Wind power: world s most expensive project in process - I

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In recent months, Nepra has announced some very objectionable Tariff determination on Wind Power. As per determination, Pakistan has now the dubious honour and distinction of hosting the world s most expensive Wind Power project both in terms of Capital cost (3. 1 Million USD per MW, almost twice as expensive as the going international rate) and as well as unit production cost of 15 cents per kWh, which is also twice of the most recent prices in some countries (Brazil got a price of 6 cents per kWh and India s stable wind tariff of around 7-8 cents per kWh).

This has been done despite being aware of the mounting circular debt due to the inability of the government to subsidise electricity and as well as the inability of the consumers to pay for the rising tariff. We are converting every advantage into disadvantage by our thoughts, actions and insensitivities. And this time the victim is one of the best wind resources of the world in terms of the availability (capacity factor). This has prompted me to write this article in which we will review the Nepra tariff determination of the wind project as a case study of the problems and issues. It is sincerely expected that the relevant quarters would receive it and contemplate over it in a positive frame of mind. We will also make some recommendations regarding the introduction of some competition in the energy supply sector. There are other issues arising out of the lack of an integrated energy and power policy that fills in the gap and resolve the interfacial and hitherto dangling issues.

First the case study of the Zorlu wind power project of 50-56 MW capacity, of which 7 MW has already been installed a few years back. In the meantime, the project promoters managed to get two upwards revision of tariffs; first 10, then 12 and now 15 cents per kWh, while the world prices of wind turbine have fallen recently by 20-25 percent. One of the Nepra s members himself has raised several objections on the tariff proceedings and its results and has written his note of dissent which remains unanswered to-date. Let me summarise the inadequacies of the proceedings in this respect.

1) The relevant tariff petition details were not made available and posted on the web-site. It was done despite my written request to the Registrar Nepra. Consequently no intervention could have been made. This scribe managed to send limited comments only based on the salient data published in the advertisement.

2) There is a persistent problem at Nepra of not adequately preparing a formal repertoire/transcript of the tariff proceedings and publishing it as a part of the proceedings. They only make audio-tapes, which perhaps are made so irregularly, that the member of Nepra himself could not be provided one. The inadequacy used to be partly covered by the write-ups through their elucidation of the issues. This time even that was missing except some perfunctory statements. The most important issue that merited enquiry and investigation was whether the tariff enhancement, as demanded by the proponent, was justified in the light of the credible reports by international agencies of a 20-25% reduction in Wind Turbine prices. It was dubbed as a general comment of mine, despite my providing the report itself that surveyed a large number of recent tenders. This kind of investigation and report if commissioned by Nepra would have cost it very heavily. It was done by no one else other than Bloomberg, one of the two or three names in the business in the energy information sector.

It is widely known that wind turbine prices have gone down due to rising competition and the increasing number of suppliers. There used to be less than 10 manufacturers, even Siemens had not entered into it and did it recently. Now there are dozens of manufacturers among falling demand due to the more attractive solar sector.

Instead of properly dealing with the issue, the determination hid itself behind the guidelines literally purporting to admit that they would accept whatever the proponent manages to declare and document as to the EPC price agreed with the supplier. No tender proceedings and no audit and no third-party evaluation, despite the serious issues involved.

Past record shows that Nepra in this case has violated its own previous practices eg UCH-2 natural gas-combined cycle project, where prices were demanded to be brought down in a similar reduction in equipment prices, due to the fall in metal prices subsequent to a temporary abnormal rise in metal prices. The conclusion: hold a public proceeding of sorts and approve the tariff with clear disregard and insensitivity to the real and reasonable issues of costs and prices.

The argument that we have more extra cost to account for to justify doubling the EPC cost and that international cost and data has no relevance is rather strange if not preposterous. Despite padding, there is a difference of 20-25% in all other conventional projects. If this logic is expected, in the future other proponents may also make a case for this largesse. But if you go by the recent projects of KESC and one of the Gencos probably Kot Addu, reasonable EPC costs have been obtained. And in the case of wind power, balance of the system costs (costs other than turbine and tower) are only 20-25% of the total.

There are some site-specific costs that have to be accounted for. In case of wind these are minimal as compared to other technologies and sites . In fact Pakistan s wind site at Gharo is one of the easiest, close to the seaport and has good transport infrastructure. Many projects do not have such easy access. Admittedly there are higher financial costs due to the higher risk factor for which an allowance could be given and a tariff of 12 cents was more than adequate in this respect.

3) There is a persistent confusion as to how much electricity is being generated by the existing installation. The member Nepra points out that it is only one MW as opposed to the installed and paid for capacity of 7 MW. Is it the lack of generation or the lack of transmission capacity at the end of the power purchaser? Even there are doubts as to the wind speed data that has been expressed by the member Nepra. The proponents have replied that higher temperatures (50 deg C) have resulted in the lower output.

GOP has undertaken to assume wind risk meaning that shortfalls below a threshold would be paid by the power purchaser. And who is the power purchaser in this case, Hesco or CPPA. A clarification of these issues is a must before committing the extra purchases. No published information is available in this respect not even to the member Nepra. Let us adopt more responsible conduct in this respect.

4) There are some more operational issues relating to the code of conduct especially at the lower level restraining at least case officers from mingling with the project proponents. There are codes of conduct in this respect elsewhere both for civil servants in general and especially for those in the regulatory bodies. There are no fool-proof ways for preventing collusion and conspiracy.

Yet some steps can be taken to at least safeguard our young men who are the case officers. Also it is felt that the existing procedures and processes do not adequately safeguard the public interest. Making a regulatory body is not enough, nor the holding of public hearing that we have dissected one of the cases and pointed out its inadequacies. Third party evaluations and NGOs are to be encouraged. A few individuals like this scribe are performing this function at a great personal cost and sacrifice.

Even developed countries have problems in this respect, although they have more or less done away with the cost-plus approaches that we depend upon so heavily. In Canada, regulatory agencies are paying for the investigation and travelling expenses of the qualified interventionists.

In the California Energy Commission, there is an independent department that studies projects from the point of view of public interest. Perhaps the best way is to bring in more competition into the energy market and its processes. Certainly in case of energy supplies, if not distribution, this can be done reasonably well. But this is the subject that we will dilate upon in the next article in this series.

 

 

Courtesy: Business Recorder

 


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