In part I of his latest feature on the Indian renewable
energy market, Business India executive editor Sarosh Bana
provided an overview of the issues impacting the industry. In
the second instalment of this three-part exclusive, Bana drills
down deeper, discussing the dynamics of the Indian solar market
and how it stacks up to not only solar countries around the
world but also other renewable energy sectors within the India
market itself.
Foreseeing solar to become a mainstream energy source in India, Ajay Goel, CEO of Bangalore-based Tata Power Solar1, says the build-up of solar power capacities was hampered by the disinclination of companies to invest in manufacturing in the absence of long-term policy support that could have made these capacities viable, as well as increased demand and access to financing options.
Policy mismanagement does not appear India-specific. The US has been particularly affected by this drawback that decimated its wind farm installations by 90 per cent in 2013, from a record 13,000 MW the previous year, according to new data released by the Global Wind Energy Council (GWEC). The US, with 61,000 MW of wind capacities, is next only to China’s 91,000 MW in the list of 85 countries surveyed by GWEC with cumulative wind capacities of 318,000 MW. India also reflected the global downturn where 45,000 MW wind generating capacities were installed worldwide in 2012, but slumped to 35,000 MW in 2013. This was only the second time in 25 years that installed capacity had shown negative growth.
Other impediments in India cited by Makhija are the mandatory forecasting for projects with severe penalty for deviation from scheduled generation, increased credit risk due to delayed payments by discoms, lower-than-expected increase in Feed-in Tariffs (FiTs) in some states, severe evacuation constraints, and the steep Rupee depreciation that has affected foreign currency borrowings and cost of turbines using imported components and raw material.
Foreseeing solar to become a mainstream energy source in India, Ajay Goel, CEO of Bangalore-based Tata Power Solar1, says the build-up of solar power capacities was hampered by the disinclination of companies to invest in manufacturing in the absence of long-term policy support that could have made these capacities viable, as well as increased demand and access to financing options.
Policy mismanagement does not appear India-specific. The US has been particularly affected by this drawback that decimated its wind farm installations by 90 per cent in 2013, from a record 13,000 MW the previous year, according to new data released by the Global Wind Energy Council (GWEC). The US, with 61,000 MW of wind capacities, is next only to China’s 91,000 MW in the list of 85 countries surveyed by GWEC with cumulative wind capacities of 318,000 MW. India also reflected the global downturn where 45,000 MW wind generating capacities were installed worldwide in 2012, but slumped to 35,000 MW in 2013. This was only the second time in 25 years that installed capacity had shown negative growth.
Other impediments in India cited by Makhija are the mandatory forecasting for projects with severe penalty for deviation from scheduled generation, increased credit risk due to delayed payments by discoms, lower-than-expected increase in Feed-in Tariffs (FiTs) in some states, severe evacuation constraints, and the steep Rupee depreciation that has affected foreign currency borrowings and cost of turbines using imported components and raw material.
While wind energy accounts for 8.24 per cent of India’s overall
electricity capacity, this share is 33.8 per cent in Denmark,
followed by 24.6 per cent in Portugal, 20.9 per cent in Spain
and 17.3 per cent in Ireland. Denmark is
targeting 50 per cent wind by 2020, primarily from offshore
wind farms.
Similarly, the global solar power industry is expected to get a
boost from Saudi Arabia — the world’s largest exporter of crude
— which plans to harness solar energy to meet almost 30 per cent
of its total energy requirement by 2032 by investing $109
billion to produce 41 GW of solar energy by that time.
Wind turbine manufacturers such as Suzlon, Vestas and Enercon
(renamed Wind World) have captured the largest market shares of
wind power installations in India in the past, Gamesa’s Kymal
notes. “Over the past couple of years, many new entrants like
Regen, Gamesa and GE have established their installation base in
India,” he adds.
In 2013-14, Suzlon regained its top spot in the country, with a share of 19.4 per cent, edging past Gamesa’s 19.1 per cent. The shares of Wind World were 17.03 per cent, Regen, 15.9 per cent, GE India, 9.6 per cent, INOX Wind, 7.2 per cent, and Vestas, 3.9 per cent.
In 2013-14, Suzlon regained its top spot in the country, with a share of 19.4 per cent, edging past Gamesa’s 19.1 per cent. The shares of Wind World were 17.03 per cent, Regen, 15.9 per cent, GE India, 9.6 per cent, INOX Wind, 7.2 per cent, and Vestas, 3.9 per cent.
Venkataraman Rajaraman, director of infrastructure and project
finance at Fitch Group’s India Ratings & Research, in Chennai,
says India has pushed ahead relatively successfully on renewable
energy. Most global OEMs have set up manufacturing units in the
country and wind developers have been helped in land acquisition
by the respective state governments. But he says the sector is
constrained by high costs of importing capital equipment, which
is heavily debt funded.
“Many developers have not hedged these exposures, rendering them vulnerable to exchange and interest rates,” Rajaraman notes. “Universally, solar power is expensive and unviable but for policy support from governments, and availability of debt too is generally more difficult than for other renewables.”
“Many developers have not hedged these exposures, rendering them vulnerable to exchange and interest rates,” Rajaraman notes. “Universally, solar power is expensive and unviable but for policy support from governments, and availability of debt too is generally more difficult than for other renewables.”
Manufacturers leverage renewables
Amit Kumar, executive director, energy & utilities,
PricewaterhouseCoopers Pvt. Ltd (PwC), says the
high net worth beneficiaries of accelerated depreciation had
been manufacturers of textiles, cement, steel and automobiles
who used RE as captive power for their power-intensive
industries. They enjoyed the benefits on their host business and
were less concerned about improving power generation and Plant
Load Factor (PLF). Others, including smaller investors, also
invested in wind turbines to minimise their income tax
liabilities.
“Projects were set up in areas of low wind density and this resulted in low generation,” Kumar points out. “In short, the focus was more on earning profits and less on improving generation.”
“Projects were set up in areas of low wind density and this resulted in low generation,” Kumar points out. “In short, the focus was more on earning profits and less on improving generation.”
However, Kumar expects the shift from the tax benefit-based
investment to the IPP-based model for wind power to represent
the next generation growth phase. “IPPs are keen now to invest
in this matured market that also has access to proven technology
and skill-sets,” he explains. “They have far less risky
investment options now and are increasingly developing wind
farms, each of an installed capacity of 50 MW and above.” IPPs
also have a choice of revenue models and are assured impressive
returns with the right kind of strategy and revenue model.
Ashwin Gambhir, senior research associate at Pune-based Prayas
energy consultancy, also sees India entering the next phase of
renewable power development where installations will pick up
mainly on commercial considerations and not on incentives.
Observing that strict RPO compliance will further help the
industry, he says, “Wind power prices, however, need to be
discovered through competitive bidding — the same way it is done
in solar — to discover true prices and help increase targets.”
For wind, there is no competitive bidding involved and projects
may be installed through the FiT or RE Certification (REC) route
as long as the utilities off-take that power to meet their RPOs.
Countries such as the US, China and Brazil have such bidding in
wind. Solar power projects are selected through competitive
bidding for pre-decided capacities.
Notified by the Central Electricity Regulatory Commission
(CERC), REC is a market-based instrument that facilitates the
RPO portfolio by inter-state exchange of RECs, one REC equalling
one MWh. The REC mechanism seeks to address the mismatch between
renewable energy availability and the requirement of the
utilities to meet their RPO through a national-level market.
According to the CSE report, competitive bidding leads to market
price discovery and the possibility of price reduction. It notes
that competitive bidding without a robust policy framework for
quality control may lead to project failure, as intense
competition will force developers to quote unviable tariff and
compromise on quality and technology.
Bikesh Ogra, president (Solar) of Mumbai-based Sterling &
Wilson, finds India’s wind sector reviving with the
re-introduction of GBI, its ‘backbone,’ though REC has
floundered from poor RPO implementation. CSE mentions
that while most states introduced their own RPO targets in 2010,
none of them abided by them. States with insufficient renewable
resources face difficulty in meeting their RPO targets. For
instance, Rajasthan reduced its target from 8.5 to 6 per cent.
But Tamil Nadu reduced its target from 14 to 9 per cent, despite
drawing 9.5 per cent of its electricity from renewables.
Solar projects upto 500 kW are provided 30 per cent of their
capital costs by MNRE. The Viability Gap Funding (VGF), a
capital subsidy, is expected to reward “genuine solar
developers” who maintain the cost-quality balance, says Ogra.
“Investments in RE are also being motivated by concessional
excise and custom duties, as also FiT norms, the best example
being Gujarat,” he notes. “One of the drivers for investment in
RE in future will be the build, operate, transfer (BOT) model.”
Ripe for solar
Ogra says that because it is incipient, India’s solar sector has
enormous potential for growth, whereas countries like Germany
and Spain have reached maturity. He maintains, however, that
many RE projects have been derailed due to non-availability of
project financing, apart from slow and poor policy
implementation. “While financing is easily available in
solar-developed countries like Germany, USA, Italy and Japan,
project financers and equity investors in India are slowly but
steadily putting their money in RE projects,” he notes. Sterling
and Wilson, an associate company of the US$2.5 billion
148-year-old Shapoorji Pallonji Group, is the largest solar EPC
in India and 20th globally. It has commissioned over
200 MW of solar projects in India and is building about 200 MW
of solar PV across the world.
However, with fair capacity additions in the country, financial
institutions are now more open to funding if project developers
have sound basics. Other renewable energy sources such as
biomass and Small Hydro Projects (SHPs) are largely evaluated on
a different risk profile based on location and availability of
raw material (in case of biomass projects), these factors
affecting their bankability.
FiT, the world’s most successful policy mechanism for
stimulating the development of renewables, was introduced in
1995 when the Ministry of Non-conventional Energy Sources, the
precursor of MNRE, specified uniform FiT of Rs2.25 (3.81
cents)/kWh, with a yearly 5 per cent escalation for all RE
sources. The National Tariff Policy empowers SERCs to determine
preferential tariff for RE sources after taking into account
their potential and impact on retail tariff.
Goel says that solar projects, starting from JNNSM Phase I, have
been auctioned via a reverse bidding mechanism (companies
selected on the basis of quoting the least FiT), rather than a
predictable FiT that is used all over the world and in India for
wind energy projects. “Reverse bidding mechanisms have gained
popularity even at the state level,” he indicates. “Gujarat’s
solar programme was funded through FiT and is considered by many
as the most successful model to date.” Incentive systems should
hence be made predictable for solar projects through FiT at both
the central and state levels, he adds.
Ashish Rajvanshi, Principal, and Raghav Iyer, senior associate
(engagement manager), of Booz & Co. (India) Pvt. Ltd, now
part of PwC and renamed Strategy&, explain that renewable energy
projects are awarded in two categories, commercial and pilot.
Pilot projects are generally given through FiT, commercial
through reverse bidding, where IPPs bid the amount they need to
set up and operate the plants. In case of conventional power
projects, they are typically driven through pubic private
partnerships (PPPs) or off-take agreements with built-in
escalation for fuel prices.
“The ownership model in wind has clearly seen a shift towards
IPPs from pure financial investors,” Rajvanshi notes. “Solar
still has small-scale investments from investors with no
experience in renewable energy.” With sourcing being the key to
cleantech projects, he deems sourcing the right solar panels
imperative as they account for almost half the up-front cost,
and any savings on this front can significantly improve the
business case for the project.
“Most IPPs have recognised this and have tie-ups with major equipment manufacturers,” Rajvanshi adds.
“Most IPPs have recognised this and have tie-ups with major equipment manufacturers,” Rajvanshi adds.
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