Wednesday, May 22, 2013

Recent increase in power tariff: Towards wind power auctions

Nepra has announced increase in power tariff once again. Most trade bodies have protested. Only one month back, NEPRA issued upward wind tariff, excessive and unreasonable, no body protested or even noticed. This is unfortunately typical in Pakistan, even responsible bodies like FPCCI are not immune to it. High Power generation tariffs (cause) are neglected and DICO tariff (consequence) is ignored. At DISCO level, the tariff die has already been caste.
There is nothing NEPRA can possibly do about it, except to pass on the cost of production to the consumer. NEPRA can, however, put a restraint on power generation tariffs where proponents propose unreasonable tariffs, out of sync with the market prices. Wind Power Tariff is a case in point. In this brief, we would demonstrate how unreasonable the wind power tariff is and what can be done about it ,bringing it to a level that is not only affordable but actually contributes a considerable share in power supply mix of the country.
The recent Brazilian energy auctions and closing of deals at 4.349 US cents (one-third and one-fourth of Wind Tariff in Pakistan) is an eye opener. In fact not only Brazil, but whole of South America has recently betrayed a trend of falling wind power prices; the large Brazil and tiny Uruguay. Accounting for the differences in Brazilian conditions (higher capacity factors), this translates to 6 cents for Pakistan. Our current predicament and energy crisis, as widely understood and appreciated by now, is among others, due to high distribution losses, dependence on expensive oil, and the consequent circular debt issue. If Pakistan manages to create the same business conditions as in Brazil, except the natural and physical ones, she can benefit from these favourable market conditions, and solve its immediate problem for quite an extent. If we are able to get the same prices, mutatis-mutandis, say at 6 cents (adjusted for capacity factor differences), we can probably induct 500 MW rather immediately say 18 months, and another 500 MW by end 2015, it is going to make a significant difference both on supply situation and as well as prices. This is an opportunity the next government should not miss. In fact the test of the new government would be as to how it conducts itself in this respect; new trend of competition and transparency or business as usual. In the following lines, I would explain the background and details of the issue which would enable the reader to appreciate the scope of optimism that I have expressed in this respect.
The current wind tariff as permitted by NEPRA at 13.5-16 cents, and proponents asking for more, is certainly not tenable. It is out- of- sync with current market conditions. And it is certainly, at prices close to Oil, not affordable either by people or by the government. In the past, Brazil used to have high wind tariff under a cost-plus type regime as it prevails in Pakistan. Auctions and competition has changed this. Brazilian deal is the lowest of all, but not certainly, a freak situation. It is a trend and good news for buyers and eventually for sellers, as the market is going to expand tremendously under this kind of affordable prices. The next door small countries like Uruguay and Peru got comparable prices at 6 cents. Uruguay has, under these prices, fast tracked its wind power programme and is on its way to acquire 1000 MW of Wind Power. India is for a long time now on 8 cents, at very mild and inconstant wind conditions (20% capacity factor).Let us see where we are and where to we can go under these market conditions. Auction and competition in energy purchases is the new order, at least, in the emerging economies like South Africa, Turkey etc who have taken to this mode and are tremendously benefiting from it.
Nepra has approved an upfront tariff for wind power at 13.52 cents levelized (16 cents for 1-10 years) for foreign debt financed projects. For locally financed projects, the rates are still higher; 16.2926 cents levelized (almost 20 cents for the first ten years). For the uninitiated, let me explain the terms in an ordinary language. Levelized can be understood as some kind of an average. Tariff is higher for the first ten years and low for the next ten years due to debt repayment liabilities in the in the initial 10 years, hence the need of averaging. There are two kinds of tariff system; upfront which is being discussed here. It is a fixed tariff defined upfront, spelling out the rate at which electricity would be bought and sold. The other is Cost-plus, meaning thereby that the investor is paid for whatever it costs to him (or whatever he claims to have cost him) plus an agreed return on his equity. Cost-plus is very frankly a Khulla Khata, as the name implies. In countries like Pakistan notorious for corruption and white collar crimes, this may almost be a recipe for disaster.
Even if one may not question other cost components, Capital cost basis of these NEPRA tariffs is highly contentious, as I shall explain; Nepra is caught between critics like this scribe (self-proclaimed defender of the public interest) who always point out that it is too much and the ambitious investors, who want to make hay while the Sun shines, and for whom, nothing is too much. Nepra has allowed or assumed a CAPEX of 2.4-2.5 Million USD per MW, which is quite liberal and in my view profligate. Even the liberal upfront tariff may not be found attractive enough by most local promoters as they are looking forward to their approved cost-plus tariffs of 16-17 cents with practically no risk at all.
Let me brief the readers now on true costs and prices of wind turbines and wind power in different parts of the world (References would be made available upon request). Uruguay in the wind power auctions held by it in 2012, got prices of 6.235 cents per kWh. Uruguay is no wind power giant, nor does it have a wind turbine industry or infrastructure. It imports every thing. Where does the established industry argument go in case of Uruguay, a tiny developing country with a population of 3.5 million? In fact, often local production can be a liability. In India, local Wind turbine prices are higher (900.000 USD per MW or higher), while China is ready to offer high technology (DFIG) turbines at 645,000 USD per MW. Add 100,000 USD per MW for transportation, it is still cheaper than Indian local turbine. Chinese wind turbines should not be taken in low esteem any more. China has an installed base of more than 75000 MW of wind power, highest capacity in the world and mostly produced in China. Reliance India has contracted a 2500 MW of wind power capacity from China at those kinds of Chinese prices.
In Europe, where the manufacturing costs are the highest, EWEA (European Wind Energy Association) reports European costs of 1.23 million Euro (1.6 million USD) per MW installed and generation cost of 5.3 euro cents (6.89 US cents).Feed in Tariff in Germany has been 8.93 eurocents for the first five years and 5 Euro cents thereafter, and is being curtailed or withdrawn, if not withdrawn, already. Brazil got a price of 4.75 cents in 2012 auction. Brazil has one wind turbine manufacturer. She got such attractive offers not because of the sole wind turbine local supplier, but because of international fierce competition. A leading European Electricity giant Iberdola is involved, possibly shipping from China. And we are literally next door to China. Urumqi (head quarters of Chinese Wind Power giant Gold Wind) is a few hours drive from our border. In the US for the last several years, wind power has been competing with Natural Gas Combined Cycle (NGCC) and is now poised to even surpass coal power. Those who know how much cheap coal power is in the US would be able to appreciate what I am talking about. For the skeptics, let me reproduce here some credible references;
1) Vestas (2011d) reports that its average (nominal) price on new orders world-wide during the first half of 2011 was 967 EUR/kW, down2.5% from 992 EUR/kW in 2010. Bloomberg NEF (2011c) suggests a steeper decline, as the price of turbines within its sample that were contracted in the first half of 2011 for delivery (world-wide) in the coming twelve months fell to 940 UR/kW, a 7% decline from 2010 levels of around 1,000 EUR/kW. (Source: Mark Bolinger and Ryan Wiser, Understanding Trends in Wind Turbine Prices Over the Past Decade, Lawrence Berkeley National Laboratory, October 2011)
2) Cheapest Wind Energy Spurring Renewables Deals: 4.394 US cents per kWh
Prices for wind power have been steadily falling in government auctions since 2009. Developers in the December auction signed contracts to provide wind power at an average 87.94 reais ($43.94) per megawatt-hour, 13 percent less than the rate in the 2011 sale and 41 percent less than the 2009 price, according to the website of Brazil's national energy agency Empresa de Pesquisa Energetica.
3) Brazilian developer Bio-energy says it has signed a turbine supply deal with GE worth R$1.8bn ($900m).
Bio-energy says the US industrial giant will provide it with 377 turbines. The 1.7MW machines were specially designed to match the wind regime at Bio-energy's projects in the northern state of Maranhão, says a statement from the developer. It specifies that 207 turbines are destined for what is considered to be the most keenly-priced wind project in the country, which was awarded at R$90 ($45) per MWh in Brazil's last tender round. Another 170 turbines will be used for future projects.
4) MINGYANG China (DFIG) Turbine Prices
Wind turbine maker China Ming Yang Wind Power Group said Friday the market prices for 1.5-MW and 2-MW Chinese-built wind turbine generators would rise to CNY 4,000 (USD 642/EUR 471) per kW in 2013.
The company's statement came as a confirmation of predictions about the price increase made earlier by chairman and chief executive Chuanwei Zhang. The company said also that it planned to ship 2.5 GW of wind turbine generators this year, both at home and abroad.
5) Global Wind Turbine Prices
Global turbine contracts signed in late 2010 for delivery in H1 2011 and H2 2011 display very aggressive pricing, with average values at $1.33m/MW. This is a 7% decrease compared to contracts signed in 2009 and 19% down from peak values in 2007-08.Low-priced power-purchase-agreements in markets with exposure to electricity prices - rather than fixed feed-in tariffs - seem to have put further pressure on turbine contracts: Italy, the UK and the US all display average pricing well below EUR 1m/MW for contracts signed in 2010 for delivery in H2 2011. The US presents the lowest pricing of all markets so far with values averaging $1.27m/MW (euro 0.93/MW).All manufacturers covered by the survey have displayed aggressive pricing, including several contracts for leading ("Tier 1") manufacturers - in some cases below euro 0.90m/MW ($1.22m/MW).
BNEF (Bloomberg) reports even further lower prices in the wake of Tariff changes in the US and with the advent of auctioning in many emerging market. Add a maximum of 100 Euro per KW for transportation and compare it with 2500 USD per kW of installed cost claimed by promoters and approved by Nepra.
Although, cost padding has been endemic in Pakistan, it has never been as grotesque as it is in wind power. If one does the arithmetic, there is a discrepancy of more than 500 million USD per project in the recent cost-plus wind tariff schemes. Nepra has been awarding a tariff of 10-12 cents when the wind turbine prices were at their peak for two reasons; demand for wind turbines and inflation in material and commodity prices. Both these factors have changed since then. Steel and other metal prices have come down significantly. Consequently, wind turbine prices have come down by 40-50%. And then the China factor and reduced demand and over-supply of wind turbine in the international market. The rush is on solar, not on wind. No investment came to wind power in Pakistan in that period. However, this was mistaken by our decision-makers to be due to the low tariff. Chinese were not there in the market and European market was too hot. No amount of tariff could have possibly brought the Europeans to Pakistan market. Situation is drastically changed now. Those people who have difficulty in supply or prices can contact me, for free advice. Thus instead of decreasing the tariff from 12 cents to 8-10 cents, NEPRA has increased it, in the aftermath of 2008, when a new team arrived at AEDB and a new government in saddle with Rental Power controversy to its credit.
Wind power has come of age. Wind Turbines may look the same but a lot has changed. Wind turbines have become more efficient, produce more energy for the same capacity and buck, have grown taller (from 40 meters of yesteryears to a 100 meters today) extracting more energy from the same site and location than it was earlier and have better controls, all contributing to the bottom line. Consequently, Wind Power has become competitive, more than ever before. Those who talk and propose of high wind Tariffs are living in yester years. In today's fast changing technology, 3-5 years is a long time. Unfortunately, the mindset in this part of the world changes at a much slower rate. Hence, there is a group here which does not accept the evidence. Some have vested interest and some are swayed back by the glib talk of the vested interest.
What is so wrong with our poor and Piyara Pakistan. What is so specific to Pakistani conditions that do not match with anywhere in the world; small Uruguay, large Brazil, mighty US, equally poor neighbour India and expensive Europe. Pakistan is the highest, the most affording cash surplus country, which is suffering loadshedding because it cannot pay for the fuel. Let me tell you what is specific to Pakistan, in addition to what you may have already understood; Pakistan has one of the best wind resources in the world above 31% capacity factor. Its wind power site is situated almost in the outskirts of the seaport of Karachi, with no access problem or difficulty. As is said of Pakistan cricket; stealing defeat from the jaws of victory. And as a very sincere Pakistani known to me aptly puts it; converting strength into weakness rather than vice versa. This is a classic case of this syndrome. Imagine, what kind of energy volumes, if not surplus, could be bought with Uruguay prices or slightly more of it? As we have mentioned elsewhere, wind turbines have come of age. There used to be a practical constraint of 10% share of wind pwer due to the strains caused by fluctuating wind power. With advances in technology, variable speed, gearless, wind turbines and the associated electronics (converters), wind turbine generators behave almost as smoothly as conventional power. One can induct more of wind power into the grid (a 20% share) than it was hitherto possible , provided old technology is not pushed on to us by the project promoters and the watchdogs do their job. One could look forward to a market of 2500 MW initially and expanding to twice or thrice more with the rising demand and grid capacity.
It is highly unlikely that any project would be approved by the Ministry of Finance which has to issue guarantees and provide for these excessive liabilities in the context of mounting circular debt. Project promoters should weigh the desirability of two scenarios; occasional windfall or a continuing business with reasonable margins. Also the wind power enthusiasts (let me clarify, I like wind power, although at affordable rates) and the relevant government agencies should understand that it is the competitively priced wind power that is going to have the market and not otherwise. If you do not accept my data, go for a fair and transparent auction and discover for yourself. Let the most efficient ones get the orders and make money. Uruguay, a small country conducted these fruitful auctions giving cheap wind energy, is on its way to install 1000 MW by 2015 from just a 50 MW figure a few years back. They are buying more and fast at that.

Upfront Wind Tariff 2013 vis-à-vis Wind tariff and rates elsewhere
CAPEX(NEPRA)                                 2.4-2.50 Million USD per MW
NEPRA Tariff(foreign loan)     13.52 US cents per kWh(16 cents 1-10 yrs)
NEPRA Tariff Local Loans       Rs 16.2926 per kWh(Rs 19.7344 1-10 years)
CAPEX Europe                   1.23 Million Euro per MW(1.6 Million USD)
COGE Europe                                                5.3 Euro cent
FIT. Tariff Germany                        8.93 Ecents for 1st 5 yrs and4.9 cents thereafter
FIT.  India                                           8 US cents per kWh
CAPEX India                                       1.2 Million USD per MW
China Wind Turbine Price                              500-600 USD per KW
Vestas Wind Turbine Price                                1200 USD per KW
Uruguay Auctioned Tariff 2012                     6.235 US cents per kWh
Brazil Auctioned Wind Tariff                    4.75 US Cents(6.89 cents
Turkey's FIT Tariff                                  adjusted for highercapacity factor) per kWh7.3 US cents per kWh