111129 Chinese Wind Technology_smarter Way for NZ_summary_FMAC

8/2/2019 111129 Chinese Wind Technology_smarter Way for NZ_summary_FMAC

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NZ Wind Development Plan Proposal (DRAFT)

FMAC Ltd Page 1

Chinese Wind Technology A Smarter Way to Develop Large Scale Onshore Wind?

A Summary Paper

By Frank MacCullaich

29 November 2011


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1.0 Executive Summary

1.1 Development Plan Proposal. This paper provides an outline of the rationale to develop commercialscale wind farms in New Zealand (NZ) using Chinese (Asian) wind technology.

1.2 90% RE by 2020. The NZ Government is committed to supplying 90% of generated electricity fromrenewable sources by 2020. Currently that figure stands around 70-80% subject to seasonal and yearlyclimatic variations.

1.3 No Financial Support in NZ. There are no financial support or market tariff mechanisms to promoteuptake of new energy generation technologies in NZ, which is in stark contrast to Europe, UK, USA andAustralia. This is primarily due to the relatively high contribution the existing national renewableenergy portfolio already generates into the domestic market, which is predominantly hydro.

1.4 The Big 5 Wind Seen as High Risk Financially - The NZ electricity market share is dominated by what

are known as the Big 5, consisting of the utilities (Gentailers): Contact Energy, Genesis, Meridian,Mighty River Power and TrustPower. All of these players are currently sitting on a range of winddevelopment proposals. Internal industry information strongly indicates that few, if any, of the large(200 MW +) wind projects granted resource consent will be constructed due to the high risk of lowNPV. Indications from both within the electricity industry players and Government is that geothermalis now emerging as the favoured renewable energy development technology to most significantlycontribute to the 2020 RE target.

1.5 Geothermal Leading New Technology. A short discussion held with the NZ Prime Minister, JohnKeys, in early September 2011 confirmed to the author that there are no Government plans tosubsidise new energy technologies and that Geothermal is the RE technology likely to be favoured bythe Government owned utilit ies in progressing proposals to meet the 2020 RE target.

1.6 Low NPV/IRR %. It is now recognised by GenTailers that the standard financial models of large scalewind development projects in NZ do not offer scale of economies that lower the financial risk (i.e.large scale projects of 100s MW capacity are showing NPVs close to zero in worst case financialmodels). This is despite the NZ dollar exchange rate being currently of record-high strength (i.e. circa 2NZD to 1 GBP at the time of writing, long term average closer to 3:1). The exchange rate is significantfor capital expenditure as the standard financial model deployed by the NZ utilities look to source windturbine supplies from Europe.

1.7 Chinese Technology. In western-world markets, turbine costs make up the majority (65-70%) of thetotal project CAPEX. It is understood that Chinese technology is 25-40% cheaper than Europeansuppliers.

1.8 The Business Case. There is a strong investment signal for large scale wind development in NewZealand via the utilisation of Chinese wind turbine technology. The cheaper costs and equivalentquality to that of European manufacturers and robust enforcement of warranties underpins thebusiness case of utilising Chinese suppliers, which this paper covers at a preliminary level.

1.9 Due Diligence Recommendation. Appropriate further review should be undertaken to verify thebusiness case of purchasing from Chinese suppliers such as Sinovel, including the accuracy ofoperational data and legal soundness of warranty enforcement in order to satisfy investmentconfidence requirements.


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Table of Contents

1.0 Executive Summary 2

2.0 Introduction 4

3.0 NZ Electricity Market Background 4Wholesale Market Structure .......................................................................................................................................... 4

4.0 Financial Model NZ Onshore Wind Farm 5Figure 1 - European TSA .............................................................................................................................................. 6Figure 2 - Chinese TSA ................................................................................................................................................. 7Figure 3 - TSA Comparative Costs ................................................................................................................................ 8

5.0 Warranties Issue of Security 8

6.0 Summary & Recommendations 9


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2.0 Introduction

2.1 The overall aim ofthis summary paper is to provide an indication of the signals to invest in the NZonshore wind market using Chinese (Asian) commercial scale onshore wind technology. There is a

case study on comparing the costs of a top Chinese wind turbine supplier to that of the leadingEuropean manufacturers. In addition, there is a preliminary review of the warranties for operationalavailability and power curve performance that the case study Chinese supplier could offer.

2.2 The report begins with an overview of the present NZ electricity market regulatory structure andsubsequently presents a financial model of a 62 MW onshore wind farm, comparing the financials ofwind turbines supplied from Europe to that of China. The information supplying the comparativefinancial models was sourced from an actual project (62 MW) based in Scotland.

2.3 The report does not detail the merits of New Zealands wind regime, planning system or the nuancesinvolved in obtaining a Power Purchase Agreement (PPA), as this would be subject to a more detailedand broader scope study on the investment signals of the NZ wind market.

2.4 Nonetheless, it is suffice for the purposes of this report to add that resource (planning) consentapplications for commercial scale onshore in New Zealand have a greater than 90% approval rate andthat it is one of the windiest countries in the world with many potential development sites enjoying10m/s average wind speed and over 40% capacity factor .

3.0 NZ Electricity Market Background

Wholesale Market Structure

3.1 The New Zealand wholesale spot market is based on bid-based security-constrained, economicdispatch with nodal (location) prices.

3.2 Electricity is traded at a wholesale level in a spot market. The market operation is managed by severalservice providers under agreements with the Electricity Authority (NZ). The physical operation of themarket is managed by Transpower in its role as System Operator.

3.3 Generators submit offers through a Wholesale Information and Trading System (WITS). Each offercovers a future half-hour period (called a trading period) and is an offer to generate a specifiedquantity at that time in return for a nominated price. The System Operator (Transpower) uses ascheduling, pricing and dispatch (SPD) system to rank offers, submitted through WITS, in order of

price, and selects the lowest-cost combination of resources to satisfy demand.

3.4 Electricity spot prices can vary significantly across trading periods, reflecting factors such as changingdemand (e.g. lower prices in summer when demand is subdued) and supply (e.g. higher prices whenhydro lakes and inflows are below average). Spot prices can also vary significantly across locations,reflecting electrical losses and constraints on the transmission system (e.g. higher prices in locationsfurther from generating stations). Trades take place at approximately 285 nodes (grid injection pointsand grid exit points) across New Zealand every half-hour. Generators make offers to supply electricityat 59 grid injection points (GIPs) at power stations, while retailers and major users make bids to buyelectricity at 226 grid exit points (GXPs) on the national grid. Final prices at each node, taking accountof grid losses and constraints, are processed and confirmed the following day.


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3.5 All electricity generated is required to be traded through the central pool, with the exception of smallgenerating stations of less than 10MW.Bilateral and other hedge arrangements (PPA) are possible,and function as separate financial contracts.

3.6 Industry knowledge indicates that Power Purchase Agreements (PPA) obtained today would be circa$80 per MWh, for a typical period of 5 years.

4.0 Financial Model NZ Onshore Wind Farm

4.1 The simple financial models constructed have relied on experience of the author and in-house datafrom established UK and NZ wind developers.

4.2 The investment model is developing an onshore wind farm on a Greenfield site through resourceconsent, construction to operation.

4.3 Both investment scenarios, Figures 1 and 2, are modelled on an actual onshore wind farm, (i.e.capacity, capex, opex, wind resource, operational l ife span), containing the following assumptions:

- Operational life of 25 years (now industry standard);

- No financial support;

- Project start year 2015.

- Installed name plate capacity of 61.7 MW;

- Average wind speed of 8 m/s;

- Annual average wind resource (net output) of 218.7 GWh amounting to 40% Capacity Factor. Yield

prediction of 3.54 GWh/yr per MW installed, as provided by Siemens;- Grid Use of System charges based on $40 per installed kW per annum;

- Revenue (PPA) begins at $90 per MWh come year 2015, based on 2.5% inflation rate from 2011;

- An annual inflation rate of 2.5% (applied to revenue as well) and discount rate of 10%; and

- Exchange rate of 2 NZD per every GBP sterling.

4.4 Figure 1 is modelled on a contracted Siemens Turbine Supply Agreement (TSA) price.

4.5 Figure 2 is modelled on a received Sinovel Tender Price Band (representative Chinese TSA price). Yield

prediction was 13.5% more than Siemens at 4.09 GWh/yr per MW installed; however, both thefinancial models use the Siemens yield figure as the benchmark.

4.6 Sinovel is close to 36% cheaper than Siemens, which is the only variance used in the financial modelcomparative.

4.7 The full spreadsheet versions of the financial models are provided seperate to this report, and shownin summary below.


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Figure 1 - European TSA

4.8 Figure 1 (Siemens) shows a negative NPV with PPA of $90/MWh flat (annual 2.5% inflation) at 10%discount rate from Start Year 2015.

4.9 Profit is possible in the following scenarios:

- PPA of $95/MWh, with 10% Discount Rate, produces an NPV of $9.3 Mill ion;

- PPA of $90/MWh, 6% Discount rate produces an NPV of $59.3 Mill ion; and

- PPA of $95/MWh, with 6% Discount Rate, produces an NPV of $73.8 Mill ion.

Figure 1. NZ Windfarm Financial Model European TSA.

4.10 Based on the above worst case model scenario and the current strong NZD exchange rate being likelyshort-term, it is easy to appreciate the high investment risk and the reason, therefore, that NZGenTailers are nervous to advance resource consented projects in the multiple 100s MW capacityrange.


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Figure 2 - Chinese TSA

4.11 Figure 2 (Sinovel) shows a significantly positive NPV of $53.1 Million with PPA of $90/MWh flat (2.5%inflation) at 10% discount rate from Start Year 2015.

4.12 Profit is enhanced in the following scenarios:

- PPA of $95/MWh, with 10% Discount Rate, produces an NPV of $63.1 Million;

- PPA of $90/MWh, 6% Discount Rate produces an NPV of $115.2 Million;

- PPA of $95/MWh, with 6% Discount Rate, produces an NPV of $129.7 Mill ion.


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Figure 3 - TSA Comparat ive Costs

4.13 Figure 3 shows a snapshot TSA prices collected from a phase 1 tender process undertaken for a UKonshore wind farm in late 2010.

4.14 Prices shown are in Euros and includes full contract price of: Turbine Supply & Installation,Transformer (Switch gear & installation) and full transportation from source to site.

Figure 3. Wind Turbine Supply Agreement Costs () A Comparison (2010).

4.15 From the above Figures 1-3 it is clear that Chinese suppliers, such as Sinovel, could enable a strongbusiness case based on financial terms to develop onshore wind farms in New Zealand.

5.0 Warranties Issue of Security5.2 With China being a communist state, it is natural for developers from capitalist nations to raise

questions regarding the risk involved in the security strength of warranties for power curveperformance and generation availability.

5.3 Warranty security underpins the business case for Asian technology just as much as the capital turbinecost being an average 26% cheaper (see Fig. 3) than European suppliers.

Sinovel Preliminary Due Diligence Case Study

5.4 From discussions held with the author to date, Sinovel offered the following information in regards toexisting operational records, warranty of performance and availability:

Operational Availability Guarantee. Sinovel is able to provide an availability guarantee of 97%.

Warranty Period Provide 10 years warranty period, first 2 years free. During the warrantyperiod the operational availability, noise levels, and power curve performance are all guaranteed.A liquid damage would apply if any aspect fails the contractual level;

Financial Bond. Held by independent legal third party to pay the liquid damage in the event that

Sinovel does not comply with warranty conditions and/or compensation for loss of opportunitycosts (downtime);


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Detailed Due Diligence. Sinovel are willing to assist any detailed analytical process of recordedsite data, engineering analysis and contract legal review, including a site visit to China to look atexisting wind farms and manufacturing plant;

Operational Records. Due diligence parties will obtain access to data and operational plant to

assess performance and maintenance records obtained from existing wind farms operating inChina. The 5 year operational site records for both the 1.5MW and 3MW models are available forinspection and will show 94-98% availability;

Bank Finance. Sinovel as supplier would be able to access Chinese bank finance for constructingconsented projects; and

Miscellaneous. Sinovel are willing to consider any proposals to enable a breakthrough into thewestern market.

6.0 Summary & Recommendations5.5 Chinese onshore commercial scale wind technology is 25-40% cheaper than European suppliers, which

creates potential development opportunity for those markets not containing any financial subsidies topromote the uptake of renewable energy technologies, such as New Zealand. Furthermore, otherwestern markets could realise potential for lowering capex and thereby increasing net profits (e.g.Canada, Europe, UK, USA).

5.6 As a communist state there are obvious questions to ask of Chinese (Asian) suppliers regarding the riskinvolved in the security of warranties for power curve performance and generation availability.

5.7 Detailed due diligence involving Chinese turbine suppliers, such as Sinovel, should be carried out toverify the accuracy of operational data and legal soundness of warranty enforcement in order tosatisfy investment confidence issues.

5.8 It is recommended that wind industry parties look for cooperation to further investigate thepreliminary business case presented in this paper, a process in which the author (FMAC Ltd) is willingto be part of.

For more information contact the author:


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Kind Regards,

Frank MacCullaich BSc PgD [email protected]: +64 (9) 536 4103Mob: +64 21 956 989

AucklandNew Zealand

111129 Chinese Wind Technology_smarter Way for NZ_summary_FMAC

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