Negative tariffs for electricity!

During howling winter weather two years ago, the thousands of windmills dotting Denmark and its coastline generated so much power that Danes had to pay other countries to take the surplus. The incident was the first of its kind, and lasted only a few hours... Since then, there have been just two more instances in which the price of wind power in Denmark turned negative for a significant period of time because of excess wind.

This draws attention to the problems posed by the intermittancy and volatility of wind power and the need to effectively manage it. Apart from required complementary physical infrastructure, it also requires technologies that can store electricity. With an ambitious off-shore wind power generation plan, Denmark hopes to generate half its power from wind within eight years, up from less than a quarter currently. In this context, it is estimated that the supply of electricity might exceed demand for about 1,000 hours each year by 2020 unless there are substantial changes in the way electricity is managed in Denmark.

Among the technologies and practices being tried out to store wind power include pumping water uphill to reservoirs and releasing them to generate hydro-power later; extracting hydrogen from water through electrolysis and then using it to run fuel cells or synthesize gas to provide power when wind was unavailable; different types of batteries; and storing them in the batteries of electric vehicles.

Trade protection in solar power

As India embarks on an ambitious program to rapidly expand its solar generation capacity to 20000 mW by 2022 under the Jawaharlal Nehru National Solar Mission (JNNSM), there are several important policy issues that need to be carefully addressed. I had blogged earlier about the uncertainty associated with the recent solar auctions due to the extraordinarily low tariffs quoted by successful bidders.

Another issue that needs to be addressed immediately involves the extent of policy protection permissible to local manufacturers without infringing on the WTO commitments. In recent months, Indian solar panel manufacturers have raised the pitch by accusing Chinese manufacturers of dumping and have called on the government to provide trade protection against them. The Indian firms are seeking anti-dumping duties on Chinese exports and also a 15% tariff on imports of thin-film solar panels (where American firms lead and which is the preferred choice for Indian developers). They complain that US and Chinese imports can be brought into the country tax-free, whereas Indian manufacturers have to pay duties on raw materials to make the same products. They also argue that Chinese firms benefit from cash grants, raw-materials discounts, preferential loans, tax incentives and cheaper currency.

The JNNSM provides for protection to domestic industry so as to catalyze the development of local panel and cell manufacturers. It mandates use of only indigenous crystalline silicon solar panels and solar cells. Furthermore, domestic content (equipment and technology) requirement will gradually increase under the mission. It exempts thin-film panels, which is more sophisticated and has limited Indian production capacity, from the indigenous production requirement. However, this local production requirement has not helped trigger much domestic manufacturing activity in solar sector.

Low-cost Chinese rivals like Suntech and Trina Solar Ltd (TSL) and US firms backed by preferential trade finance including First Solar, the world's largest thin-film panel maker, have reaped most of the equipment orders for 1,100 megawatts of plants to be built by January 2012. Indian suppliers such as Tata BP Solar India, Indosolar Ltd and Moser Baer India (MBI) have received almost no orders from developers building plants in India and are producing far below their factories’ full capacity.

India’s total manufacturing capacity is about 1,500 MW of panels and 500 MW of cells. Indsolar, India's biggest cell company, stopped production in June and has defaulted on 2.75 billion rupees ($52 million) of long-term bank loans as its business became "unviable". Cell prices have plunged 62% to about 52 cents just in 2011 alone on the back of intense Chinese competition and declining demand in Europe where governments have cut subsidies.

The global trade in solar power equipment making in particular and renewables in general have been marked by acrimonious accusations of unfair trade practices. For some time now, US manufacturers have been lobbying hard for imposing anti-dumping duties on Chinese imports. India's local production requirement for solar equipments has been criticised by US, EU and Japan.



It is important that any national policy to facilitate the development of domestic industry are in conformity with India's WTO obligations. However, it would appear that the prevailing policy support to promote local production stand in contravention to WTO provisions. Unlike cash-rich China, where government provides direct subsidies to manufacturers, the fiscally strained Indian government has preferred to mandate local production requirement.

The WTO’s Article III: 4 of Trade Related Investment Measures (TRIMS) and General Agreement on Tariffs and Trade (GATT) III prohibits protectionism and discriminatory treatment against imported products and in favour of domestic products (the national treatment rule). It cannot mandate a private project developer to use only domestic content, though if government is the procurement agency, it can choose between domestic and imported content.

However, Article III 8 allows for payments of subsidies to domestic producers and consumers. This means that the government's purchase of electricity at high price and provision at a lower rate to the consumer is itself not violative of WTO treaty provisions. But, with the Chinese, this subsidy is provided directly to the producer. It is this exemption given to subsidizing domestic producers that has enabled Chinese exporters to avoid infringing WTO regulations. In 2010 alone, Chinese Development Bank gave $30 billion in low-cost loans to top five domestic solar panel manufacturers.

Interestingly, given that direct subsidy to its producers is its preferred method of industrial policy, China is able to skirt around the WTO agreement and massively subsidize its exporters. Such top-down direct subsidies and forcing them to compete for global market share is possible because China has deep pockets. Other countries cannot afford an industrial policy that subsidizes their domestic producers and therefore prefer to impose regulatory restrictions on foreign competitors and imports.

It is ironical that this provision of the WTO regulations which now the Chinese invoke with such devastating effect was itself the preferred route of industrial policy for the western economies for many years. Now the shoe is on the other feet. China has the comparative advantage with subsidizing its domestic manufacturers while the US and India are left to fend the Chinese onslaught with regulatory restrictions - higher tariffs or anti-dumping duties.

Given the changed dynamics of the global economy, it may now be in the interest of developed countries and emerging economies like India to propose renegotiating Article III 8 of the WTO treaty so as to restrain China's industrial policy. If tariff protection and subsidies are two sides of the same coin, then there is a strong case in favor of establishing some balance between Article III 4 and 8 of the WTO treaty.

Hastening grid-parity or solar bubble?

A little late on this. The tariff quotes received in the second round of bids, concluded in first week of last December, for setting up solar projects under India's National Solar Mission (NSM) appears to indicate that solar energy prices will converge with conventional thermal power tariffs much sooner than expected. Or does it?

The lowest bid, in a reverse auction bid process, was for Rs 7.49 per unit, which is 50% lower than the benchmark tariff of Rs 15.39/unit fixed by the Central Electricity Regulatory Commission (CERC) and about 27% lower than winning bids in the first round of NSM auctions. The highest successful bid was only Rs 9.44/KWh and the average price for the winning bids for a total of 350 MW came to Rs 8.78/KWh (16.5 cents). Rajasthan was the preferred location for most bidders, with 295 MW out of the 350 MW located there. Germany, the world’s biggest solar-power user, pays about 17.94 euro cents (23 American cents) per KWh.

The projects are in the range of 5-20 MW capacity. The lower prices are attributed to the steep decline in prices of solar modules, which make up 50-65% of the total project cost. The successful bidders have to complete their projects in 13 months, failing which they face forefeit of large bank guarantees besides other steep fines.



In the first phase of the NSM, a total of 28 Solar PV developers aggregating upto 150 MW and 8 Solar Thermal Developers aggregating upto 500 MW were selected based on maximum discount offered on CERC determined tariffs. The feed-in-tariff determined by CERC was Rs 17.91 for PV and Rs 15.31 for solar thermal. The cut off discounts were 515 paise and 297 paise for Solar PV and Thermal projects respectively.

The NTPC Vidut Vyapar Nigam (NVVN) is the nodal purchaser of solar power under the Mission. It then sells to distribution utilities who have to meet their mandated renewables target. In order to incentivize indigenous production facilities, the NSM mandates the use of only indigenous crystalline silicon solar panels and solar cells. The NSM was launched in 2010 and has an ambitious 20,000 MW target by 2022.

Official estimates on grid cost parity for Solar is around 2020. However, at this rate, it may happen much faster. KPMG's excellent recent report on the prospects of solar power in India foresaw rapid declines in prices of solar PV panels and forecast grid-parity by 2017-19. However, if the recent solar bids are any indication, even its best case scenarios may be outstripped and the grid-parity could occur much earlier.



Some estimates point to a more aggressive convergence. The latest bid rates lend credence to this view.



Since industrial and commercial retail tariffs are already in the 700 paisa range for many consumer categories like commercial, solar roof-top is viable even today.

But amidst the euphoria, there may be a need for closer examination. Is there are winner's case associated with these extraordinarily low bids? It not only goes completely against conventional wisdom in the industry circles, even with the sharply declining panel prices, but there are also signs of irrational exuberance associated with bubbles. The quoted prices are far lower than anything anywhere in the world. There are stories that the bids from even the first round of auctions are commercially unviable.

Many generators have questioned the wisdom of these successful bidders and claim that the projects are commercially unviable at these rates. It cannot be a coincidence that most of the larger solar players remained away from these bids. Another concern is the fact that out of the 30 short-listed bidders, almost 20 have had nothing to do with solar photo voltaic (PV) power. These are normally prima facie indications of bubbles.

In this context, lessons from the first phase may be instructive. However, the project commissioning prospects for projects approved under the first phase of the Mission wherein 28 projects of 5 MW each were awarded late in 2010 and due for completion by January 9, 2012, appears not very encouraging. Atleast 12/28 projects are certain to miss the deadline and incur penalties.

In this context, India's solar industry and policy makers would do well to pay heed to the cautionary tale from Spain, once the unrivalled European solar market. In 2007 the government announced a solar policy that guaranteed fixed electricity rates of up to 44 euro cents per KWh to all new solar panel projects plugged into the electrical grid by September 2008. In 2008, backed by generous feed-in-tariff (FIT) subsidies, there was a flood of investments and Spain accounted for more than 40% of the world's total solar PV installations. In just 2008, the country committed itself to solar FIT payments estimated at $26.4 billion.

Against a modest target of 400 MW, some 3000 MW of solar capacity were installed in Spain within 18 months. Then the bubble burst on the face of over-capacity and fiscal strains. The entire industry was devastated. Its faulty regulations have become a watchword for how government renewable-energy programs, poorly conceived, can go awry.

On the positive side, there are two features of the solar policy that is laudable and stands in contrast to the governance failures that characterize such policies. One, instead of plunging big time into solar generation, the government is right in testing the waters with such small calibrated auctions. It will help the government learn about the market and help design effective policies when the implementation is done on scale.

Second, the transparency associated with auctions is in stark contrast to the opacity that has been the source of numerous corruption scandals that have rocked the country in recent years. In fact, this has ensured that the government does not face the problems created by the overly generous FIT subsidies of Spain and other European countries. But this is also a reminder to those advocates of mindless auctions that the most effective allocation process is market-specific and is not always open-ended auctions.

Update 1 (20/2/2012)

Government of India has encashed the bank guarantee worth nearly Rs 2 Cr each on 14 project developers for failing to meet the commissioning deadline (January 9,2012) under the first batch of phase I of the JNNSM. After this, the developers are given two months' time to finish the project, and if they still don't, this would entail further loss of bank guarantee — thereafter, three months time is provided with penalties to complete the project, failing which the project would stand removed from the Mission. The total extension in this manner is up to six months beyond the scheduled date.

Under the first batch, 35 new projects were expected to generate 610 MW of solar power (140 MW of photovoltaic and 470 MW thermal) and grid connectivity was expected by January 2012.

The 20 MW wind turbine?

It is a sign of the amazing advances in technology, driven by commercial considerations, that Don Quixote's "giants" keep getting ever more humongous by the day.



One of the biggest constraining factors with wind power was the need for massive tracts of land to develop reasonably large windfarms. However, in recent years, as windpower emerged as a favored source of renewable energy, manufacturers have been working to make wind mills bigger, so that they can reach faster and steadier winds and the blades can cover larger areas. Wind farm developers too have been trying to get lesser numbers of larger turbines to generate the same power. The current leader in this race is the German wind turbine manufacturer Enercon GmbH.



The Enercon E-126 turbine - with a hub height of 135 m (443 ft), rotor diameter of 126 m (413 ft), total height of 198 m, total weight of 6000 mt - can generate 7.5 MW power per turbine today. Its first turbine was installed at Emden in Germany 2007, and a total of 24 are operational today, with the biggest farm using the turbine being at Estinnes, Belgium. The world's largest wind farm, the Markbygden Wind Farm, with 1,101 turbines covering just 500 sqkm to generate 4000 MW is under construction in northern Sweden and will contain approximately 150 Enercon E-126 7.5 MW wind turbines.



A Times report points to a study commissioned by the European Commission, 'Upwind: Design Limits and Solutions for Very Large Wind Turbines', which has found that a 20 MW turbine — with each blade probably more than 120 meters long — was "feasible".







Research and development work on wind turbines has proliferated around matters like how to pitch, or angle, the blades and how to monitor wind speed and direction at a turbine more accurately, using lasers. Further, since many of the best wind sites have already been claimed, developers are forced to build in place not so windy, which in turn makes innovation all the more crucial for cost-effectiveness.



The most active area of innovation has been in the design of gearbox, which speeds up the wind-powered rotations of the blades. A big breakthrough in recent years has been the use of a technology called direct drive that replaces the less reliable and high maintenance gearbox with a lower-speed generator. One of the key differentiators of the Enercon-126 is the use of a gearless, direct drive mechanism.



See also this graphic of global wind power capacity in 2010.

The solar power convergence

One of the most talked about points in power sector is when the cost of solar power converges with conventional carbon power. At current pricing levels, solar photo-voltaic generators still cannot compete with thermal and other traditional generators. However, the dramatic reduction in solar panel prices in recent years has ensured that the convergence is not far away.

The graphic below shows that PV panel manufacturing costs have come down, from $60 a watt in the mid-1970's to $1.50 today, declining about 18% for every doubling of production. People often point to a "Moore's Law" in solar - meaning that for every cumulative doubling of manufacturing capacity, costs fall 20%.



A staggering ramp-up in installations around the world have driven an even greater increase in solar manufacturing. Underlining the speed with which solar panels can be manufactured and installed, in 2010, 17 GW of capacity was manufactured, shipped and installed, the equivalent of 17 nuclear plants in one year! GTM Research predicts we'll have 50 gigawatts of module global production capacity by end-2011.



The commercial convergence is more likely to happen earlier with distributed solar generation in rural and remote areas for lighting, agriculture pump sets etc. Even in cities, technologies other than flat-panel PVs, like concentrating parabolic troughs and multiple reflecting mirrors offer great potential to both generate electricity and heat for boiling water in large single-point installations like hotels, hospitals, airports etc.

Stephen Lacey has excellent pricing curves of solar with respect to peaking natural gas, nuclear, and thermal. He shows that solar PV panels will become competitive against even new coal plants in the next 6-8 years.

Pros and cons of bio-fuels

Via: Online Schools

(HT: Eco-politology)