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

State of the Indian
Wind Industry
Industry Leader Thoughts

By Ben Schiller

State Of The Industry:

Introduction

India’s renewable energy industry one of the most dynamic in the
world. With a rapidly growing economy, an expanding population
and an unprecedented thirst for power, wind is increasingly being
seen as an essential part of the domestic energy mix.

However, it is widely known that there are key challenges to be
overcome in order to achieve the renewable energy target of “40
gigswatts (GW) by 2022”. Key issues surround securing finance,
sustainable government policy, the domestic manufacturing
environment among others.

In conjunction with the Wind Energy Development Forum (6-7
September, New Delhi) this short report will give you insight into
the thoughts of some of the leading figures central to the next
stage of commercial wind energy development in India.

If you find this report interesting, please let me know – I’d be
delighted to hear your feedback.

Will Broad
VP 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


Estimates of wind energy potential in India have been rising “With the drop of accelerated
rapidly in recent years. In 2010, India’s Center for Wind Energy depreciation - the quality of
Technologies put it at just 103 gigawatts (GW). Then a joint study projects will improve, and the
by Harvard University and the Technical Research Center of investment environment will
Finland assessed it at about 1,000 GW. Most recently, the get better as well”
well-respected Lawrence Berkeley National Laboratory, in
California, 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 Infra
wind production, improvements in turbine technology, and
greater use of geographic information systems (GIS) to identify
sites, have all contributed to the higher forecasts.

In truth, estimating wind energy development in a country the
size of India, based on so many assumptions, and slicing through
so many variables, is an inexact science, to say the least. But the
higher 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 exact
numbers. Nobody doubts that India has a lot of demand for
power, and the opportunity for wind is great, if only developers,
and government, and others, can come together to make the
most of it.

The sobering reality at the moment is that industry is nowhere
near 3,000 GW of capacity. About 16,078 megawatts (MW) was
installed in India by the end of 2011, according to the Indian Wind
Turbine Manufacturers Association (none of these estimates
include offshore capacity, which is another story). And, the
industry faces a lot of challenges before it can move forward
conﬁdentially, 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 deep
network of local turbine manufacturing, installation and
maintenance 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
• How the industry can cope with land-acquisition and grid
bottleneck issues Establish commercially
• How the industry can build up its turbine manufacturing, projects
and support services industries
• The challenges over the next 5 to 10 years /india


Three industry leaders give their thoughts on these and other “With the new Generation
issues: Based Incentive (GBI)
introduced just over a year
Sunil Jain is the chief operating officer ago, we've 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 in
development. He has more than 27 years of engineering Mr Krishnakumar,
experience, particularly in the auto and infrastructure sectors, as Orient Green Power
well 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 wind
capacity. He is a mechanical engineer with about 30 years of
industrial experience in sales and marketing and international
business development, and holds a bachelor’s degree in
mechanical engineering from Alagappa Chettiar College of
Engineering & 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 Energy
Technology. He studied electrical engineering at Iowa State
University, in the US, and lives in Bangalore.

Financing

What’s the current climate for raising funds? What’s the impact
from the end of accelerated depreciation?

Sunil Jain: A lot of investment has come into the wind business in
recent times. Almost $600m of private equity funding has already
been committed in the last year and a half, and almost $200m Wind Power
has been committed by the development companies themselves. Development
It is too early to say what will happen to the accelerated
Forum India
depreciation rule. We should know in the next two months. But, if
it goes, I think it would positive for the Indian industry. There may Establish commercially
be temporary drop in capacity additions. But in the long run, the successful wind power
quality of projects will improve, and the investment environment projects
will get better as well. Investors will come in as IPPs, not for
tax-and-ﬁscal beneﬁts. In the past, there have been investors www.windenergyupdate.com
coming in just for tax reasons, though not Green Infra, I should /india
make clear.


But, while there is plenty of equity funding available, the cost of “In the next 3 to 5 years we
debt financing is still very high. That can make your returns will see a consolidation phase
unviable. Indian banks have got sector-lending limits, including in the wind industry”
for the power sector. Banks can put aside only certain percentage
of their portfolio for power projects. And, since wind is seen as
more risky than thermal projects, the majority goes to thermal, Sunil Jain,
and you are left with very little for wind. Green Infra

Another issue is that banks are not very forthcoming on pure
non-recourse finance. If you can get debt financing, it is quite
expensive. If your cost of debt is 13 percent today, and the
government is only giving you 15 percent post-tax return on your
equity, it’s not working out. The return on investment is low.

P. Krishnakumar: The cost of funding is a concern. The market
interest rate is 14 or 15 percent, which is not really a workable
level. The banking support is there for the right project, but wind
is still not considered as a “priority sector”, which would provide
better 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 in
the right location, based on wind availability and the right capital
cost and tariff, it will provide adequate returns. And you have
fewer operating costs, less plant considerations, and fewer
people management issues than with biomass, which we are also
involved with. There is a higher level of return in biomass, but a
higher risk level as well. So, in our portfolio, we try to have a
balance, with about 60 percent wind, and 40 percent biomass.

The end of accelerated depreciation will have an impact. Until
this year, out 17 GW we have installed in the country, I would say
about 14 GW came through accelerated depreciation. That was
the major impetus. But, in the last few years, we’ve seen more
IPPs coming into the market. With the new Generation Based
Incentive (GBI) introduced just over a year ago, we've seen the
addition of 3,200 MW in 2011-12, which is the highest annual
addition to date. The end of accelerated depreciation and GBI will
certainly hamper growth. I would expect a drop of at least 1,000 Wind Power
MW, compared to last year. Development
Malolan Cadambi: We’re in talks with private equity firms who see
Forum India
value in building large projects with economies of scale. The
average onshore project is 30-40 MW. An offshore wind project Establish commercially
can easily start at 200 MW. The advantage over onshore projects successful wind power
is you don’t have the logistical problems, land acquisition issues, projects
and we can get easily connected. The land acquisition problems
for Andhra Lake Wind power project in Maharashtra show the www.windenergyupdate.com
difficulties. India has a shallow continental shelf for quite a long /india
distance from our coast.
It has been a little bit difficult to talk to private equity firms,


because they haven’t seen any offshore projects before. We are “With technology having
the first in India. But there are funds who have invested in private improved significantly, the
ports and marine projects who can relate to offshore wind, and sites that were not good
have a lower risk perception. before are now good for
development”
The accelerated depreciation rule formed the base for the wind
industry. But, for our project, the direct tax code is more
important. The proposed investment-based deduction under the Mr Krishnakumar,
DTC is far more effective in incentivizing capacity additions, I Orient Green Power
think.

The firms we’ve spoken to are quite comfortable with it. They see
it as more beneficial than accelerated depreciation.

We’re also planning debt financing as well. We’re talking to the
export credit agencies in Europe, Asia and North America about
long-term loan guarantees for the debt portions. The fact that
Europe already has nearly 3,800 MW of offshore wind proves that
offshore wind is a mature technology.

Infrastructure

Is the grid a bottleneck for expansion? How are good are Indian
turbine makers, and what about support services for installation
and maintenance?

P. Krishnakumar: The best wind sites are in the southern part of
India, particularly Tamil Nadu. Between 40 and 50 percent of
wind 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 6
GW of wind power. But with technology having improved
significantly, the sites that were not good before are now good
for development. So, we have a short-term issue with
transmission lines not being available. The government is aware
of the issue. But even if they start work right now, it will take
18-24 months minimum to correct the problem. That’s a major
challenge there, but less so in other states. Wind Power
Development
We have enough manufacturing capacity for the turbines that we
need. Almost all major global players in wind, including Suzlon,
Forum India
GE, Vestas, Gamesa, Leitwind, have operations in India. We also
have installation and maintenance companies that have been in Establish commercially
business since the 1990s. The key thing is we have a lot technical successful wind power
manpower available, particularly in the southern part of the projects
country. So, I don’t think that’s really a challenge, at all.
/india


Malolan Cadambi: The grid is a worry, but there are ways around “The need is to have
it. There are onshore wind developers who plan to connect to manufacturers who are very
central transmission line, instead of the state transmission line. competitive in developing
The 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 wind
project to the central transmission line by looking at a project of
200 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 Energy
cost over a large generation capacity.

There is already an offshore oil industry in India, which has a vast
supply chain that we can tap into to build offshore. There are no
offshore wind turbine manufacturers in India at the moment, so
we plan to import these. But there are a lot of service providers
who can fabricate the foundations, lay cables, and do
installations. We have pretty good support contractors that are
well-financed.

Sunil Jain: Grid availability is a cause of concern. India has a
peculiar situation where the law says renewable energy must get
priority when you are transmitting power into grid. But
unfortunately when it comes to backing down because of the
capacity constraints, it is wind energy that is backed down first,
because it is easiest to back down. You cannot back down a
thermal plant at a moment’s notice, but a wind plant can be done
like that. Also, the transmission and distribution systems are
primarily owned by governments, and development has been
slow.

So, the wind generators have been suffering on that account,
particularly in Tamil Nadu. I understand that the government and
the ministry are trying to focus on this to ensure that the grid is
not an issue, because it is not only wind that is affected. Plans for
solar will also be in trouble. But I’ve heard the government is
aware of the situation, and is making a lot of investment in grid
upgrades. Hopefully, in the next two years, the situation will
improve dramatically. If not, we could see a slowdown in
renewable investments in the next 2-3 years.
Wind Power
State to State Development
What issues does the industry face at a local level, and how
Forum India
helpful are state governments in addressing these?
Malolan Cadambi: Because we doing the first offshore wind successful wind power
project in India, there was no policy framework in place when we projects
started talking to the government. So, we suggested a larger
intellectual framework for offshore wind in India. Thankfully, the www.windenergyupdate.com
Tamil Nadu Energy Development Agency was receptive to our /india
ideas, and the R&D Council of the Centre for Wind Energy


Technology also accepted our approach. The idea of leasing the “The government has
sea-bed, which the Ministry of New & Renewable Energy is now liberalised capital inflows, so
doing, was something we floated back in 2010. we can expect more foreign
debt for projects”
For onshore wind, every state has a policy, despite budgetary
constraints. Gujarat is one of the best for onshore wind. Tamil
Nadu, 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 Infra
offshore, we’ve had excellent support from the state
development agency, as well as from the Ministry of Renewable
Energy.

Sunil Jain: The acquisition of land is a major issue. It’s a common
problem across the states, and wind is most endangered, because
it requires a lot of area. When you do a 100 MW wind farm, you
are looking at 400-500 acres of land, a lot of which is agricultural,
or forest land. Projects get delayed because of that. There is a
very long process, between 24 and 30 months, to acquire forest
land, and to clear it before you can start the project.

And, to be honest, I don’t really see any resolution to the
problem. It can only get worse; it will not get better. The moment
you go and try to acquire land, local issues and the local
population will obstruct or constrain the acquisition process.
Everybody senses an opportunity.

The problem is that we are not seeing government intervening in
such cases. They are asking private developers to resolve the
issue themselves, which is not always possible. Because of India’s
federal 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 not
on the same page.

The second thing is the financial strength of the state-owned
distribution companies (discoms). The discoms have been
supplying power at concessional rates, which results in
under-recovery of generation costs. That has meant huge losses Wind Power
for state utilities, and delays in payments to generators. But Development
hopefully the recent tariff revision by most utilities will improve
the discoms’ financial situation.
Forum India

Future Challenges Establish commercially
What are the main challenges in the next 5-10 years? projects
Malolan Cadambi: The first main challenge for onshore is the www.windenergyupdate.com
high-cost of credit. I think there is an opportunity to develop a /india
bond market to ensure there are fixed rate long-term bonds are
available. Currently, the lack of long-term credit is a major issue.


The 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 focus
moment, the R&D budgets for Indian wind turbine manufacturers on wind than there is right
are somewhat low. We haven’t seen any new technology now”
adoptions to adapt to Indian conditions, although there is ample
scope for such research.
Mr Krishnakumar,
If we address these two issues properly, I think the industry will Orient Green Power
grow 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 to
think of developing wind at a higher pace than we have been.

Sunil Jain: The reason I’m positive is that interest costs are bound
to come down, because the economy cannot survive if you have
these costs for a long period. Also, the government has liberalised
capital inflows, so we can expect more foreign debt for projects
here, and I don’t see equity as an issue.

At the same time, India has a very strong local manufacturing
base for producing wind turbines, which is another added
advantage, and all the other services you need to build, and
maintain, wind farms are also available.
In the next 3 to 5 years, I think we will see a consolidation phase
in the wind industry, with some smaller players disappearing, and
some of the largest companies reaching utility-scale of
operations.

P. Krishnakumar: There are a few things the government needs to
do. One is to reduce the financial burden on the industry. Wind is
capital intensive, and you have to invest a lot in additional
services. So, it’s hard to get started. The industry would be benefit
from having “priority sector” status for funding of projects.

The second thing is its policies. We knew only last month that
accelerated depreciation was going to be scrapped, along with
GBI. Until late in the day, there were indications that it might be
extended. We need continuity of policy, and we need more of a
focus on wind than there is right now. The current focus is on
solar, and wind has been taking a bit of a backseat for the Wind Power
government. With energy supply falling behind national demand, Development
we need to enhance renewable energy, and that means we need
more support.
Forum India

projects

/india


Concluding remarks “The lack of long-term credit
is an issue”
The fundamentals are in place for the Indian wind industry to be
successful – not least the fact that continued economic growth
requires 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 Energy
in the detail of financing, site preparation, and government policy.
And the industry will have to see improvement in each of these
areas if it is going to reach its potential.

In the short term, grid capacity issues will also have to be
rectified, with more precedence given to wind energy in the
transmission system. The situation in in Tamil Nadu, which is the
focus of all three speakers’ projects, will be critical, and may send
a larger signal about the readiness of India as a whole.

Sunil Jain’s comments about land acquisition issues point to a
more intractable set of problems. His statement that “it can only
get worse; it will not get better” may seem pessimistic. But it may
also be realistic. Without more intervention by government to set
aside land for development, the industry is likely to continue to
see substantial delays, especially as land becomes more valuable
over time.

The onshore land issues are a good argument for offshore
development, which has barely begun, but holds enormous
potential. If regulators can build the right policy framework, the
grid is extended, and India can develop its own offshore
manufacturing industry, turbines could soon start appearing all
around the shoreline. The experience of other countries, such as
Denmark or the UK, shows that offshore is at least as good a
long-term bet than its onshore counterpart. It is not surprising
that Malolan Cadambi is so optimistic about his company’s
project off Tamil Nadu, despite the relative difficulties of raising
funds, and that policymakers have little experience with such
schemes.

Finally, P. Krishnakumar makes some excellent points about the
current financial situation of the distribution companies not Wind Power
helping the development of renewables, and the fact that the Development
government is currently more focused on solar than wind. The
reality of renewables everywhere is that the industry is still young,
Forum India
and still over-dependent on the vagaries of government and
regulation. Until there is more certainty, and fewer Establish commercially
inconsistencies, renewable companies will always be looking over successful wind power
their shoulder. Hopefully, the playing field will become more level projects
over time.
/india


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

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

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