SORDID ISSUE OF WIND POWER TARIFFS
May 2 - 15, 2011
In Pakistan, people and other stakeholders make protestations at the wrong time, normally when NEPRA approves raise in electricity tariffs. There is no use crying over the spilt milk, the die is cast usually much earlier when tariffs are awarded to power generating companies.
Piece by piece individual tariff decisions cumulate to an unaffordable bulk. Recently a wind tariff petition has been filed with NEPRA asking for a 20 per cent increase in the already high approved tariff of 12 cents per unit. In this space, we will examine the issue and provide some perspective on it.
We need energy including renewable energy but at a reasonably competitive prices. Ideally, it should be lower, keeping in view the low paying capacities of the consumer, but that is not possible. Every thing is imported, plant, fuel and the knowledge. Neither subsidies are feasible as government does not have the money. Unpaid subsidies have created circular debt problems, which affect electricity supply through underutilization of an already low installed capacity. Therefore, the relevant authorities have to be careful and judicious in making tariff awards.
Considerable wind power capacities have been installed in the world, which today exceeds 150,000 MW. China leads the world with an installed capacity of 44,733 MW, followed by the U.S. with 40180 MW, Germany 27214 MW, Spain 20,676 MW and India 13065 MW. Even smaller countries like Egypt and Turkey have respectively installed 550 MW and 1329 MW.
Wind power cost (turbine etc) were very high up to the year 2008, since then the costs have been gradually coming down. In the period up to 2008, the demand was too high and supply capacity was trying to catch up with the surging demand. So much so, that wind turbine suppliers would not even respond to the equerries of buyers from this part of the world, or gave inordinately large lead times. There are two reasons for this; a) Wind turbine supply industry has expanded and supply bottlenecks removed; b) Gearless turbines have become more popular (gearing system used to be a supply bottlenecks; C) Wind power is now increasing competition from solar, dividing the attention of investors.
More than 100 letter of intents (LOIs) had been issued in Pakistan almost a decade ago, and many (20 plus) got lands allotted in the wind area. As mentioned earlier, the progress in the sector has been marred by excessive supply bottlenecks and high capital costs. Some 13 parties, all of these not being land allotees, invested in feasibility studies, and five out of them acquired generation licenses and tariff approvals. Two or three parties got a power purchase agreement and one installed a small capacity of some seven MW. Tariff enhancements are being requested and applied for, which is not justified as we shall examine later in this space.
WIND TURBINES COSTS
In the period 2005-8, wind turbines typically cost above USD1500 per kW. Today, a typical turbine costs around 900-1000 USD per kW.
The newcomers like China and India offered the current level prices even in the high price period. In their domestic markets, China and India sold well and built formidable capacities. Today, India has an installed base of 13065 MW, adding more than a thousand MW every year. China, starting from zero, only a few years back, has installed a generation capacity of 44733 MW by the end of 2010, out of which 18928 MW has been installed in 2010 only. Due to considerable installed base, the financing agencies are less reluctant to finance projects, which are supplied by these two countries. Today, the total capital cost for wind power allowed by regulatory agencies in India varies around Rs4.3-5.35 crore per MW (900-1200 UD per kW). Allowing for 25-30 per cent installation costs, the wind turbine cost comes out to be 750-900 USD per kW, which is about 75 per cent of the European cost. Earlier this cost differential used to be even higher.
WIND POWER TARIFFS IN THE WORLD
The Feed-in-Tariffs (FIT) have also come down considerably. In most European countries, FIT is around or below 12 US cents per kWh. These are European prices, which have been on the higher side. Present tariffs in EU countries were fixed in April 2010; the new tariffs are expected to be revised downwards reflecting the still lower wind turbine prices in the intervening period.
In Europe, typical wind tariff is less than 12 cents and in the US even lower. In some of the good sites in Germany, the wind power tariff is as low as 7 cents. In India, it is around 3.5 Indian rupees per unit, which makes it under eight cents. It would have been still lower than this figure by a good 25 per cent if India had the same high capacity factor wind resource as we have in Pakistan. Pakistan Capacity Factor approximates the US average, which is among the highest in the world.
In many countries wind power has started competing with coal and gas, having come as low as 7 cents per unit. In Turkey, another comparable example, Feed-in-Tariff is 7.3 cents, and an additional incentive for local content up to 3.7 cents depending on the level of local content. As per recent bids in that country, 12 of the 17 successful bidders offered a tariff of 6.4 cents, 12.5 per cent lower than the basic allowed tariff. Admittedly, quality of wind resource in Turkey is high, equal to Pakistan. So, the trend is towards reduction in wind power prices, tariffs and equipment cost. Seller's market has gone. In Brazil, recent biddings have resulted in Wind FIT of 7.5 US cents per kWh. In fact, auction approach has expanded the role and market of wind power in that country due to lower prices. Same seems to happen in Turkey where auctioning and resultant low tariff has brought wind power into the main stream.
Why should wind power cost be more expensive than in other countries?
It depends on the quality of Wind resource; wind speed and the capacity factor.
Pakistan wind resource at Gharo is better than many countries in the world with a capacity factor exceeding 30 per cent, while in India it averages around 22 per cent at most locations. Similar is the situation of quite a few European countries on which data is available. In Europe, the capacity factor averages around 25 per cent, although some sites may have a higher CF. In Spain and Denmark, capacity factor is generally high at 30 per cent, resulting in the lowest wind tariff in Denmark. In Morocco, and around capacity factor exceeds 41.5 per cent. Turkey, Brazil and Pakistan have comparable CF between 30 and 35 per cent, only second to USA and Morocco.
WIND POWER TARIFF IN PAKISTAN
Most of the approved wind power projects in Pakistan got their tariffs approved in the high price period. These were not implemented due to supply problems as mentioned earlier. There is a strong case for revisiting those approved tariffs, and bringing these down appropriately reflecting the new cost realities. A reasonable wind power tariff today should not exceed Rs10 (12 cents) per kWh. These days fuel cost for oil base power is Rs12 per kWh. But, these are abnormal and hopefully transient prices. There are all kinds of forecasts for oil prices. A more reasonable yardstick of oil reference price is 80-100 USD per barrel. As per NEPRA advertisement for fuel tariff hearings, the average fuel cost today for power generation is Rs7.16 per kWh.
Wind Turbine prices have fallen to their lowest in recent years. This is the caption of a report released recently by Bloomberg. The report reveals that the wind turbine prices have come down by 18 per cent, and are lower than pre-commodity price hike period. However, we tend to live in a different world. Project promoters of wind projects are demanding higher prices than approved earlier. A NEPRA hearing for a 25 per cent increase in approved tariff is scheduled for next month.
According to the publication, global contracts signed in late 2010 for delivery in H1 2011 and H2 2011 were for USD1.33 per MW in Europe, and in the US even lower at 1.27 USD per MW. A wind power monthly in its special report on India in April 2011, cites a deal among Dongfang of China and SKS energy of India signed in December 2010, for a supply of 166 wind turbines (249 MW) for a total price of 145 million Euros, which comes out to be 0.844 million USD per MW, to beat the local Indian manufacturers which are selling at even lesser rate.
To our information, Chinese turbines are being supplied in place of the originally approved German turbines in Pakistan projects. Including 33 per cent construction costs, European total capital cost comes out to be 1.769 USD per MW, and Indo-Chinese price at 1.12 million USD per MW. In Pakistan, the current asking rate as per the latest tariff petition is USD2.872 million per MW, which is 62 per cent higher than installed costs in Europe, and 250 per cent higher than the Chinese equipment installed in India. These are more akin to nuclear power plant rates which have a capacity utilization of 90 per cent. Wind turbine is just one piece of equipment, and much simpler and crude comparatively. Who will pay for all this? Neither the government, nor the people have the money to pay for the consequential tariff.
NEPRA had till recently approved wind tariff at around 12 cents per kWh, and only in last August approved tariff for Fauji Fertilizer at 16 cents, giving cause to the others to share in the loot, so to say. The recent petition asks for an enhancement of 25 per cent i.e. from 12 cents to 15 cents per unit. I do not have details of the new petition for increase in tariff (except for what has been provided in the advertisement), as NEPRA has not posted the details on its website. There seems to be a trend in avoiding providing timely data and information to the stakeholders; so much for transparency.
THE DUBIOUS MERIT OF HIGHER RETURNS
Why is it so that we get higher energy tariff. In the US average consumer tariff is 10 cents. We are the only unfortunate country other than the oil rich countries, which produce electricity based on oil. Earlier oil had a 33 per cent share in our electricity production and now it has increased to 50 per cent. Most of the countries produce their electricity from coal, nuclear, gas and hydro.
The other reason for expensive energy in Pakistan is what we are facing in case of wind power. The unabated tendency in Pakistan is to book higher capital cost. Regulatory agencies are supposed to check this trend. Earlier, there was a requirement of three quotations, now there is a requirement of open tendering. All can be managed in a country which is still one of the least documented. As it is Pakistan that offers probably the highest return on equity at 18 per cent IRR and that in foreign currency. Add a 5 per cent annual long term currency depreciation the allowed IRR on equity becomes 23 per cent. In India, return on equity of 16 per cent is allowed in most of the states, and that is in local currency. In the US, return on equity for wind power are typically at 7.5 per cent , in Germany 9.5 per cent and Spain 10 per cent. In the most wind friendly country Denmark, it is 11 per cent. Thus, allowed rate of return should be enough of an incentive.
The idea of awarding higher and higher rates of return on equity, especially in the context of inflated capital cost bookings, may be revisited; as the average energy costs keep going high .There is an upper limit to what the consumer can pay. The rising circular debt has shown the gravity of the problem, neither the government nor the consumer can afford the energy subsidies and the bills respectively. Renewable energies pose an extra problem. Capital costs are twice as high, which is tantamount to a virtual fuel cost of 50 per cent. Higher return on renewable such as wind power actually means paying higher return on fuel cost in the parlance of conventional energy. More than 80 per cent of the cost of renewable energy tariff is capital cost.
THE MERIT OF AUCTIONING
If wind power is not beset by unreasonably high capital costs, there is now a chance for wider scale penetration of wind power. Wind power tariff rather than the high rates of return on equity may become the driving force, as the trend is emerging in many countries. An immature market offering risky high returns often encourages unstable investors. Except for exceptions, most wind energy project promoters do not fall into the category of stable parties, if compared with the IPP list.
It may be advisable for the agencies to either auction the projects or announce pre-tariff. In India, auctioning has been done in case of solar power. The received bids were considerably lower than the reference price. Auctioning is very simple for wind, as all projects have the same basic data that affects cost. But, nothing absolves the officialdom from doing the necessary homework and adequate verification and seeking expert neutral advice where it is required.