An SEC filing required as a condition of the potential sale of windfarms from Hawaii’s largest wind farm developer, First Wind, to TerraForm Power, Inc., have revealed a number of difficulties the subsidized windfarm has faced in meeting its terms of operation with regard to generating and delivering reliable power to the grid.
As reported in the Hawaii Free Presss (Feb. 8), the SEC filing paints a company in trouble, even before the sale is approved. In the filings TerraForm acknowledged:
We have limited experience in energy generation operations. As a result of this lack of experience, we may be prone to errors .... We lack the technical training and experience with developing, starting or operating non-solar generation facilities. With no direct training or experience in these areas, our management may not be fully aware of the many specific requirements related to working in industries beyond solar energy generation. Additionally, we may be exposed to increased operating costs, unforeseen liabilities or risks, and regulatory and environmental concerns associated with entering new sectors of the power generation industry, which could have an adverse impact on our business as well as place us at a competitive disadvantage relative to more established non-solar energy market participants. In addition, such ventures could require a disproportionate amount of our management’s attention and resources. Our operations, earnings and ultimate financial success could suffer irreparable harm due to our management’s lack of experience in these industries.
TerraForm’s filing also indicates First Wind’s wind farms suffer from an array of problems. For instance, under its power purchasing agreement, First Wind was required to install and maintain a battery energy storage system to maintain electric grid stability and reliability. However, the battery system manufacturer and manager, Xtreme Power, is in bankruptcy and no longer provides replacement batteries or other necessary components. Though First wind is attempting to secure replacement batteries, it admits the new battery system may not be able to meet the company’s terms of operation.
An additional equipment problem uncovered in TerraForm’s SEC filing is the turbines and other equipment originally produced and supplied to First Wind by Clipper Windpower are no longer manufactured, backed or serviced by Clipper. A number of defects were found in the turbines and other equipment Clipper provided, affecting various turbines operations up to the present. The defects resulted in prolonged, “downtime for turbines at various projects,” according to TerraForm’s SEC filing.
Prolonged arbitration and litigation ensued, resulting in a settlement agreement signed by First Wind releasing Clipper from all warranty and maintenance obligations. As a result, TerraForm reports, “if Clipper equipment experiences defects in the future, we will not have the benefit of a manufacturer’s warranty on such original equipment, may not be able to obtain replacement components and will need to self-fund the correction or replacement of such equipment, which could negatively impact our business financial condition, results of operations and cash flows.”
Location and Financing Problems
TerraForm lists a number of other problems potentially resulting in losses or even the closure of some turbines or windfarm sites entirely. For instance, First Wind did not properly notify the FAA of wind turbine construction in certain locations, thus if aviation conflicts arise, the turbines may have curtail their operation or even be shut down. In addition, operations at some wind farm locations have been curtailed due to an excessive number of endangered bats and birds being killed by the turbines.
TerraForm is also concerned the wind farms it wishes to purchase may be unable to secure financing for ongoing operations unless Congress keeps in place the entire panoply of subsidies and tax advantages wind farms currently benefit from. According to TerraForm, “PTCs and accelerated tax depreciation benefits generated by operating projects can be monetized by entering into tax equity financing agreements with investors that can utilize the tax benefits, which have been a key financing tool for wind energy projects. The growth of our wind energy business may be dependent on the U.S. Congress extending the expiration date of, renewing or replacing PTCs, without which the market for tax equity financing for wind projects would likely cease to exist.” It is an open question whether Congress will continue to renew the wind production tax credit or if it will continue to provide favorable tax breaks to the energy industry.
With the all of these forces buffeting First Wind’s wind farms, one may wonder why TerraForm wants to purchase the assets.