An interesting discussion that I came across recently at the Renewable Energy 2012 Wind Conference in Pune; was on “Indian Wind Turbine Manufacturers are selling IRRs rather than Turbines”.
Its a known fact that Indian Wind Turbine Manufacturers (WTM) offer turnkey solutions to wind project developers and investors. A WTM identifies land, its suitability to a wind energy project, works out the infrastructure including civil and electrical work, substation, government approvals and sometimes even the bank debt (based on certain criteria). WTMs also take care of the O&M.
A wind developer is expected to invest equity, work out bank debts & difference financial combinations and company strategy of growing. But rest is taken care by the WTM.
A WTM approaches a wind developer/investor with a complete project plan including land, wind speed, expected generation & tariff, timeline and IRR. A developer then based on company strategy decides on investment.
This has been the reason that inspite of new technology advances in wind energy space and somewhat decreasing cost of technology, the IRR of wind developers have not changed much.
A WTM prices the project in such a way that the wind developer/investor earns within a range of IRRs: 15%-18% (some % up and down).
Example: project near the WTM’s plant and in higher wind speed region may cost more than project far from WTM’s plant (higher transportation costs) and in low wind speed region. Ofcourse there are some other factors that play here including infrastructure and tariff.
The trend of WTM selling IRR is now expected to somewhat change over the coming years. With wind projects moving away from a tax saving project to actual wind generation business, more IPPs are coming in the picture and they will start looking at ways to increase their margins.
Some IPPs are already involved in identifying and buying land on their own; initiating electrical and civil work within the organization’s review and working with government for PPAs and other clearances.