demand -- are making their mark on the Indian wind industry. The
opportunity for energy trading in a far freer market is appearing on the
horizon and a new breed of hard-nosed wind project developer is emerging to take advantage of what all agree are significant opportunities ahead
Across India, change is in the air. Debate about tax breaks and subsidies is no longer the mainstay of conversation in the country's wind power community. Rather, turbine performance amid harsh market realities has become all-important. The reason: significant policy improvements implemented under the Electricity Act 2003 are setting the market free. Past obstacles to development are being removed, while interest rates are down to single digits.
The improved business climate has encouraged the financial community to turn to the wind sector as a serious investment option -- but it wants hard and fast guarantees of project viability for the long term.
The Indian wind sector of old, often plagued by failing equipment, financial scandal and stories of unscrupulous behaviour, is no longer sustainable. Today, its projects have to stand the test of time and compete internationally if the country plans to keep its position as the fifth largest market in the world, let alone move up the world table. This will require firm policy stability and a new attitude by developers and manufacturers alike.
"Banks are not comfortable giving loans unless there is a pay-back within six years, so projects will have to be competitive and viable," says Indowind's K.V. Balakrishnan, who describes himself as "a developer in the true sense of the word."
Distancing themselves from continuing calls for subsidies, the new breed of Indian wind developer is clear that investment needs to be protected and trading will not survive on subsidised products. "In 1998, projects started showing signs of paying back. By 2005, the industry will not be in a position to ask for subsidies. The time for inter-state energy trading is ripe as the market moves towards increased generation and talk is of cost per kilowatt hour not megawatts of capacity," Balakrishnan says.
R. Kannan of Tamil Nadu Electricity Board (TNEB) adds: "Individual investors are now giving way to developers, but for this trend to continue policy will need to be consistent." NEG Micon's Ramesh Kymal agrees, saying a stable policy framework must be set up for the pure developer concept to take off in India. "Access to land still suffers from hiccups, for example. However, once the market matures, resolving these kind of issues and maintaining a stable policy will be the only way forward in future."
Pure players
These views are echoed by the "true developer," Balakrishnan, who warns that major financial institutions will simply refuse to back Indian projects without firm policy stability. The risk and the economics involved must stack up. While smaller investment companies will be satisfied with smaller returns, the major institutions will not. He is all too familiar with the dilemma.
With a focus on merchant banking and corporate finance, his company, Subuthi Finance, promotes Indowind, one of the first independent renewables power producers. Subuthi's initial capital investment of half a million dollars in Indowind is now worth over $9 million. "It could have been higher if policy reversals in Tamil Nadu in the past three years had not taken place," Balakrishnan points out. "The strengths we built up helped us withstand shaky times such as the increases in charges for wheeling from seven percent to twenty percent in Andhra Pradesh."
Indowind operates in Tamil Nadu, Karnataka and Andhra Pradesh and has a licence to install a 10 MW wind project in Rajasthan. As in other parts of the world, establishing non-wind community projects has become an essential ingredient in its project development strategy. In Muppandal, Tamil Nadu, where it owns 1000 acres of land, the company plans to grow organic crops such as coconuts using drip irrigation. "This involves the local community directly, a factor that we bring into our business plans," says Balakrishnan.
Growing at a rate of 264% a year, admittedly from small beginnings, Indowind has increased its installed wind capacity to 34 MW from 250 kW (0.25 MW) in 1995. Now the company feels it is at the peak of its learning curve having developed its skills on keeping costs down and on outsourcing of spare parts rather than depending on manufacturers "who often charge inflated prices." It is ready to increase its activity. "If we are able to raise funds, we would look at establishing a wind energy portfolio and bring in venture capital for the wind industry because wind power projects are self liquidating and do generate revenue," Balakrishnan says.
Significant opportunities
The Electricity Act 2003 has opened up significant new opportunities, he adds. The company is looking seriously at trading in energy assets now that the government is inviting private energy traders to participate in the market. Despite competition from companies such as Reliance Energy Trading, Balakrishnan says candidly: "There is no real competition because of the huge demand-supply gap. The new capacities coming up, both in the conventional and renewable sectors, cannot meet the huge demand gap in the near future."
Energy trading, Balakrishnan predicts, will result in consolidation in the industry with three to four major companies left. Already, he says, people are conscious of the increasing availability of green power, introduced to the retail market in the past year. "Companies are beginning to use green power as a brand equity to green up their image. This is a big change," he says.
Unlike in the West, however, where clients add green power to their portfolio in an effort to be seen to be green, it is cost which rules decision making on energy purchases in India. As S.R. Guragol of Alstom Power Boilers says: "While green is a good label to have, the fact is in India, price dictates everything. We buy wind energy because it is available and competes with conventional power."
Balakrishnan is confident that selling green power will become easier as generation capacity increases. This will happen. India is bound to signing the Kyoto Protocol in 2007, committing it to a mandatory target of 10% of electricity supply from renewables. Indeed, the Electricity Act 2003 already commits to 10% from non conventional energy sources.
Clarifications needed
Clarifications of the new electricity act are still required. The term "non conventional energy sources" remains open to interpretation. While the act says the energy mix of every state must have renewables, it does not stipulate a minimum mandatory proportion. That decision is left to each State Energy Regulatory Commission. Nor does the act define eligible renewables.
"It is unfortunate that renewables are not defined in the act. For all practical purposes, nuclear and hydro are also renewables," explains Vestas RRB's Sarvesh Kumar. Exaggerating the point for emphasis, he states: "Every country in the world has a renewable energy policy that makes it mandatory for use of renewables in the energy mix to help it move forward. In India, the policy has been long in coming." Confidence is growing that these issues can be resolved satisfactorily and that the act will get fully cleared by next year. "But we are losing time," notes Balakrishnan.
In line with the electricity act's introduction, India's power market has been comprehensively reformed, with positive implications for future wind power development. Moving away from the painful regulations of the past, licensing of decentralised projects in rural areas is no longer a requirement and development of wind powered plant for own generation can proceed without planning consent. Loss making, inefficient state electricity boards are being reorganised and state electricity regulatory commissions established. Already several states, including Andhra Pradesh, Karnataka and Rajasthan, are well on the way to change.
For India to realise the full potential of wind power the positive co-operation of all states and investment in the necessary grid and transmission infrastructure will be essential. "The industry should lobby with windy states to allow higher than ten percent generation in their respective states so as to compensate the losses from non windy states. This can be possible only if the states allow inter-state transmission of power from windy to non windy states," says power consultant Paddy Padmanabhan. Progress in this area is expected to be made from 2004 when the act comes fully into force along with the National Electricity Plan. "The trend in the next few years will be to generate energy in the windy states and transmit it to non windy states. This will gain importance when offshore wind farms are introduced into India," continues Padmanabhan.
Rangarajan Balajee of Indowind adds: "A national renewable energy policy that will allow trading of energy across states and third party sales or a tariff at ninety percent of high tension tariffs is needed immediately for the sector to grow at the rate it has done in Germany."
Determination of wheeling charges for sending electricity along wires under the act, both by the state commissions and the central energy commission, is an essential issue the wind industry will be looking to influence. Lack of fair access is seen as one of the biggest obstacles facing the industry.
To reduce the significant transmission losses, concessional wheeling charges will be essential for the wind sector to grow, says Padmanabhan, yet the recent trend is to set high charges. In Karnataka, the charge has more than doubled, leaving one analyst, who declines to be named, describing Karnataka Power Transmission Corporation (which set the rate) as a "scavenging machine that charges for reactive power, high rates for wheeling, and even a one time cost of $550 per megawatt."
Other states are likely to follow Karnataka's lead. TNEB's Kannan points out that Tamil Nadu is expected to go down the same path. "Wheeling is an infrastructure we are using and it is a pity that utilities are making it their golden duck," says Balajee. "It looks like we have to be ready for a twenty percent increase in wheeling charges on average, which may make wind energy expensive to customers."
Maintaining momentum
While the fine print of the electricity act is still to be haggled over, all appear to agree on one thing -- the wind industry needs to bring its own costs down. As Ajit K. Gupta, long time advisor to the Ministry of Non-Conventional Energy Sources (MNES), says in the Consolidated Energy Consultant's Directory of Indian Wind Power 2003, the provisions of the act "should help bring about a conducive policy and regulatory environment for accelerated wind power development."
With an installed wind capacity in India of 1900 MW, political hopes are high that the act will galvanise the industry into meeting future targets. Since the introduction of the country's Tenth Plan (2002-2007), which saw an improved policy regime in some states, India's wind power installation rate began to pick after the minimal activity during the Ninth Plan period (1992-1997). Indeed, around 550 MW (an investment of around $330 million) has been installed in the first two years of the Tenth Plan -- taking the country a third of the way to its Tenth Plan target for 1500 MW in new installed wind capacity. By the end of the Eleventh Plan, MNES expects wind generation to have increased 5000 MW on today's levels.
"The goal for 2012 is certainly achievable and, in fact, could be brought forward," says Gupta. "The industrial base and other infrastructure that have already been created will enable us to embark on a much larger program. A long term goal of 20,000 MW of wind power by 2020 is not inconceivable if adequate momentum is generated in the coming years."
A proper market
Liberalisation clearly means the wind market needs to aim at standing on its own feet by then, says Balakrishnan. With improved policy conditions now ever nearer, the pressure is squarely on the wind industry to impress the financial community if projects are to be built and targets met. "Already, larger capacity turbines, such as Suzlon's 1.25 MW machine, are bringing in savings. Performance-based incentives will also contribute to carbon trading, an added benefit to wind."
staying power
Indeed, turbine manufacturers as well as operation and maintenance providers will have a key role to play in making projects more viable. "In future, service is going to be expensive and manufacturing costs will have to come down. Those who want to stay in the business, will need to understand this," stresses Balakrishnan.
Indowind's Balajee agrees: "We're now signing long term contracts in order to avoid increases in operation and maintenance costs, that can go up by five percent annually, and at placing our technicians and guards on site to ensure safety of machine parts often prone to pilferage." Despite India's 15 years of experience in wind energy, he adds that its regretful that quality is still not up to the mark with 20% of gear boxes failing and blade tips breaking. This poor performance of the past now needs to be replaced with an industry and equipment that inspires confidence in investors along with a stable and consistent policy framework.
As a delegate at the recent Renewable Energy summit in New Delhi, organised by the Associated Chamber of Commerce explains: "India is now at a cross roads where it can make renewable energy happen." If the self-proclaimed new breed of forward looking developers stand by their words, it will.
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