Morgan Stanley’s Continuum Dumps Suzlon Model for Growth

Morgan Stanley-backed Continuum Wind Energy Pte, which plans a more than 10-fold surge in its India capacity, is dumping a 20-year model that helped Suzlon Energy Ltd. (SUEL) dominate Asia’s second-biggest turbine market.

Continuum aims to build 1,360 megawatts of wind farms by 2017, almost all of that on its own, abandoning an industry practice of hiring turbine makers to execute projects on a turnkey basis, Chief Executive Officer Arvind Bansal said. The new model will help utilities manage the assets better and boost their profitability, he said.

Developers in India are building more productive wind farms by doing away with a system set up by turbine makers Suzlon and Vestas Wind Systems A/S (VWS), which handed ready-made projects to investors. Continuum, whose expansion is set to beat the present operating capacity of India’s biggest wind utility CLP Holdings Ltd. (2), has already managed to cut generation losses at its farms under the new model.

“The turbine manufacturer’s focus is to sell turbines,” Bansal said in an interview. In contrast, the utility’s focus is to sell the most units of electricity possible. “That’s where the disconnect starts.”

Fighting Blackouts

India, which is fighting blackouts that hold back growth, is seeking to cut dependence on imported fossil fuels and double clean energy capacity to about 59 gigawatts by 2017. Its wind capacity is forecast to increase by 2,050 megawatts this year, topping the U.S. in annual installations for the first time, according to Bloomberg New Energy Finance.

The market’s shift to wind utilities focused on maximizing electricity output will force manufacturers to compete on turbine performance alone. That could benefit General Electric Co. (GE) and ReGen Powertech Pvt. over entrenched suppliers such as Suzlon, said Madhavan Nampoothiri, founder of Chennai-based RESolve Energy Consultants.

Suzlon declined to comment as it’s observing a silent period before announcing second-quarter results tomorrow. Shares of the Indian turbine maker have dropped 43 percent this year to 10.60 rupees, compared with a 6 percent gain in the benchmark S&P BSE Sensex. (SENSEX)

Generation Loss

Within a year, Continuum will triple capacity to more than 300 megawatts, including a 264-megawatt farm in Satara, in the state of Maharashtra, that is India’s largest held by a single owner. There, it’s installing machines from three vendors side-by-side to maximize generation.

Wind farms supplied by turbine makers can suffer as much as 6 percent in generation losses due to challenges such as transmission lines tripping or poor roads lengthening maintenance downtimes, he said. Continuum has reduced such losses to 1 percent.

Morgan Stanley (MS) Infrastructure Partners holds an undisclosed majority stake in the Singapore-registered Continuum. It has invested more than $100 million in the company.

Turbine manufacturers “want to stuff as many turbines into the project as possible,” Bansal said at his office in Mumbai. “You are buying the down side. There’s no mechanism to optimize your returns.” With self-development, a utility has the flexibility to choose the best sites, the suppliers, the number of turbines, as well as the ability to gather better wind data and generate as much power as possible, he said.

Tax Breaks

Turnkey deals allowed investors with no power background to buy windmills for tax benefits rather than to generate energy. Most of India’s 20,000 megawatts of wind capacity was built claiming tax breaks, leading to small, fragmented holdings that owners often allowed to rust and idle once the depreciation benefits were claimed.

Continuum’s strategy and full ownership is also paying off after Indian regulators imposed a directive on July 15 ordering wind farms to forecast their day-ahead power output or face fines. Goldman Sachs Group Inc.’s ReNew Wind Power Pvt. and Tata Power Co. (TPWR) warned the rule would wipe out industry profits because it was too difficult to meet.

Complying with the rule is nearly impossible when a farm has multiple owners because no investor will allow his turbine to be switched off to optimize total generation, Bansal said. Also, it’s difficult to share penalties. Continuum foresaw such challenges in 2010 and has been practicing forecasting for more than two years, he said.

Larsen, Tata

Wind farms are already able to supply power at the same cost or cheaper than new coal-fired plants in some states. That’s opening up a market for wind utilities to sell directly to industrial and commercial businesses, which pay the highest power tariffs, Bansal said.

Continuum completed its first such project in Gujarat state where a 28-megawatt wind farm sells its output to Larsen & Toubro Ltd. (LT) and Tata Motors Ltd. (TTMT) under a 12 1/2-year contract at a price that is lower than what those companies pay for grid power.

Proposed reforms in India’s electricity market to separate power distribution and transmission, both largely monopolized by state-run companies, could spur such deals, he said.

India’s biggest developers, CLP and Tata Power, buy turnkey wind farms from turbine manufacturers who require cash to fund execution of the projects.

Globally, manufacturers including Suzlon, Vestas and Gamesa Corp Tecnologica SA (GAM), have cut at least 9,000 jobs and closed plants amid overcapacity as machine prices fell by a quarter from their peak in 2009. Suzlon last year ceded its position as India’s top wind-turbine supplier for the first time in at least a decade after defaulting on bond repayments and struggling to carry out orders due to a lack of capital.

“Developers that haven’t been doing self-development will start having to,” Bansal said. “The inventory of turnkey projects has dried up because manufacturers don’t have the working capital to fund them.”

To contact the reporter on this story: Natalie Obiko Pearson in Mumbai at npearson7@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net

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