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Wind power: Will it survive the slowdown? - Views on News from Equitymaster

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Wind power: Will it survive the slowdown?
Dec 29, 2008

In the scenario of a severe global strain on liquidity, it is natural that one would be apprehensive about the demand for something as capital intensive as a wind turbine (WTG). However, all may not be as bad as it may seem. India’s preeminent WTG manufacturer – Suzlon – was recently in the news, and thankfully this time for the right reason. One of the company’s subsidiaries, REpower, is likely to bag a huge wind turbine contract for setting up a wind farm with a capacity of 1,250 MW in the next few months. Once placed, this would be the world’s largest single order for wind turbines. REpower’s potential customer for this contract would be German utility company RWE.

The demand for these high end products is not purely governed by a single factor. On a global level, there are numerous factors that either aid or hinder demand for WTGs. Thus to bring a little clarity on the issue especially in light of the current scenario, here is a list of positives and negatives that will work in favour of or against the demand for Suzlon’s products in the future.

Demand drivers:

  • Generating power from WTGs is environment friendly, unlike conventional methods of power generation which cause great harm to the environment and act as a catalyst for unfavorable climate change.

  • The governments of most countries, both developed and developing have realized the importance and urgency for increasing the proportion of power generated from renewable sources like wind power. The Kyoto Protocol, formulated in 1992, establishes legally binding commitments for the reduction of greenhouse gases on member countries (180 countries as of 2008). Thus the countries have taken various steps like extending a systems of ‘production tax credit’ which award companies tax credits for producing power through renewable sources and ‘renewable portfolio standards’ which place an obligation on electric utilities to produce a minimum stipulated part of their electricity from renewable energy sources.

  • Abundant and perpetual supply of wind which is the fuel for generating wind power.

  • Zero fuel costs which make it a great way to hedge power generation costs for the long term.

  • Cost per mega watt (MW) required to set up a wind turbine is comparable to setting up of conventional thermal power plants. It is about Rs 50 to 55 m for the former while it is about Rs 45 m for the latter.

  • Quick installation

  • Operation and maintenance costs tend to be low

  • No labour costs for daily operation

  • Customers are mostly power utilities that tend to be cash rich and thus would continue to place orders

Constraints:

  • Wind power cannot be used as a standalone source of power. This is due to the fact that wind does not blow continuously enough to produce power all the time. Thus electricity from wind is intermittent and therefore must have a back-up supply from another source.

  • There are some restrictions that come into the picture when the location of installation is to be decided. It must necessarily be a place where strong, dependable winds are available most of the time, as also there should be no hindrance or interference with anything else in the area.

  • WTGs are susceptible to damage from strong winds and lightning.

  • The extreme size and height of the parts of a WTG makes it expensive and difficult to repair in case of a breakdown.

  • Electricity produced by wind power sometimes fluctuates in voltage and power factor, which can cause difficulties in linking its power to a utility system.

  • There are also some aesthetic concerns which sometimes makes it difficult to find a location for setting up a wind farm. The noise made by rotating wind machine blades can be annoying to nearby inhabitants. Some are also averse to having WTGs installed in their areas because it would be a compromise with the scenic beauty of the landscape in the region.

All in all, there has been a growing appeal for the positives that wind turbines offer to their owners. WTGs are finding rapidly increasing markets in countries like China, the US and India. The more mature European markets too still have a tremendous potential for upgradation of their older wind turbines which employ obsolete technology.

Apart from that, the obligatory imposition of renewable energy criteria on utilities in most major countries is also propelling a certain amount of inelastic demand. All these factors come together to ensure that the demand for WTGs is stable and long term enough to endure through this recessionary period.

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