Wind Energy Update's State of the Indian Wind Industry: Industry Leader's thoughts

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As wind power grows in size in India this mini report views the growing market form a industry leaders piont of view. Created by Wind energy Update for the upcoming conference Wind Power Development Forum India for more info please go to the website at http://bit.ly/Report-India

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Wind Energy Update's State of the Indian Wind Industry: Industry Leader's thoughts

  1. 1. State of the IndianWind IndustryIndustry Leader ThoughtsBy Ben Schiller
  2. 2. State Of The Industry:Industry Leader ThoughtsIntroductionIndia’s renewable energy industry one of the most dynamic in theworld. With a rapidly growing economy, an expanding populationand an unprecedented thirst for power, wind is increasingly beingseen as an essential part of the domestic energy mix.However, it is widely known that there are key challenges to beovercome in order to achieve the renewable energy target of “40gigswatts (GW) by 2022”. Key issues surround securing finance,sustainable government policy, the domestic manufacturingenvironment among others.In conjunction with the Wind Energy Development Forum (6-7September, New Delhi) this short report will give you insight intothe thoughts of some of the leading figures central to the nextstage of commercial wind energy development in India.If you find this report interesting, please let me know – I’d bedelighted to hear your feedback.Will BroadVP Asia | Wind Energy Update+44 (0)207 375 7516 | will@windenergyupdate.com Wind Power Development Forum India 6-7 September 2012, New Delhi Establish commercially successful wind power projects www.windenergyupdate.com /india
  3. 3. State Of The Industry:Industry Leader ThoughtsEstimates of wind energy potential in India have been rising “With the drop of acceleratedrapidly in recent years. In 2010, India’s Center for Wind Energy depreciation - the quality ofTechnologies put it at just 103 gigawatts (GW). Then a joint study projects will improve, and theby Harvard University and the Technical Research Center of investment environment willFinland assessed it at about 1,000 GW. Most recently, the get better as well”well-respected Lawrence Berkeley National Laboratory, inCalifornia, reported that India could have between 2,006 GW and Sunil Jain,3,121 GW of wind capacity. The study said greater efficiency in Green Infrawind production, improvements in turbine technology, andgreater use of geographic information systems (GIS) to identifysites, have all contributed to the higher forecasts.In truth, estimating wind energy development in a country thesize of India, based on so many assumptions, and slicing throughso many variables, is an inexact science, to say the least. But thehigher estimates are at least consistent with other major markets,such as the US and China, which have also raised their estimates.And the important takeaway is the trend, rather than the exactnumbers. Nobody doubts that India has a lot of demand forpower, and the opportunity for wind is great, if only developers,and government, and others, can come together to make themost of it.The sobering reality at the moment is that industry is nowherenear 3,000 GW of capacity. About 16,078 megawatts (MW) wasinstalled in India by the end of 2011, according to the Indian WindTurbine Manufacturers Association (none of these estimatesinclude offshore capacity, which is another story). And, theindustry faces a lot of challenges before it can move forwardconfidentially, including access to reasonably priced funding,access to the most appropriate sites, access to a reliable grid,more supportive and consistent government policy, and a deepnetwork of local turbine manufacturing, installation andmaintenance services.This short report will address the following questions:• The outlook for financing in equity and debt markets Wind Power• The impact of government policies, such as the scrapping Development of the “accelerated depreciation” rule Forum India 6-7 September 2012, New Delhi• How the industry can cope with land-acquisition and grid bottleneck issues Establish commercially successful wind power• How the industry can build up its turbine manufacturing, projects and support services industries www.windenergyupdate.com• The challenges over the next 5 to 10 years /india
  4. 4. State Of The Industry:Industry Leader ThoughtsThree industry leaders give their thoughts on these and other “With the new Generationissues: Based Incentive (GBI) introduced just over a year Sunil Jain is the chief operating officer ago, weve seen the addition of Green Infra, an IPP that was founded of 3,200 MW in 2011-12, in 2008 to develop wind, hydro, solar which is the highest annual and biomass projects. It currently has addition to date.”214 MW of projects in operation, and another 300 MW indevelopment. He has more than 27 years of engineering Mr Krishnakumar,experience, particularly in the auto and infrastructure sectors, as Orient Green Powerwell as a background in business development and M&A. P. Krishnakumar is managing director of Chennai-based Orient Green Power, an independent renewable energy developer with 315 MW of installed windcapacity. He is a mechanical engineer with about 30 years ofindustrial experience in sales and marketing and internationalbusiness development, and holds a bachelor’s degree inmechanical engineering from Alagappa Chettiar College ofEngineering & Technology, Madurai Kamaraj University. Malolan Cadambi is Managing Director of Greenshore Energy, which is developing offshore wind energy off the Indian coast. He has consulted with by the Ministry of New & Renewable Energy on the prospects of offshore wind, and presented to the R&D Council of Centre for Wind EnergyTechnology. He studied electrical engineering at Iowa StateUniversity, in the US, and lives in Bangalore.FinancingWhat’s the current climate for raising funds? What’s the impactfrom the end of accelerated depreciation?Sunil Jain: A lot of investment has come into the wind business inrecent times. Almost $600m of private equity funding has alreadybeen committed in the last year and a half, and almost $200m Wind Powerhas been committed by the development companies themselves. DevelopmentIt is too early to say what will happen to the accelerated Forum India 6-7 September 2012, New Delhidepreciation rule. We should know in the next two months. But, ifit goes, I think it would positive for the Indian industry. There may Establish commerciallybe temporary drop in capacity additions. But in the long run, the successful wind powerquality of projects will improve, and the investment environment projectswill get better as well. Investors will come in as IPPs, not fortax-and-fiscal benefits. In the past, there have been investors www.windenergyupdate.comcoming in just for tax reasons, though not Green Infra, I should /indiamake clear.
  5. 5. State Of The Industry:Industry Leader ThoughtsBut, while there is plenty of equity funding available, the cost of “In the next 3 to 5 years wedebt financing is still very high. That can make your returns will see a consolidation phaseunviable. Indian banks have got sector-lending limits, including in the wind industry”for the power sector. Banks can put aside only certain percentageof their portfolio for power projects. And, since wind is seen asmore risky than thermal projects, the majority goes to thermal, Sunil Jain,and you are left with very little for wind. Green InfraAnother issue is that banks are not very forthcoming on purenon-recourse finance. If you can get debt financing, it is quiteexpensive. If your cost of debt is 13 percent today, and thegovernment is only giving you 15 percent post-tax return on yourequity, it’s not working out. The return on investment is low.P. Krishnakumar: The cost of funding is a concern. The marketinterest rate is 14 or 15 percent, which is not really a workablelevel. The banking support is there for the right project, but windis still not considered as a “priority sector”, which would providebetter interest terms.Wind has a different risk profile from other types of renewables,with lower risks, and lower returns. If you put the right machine inthe right location, based on wind availability and the right capitalcost and tariff, it will provide adequate returns. And you havefewer operating costs, less plant considerations, and fewerpeople management issues than with biomass, which we are alsoinvolved with. There is a higher level of return in biomass, but ahigher risk level as well. So, in our portfolio, we try to have abalance, with about 60 percent wind, and 40 percent biomass.The end of accelerated depreciation will have an impact. Untilthis year, out 17 GW we have installed in the country, I would sayabout 14 GW came through accelerated depreciation. That wasthe major impetus. But, in the last few years, we’ve seen moreIPPs coming into the market. With the new Generation BasedIncentive (GBI) introduced just over a year ago, weve seen theaddition of 3,200 MW in 2011-12, which is the highest annualaddition to date. The end of accelerated depreciation and GBI willcertainly hamper growth. I would expect a drop of at least 1,000 Wind PowerMW, compared to last year. DevelopmentMalolan Cadambi: We’re in talks with private equity firms who see Forum India 6-7 September 2012, New Delhivalue in building large projects with economies of scale. Theaverage onshore project is 30-40 MW. An offshore wind project Establish commerciallycan easily start at 200 MW. The advantage over onshore projects successful wind poweris you don’t have the logistical problems, land acquisition issues, projectsand we can get easily connected. The land acquisition problemsfor Andhra Lake Wind power project in Maharashtra show the www.windenergyupdate.comdifficulties. India has a shallow continental shelf for quite a long /indiadistance from our coast.It has been a little bit difficult to talk to private equity firms,
  6. 6. State Of The Industry:Industry Leader Thoughtsbecause they haven’t seen any offshore projects before. We are “With technology havingthe first in India. But there are funds who have invested in private improved significantly, theports and marine projects who can relate to offshore wind, and sites that were not goodhave a lower risk perception. before are now good for development”The accelerated depreciation rule formed the base for the windindustry. But, for our project, the direct tax code is moreimportant. The proposed investment-based deduction under the Mr Krishnakumar,DTC is far more effective in incentivizing capacity additions, I Orient Green Powerthink.The firms we’ve spoken to are quite comfortable with it. They seeit as more beneficial than accelerated depreciation.We’re also planning debt financing as well. We’re talking to theexport credit agencies in Europe, Asia and North America aboutlong-term loan guarantees for the debt portions. The fact thatEurope already has nearly 3,800 MW of offshore wind proves thatoffshore wind is a mature technology.InfrastructureIs the grid a bottleneck for expansion? How are good are Indianturbine makers, and what about support services for installationand maintenance?P. Krishnakumar: The best wind sites are in the southern part ofIndia, particularly Tamil Nadu. Between 40 and 50 percent ofwind operations are currently there. After that, you have Gujarat,Maharashtra, Rajasthan, and Karnataka.In Tamil Nadu, the initial estimates, 10-15 years back, were for 6GW of wind power. But with technology having improvedsignificantly, the sites that were not good before are now goodfor development. So, we have a short-term issue withtransmission lines not being available. The government is awareof the issue. But even if they start work right now, it will take18-24 months minimum to correct the problem. That’s a majorchallenge there, but less so in other states. Wind Power DevelopmentWe have enough manufacturing capacity for the turbines that weneed. Almost all major global players in wind, including Suzlon, Forum India 6-7 September 2012, New DelhiGE, Vestas, Gamesa, Leitwind, have operations in India. We alsohave installation and maintenance companies that have been in Establish commerciallybusiness since the 1990s. The key thing is we have a lot technical successful wind powermanpower available, particularly in the southern part of the projectscountry. So, I don’t think that’s really a challenge, at all. www.windenergyupdate.com /india
  7. 7. State Of The Industry:Industry Leader ThoughtsMalolan Cadambi: The grid is a worry, but there are ways around “The need is to haveit. There are onshore wind developers who plan to connect to manufacturers who are verycentral transmission line, instead of the state transmission line. competitive in developingThe catch is that you have to have a project of mor than 50 MW new technologies”to do that. So we plan to connect our proposed offshore windproject to the central transmission line by looking at a project of200 MW. We will have a simple AC transmission system to Malolan Cadambi,connect to the central line. It is not expensive, if we spread the Greenshore Energycost over a large generation capacity.There is already an offshore oil industry in India, which has a vastsupply chain that we can tap into to build offshore. There are nooffshore wind turbine manufacturers in India at the moment, sowe plan to import these. But there are a lot of service providerswho can fabricate the foundations, lay cables, and doinstallations. We have pretty good support contractors that arewell-financed.Sunil Jain: Grid availability is a cause of concern. India has apeculiar situation where the law says renewable energy must getpriority when you are transmitting power into grid. Butunfortunately when it comes to backing down because of thecapacity constraints, it is wind energy that is backed down first,because it is easiest to back down. You cannot back down athermal plant at a moment’s notice, but a wind plant can be donelike that. Also, the transmission and distribution systems areprimarily owned by governments, and development has beenslow.So, the wind generators have been suffering on that account,particularly in Tamil Nadu. I understand that the government andthe ministry are trying to focus on this to ensure that the grid isnot an issue, because it is not only wind that is affected. Plans forsolar will also be in trouble. But I’ve heard the government isaware of the situation, and is making a lot of investment in gridupgrades. Hopefully, in the next two years, the situation willimprove dramatically. If not, we could see a slowdown inrenewable investments in the next 2-3 years. Wind PowerState to State DevelopmentWhat issues does the industry face at a local level, and how Forum India 6-7 September 2012, New Delhihelpful are state governments in addressing these? Establish commerciallyMalolan Cadambi: Because we doing the first offshore wind successful wind powerproject in India, there was no policy framework in place when we projectsstarted talking to the government. So, we suggested a largerintellectual framework for offshore wind in India. Thankfully, the www.windenergyupdate.comTamil Nadu Energy Development Agency was receptive to our /indiaideas, and the R&D Council of the Centre for Wind Energy
  8. 8. State Of The Industry:Industry Leader ThoughtsTechnology also accepted our approach. The idea of leasing the “The government hassea-bed, which the Ministry of New & Renewable Energy is now liberalised capital inflows, sodoing, was something we floated back in 2010. we can expect more foreign debt for projects”For onshore wind, every state has a policy, despite budgetaryconstraints. Gujarat is one of the best for onshore wind. TamilNadu, which has the best potential, is slightly constrained in its Sunil Jain,budget, which has led to some hiccups in revenue flows. But for Green Infraoffshore, we’ve had excellent support from the statedevelopment agency, as well as from the Ministry of RenewableEnergy.Sunil Jain: The acquisition of land is a major issue. It’s a commonproblem across the states, and wind is most endangered, becauseit requires a lot of area. When you do a 100 MW wind farm, youare looking at 400-500 acres of land, a lot of which is agricultural,or forest land. Projects get delayed because of that. There is avery long process, between 24 and 30 months, to acquire forestland, and to clear it before you can start the project.And, to be honest, I don’t really see any resolution to theproblem. It can only get worse; it will not get better. The momentyou go and try to acquire land, local issues and the localpopulation will obstruct or constrain the acquisition process.Everybody senses an opportunity.The problem is that we are not seeing government intervening insuch cases. They are asking private developers to resolve theissue themselves, which is not always possible. Because of India’sfederal structure, the power of governments is limited.P. Krishnakumar: The challenges at state level are the regulations.Sometimes, the state and central regulatory commissions are noton the same page.The second thing is the financial strength of the state-owneddistribution companies (discoms). The discoms have beensupplying power at concessional rates, which results inunder-recovery of generation costs. That has meant huge losses Wind Powerfor state utilities, and delays in payments to generators. But Developmenthopefully the recent tariff revision by most utilities will improvethe discoms’ financial situation. Forum India 6-7 September 2012, New DelhiFuture Challenges Establish commercially successful wind powerWhat are the main challenges in the next 5-10 years? projectsMalolan Cadambi: The first main challenge for onshore is the www.windenergyupdate.comhigh-cost of credit. I think there is an opportunity to develop a /indiabond market to ensure there are fixed rate long-term bonds areavailable. Currently, the lack of long-term credit is a major issue.
  9. 9. State Of The Industry:Industry Leader ThoughtsThe other need is to have manufacturers who are very “We need continuity of policy,competitive in developing new technologies. Typically, at the and we need more of a focusmoment, the R&D budgets for Indian wind turbine manufacturers on wind than there is rightare somewhat low. We haven’t seen any new technology now”adoptions to adapt to Indian conditions, although there is amplescope for such research. Mr Krishnakumar,If we address these two issues properly, I think the industry will Orient Green Powergrow at a much faster pace. We don’t have natural gas reserves,and we can’t burn every coal reserve that we have. So, we need tothink of developing wind at a higher pace than we have been.Sunil Jain: The reason I’m positive is that interest costs are boundto come down, because the economy cannot survive if you havethese costs for a long period. Also, the government has liberalisedcapital inflows, so we can expect more foreign debt for projectshere, and I don’t see equity as an issue.At the same time, India has a very strong local manufacturingbase for producing wind turbines, which is another addedadvantage, and all the other services you need to build, andmaintain, wind farms are also available.In the next 3 to 5 years, I think we will see a consolidation phasein the wind industry, with some smaller players disappearing, andsome of the largest companies reaching utility-scale ofoperations.P. Krishnakumar: There are a few things the government needs todo. One is to reduce the financial burden on the industry. Wind iscapital intensive, and you have to invest a lot in additionalservices. So, it’s hard to get started. The industry would be benefitfrom having “priority sector” status for funding of projects.The second thing is its policies. We knew only last month thataccelerated depreciation was going to be scrapped, along withGBI. Until late in the day, there were indications that it might beextended. We need continuity of policy, and we need more of afocus on wind than there is right now. The current focus is onsolar, and wind has been taking a bit of a backseat for the Wind Powergovernment. With energy supply falling behind national demand, Developmentwe need to enhance renewable energy, and that means we needmore support. Forum India 6-7 September 2012, New Delhi Establish commercially successful wind power projects www.windenergyupdate.com /india
  10. 10. State Of The Industry:Industry Leader ThoughtsConcluding remarks “The lack of long-term credit is an issue”The fundamentals are in place for the Indian wind industry to besuccessful – not least the fact that continued economic growthrequires more energy, and there is a limit to what traditional Malolan Cadambi,sources such as nuclear and coal can supply. The devil, though, is Greenshore Energyin the detail of financing, site preparation, and government policy.And the industry will have to see improvement in each of theseareas if it is going to reach its potential.In the short term, grid capacity issues will also have to berectified, with more precedence given to wind energy in thetransmission system. The situation in in Tamil Nadu, which is thefocus of all three speakers’ projects, will be critical, and may senda larger signal about the readiness of India as a whole.Sunil Jain’s comments about land acquisition issues point to amore intractable set of problems. His statement that “it can onlyget worse; it will not get better” may seem pessimistic. But it mayalso be realistic. Without more intervention by government to setaside land for development, the industry is likely to continue tosee substantial delays, especially as land becomes more valuableover time.The onshore land issues are a good argument for offshoredevelopment, which has barely begun, but holds enormouspotential. If regulators can build the right policy framework, thegrid is extended, and India can develop its own offshoremanufacturing industry, turbines could soon start appearing allaround the shoreline. The experience of other countries, such asDenmark or the UK, shows that offshore is at least as good along-term bet than its onshore counterpart. It is not surprisingthat Malolan Cadambi is so optimistic about his company’sproject off Tamil Nadu, despite the relative difficulties of raisingfunds, and that policymakers have little experience with suchschemes.Finally, P. Krishnakumar makes some excellent points about thecurrent financial situation of the distribution companies not Wind Powerhelping the development of renewables, and the fact that the Developmentgovernment is currently more focused on solar than wind. Thereality of renewables everywhere is that the industry is still young, Forum India 6-7 September 2012, New Delhiand still over-dependent on the vagaries of government andregulation. Until there is more certainty, and fewer Establish commerciallyinconsistencies, renewable companies will always be looking over successful wind powertheir shoulder. Hopefully, the playing field will become more level projectsover time. www.windenergyupdate.com /india
  11. 11. State Of The Industry:Industry Leader Thoughts All the industry experts interviewed in this report are speaking at the upcoming Wind India Development Forum 2012 (6-7 September, New Delhi). Featuring representatives from the MNRE, IREDA, CERC, Suzlon, Tata Cleantech Capital, State Bank of India, Myrah Energy, Moser Baer and many more, it is set to be the key networking forum for those looking to develop commercially successful wind power projects. To get more information and reserve your place, download the conference brochure here: http://www.windenergyupdate.com/india/conference-event-brochure.php Exclusive offer: Get $150 off your ticket before 25th May when quoting the code “E-REPORT” when booking online here

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