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Bangui wind farm: ‘Green’ and profiting

July 31, 2008 4:14am
MANILA, Philippines - The meteoric rise in world oil prices has been a bane to many but a boon to those who know that the supply of oil is finite and the alternatives and profits lie in "green" alternatives.

Filipino and Dutch entrepreneurs are now exploiting the country’s wind power for electricity production, lighting up communities and pocketing profits in the process.

And because their business does not contribute to the accumulation of harmful greenhouse gases, they are generating additional revenues through a mechanism provided by an international agreement on climate change, proving that "green" businesses can be doubly rewarding.

Northwind Power Development Corp. runs the Northwind Bangui Bay Project that harnesses wind coming from the South China Sea into electricity that helps light up Ilocos Norte in northern Luzon.

The project has been in operation since 2005, supplying the Ilocos Norte Electric Cooperative (INEC) with around 25 megawatts of power, equivalent to 40% of the cooperative’s power requirement.

Fifteen wind turbines, each 70 meters tall, each equipped with three 41-meter blades, rise along a nine-kilometer windswept beach in Bangui. The first of its kind in the Philippines and in Southeast Asia, they have become a tourist attraction.

Marlon M. Centeno, vice-president for business development at Northwind Power, said the project was made "viable" because of a loan by the Danish government.

The Danish government, through the Danish International Development Agency (DANIDA), extended the firm a $29.5-million "mixed credit" or zero-interest loan. The balance of the $48-million initial investment was raised through debt and equity by Northwind Power’s shareholders.

The company has turned a profit since its wind project got off the ground, thanks to the Danish assistance in large part, as well as the appreciation of the peso and attractive tariffs in the past two years.

Wind projects normally become profitable after seven years in operation.

Cash from carbon credits

Yet aside from the money made from power sales, the firm also generates cash from the greenhouse gases it offsets.

Because it does not use fossil fuels to produce electricity, each megawatt of power produced offsets approximately 0.655 ton of carbon dioxide equivalent. Taken another way, if the facility were using fossil fuels, it would have produced 0.655 tons of carbon dioxide equivalent with each megawatt of power.

Annually, its emission offset is estimated to reach around 57,000 tons of carbon dioxide equivalent.

Greenhouse gas emission reductions are measured per ton of carbon dioxide equivalent, carbon dioxide being the reference gas against which other greenhouse gases are measured. Other greenhouse gases are methane, nitrous oxide, hydroflourocarbons, perfluoro-carbons and sulfur hexafluoride.

Northwind Power is among the 17 Philippine-based projects registered with the CDM Executive Board based in Bonn, Germany - the international body that issues the certificates called certified emission reductions or CERs that are used in carbon trading.

A CER is issued for every ton of carbon dioxide equivalent.

The company, in fact, was the first and so far the only Philippine-based venture that has availed of the clean development mechanism (CDM) in the Kyoto Protocol on climate change, which allows a project based in a developing country to sell its emission reductions to a company based in or the government of an industrialized country.

Giovanni A. Macapobre, Northwind Power business development manager, said the company’s earnings from its reductions have mounted to several thousand dollars - paltry compared to the firm’s operating expenses - but are additional cash nonetheless.

The idea under the CDM is that industrialized countries can buy CERs from developing states so they can meet greenhouse gas emission commitments under the Kyoto Protocol.

The international agreement, adopted in December 1997 and which came into force in 2005, mandated industrialized countries to reduce their greenhouse gas emissions by 5.2% below 1990 levels over 2008 to 2012. The agreement aims to curb greenhouse gas emissions in order to mitigate climate change, described as the greatest threat to the planet.

Industrialized countries, in Europe in particular, operate by a cap-and-trade system that limits their gas emissions. Factories in these countries can either reduce their emissions or buy CERs from developing nations to count against their emissions.

CERs are issued by the CDM Executive Board upon third-party verification that greenhouse gases have been offset or reduced by a project. They serve as the CDM currency.

In the case of Northwind Power, it entered into an emission reduction purchase agreement with the World Bank, the trustee of the Prototype Carbon Fund created by 17 companies and six governments to buy CERs, in December 2004.

The contract is good for 10 years or up to 2015, said Mr. Macapobre, with the World Bank agreeing to buy each ton of carbon dioxide equivalent for $4.25.

Northwind Power has committed to displace a total of 358,000 tons of carbon dioxide equivalent - or 35,800 tons a year - under its agreement with the World Bank.

For the first crediting period - June 2005 to August 2006 - the company was able to generate around 28,000 CERs. by the second crediting period - August 2006 to August 2007 - these rose to around 37,000 CERs.

"Our first check amounted to $65,000, and the second, $86,000," Mr. Macapobre said.

He explained that Northwind Power owes the World Bank some $200,000 for the baseline study the bank did that qualified the Northwind Bangui Bay Project as a CDM project. Payment is made out of the company’s CER proceeds, which explains the small check amounts.

The company is expecting to earn more by the third crediting and succeeding periods, however, as it begins producing more power and settles its debt with the World Bank.

For the third crediting period, for instance, Northwind Power is expected to earn "more than 37,000" CERs, Mr. Macapobre said.

Phase two of the project is underway, with five additional wind turbines to become operational in August. The five will add eight megawatts to total power generation.

With a total of 33 megawatts, Mr. Macapobre said it is very likely Northwind Power will comply with its greenhouse gas emission reduction commitment with the World Bank even before 2015.

"We can serve ahead in seven or eight years," he said.

This means Northwind Power can begin scouting for other CER buyers, who can offer higher prices, earlier.

The company is also looking forward to hurdling the third crediting period in order to exploit the burgeoning market for carbon credits.

"For the first three years, all CERs were committed to the World Bank, and thereafter, the uncommitted volume can be sold to interested parties," Mr. Macapobre said.

This means that CERs in excess of the 35,800 promised to World Bank each year can be sold to other parties.

Mr. Macapobre said that many "interested parties" have approached Northwind Power, dangling prices of 12 to 13 euros per ton of carbon dioxide equivalent - more than four times the World Bank price with the euro fetching around 1.50 dollars at prevailing exchange rates.

What will Northwind Power do with its emission offset earnings? "We will invest in the development of other sites," Mr. Macapobre said.

Vast RP potential

The country, according to a study made by the National Renewable Energy Laboratory of the United States , has the potential to generate 76,000 megawatts of power from wind energy.

Validation by the Energy department and the World Wide Fund for Nature has established that 7,400 megawatts of this number are viable, based on location in the country, wind speed and density, and economic feasibility including access to the transmission grid.

Only 25 megawatts has been tapped through the Northwind project.

"Surveying per site requires $20,000," Mr. Macapobre said.

The amount covers the construction of a tower and instruments such as a wind vane, which determines wind direction, and an anemometer, which measures wind speed.

Ten sites are needed at the same time because it’s more economical, since a study should last at least two years.

Northwind Power wants to capitalize more on the country’s wind energy potential. "At the start, the main consideration was just how to sell the power generated, to just serve [INEC]," Mr. Macapobre said, but this has changed.

Fifteen wind turbines plus the five scheduled to become operational next month will occupy just six kilometers of the nine-kilometer Bangui beach, presenting room for further expansion.

Community benefits

Meanwhile, the community that hosts the windmills, Bangui, benefits from a fee paid by the company per its agreement with the Energy department.

For every kilowatt sold, the company has to remit one centavo to the Energy department, of which half will go to an electrification fund, a fourth to a development and livelihood fund, and the remaining fourth to a reforestation, watershed management, health, and/or environment enhancement fund.

"This is a commitment for the entire life of the project," Mr. Macapobre said. "We pay directly to the Energy department, which then disburses the funds."

The electric cooperative, which serves 23 municipalities as well as Laoag City, enjoys discounts and savings that are passed on to customers.

As it puts the finishing touches on the additional five turbines in Bangui, Northwind Power is in the thick of discussions with the Cagayan Electric Cooperatives 1 and 2.

A two-year study has shown that the wind in Pamplona, Cagayan, which faces the Pacific Ocean, is as strong as in Bangui. But supply contracts with the two cooperatives need to be concluded first, Mr. Macapobre said, before financing can be secured.

"Once we close the contracts, then we can start with the groundwork," he said. "Hopefully, the wind farm will be up and running by 2012."

Another DANIDA loan is not in the drawing board, however, as the Danish government has removed the Philippines from the list of developing countries that can avail of its assistance.

Mr. Macapobre added that compliance with the DANIDA loan’s stipulation that the wind turbines be sourced from a Danish company will be hard to do. "There’s a long list of orders," he said, noting the rash of construction of wind farms worldwide. - BusinessWorld