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India

India

Indian wind policy reaps market growth

INDIA: India's wind sector has reached the world stage, and many players are vying for the limelight as government policy creates opportunity for domestic and overseas wind energy businesses alike.

Infectious energy: India attracting major international firms
Infectious energy: India attracting major international firms
Despite persistent obstacles — chiefly insufficient grid capacity and poor roads — the groundwork is taking shape for what domestic analysts predict will be 16% growth in capacity every year, for years to come.

One sign of change is that the number of turbine manufacturers has shot up to almost 20.

"There used to be only three, with a couple of others that came in and out," says Caitlin Pollock, IHS Emerging Energy Research’s senior analyst, who specialises in Asian wind.

The growth is the result of a new business model that supports a broader array of wind businesses.

"There seems to be a lot more interest in potential demand, from every sort of industrial-sector company to utilities," says Pollock.

A case in point involves China’s Dongfang Electric, which in December announced it would sell 249MW of wind turbines to Indian developer KSK Energy Ventures.

The INR 9,150 million (€145 million) agreement covers 166 turbines, the largest-ever international equipment supply deal by a Chinese turbine manufacturer.

Another eye-catching development is a giant order by independent power producer Caparo Energy India.

Suzlon says it has entered into an agreement to supply 1GW to Caparo Energy, in what Suzlon calls the largest Indian turbine supply agreement to date.

Caparo plans to build a portfolio of Indian wind farms totalling 5GW by 2017, in two phases.

Caparo chief financial officer Vikram Kailas says that in the second phase, his company plans to buy turbines from foreign suppliers, but he declines to reveal an exact time table or identify which suppliers are being considered.

Despite this, it is welcome news for foreign suppliers that have until now struggled to break into the Indian market. Just as importantly, Caparo’s move heralds the arrival of bigger developers.

National policy required

"One obstacle to much stronger growth in India has been the fact that there really is not a lot of cohesion in national policy," says Pollock.

An emblem of this is the grid policy, which is decided not from the top but state-by-state.

"There’s a lot of lip service happening at a national level," she says, "but there really isn’t a lot of money behind it, especially in comparison with countries such as China"

Change is now occurring on several fronts. There is, for example, the Generation Based Incentive (GBI) of INR 0.5/kWh (€0.0008/kWh) paid to wind power generators for their output.

While Pollock calls this somewhat symbolic, indications are that it will be extended for several years beyond 2012, providing some continuity.

More significantly, government-mandated power purchase prices for wind are rising. Also bearing fruit are broader obligations on companies to obtain their energy from renewable sources and an exchange programme started last year for renewables certificates.

"That’s getting utilities much more interested," says Pollock.

All the same, she sounds a note of caution.

"I hesitate to say we’ll see giant growth until we see more certainty.

The only real change that’s concrete is new companies getting into the market on the supply side."

That alone represents a significant change, she adds.

The Indian market differs from others in that about 70% of turbine customers are manufacturers using the electricity themselves. The government’s fixed power purchase prices for wind and the GBI are partly aimed at encouraging other investors in wind capacity.

Manufacturer Suzlon is the biggest supplier of turbines to the domestic market, but new entrants are expected to make quick inroads. Danish wind experts BTM Consult last year forecast that demand in India for wind capacity would grow by between 2.5GW and 4GW annually for the next few years, more than doubling current installed capacity to 27.3GW in 2014. 

Some insiders see manufacturing capacity growing by roughly the same figure. Pollock says that whether or not turbine factories are built that quickly, the policy framework is certainly causing a shift in practice that will encourage new and more diverse production.

Likely to ebb in prominence are turnkey project developments, in which the developer oversees every aspect of project delivery, including acquisition of land, turbine manufacture, and engineering, procurement and construction services.

While this approach has helped turbine suppliers generate demand for their machines, some global players have been wary, not least because of misgivings about Indian land deals.

Inefficiencies

As matters stand today, many developers are able to get away with sub-standard wind projects, having performed little or no wind measurement, then sell them to affluent buyers who use the assets as accounting write-offs rather than operate them as going concerns for renewable energy, explains Pollock.

"This can lead to improper siting or perhaps siting in areas with relatively low wind resources," she says. "Given the inefficiencies in the way projects have been developed and operated thus far, there is ample room for improvement." 

Such shoddy preparation is particularly problematic in India, where wind speeds can vary drastically over the course of a year.

"In fact, at times they can range from speeds that are about three times those in other competitive markets for three months, to negligible speeds for the rest of the year," explains Pollock. "It’s a market that really needs to be well measured."

Rupesh Sankhe, a power industry analyst at securities firm Angel Broking, in Mumbai, describes situations where investment has been held back due to concern over patchy wind densities.

These result in low capacity factors — the ratio of a turbine’s total energy output to theoretical sustained peak output — of 21-22% in regions with particularly weak resources. This compares to an average capacity factor of about 35% in the US.

The break-even point of six to seven years is slightly later for wind than for other sources of generation, Sankhe says, but he does not see this as a big problem.

"Potential is huge," he says. "Players, because of the higher incentives, are putting their money in this business.

"We’ll see investments because of higher returns on equity."

Sankhe foresees investment of INR 500 billion (€7.9 billion) spread over the next four or five years.

Low expectation

While there are already strong institutional financing mechanisms in India, there are also considerable barriers to securing local financing, according to Madhusoodan Pillai, founder and director general of not-for-profit organisation the World Institute of Sustainable Energy, in Pune.

Conventional debt-financing methods, he says, are not geared to project finance for renewables, which are typically regarded as high risk, low return.

"Even equity participation from private equity players is difficult to secure, because of this perception," he adds.

However, new players are bringing heightened credibility to the Indian wind power market. In an echo of Caparo’s record-breaking deal with Suzlon, Pillai says the arrival of independent power purchasers in India’s wind sector will help establish project financing, where loans are repaid primarily from a project’s cash flow, with the project’s assets and rights held as collateral.

Pillai says banks are increasingly willing to lend to renewable energy projects on a non-recourse basis, whereby loans are secured only by collateral — typically real property — if the borrower defaults.

"This shift in the attitude of financiers is reflected in extended maturities and tenure of loans, and lower borrowing costs," he says.

The changing paradigm across India’s wind sector may be subtle, but the implications can be clearly spotted on the balance sheet.

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