Distributed Generation’s Role in Colombia’s Future

Drought, electricity rationing, and increasing reliance on dirty thermal power are adding to the woes of the Colombian power sector.

El Niño has caused drought and high temperatures across northern and western Colombia since early 2015. Much more potent than usual, the current version is called ‘Super El Niño’ and is likely to last up to 5 years. In 2015, 9 of Colombia’s 32 departments (provinces) were in a state of emergency due to extreme drought in 2015. In recent months, El Niño dried up parts of the Magdalena River, the country’s main waterway. Electric power generation capacity, more than 70% of which comes from hydropower, has suffered. Power generating companies like ISAGEN, EMGESA, AES, and EPM have been squeezed, with little revenue to offset large fixed costs. Climate change scientists suggest that the intensity and frequency of this phenomenon will increase.

Unplanned outages of Colombian power generation plants like EPM-operated Guatape and Celsia-operated TermoFlores, sapped 10% of the country’s power supply in March alone. Additionally, about 15% of electricity is lost in transmission, leakages, and theft. Given the impact of El Niño and anticipating further reduction in hydropower generation, the government is likely to extend the electricity rationing that happened in March 2016.Colombia experiences 1.2 power outages in a typical month, and the value lost due to these power outages is estimated to be around 1.8% of sales, according to a World Bank survey. In an already constrained power system, electricity demand is growing at 13% annually, making the problem critical to the country’s future.

Distributed Generation’s Role in Colombia’s Future


The government plans to add 7 GW to the national grid network by 2027. While there has been a focus on reducing reliance on hydropower since the 1990s when its contribution was over 80%, more than 20% of the upcoming capacity will come from thermal generation, which is carbon intensive.

Distributed power generation – decentralized small scale technology producing anywhere from a few kilowatts to up to 50 MW close to the end user– can help mitigate the looming power crisis. Multiple units can even cater to a “micro-grid” that is either independent of the grid or connected to it through smart net meters. Previously, distributed generators relied on synchronous generators, induction generators, and micro-turbines (which were used as power back-ups), but these are gradually being replaced by solar PV, wind, biogas, and geothermal systems. Distributed generation based on renewable technologies reduces the cost of generation, cuts transmission and distribution losses, and can make self-sufficient 5-10% of the population, which is not connected with the national grid system and receives only about 5-10 hours of power daily.

The potential for distributed power generation is considerable. Small hydropower in Colombia can potentially produce up to 150,000 GWh of power per year from multiple generation sites which are less than 20 MW each. The country has significant solar power resources, with daily average radiation of up to 6kWh/m2. According to a study by the World Bank’s Energy Sector Management Assistance Program (ESMAP), approximately 190 million m3/yr of biogas generated from coffee plantations can produce 995,000 MWh of power. And, geothermal potential has been estimated at 2,210 MW (vs. current installed capacity of only 14.4 MW).

Colombia needs to finalize and articulate its electric market legislation for the country to realize the potential of distributed generation. It was among the last of the Latin American countries to have a renewable energy law. The law passed in 2014 after two years of deliberations. Limited policy development has failed to pass a provision to allow power purchase agreements with utilities, especially the largest ones such as EPM, ISAGEN, and EMGESA. Hence there is a relatively small number of small private sector players and investors.

However, there is reason to believe that even small scale development of renewable energy is on government’s radar, given that the government woke up to clean energy development to begin with. According to the plan published by the energy and mining planning agency (Unidad de Planeación Minero Energética, or UPME), 54 MW and 50 MW of solar and geo-thermal power capacity will be installed by 2020. Tax incentives give reasons to small and medium sized enterprises to invest in small scale distributed power generation: no value added tax (16%) on capital equipment, import duty exemptions for renewable energy projects, accelerated depreciation on capital equipment (50% in the first five years).

Even though the government woke up late in addressing the regulatory omissions, it needs to take it from here in an accelerated fashion. The future of distributed power generation lies mainly with small and medium players while the large players will be struggling with optimizing the performance of grid-connected hydro and thermal projects and their transmission. Future policies must focus of power purchase agreements and feed-in-tariffs so that the distributed generation sector attracts progressively more investment capital from the private sector for faster growth.

DONG-Siemens Collaboration a Model for Long-Term, Sustainable Supply Chain Partnerships

b2ap3_thumbnail_Bride-and-groom-ss_164851256The DONG-Siemens offshore wind collaboration, a long-term relationship that began in 1991 and has involved over 930 turbines used across more than 13 windfarm projects, is a model of sustainable and long-term supply chain organization for strategic partnerships in offshore wind. The way the relationship has played out  leverages economies of scale of the WTG, and takes advantage of reductions in cost over time due to learning curve effects, without sacrificing commercial independence. Many companies in the industry are seeking the optimal form of interaction with customer and suppliers of key components and services (preferred supplier, partnership, direct investment, etc. – my book “Optimal Supply Chain Management in Oil, Gas & Power Generation” provides a roadmap for building industry partnerships, which articulates and classifies different levels of partnerships). The mode of commercial organization that DONG and Siemens have created provides a model for many other players to study and emulate.

Mainstream Renewable Power Locks in High Cost Structure at Neart Na Gaoithe Windfarm

b2ap3_thumbnail_Fat-shutterstock_125676140In contrast to other windfarm owners and developers that have established supply chains that achieve economies of scale through standardization, and replication of proven, reliable, and cost-efficient technologies and processes, Mainstream Renewable Power (MRP) has locked in a high-cost supply chain for its Neart Na Gaoithe windfarm. This could explain why the Department of Energy and Climate Change’s Final Investment Decision Enabling for Renewables (FIDeR) regime classified the windfarm as “unaffordable.”

In what way is the supply chain configuration expensive?

  • The group appointed an exclusive preferred supplier (Siemens), apparently before deciding on the technology platform or negotiating price or terms. Although this is done sometimes in the oil and gas business, this approach should be reserved for risky and/or remote projects where a single source is the only or clearly the best option. It is not a “best practice.” My book “Optimal Supply Chain Management in Oil, Gas and Power Generation” has a flowchart that shows when to single source, and the chart shows that there are relatively few circumstance in which you want to specify the source before choosing the model or negotiating a price. MRP just wrote Siemens a blank check. There is no doubt that Siemens is a great supplier; it’s just that this approach is not the most cost-efficient way to manage a project that is struggling for financial viability.
  • MRP has decided to outsource project management from soup to nuts. It will outsource Engineering, Procurement, Construction and Installation, rather than just E or EP or EPC. For sure, EPCI firms get the job done, but they charge a premium for it and usually have an incentive to increase the cost of the project rather than reduce the cost (since they frequently get reimbursed as a percent of the cost). If you have the capabilities in-house (and perhaps MRP does not), you can reduce the cost of the project by managing it yourself, as other major windfarm owners/operators have done.
  • It enlisted two EPCI partners rather than one, which is bound to be even more costly than having one EPCI partner, as each one will need to be compensated. As a 25% shareholder in MRP, the choice of Marubeni is obvious, but the rationale for tacking Technip on too is less obvious.

There may be reasoning behind these agreements that makes them cost-efficient supply chain maneuvers, which MRP is keeping close to the vest. Let’s hope that there is some hidden supply chain wisdom in play.

Savvy Supply Chain Planning the Key to North Sea Offshore Wind farm Profitability

b2ap3_thumbnail_wind-turbine-73158643The last 12 months have seen the unraveling of many Round 3 offshore UK windfarm plans. Both Vattenfall and RWE, although they are still committed to some major successful projects, have decided to curtail their future spending on renewables (mostly wind) by nearly half. RWE pulled out of the Atlantic Array. Others have scaled back the size and/or number of planned projects in light of a sluggish political / consenting process and strong opposition from environmentalists. Even the enticement of huge subsidies (for example, from the European Investment Bank, or EIB) can only tie up capital and business plans for so long.

The success or failure of these offshore wind projects hinges on savvy supply chain planning and management, which can reduce investment cost by 13% without trying hard, and by more than 20% when push comes to shove. The “supply chain” delta can be the difference between a loss-making project and a profitable one. Siemens understands this well. It has developed a well-crafted modularization program that can extend from the owner through the WTG supplier through to component and maintenance suppliers. But an optimal supply chain strategy involves more than modularization. Supply chain thinking should have already entered into the decision to invest in the project in the first place, since the costs, benefits, and risks of supply chain decisions are integral to the program’s cost and financial results. Strategic supply chain planning should dictate how many phases there should be and how large each one should be; how to stage and organize the engineering, construction, and procurement of key equipment in each stage and across all the stages; how to choose key suppliers and how and when to align with them; whether to bundle procurement together into large modules or split it up into small chunks; whether to insource or outsource various facets of operation and maintenance; and when to commit to contracts and incur financial milestones.

While it may be too late for projects that already been cancelled, E.on, Forewind (Dogger Bank), EDF/Eneco (Navitus Bay), SSE, Scottish Power, and Blackstone (Nordlicher Grund) may want to get an outside expert’s opinion on how much can be saved by optimizing the supply chains of projects that are currently being downsized or are at risk of being cancelled in the future.

Can Extra Long Monopiles Really Replace Jacket Foundations for Offshore Wind Turbines?

b2ap3_thumbnail_Offshore-wind-turbines-43932955Siemens Project Ventures GmbH has apparently not decided which type of wind turbine foundation to use for its 600 MW Hornsea One project (Heron Wind) in the North Sea, despite having chosen Siemens’ own SWT-6.0-154 wind turbines for the project (a joint venture with Mainstream Renewable Power and DONG). Five years ago, monopiles would have been out of the question in that water depth (25-40 meters), and the prospect of using gravity base foundations would have raised many engineering questions, leaving jackets as the default choice. Today, due to the advent of extra-long monopiles, there is a renewed debate on the subject of foundations. Still, the challenges of monopiles supporting the weight of a 6+ MW turbine 200 meters from the ocean floor and rotating a 154-meter diameter blade on a single pole would seem to be a major concern – bending and buckling in heavy waves and wind, not to mention shipping and installing a monopile of that length.

The offshore wind industry often takes its engineering, procurement, and construction cues from the offshore oil and gas industry. Of course the weight and physics of offshore oil rigs and production platforms are totally different than wind turbines, and the wind and wave conditions are engineered for every farm, but in general it is a lot easier to make offshore windfarms cost-effective if they are based on proven technologies such as jacket foundations (manufacturing, shipping, installation, operation, maintenance, and decommissioning) repeated in high volume with significant economies of scale, at least in the early stages.

Informed responses would be appreciated. Please comment.

Standardization: How RWE Innogy is Minimizing the Supply Chain Cost of a Multi-Project Windfarm (Nordsea 1,2, and 3)

b2ap3_thumbnail_DNA-shutterstock_107069489Innogy’s Nordsea windfarm program is a model for supply chain leverage. The program is being constructed in three independent projects (Nordsea 1, Nordsea 2, and Nordsea 3). Each of the three was consented and will be constructed separately. This diversifies financial, legal, and regulatory risks. However, from a procurement and operational point of view, the projects are essentially replicas of each other, thereby allowing for standardization of processes, technologies, suppliers, and governance. The capacity of each project is similar, ranging from 295 MW to 369 MW. All three projects will utilize the same turbine make and model: the Senvion (formerly REpower) 6.2M 126. The chosen turbine is the largest available that has a successful track record of offshore performance, which reduces its risk of operational and maintenance problems. The WTG contracts are long-term and include 10-year maintenance contracts (at least for Nordsea 2 and 3), based on a 2b euro framework agreement between RWE and Senvion that assures close cooperation and mutual alignment of interests for the life of the farms. Bravo, RWE, for setting an example of how to run a cost-optimized windfarm business.

What Size and Number of Offshore Wind Turbines Should RWE Use to be the Most Cost-Efficient for its Targeted MW Output at Triton Knoll?

b2ap3_thumbnail_3-Cupcakes-shutterstock_25212865What size and number of wind turbine generators (WTGs) should RWE choose to produce the targeted power output from its Triton Knoll and other windfarms? Using small turbines (3.6’s) can minimize upfront per-unit costs (in significant part by leveraging economies of scale for ordering many units at once) and produce reliable and predictable operating and maintenance costs, but this choice requires more turbines to generate the same power, and at some point the units may go “out of service” or “no longer be supported” (think of your old software) by Siemens, potentially driving a need to train and develop in-house maintenance and operating staff. Using a larger turbine (RWE is apparently eyeing 8.0 MW units, which would require extensive development) would clearly reduce the number of units required, but typically dramatically increases both the per-MW purchase and the installation costs, as well as the the risk of “infant mortality,” model obsolescence (think Windows Vista), and possibly high operating and maintenance costs. Operators like RWE can borrow from the body of knowledge of capacity management (a subset of operations management), which basically offers three strategies: lead, follow, or match the anticipated demand (or in this case, the anticipated standard WTG size). Boston Strategies International has simulated “total cost” under each of the three strategies. The sum of the individual effects must be assessed over the life of the farm, taking into account the per-unit costs; per-MW costs, number of units required; installation costs; economies of scale in procurement, operation and maintenance; reliability; and risk of obsolescence; and other factors.

European Wind Power Projects Can Deliver Positive ‘Return on CapEx’ Through Forward-Looking Supply Chain Planning

b2ap3_thumbnail_shutterstock_4056883The upcoming Wind Developer Congress this week in Berlin should be interesting. I’m hoping that it will help owners, developers, OEMs, and lenders to develop procurement strategies that assure availability of long lead time equipment and services, while improving their assessment of financial and operational risks, such as regulatory hurdles and uncertainty of future lead times for wind turbines, installation services, and electrical equipment. In addition to furthering BSI’s work evaluating the financial potential of specific projects through supply chain optimization, I’m looking forward to learning more about energy storage and design improvements that can accelerate payback for offshore wind in general.