Public–private partnerships for wind power generation: The Portuguese case

Abstract

Today’s portfolio of energy production, based mostly on fossil fuels, and increasing energy consumption go against a sustainable vision for the world’s development. Governments are shifting their energy policies towards renewable, nonpollutant sources of energy, developing large investment plans to ensure an adequate response to energy demand growth while keeping the environmental impact within reasonable boundaries. As in many other infrastructure-related sectors, new models for the provision of these facilities, and services, are being developed. Over the past 20 years, highways, hospitals, social housing, airports and dams have been developed in close collaboration with the private sector, not only in a contractor–supplier relation but also in deeper partnerships where the private sector assumes a substantial responsibility in managing and running the business. These models are known as public–private partnerships (PPPs). This research will look at the Portuguese experience in the application of PPP arrangements in the energy sector, particularly as far as the development of wind power plants is concerned. The evaluation procedures for selecting the private partner, the contract structure and the risk-sharing agreement are some of the issues deserving special attention.

Introduction

The growing need for energy at a worldwide scale and a deeper environmental awareness have led to a new level of commitment by governments to develop renewable energy sources (Yue et al., 2001). Kyoto protocol, the alarming increase in greenhouse gas emissions (global warming), and disasters associated with traditional energy sources, like the recent oil spill in BP off-shore platform over the Gulf of Mexico, pressured political decision makers to implement energy policies more environmentally friendly, leading to a significant increase in renewable energies in general, and wind power in particular (Jacob, 2005). The European Commission (2005) implemented several support schemes to foster the market penetration of electricity produced from renewable energy sources (RES-E). These schemes include feed-in tariffs (a price paid by electricity companies to domestic “green electricity” producers), green certificate system (all consumers are forced to buy green certificates to producers), tendering systems (tenders for supply of RES-E, sold at market price) and tax incentives.

Several countries have been planning packages of investment to shift the portfolio of energy production towards more sustainable solutions (Webber, 2010, Saidur et al., 2010; Zahedi, 2010, Mabel and Fernandez, 2008), but under a macro-economic scenario of worldwide crisis it will be difficult for public budgets to face this new and demanding investment priority. These are not “cheap” solutions¹. Renewable energy still has a higher cost than traditional sources, and financing mechanisms need to be found to overcome this gap, and foster the development of these technologies (Yue et al., 2001). On top of this, the recent economic crisis has shown that a country’s ability to finance itself is no more unlimited. Portugal, Greece and Spain are some examples on how credit availability is restricted and may lead to a dramatic increase in interest rates. In face of these challenges, alternative ways of service delivery are required in this field.

First developed in the 1990s in the UK, public–private partnership (PPP) arrangements have been implemented all over the world in different sectors, such as water supply, health care infrastructures, transportation and also energy. They appeared as a panacea for public budgetary constraints, but their implications are wider than just a financing mechanism. In the late 90s, Portugal started developing this procurement model to address the development of highways, moving afterwards for the railway sector, seaports, and health care infrastructures and more recently has engaged in the application of these models to the provision of wind power plants.

This paper will present the Portuguese experience in this field. First, the authors will clarify the concept and rationale for PPPs usage, their benefits and pitfalls, pointing out the risks of an inadequate use. The economics behind wind power plants is also addressed, identifying the critical success factors and making a deeper analysis on the risk sharing scheme adopted for the specific case study, that is, the development of wind farms. The Portuguese experience is outlined afterwards. A general overview of the electricity sector and its organisational structure will be presented, splitting the value-chain into its primary components and identifying the key stakeholders in each sub-system, as well as the respective industrial organisation model (monopoly versus competition). A public tender procedure for an 800 MW unit is discussed next, focusing on the process of selection of the private partner, on the risk sharing scheme adopted and on the management of contracts.