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Countering the myths on Indian wind power growth

INDIA: In India, the wind-energy sector is based on a business model that requires wind-turbine manufacturers to offer buyers and investors a turnkey solution. This means that manufacturers are responsible for securing land and grid connectivity as well as the supply of turbine equipment, erection of turbines, facilitation of the power-purchase agreement and lifetime maintenance.

This approach to installing wind-energy capacity has helped deliver strong growth, but there are cracks appearing that suggest change lies ahead.

One of the most persistent myths about the constraints on further wind-energy growth in India is that there is an inadequate supply of turbines. The truth is the opposite. Turbine manufacturers in India are producing at less than 50% capacity by some estimates.

The primary hindrance to further growth is, in fact, grid connectivity and land acquisition. Ironically, the core differentiator of turbine manufacturers in India has nothing to do with technology, capacity or quality and everything to do with access to a high-quality land bank on which to install their products.

Another misconception is that Indian turbine manufacturers are highly profitable. Given that manufacturing capacity exceeds projected market size, Indian manufacturers are offering a myriad of concessions to secure orders, including extended warranties, generation guarantees, aggressive delivery schedules and low-cost maintenance contracts.

India ranks fifth in the world for installed wind capacity. New capacity for 2011-12 could be as much as 3GW. With a projected short-term growth rate of 20%, India would appear able to accommodate new manufacturing entrants easily.

But consider the issue from another perspective. An equal share of the projected 3GW could give each of the 17 existing manufacturers operating in India less than 200MW. However, unless a manufacturer can scale up and deliver 500MW annually, the economics will not work out for those seeking to be long-term players, especially as the top two manufacturers already command more than 50% of the market.

Another myth about India's wind-energy sector is that Chinese turbine manufacturers will not establish themselves here. This is not the case. It is a question of when, not if. Chinese turbine manufacturers' costs are around 30-40% lower than those of domestic manufacturers. After adding logistics and duty costs, they will still likely be able to offer a 20% discount.

The turnkey model has been a huge deterrent to Chinese firms. With terminology, language and implementation varying state by state, securing sites for new turbines is not for the fainthearted.

However, canny investors and independent power producers will eventually move beyond simply deploying capital. They will explore where they can add value by taking a more active role, which may include securing land and grid connectivity. If this occurs, it would create the conditions necessary for a plug-and-play model of wind development, with Chinese entrants able to offer a cost-effective alternative to domestically produced turbines. Such structural changes have already occurred in the thermal power plant sector.

The following are steps India's wind-turbine manufacturers can take to protect themselves from future shocks: increasing scale to reduce cost; offering technologically advanced products; driving supply chains toward standardisation; remaining alert to the issue of monopoly components and raw materials; and spreading risk across a range of products. They should also be prepared for a shift away from the turnkey model.

Hiren Shah leads strategy and sales for renewable energy company Global Wind Power. His opinions do not necessarily reflect those of the company. He can be contacted on hiren.shah@gwpl.co.in.

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