Government tender terms about to get far tougher -- Portugal Europe's third largest market

With 1024 MW online by the end of the year, Portugal doubled its wind capacity over 2005. Wind now represents over 8% of the national generating capacity and last year Portugal was Europe's third biggest wind market. This year could be even better, with 950 MW currently building, according to Porto University's Instituto de Engenharia Mecánica e Gestão Industrial (INEGI). The institute is also expecting calls soon for another 300 MW of turbines for two further projects.

Including grid connection concessions granted, "Portugal is on target for around 3500 MW of online wind capacity for 2008 or 2009," says António Sa da Costa of renewables group Asociação Portugesa de Productores Independentes de Energia Eléctrica (APREN).

Even more is on the way, mainly as a result of two government tenders, aimed at developing a total of 1500 MW over a five year period between 2009 and 2014. The deadline for both requests for proposals -- one for 1000 MW and the other for 500 MW -- was March 1. Once selections are made, the government promises to immediately launch a third call to develop a series of 10-20 MW projects totalling 200 MW. Combined, the three tenders for 1700 MW bring total committed capacity to 2014 to just over 5000 MW.

Around 2000 MW of projects are in the development pipeline from previous grid concessions. Most of these will be up and running by 2009, according to APREN. Today's market is driven by guaranteed power purchase prices in force since 2001 and averaging EUR 89/MWh over 2005. The incentive arises from the government's continued commitment to meet 39% of electricity consumption with renewables by 2010, despite a swing from right to left in last year's general election.

Returns down, risks up

The market is about to get tougher, however. In return for the economies of scale on offer, the winners of the 1000 MW and 500 MW concessions will be chosen on a points system based on exacting demands and rules which force developers, turbine suppliers and component manufacturers into large consortiums. Most points will be granted to bids which create local jobs and boost local economies. To date, the only major wind power component produced in Portugal is towers. Under the terms of the tender, extra points are also given for business strategies aimed at setting up enough manufacturing capacity in Portugal to allow them to export half of the equipment produced.

At the same time, power purchase prices are being cut -- on average by around 18% -- to EUR 73.5/MWh. Extra points will also be given for proposals that promise to sell power at a further 5% discount on the already reduced tariff. "Yet installed costs are upward," says INEGI's Alvaro Rodrigues. "Remaining sites are further from the grid, making interconnection more expensive. Plus wind resources are lower and need bigger, more expensive multi-megawatt turbines."

Equity investors in Portuguese wind development, used to returns in double-digit figures, will now have to make do with 5-7%, estimates Sa da Costa. "So, to stay the course, you have to have one of two things: a large corporate balance or tremendous faith that better tariff conditions can be negotiated."

APREN sees the only realistic chance for negotiation to lie in a clause in the new rules that fails to link the EUR 73.5/MWh starting rate to inflation. "That's just pure nonsense," says Sa da Costa. "The rule's base-date is 2005 [February]. By Portugal's current annual inflation rate, every year we will lose 2.5% on the tariff. Imagine what that means for plants connecting in 2014. We are fighting and fighting for change here."

The risks are apparently too big for some. Siif Energy -- the Portuguese renewables arm of French utility EDF, currently operating 7.8% of online capacity -- was not among the six players buying the official tender proposal documents. Nor was GE Energy, which has supplied 18.6% of the capacity installed so far.

Nevertheless, Siif is still rolling forward under the existing processing and tariff regimes. It is about to issue a requests for proposals (RFPs) for 300 MW of wind capacity according to INEG. GE's wind business, however, has not responded to RFPs for well over a year and rumours are circulating about its withdrawal from the Portuguese market.

High risks

Meanwhile, at least six players are braving the higher risks. In January, Spanish utility Iberdrola and turbine supplier Gamesa Eólica announced they had formed a consortium, Nuevas Energías Ibéricas, with Portuguese engineering firms (Windpower Monthly, February 2006). The proposal included the building of five manufacturing facilities with combined annual turnout capacity of 300 MW.

German manufacturer Repower has joined up with dominant developer Enersis and oil firm Galp, both Portuguese companies (Windpower Monthly, October 2005). Portuguese developers Generg, Finerge and Enernova, which jointly operate over 28% of cumulative capacity, have coupled with German turbine company Enercon. Spain's top utility Endesa bought control of Finerge in 2005. Enernova belongs 100% to Portuguese utility monopoly Energía de Portugal (EDP).

Tender documents have also been bought by manufacturers Nordex of Germany, Finnish WinWind and a newcomer to Portugal, India's Suzlon. Nordex has joined with Spain's fourth utility, Unión Fenosa. WinWind and Suzlon have made no official announcements about their project development partners.


Rodrigues expresses one fear regarding the trend to concentrate in developer/manufacturer consortiums: "If the developer is a member of one of the consortiums, what sense will it make to choose a turbine supplier outside that consortium?" he asks. The suggestion is that Portugal could become like Spain, where the developer's technological choice is a foregone conclusion. To date, Portugal has developed projects using some of the latest technology: the average rated capacity of installed turbines in Portugal last year was 2.1 MW, compared with 1.3 MW in Spain, which tends to settle for older technology.

Technical demands are also increasing. Among the terms governing the latest two government tenders, points will be awarded to bids that include a power output forecasting service as part-and-parcel of the project package. "Eventually it will be mandatory elsewhere," says Sa da Costa. Following the Spanish wind industry's lead, APREN members are studying forecasting models and aim to test and calibrate them at three wind plants within 18 months before making the results known to all members by 2009. The aim is to take the initiative rather than be forced to comply with restrictive regulations they have no part in influencing.

If the industry can meet all the demands -- and investors decide the risks are worth it, wind is on course to make up 22% of Portugal's national generating capacity of 16 GW, Sa da Costa says.

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