowering & The Business Opportunity
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The Opportunity
Partial repower opportunity
– >1.5 MW or greater WTG capacity
– 10 year or older turbines
14% of turbines installed since 2000
May 2016, IRS guidance established criteria for operational project upgrades to re-qualify for PTCs
Investments must be 4x retained value
Calculations on a per turbine pad basis
Business case highly project and turbine specific
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Projects since 2000:
68,090 MW
672 projects
37,710 turbines
Repower Opportunity:
8,657 MW
91 projects
5,420 turbines
Partial Wind Farm Repowering
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Partial Repowering & Key Issues
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What does partial repowering mean?
Scope depends on technical needs and meeting investment qualification threshold
Potential options include:
– Full nacelle and rotor replacement
– Replacement of rotor, various drivetrain & ancillary components, controls, & software
Tower and foundation likely to remain
Tower replacement conceivable but may not result in viable business case
20% rotor size increase ~ 10 - 20% energy increase
Larger rotors may result in loads exceeding tower and foundation capacity
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Partial Wind Farm Repowering
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Site conditions and structural reliability
Partial repowering may result in some components operating 30 years or more
Careful analysis of site conditions and fatigue accumulation is critical
Structural reliability risk levels need to be agreed upon with Stakeholders
Risk mitigation could include: Type/Project Certification, 3rd party site specific design assessment
Pad locations in projects where turbines are ‘under-sited’ based on wind conditions or low availability are good repower targets
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Partial Wind Farm Repowering
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Towers & Foundations
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Towers
– Non destructive testing at key load points and welds
– Evaluation of harmonics
– Bolted interface compatibility & adapters
– Power cable compatibility
– Risk based inspections
Foundations
– New foundation loads must be calculated
– Foundations older than 10 years may not have been designed for fatigue
– Existing site and soil conditions
– Operating history of turbine for extreme events
– Refurbishment might be possible, but costly
Partial Wind Farm Repowering
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Energy Production
Energy assessments for repowering offer lower uncertainty compared to new project development.
– Up to 2-3% reduction in uncertainty of long term AEP
– Up to 4-7% increase in 1 year P99
– Historic operating data and wind data is a significant advantage
– Environmental and BOP loss factors are better quantified
– Grid curtailment and other interconnection issues are known or have been mitigated
– Topographic and wake effects are much better understood
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Inter-turbine spacing will change which impacts loads and energy production
Load control software in new turbines may help keep loads within range, but could impact energy production
Sector management control maybe needed
Partial Wind Farm Repowering
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Balance of Plant
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Partial Wind Farm Repowering
Turbine and/or plant capacity may change – investigate electrical BoP for potential limitations
Collection system capacity and remaining life evaluations:
– Pad transformers & related cables
– Medium voltage cables and overhead conductors
– Turbine grounding
Substation:
– Main power transformers
– Feeder circuit breakers
– Main breakers
– Reactive power compensation
– Surge arresters
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Environmental & Permitting
Avian and wildlife review – larger rotor swept area
Changes to FAA approvals – increased max tip heights
Sound, shadow, and other setbacks – larger rotors may trigger re-assessment need
Local or State permitting and review processes – evaluate impact of partial repowering for triggering new review process
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Partial Wind Farm Repowering
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Contractual Consideration
New turbine supply & installation agreements
New warranties agreements and terms
Interconnection agreements – any key limitations or changes required?
Offtake agreements – min/max limits, term, rates, etc.
O&M agreements – changes due to new turbines, parts, responsibilities, etc.
Build-out/shared facilities agreements
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Partial Wind Farm Repowering
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Tax & Financial Considerations
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Tax Credits
A wind farm owner may be able to qualify for another 10 years of production tax credits on a project by repowering. Whether tax credits can be claimed requires a two-part calculation.
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Tax Credit Qualifications
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Tax Credits
First, the repowering effort must be considered underway by the end of this year to qualify for tax credits at the full rate. If it gets underway in any of the next three years, it will qualify for tax credits at a reduced rate: 80% for repowerings starting in 2017, 60% in 2018 and 40% in 2019.
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Tax Credit Qualifications
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Tax & Financial Considerations
In order for construction to be considered underway, one of two things must happen. The wind farm owner with must "incur" at least 5% of the total repowering cost or else it must start "physical work of a significant nature" by the construction-start deadline.
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Tax Credit Qualifications
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Tax & Financial Considerations
Costs are not "incurred" merely by spending money. Costs are incurred as equipment that will be used in the repowering is delivered, with one exception. The exception is that a payment this year counts as a 2016 incurred cost if the equipment is delivered within 3 1/2 months after the payment.
– Method of accounting
– Binding contract
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Tax Credit Qualifications
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Tax & Financial Considerations
Most wind companies sign a "PTC components" contract. Buy equipment whose next stop will be the project site rather than components that have to return to the factory for further assembly. Delivery can be at the factory. Avoid vendor financing. Most companies incur at least 7% in case of cost overruns.
– Guaranteed debt
– Project schedule
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Tax Credit Qualifications
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Tax & Financial Considerations
Physical work means physical work at the site or on equipment at the factory. It is harder to raise tax equity on projects that rely on the physical work test. The more physical work before the deadline, the better.
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Tax Credit Qualifications
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Repowering Calculations
Repowering requires two calculations. The second calculation is application of the "80-20 test" to each separate turbine, pad and tower to see whether the repowering will be extensive enough to lead to construction of a new "facility." Each turbine, pad and tower is analyzed like a separate power plant.
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Tax Credit Qualifications
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Financial Considerations
You must spend on the repowering of each "facility" at least four times the value of the used components retained from the original facility. The IRS prefers the depreciated replacement cost method to value the used components. That means determining their cost new and then adjusting for wear and tear and any technological obsolescence.
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Tax Credit Qualifications
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Securing Production Tax Credits
Ideally, the repowering should be about more than just renewing tax credits: for example, increasing the generating capacity or electricity output. However, the law in this area goes back to 1962 and 1994 revenue rulings. Production tax credits can be claimed on the electricity output from a new facility.
– Computational issues
– Appraisal issues
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Tax Credit Qualifications
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Q&A: Ask our Speakers
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Kevin Smith Keith Martin
Director, Asset Management &
Operating Services DNV GL
Partner Chadbourne & Parke
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SAFER, SMARTER, GREENER
www.dnvgl.com
Thank you!
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Kevin Smith [email protected]