Winds of Change Blowing Hard ?
Winds of change blowing hard ?
SUNIL KEWALRAMANI
October 23, 2008
Wind power is the most mature of mainstream renewable energy technologies and, if the world’s electricity generation is to be made cleaner, it must play an essential role.
The IEA (International Energy Agency) estimates that, if global greenhouse gas emissions are to be halved by 2050, then wind must contribute about 17 per cent of worldwide power generation by then. The costs of doing so would be offset by the savings in coal, oil and gas. The US Department of Energy, in a study in April 2007 states that US could generate 20 percent of our electricity from wind.
T Boone Pickens, the legendary Texas oil and gas executive has taken the first step to a 4,000-megawatt wind farm by 2015. The power so generated will go into a transmission line that will tie into the Electric Reliability Council of Texas system in the state of Texas, and it will be transmitted downstate. T Boone Pickens’ wind farms will be located in the central part of the United States, which will be the best from a safety standpoint. There will be a wind corridor that goes from Pampa, Texas, to the Canadian border.
Denmark’s Vestas Wind Systems A/S is No. 1 globally, followed by the GE Energy unit of Fairfield, Connecticut-based General Electric Co.
According to the Global Wind Energy Council; in 2007, about 20 GW of new wind-generation capacity was built around the world. About Euros 25 Billion were spent globally last year just on building turbines.
United States is targeting to generate 20 per cent of its electricity from wind by 2030. According to Randy Swisher, executive director of the American Wind Energy Association; this would be the equivalent of taking 140 million cars off the road. Already, in 2007; the US has erected more wind turbines (over 5GW of capacity installed) than any other country and is forecasted to shortly overtake Germany as the pre-eminent leaders in wind turbine installation. China and India are both adding turbines at a rapid rate. Spain and France are focusing attention on wind in their attempt to generate 20 per cent of energy from renewables by 2020.
Wind farm valuations are sky-rocketing. Airtricity sold its US wind assets to Eon for $ 1.4 Billion. Its assets contain only 210MW of operating farms with another 880MW soon to be operational. Rich valuations indeed but still not dotcom-like.
However, price of turbines, which have risen by more than a third in the past two years to about 1.5 Million Pounds, are expected to rise further by another 10 per cent in 2008.
India has an installed wind power generation capacity of 8696 MW; yet majority of projects have a plant load factor of just 10-15 %. Because of the lopsided nature of Indian tax laws, claiming accelerated depreciation rather than true economic sense seems to be at the back of minds of wind power project developers. As per Rule 5 (Appendix I) of the Income Tax Act 1961; companies currently can claim depreciation up to 80 % of their investment in the first year of the project itself. Companies like Suzlon Energy develop wind farms and then sell a part-ownership in such farms to individuals and firms, who in turn claim tax breaks from the government. The ministry of finance is reportedly considering a change in laws pertaining to tax breaks for wind generation projects; whereby the benefit is proposed to be linked to the actual generation of wind power and not merely the investment in a wind power project. Such change could be detrimental to companies like Suzlon and RRB India Ltd., who have piggybacked on such accelerated tax writeoffs to further their volumes.
Suzlon has faced ire over the reported splitting of its blades on its 2.1-megawatt turbines sold in the U.S. to Deere & Co. and Edison International’s Edisson Mission Energy. In India too, customers have found the power generated from its turbines to be less than expected. It is reportedly planning for a domination agreement to be concluded in “due course” according to German law, to consolidate its takeover of RE-power Systems AG, a move that will speed the transfer of technology between the two companies.
Offshore wind is another area facing significant headwinds. The wind blows more reliably offshore and is often stronger, making turbines sited in the sea attractive, and they maintain the aesthetics of the area since they can be hidden from view. However, siting turbines offshore is more difficult. It can cost up to a half more than building a wind farm offshore. It can cost up to a half more than building a wind farm onshore. Shell recently sent shockwaves through the offshore market, when, citing cost issues, it pulled out of the London Array, a proposed development in the Thames estuary. It also felt that it could earn a better rate of return by investing in onshore wind assets in the US.
Waiting list for turbines is likely to remain at about 18 months to two years, notwithstanding new manufacturing facilities about to open in China and India to meet the growing demand. This waiting period is a deterrent for smaller wind-farm players who are squeezed by long waiting queues. Thus, demand destruction at the lower end of the spectrum is inevitable, unless supply is beefed up to meet demand.
Yet, winds of change are blowing hard indeed. Until now, offshore wind farm owners were small and inexperienced, with little bargaining. Today’s customers have the scale and buying power to make stringent demands. They also have the capability to walk away from the deal if it is perceived as uneconomic. Balance of power is all set to shift in favour of the customer, and the financial return on projects is about to take centre stage.
(The author is a Wharton Business School MBA and CEO, Global Capital Advisors. He may be reached at worldequity@sunilkewalramani.com.)
About the Author
Mr Sunil Kewalramani is a Wharton Business School MBA, a CPA, CA and a leading consultant for multinational companies on global asset management, strategic planning and cross-border mergers and acquisitions
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