Losing Regulatory Approval Gamble, AEP Scraps $4.5B Wind Project

American Electric Power (AEP) has abandoned its mammoth $4.5 billion Wind Catcher project, one of its largest planned investments, and a key part of its strategy to tamp down carbon emissions by 2030.

Under AEP subsidiary Southwestern Electric Power Co. (SWEPCO)'s proposed Wind Catcher project, AEP would have acquired a 2-GW wind farm-under construction in the Oklahoma Panhandle by Invenergy-and would build a 350-mile dedicated power line that would carry wind power to the Tulsa area. SWEPCO was to own 70% of the project, while AEP subsidiary Public Service Co. of Oklahoma would have taken on the remaining 30%. The project would have featured 800 GE turbines, and it was slated to be completed by the fourth quarter of 2020.

But while AEP garnered approvals from the Arkansas Public Service Commission on May 8, 2018, and the Louisiana Public Service Commission on June 20, and it had the blessing of the Federal Energy Regulatory Commission, Wind Catcher needed approval from regulators in Texas and Oklahoma.

Demise of a Giant

On July 26, the Public Utility Commission of Texas (PUCT) formally denied the company's application for a certification of convenience and necessity authorization and related relief for the connection project in Oklahoma. The decision follows a June 12 PUCT staff recommendation to deny the certificate "as the range of probable outcomes do not justify incurring the costs that Texas customers would ultimately have to pay whether or not the net benefits actually materialize."

On July 27, AEP announced it would scrap the project. Nicholas Akins, AEP chairman, president, and CEO, in a statement expressed disappointment the company would not be able to move forward with Wind Catcher. The project "was a great opportunity to provide more clean energy, lower electricity costs and a more diverse energy resource mix for our customers in Arkansas, Louisiana, Oklahoma and Texas," he said.

"To realize the full benefits of Wind Catcher for customers, timely approvals were required from all jurisdictions so we could complete the project by the end of 2020 and be eligible for 100 percent of the federal production tax credit [PTC]," Akins said. "We want to thank our employees and our partners for all of their work on the development of the Wind Catcher project."

As Gregory Jenner, a partner at law firm Stoel Rives and former head of the U.S. Department of Treasury's Office of Tax Policy, explained, the PTC for wind is set to phase out in 2021. "Because of IRS guidelines, [AEP] likely expected that the facility had to be placed in service by the end of 2020 in order to capture the PTC. This placed a huge premium on getting immediate approval from the Texas PUC," he told POWER on July 30. "When that approval was not forthcoming, AEP apparently decided to cancel."

Securing regulatory approval to allow wind projects to be completed before the end of 2020 is a major issue with which the wind industry is grappling. As POWER noted, industry analysts expect a "valley of death" between 2021-when the PTC is phased out-and 2026, and though forecasts vary, many expect that new onshore wind capacity additions will slow if not grind to a halt. Jenner projected that regulatory roadblocks "will increasingly constrain wind projects."

But Jenner also noted AEP's decision was likely rooted in a number of other factors. "Interestingly, one of the major factors was, apparently, the effect of the Tax Cuts and Jobs Act (TCJA) of 2017, which negatively affected the economics of the development, which in turn raised substantial doubts with the Texas PUC," he said.

AEP Forced to Steer in New Direction

The Wind Catcher project was one of AEP's largest planned investments as the company embarks on a strategy to reduce its carbon dioxide emissions by 60% from 2000 levels by 2030-a move that it says is driven by customer preference. While the company relies on coal for nearly half its power production, AEP has already slashed CO₂ emissions by 44% since 2000, a feat that has likely been achieved by its transformed generation profile as well as a reduction in fleet size. AEP's resource plans suggest that the company will add 3 GW of solar and 5.3 GW of wind generation to its portfolio by 2030.

Akins on July 27 said the company remains focused on a 5% to 7% earnings growth through investments to improve service for customers. "We are investing in a cleaner, smarter energy system for our customers and will continue to pursue opportunities to provide the new energy resources and technology solutions that bring value to our customers," he said.

AEP on July 25 reported revenues of $4 billion over the second quarter of 2018-$400 million more than it recorded in the second quarter of 2017. Akins said that the strong earning performance was bolstered by "investments to enhance service for our customers, combined with favorable weather," including a significant sales increase from hotter than normal weather.

Industrial and residential sales have been strong in nearly all the 11 states where the company now provides regulated service, which reflects "improving economic conditions, rising oil prices, and overall gains in household incomes." But he warned that "tightening labor markets, higher inflation and escalating trade tensions are factors we will be watching closely as these could impact load growth."

'The Answer, My Friend, Is Blowing in the Wind'

In an earnings call held a day before the PUC dealt the death blow to the Wind Catcher project, Akins told investors that the company could "certainly live with the outcome that emerges from both the Oklahoma and Texas commissions," but how they would decide was unpredictable. "And as Bob Dylan said, 'The answer, my friend, is blowing in the wind,' " he said.

Asked by Bank of America analyst Claire Zeng how the company would replace the Wind Catcher project while still taking advantage of the PTC and other power purchase agreement contracting structures, Akins said AEP was looking at "other opportunities, where we have the renewables projects in Ohio, for example." Akins noted, though, that the economics of some of these opportunities were dampened by the tax reform.

"But remember, Wind Catcher was incremental to our base plan. And our base plan obviously supports the 5% to 7% growth rate in the investment in transmission and other areas in our regulated companies," he said. "If Wind Catcher were not to happen, there'll still be opportunities for those kinds of resources to be applied through our resource plans in those particular states."

The project's demise will likely be as steep for Invenergy, North America's largest privately held renewable energy company that was building the 2-GW wind farm in the Oklahoma panhandle, and GE Renewable Energy, which was to supply its 800 state-of-the-art 2.5-MW turbines. The companies announced construction had begun on the project a year ago, on July 26, 2017. Invenergy did not immediately respond to a request for comment on what the wind farm's fate will be, now that AEP has canceled it.

-Sonal Patel is a POWER associate editor (@sonalcpatel, @POWERmagazine)

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