Investment in Indian Wind Energy Sector - JULIUS RAMOS · SWOT Analysis ... Suzlon Energy DLF ......

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A research report on

Investment in Indian Wind Energy Sector

A research report on Investment in Indian Wind Energy Sector

TABLE OF CONTENTS

Overview ........................................................................................................................................................................................ 3

Wind Energy: Today ................................................................................................................................................................. 3

India’s installed wind power capacity .................................................................................................................. 4

Regulations.................................................................................................................................................................................... 4

Incentives offered to investors ...................................................................................................................................... 5

Generation Based Incentives .......................................................................................................................................... 5

Key policy governing investment in Wind Energy Sector ............................................................................... 5

Electricity Act, 2003 ....................................................................................................................................................... 5

National Tariff Policy, 2006........................................................................................................................................ 5

State Regulations .................................................................................................................................................................. 5

Sector Analysis ............................................................................................................................................................................ 6

SWOT Analysis ....................................................................................................................................................................... 6

Key Players ............................................................................................................................................................................... 7

Industry Forecast .................................................................................................................................................................. 7

Investment Scenario................................................................................................................................................................. 8

Clean Development Mechanism .................................................................................................................................... 8

Financial Institutions funding wind energy projects in India ....................................................................... 9

Consultants .............................................................................................................................................................................. 9

Major Investments ............................................................................................................................................................... 9

Projects ................................................................................................................................................................................. 9

Deals ....................................................................................................................................................................................... 9

Major issues affecting the Wind energy sector in India ...................................................................................... 10

Exhibits ........................................................................................................................................................................................ 10

Exhibit-1: Wind Energy Value Chain ....................................................................................................................... 10

Exhibit-2: Breakup for the Capital Expenses per MW .................................................................................... 10

Exhibit-3: Wind Density Map....................................................................................................................................... 11

Abbreviations............................................................................................................................................................................ 12


OVERVIEW

According to the Ministry of New and Renewable Energy (MNRE), at the end of 2010 the share of renewable based capacity is 10.9% (excluding large hydro) of the total installed capacity of 170 GW in the country, up from 2% at the start of the 10th Plan Period (2002-2007). The Government of India has outlined ambitious capacity expansion and investment plans for the current plan period (2007- 2012). The total investment on development of renewable energy during the plan period is expected to be in excess of $15 billion (~Rs. 60,000 Crores). The majority of this investment is being raised through domestic private investors, concessional financing from specialized government agencies and multilateral financial institutions.

WIND ENERGY: TODAY

Wind energy is the fastest growing renewable energy sector in India. With the capacity of 13,066 MW at the end of 2010, it accounts for nearly 70% of the installed capacity in the renewable energy sector in the country. Tamil Nadu is at leading position in terms of installed wind capacity with 41% of total installed capacity but attention is quickly shifting to states such as Maharashtra, Gujarat, Andhra Pradesh, Karnataka and Rajasthan where the gap between the available potential and installed capacities are much higher than those for Tamil Nadu.

The sector is growing rapidly and thus presents substantial opportunities for both the international and domestic players. In 2010, the Indian wind sector experienced its strongest annual growth ever, with 2.1 GW of new installations. It ranks fifth in terms of global installed capacity and third in annual capacity growth. According to the Centre for Wind Energy Technology (C-WET), India has an estimated potential of around 48,561 MW considering only 1% of land availability. With strong political will and the right incentives in place, wind energy can play a major role in securing a sustainable and clean energy future for India.

70.9%

15.2%

5.0% 8.3%

0.4% 0.2%

Total Capacity

Wind Power Small Hydro Power

Biomass Power Bagasse Cogeneration

Waste to Power Solar Power (SPV)

India is one of the leading power generators in the world and ranks fifth in terms of total installed generation capacity. But due to increased economic activities over the past few years, electricity demand has continuously outstripped production, and a peak energy shortage of around 12.7% prevailed in 2009-101. To meet this shortfall as well as the National Electricity Policy target of “Electricity for All by 2012”, the cleanest options available to India are Renewable Energy Technologies (RETs). For the government to seriously consider meeting its promise of electricity for all by 2012, renewable energy options will have to play a crucial role in India’s emerging energy mix. Not only are they environmentally sound but also their project gestation periods are significantly shorter than those for thermal or nuclear power plants.


INDIA’S INSTALLED WIND POWER CAPACITY

Source: Ministry of New and Renewable Energy

REGULATIONS

India has been very proactive in harnessing wind energy and initiated wind power programme as early as 1983. Some of the key Authorities governing wind energy in India are:-

1. Ministry of New and Renewable Energy(MNRE)- Government of India 2. Indian Renewable Energy Development Agency ( for financing) 3. Centre for Wind Energy Technology (for assessment testing and certification ) 4. State Electricity Regulation Commissions (SERCs)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

0

2000

4000

6000

8000

10000

12000

2005 2006 2007 2008 2009 2010

MW

Others

Gujarat

Kerala

Madhya Pradesh

Andhra Pradesh

Rajasthan

Maharashtra

Karnataka

Tamilnadu

Tamil Nadu % Share

Karnataka % Share

Maharashtra % Share

Rajasthan % Share

Andhra Pradesh % Share


INCENTIVES OFFERED TO INVESTORS

Accelerated depreciation of up to 80% of the project cost if the project is commissioned before 30 September of the financial year, or 40% if the project is commissioned before 31 March of the financial year

Exempted from income tax on all earnings generated from the project for any single 10-year period during the first 15 years of the project's life

Soft loans from IREDA o Finance up to 70% of the eligible project cost o Moratorium period up to one year

Generation Based Incentives (GBIs) for Grid based Wind Power Projects

GENERATION BASED INCENTIVES

Generation Based Incentives (GBIs) aims at attracting large private and foreign direct investment to the Wind Power Sector. IREDA is the nodal agency for the implementation of GBI. Key features of this incentive scheme are as follows:-

Incentive of Rs 0.50 /kWh through IREDA with a total cap of INR 6.2 million /MW spread over a minimum of 4 yrs (i.e. an annual cap of INR 1.55 million/MW)

Grid connected wind power projects can avail either accelerated depreciation or GBI

Incentive is over and above the feed-in tariff specified by the respective SERCs

Applicable only for captive and not for third party sale and merchant plants

KEY POLICY GOVERNING INVESTMENT IN WIND ENERGY SECTOR

ELECTRICITY ACT, 2003

Provides a role that renewable sources needs to play

NATIONAL TARIFF POLICY, 2006

Mandates SERCs to fix a minimum percentage of energy purchase from renewable sources

Takes into account availability of such resources in the region and its impact on retail tariff

STATE REGULATIONS

States Tariff - INR/kWh

Annual Tariff Escalation

Wheeling/Transmission Charges

Specified RPS for wind

Tamil Nadu 3.39 Nil( Fixed for five years) 5% of the tariff paid 10%(2008-09) 13%(2008-09) 14%(2008-09)

Gujarat 3.37 Nil 4% of the tariff paid 2%(2008-09)

Rajasthan 4.28-4.50 INR 2.02 every year for 10 years

10% of the tariff paid 5%(2008-09)


Karnataka 3.4 Nil 2% of the tariff paid 2%(2008-09)

Madhya Pradesh 4.03 Variable increase up to 20 years and then reduces

2% of the tariff paid 5%(2008-09) 6%(2009-11)

West Bengal 4 Nil INR0.30 per kWh 10%(2008-09)

Kerala 3.14 Fixed for 20 years Nil 10%(2008-09)

Maharashtra 3.5 INR0.15 per annum for 15 years

7% of the tariff paid 10%(2008-09)

Andhra Pradesh 3.5 Nil 5% of the tariff paid 10%(2008-09)

Haryana Nil Not Applicable Nil 10%(2008-09)

SECTOR ANALYSIS

SWOT ANALYSIS

Strenghts

Continuing demand- supply gap

Escalation in the cost of fossil fuel-based power generation

Availability of soft loans and government incentives

Project gestation period is significantly shorter than conventional sources

Weakness

Low capacity utilization of the wind generation plants (PLF :18-23%)

Rising land costs and developmental issues

Forced outages due to technical factors such as weak grid integration, mechanical problems etc.

Threats

Risk of obsolescence in case of technological innovations in other forms of energy

Wind power subsidies may be rationalized or pegged down

Oppurtunities

Substantial untapped market( current utlization :24%)

CDM credits for clean technologies

Enhancing productivity of existing installations by re- powering existing ones

Wind Energy


KEY PLAYERS

INDUSTRY FORECAST

Indian market grew by almost 68% on a year-on-year basis with around 2000 MW of new capacity added in 2010 making it as the third largest market after China and USA. As per the Global wind energy outlook 2010, following are the estimates of India’s future capacity addition in wind power under various scenarios:-

Assumptions under various scenarios:-

Reference ( IEA based ) o Most conservative o Based on the projections in the 2009 World Energy Outlook from the IEA o Takes into account only existing policies and measures

Moderate o Takes into account all policy and measures to support renewable energy either

already enacted or in planning stages o Assumes that the targets set by many countries are successfully implemented

Advanced o Most ambitious scenario o Assumes clear and unambiguous commitment as per the industry’s

recommendations along with the political will necessary to carry it forward

0

20,000

40,000

60,000

80,000

1,00,000

1,20,000

1,40,000

1,60,000

1,80,000

2009 2010 2015 2020 2030

MW

Wind power forecast in India

Reference

Moderate

Advanced

WORLDWIDE

Gamesha ( Spain )

E.On ( Germany)

Vestas ( Denmark )

Iberdrola Renovables ( Spain)

Siemens ( Germany)

General Electric ( USA)

NextEra ( USA)

Sinovel ( China)

Nordex ( Germany)

INDIA

Suzlon Energy

DLF

MSPL Limited

Tata Power

Green Infra Ltd

Gujarat NRE Coke in Gujarat

Reliance ADA Group

KS Oils Limited


INVESTMENT SCENARIO

Investments in renewable energy industry in India have increased from $94.58 million in 2001 to $3.7 billion in 2008 and to $7.2 billion by 2009 - at a CAGR of 72%. A significant part of these investments were made into wind energy. In 2008, wind energy investment was $2.6 billion, which is equal to 70 percent of the total renewable energy investments. So far, wind farms have been of sizes up to 50 MW instead of larger sized wind independent power projects which are expected to come in near future. But the returns on these projects depend significantly on the government policies and incentives. Key stakeholders in wind energy development includes:-

Wind Turbine Manufacturers

Dealers and distributors

Wind project developers

Consultants and contractors

Electric utilities

Government agencies

Landowners

In terms of investment opportunities, investors can invest in requirements arising at any stage of the wind energy value chain (refer Exhibit-1). These can range from manufacturing activities such as raw material production, OEM and component manufacturing or services such as feasibility study, logistics support, construction and maintenance.

CLEAN DEVELOPMENT MECHANISM

Clean Development Mechanism (CDM) is a procedure to facilitate implementation of emission-reduction projects to earn certified emission reduction (CER) credits, each equivalent to one tonne of CO2. These CERs can be traded and sold, and used by industrialized countries to a meet a part of their emission reduction targets under the Kyoto Protocol. The mechanism stimulates sustainable development and emission reductions, while giving industrialized countries some flexibility in how they meet their emission reduction limitation targets.

29%

1% 5%

6%

2%

35%

22%

CDM Projects- India

Energy Efficiency ForestryFuel switching Industrial ProcessMSW RenewableRenewable (Biomass)

India signed Kyoto Protocol in December, 1997 & ratified in August, 2002. National Clean Development Mechanism Authority is the nodal agency which evaluates and approves proposed projects and disseminates information related to CDM. The agency has being instrumental in providing effective institutional framework and issues host country approval within 40 days of the project submission. Due to such strong institutional support along with an active private participation, India is the second biggest generator of certified emission reductions. It generated 75 million CERs and expects to earn more than 600 million CERs by 2012 through green-tech investments made in at least 1,500 projects, involving capital infusion of more than Rs 1.5 lakh crores.


In the current scenario, wind energy is less affordable as the unit cost of wind energy is higher than other conventional and non-conventional sources. Further, financing wind projects in India has been a challenge. Carbon credit revenues can make these projects financially viable by bringing additional CER revenue. Current market of 1 CER is around 13.4 Euros.

FINANCIAL INSTITUTIONS FUNDING WIND ENERGY PROJECTS IN INDIA

1. IREDA – Funding arm of MNRE 2. Government agencies such as PFC and REC 3. Multilateral agencies such as World Bank, ADB and IFC 4. Bi-lateral agencies such as KFW ( German Development Bank) 5. Indian Banks such as SBI, Punjab National Bank, IDBI and ICICI Bank 6. Foreign Banks such as Standard Chartered, RBS India and Rabobank

CONSULTANTS

1. Centre for Wind Energy Technology (C-WET) 2. Consolidated Energy Consultants Ltd. 3. Det Norske Veritas AS (DNV) 4. 3TIER India Private Limited

MAJOR INVESTMENTS

PROJECTS

Company Amount (Rs billion) Investment Plans Investment Horizon

Suzlon Energy 60 Develop wind power projects worth 1 GW across the state of Gujarat

Next 3 years

Gamesa Corporacion Technologica

15 Setting up of three manufacturing facilities one each for wind blades, nacelles and wind turbine towers

Next 2 years

Satarem AG 41.1 Setting up wind energy and waste energy plants in association with Shivram Associates India

Next 5 years

DEALS

Investor Target Amount ( USD million) Date

General Atlantic Partners ReGen Powertech 35 January'11

Olympus Capital Holding Asia Orient Green Power 55 April'10

IDFC Private Equity BP Energy India 95 September'09

IDFC Private Equity SE Forge 86 September'08

Merrill Lynch Vestas RRB India 55 October'07


MAJOR ISSUES AFFECTI NG THE WIND ENERGY SECTOR IN INDIA

Technological o Lack of transmission infrastructure o Estimation of effective turbine capacity not deterministic

Regulatory o Complexity of subsidy structure and involvement of too many agencies such as

MNRE, IREDA, SERCs etc.

o Land acquisition problems for exclusive installation

Investment related o Capital Expenditure much more as compared to conventional sources

EXHIBITS

EXHIBIT-1: WIND ENERGY VALUE CHAIN

EXHIBIT-2: BREAKUP FOR THE CAPITAL EXPENSES PER MW

Particulars Amount (in Rs crores)

% of Total

Turbine 3.68 70 Civil Work 0.58 11 Electrical Work 0.47 9 Grid integration 0.37 7 Installation 0.11 2 Others 0.05 1 Total 5.25 100 Source: EAI Website

Operational & Maintenance costs are approximately Rs. 0.50 per kWh for the first five years and increases with time at around 5% escalation after that period.

Raw Material & Machinery

Suppliers

Design & Development

Services

Component Suppliers

Wind Turbine Companies

Construction & Installation

Services

Wind Farm Developers

Steel Carbon

Fibre Balsa

Wood Fibre glass Machinery Tooling

Design Engineering Research Machining Automation Assembly

Gearbox Bearing Tower Generators Blades Electronics

OEMs Large

utility scale Small wind

EPC Construction

Companies Transport

Services Maintenance

Feasibility analysis

Project Developers

Utilities


EXHIBIT-3: WIND DENSITY MAP


ABBREVIATIONS

IREDA Indian Renewable Energy Development Agency GBI Generation Based Incentives NABARD National Bank for Agriculture and Rural Development C-WET Centre for Wind Energy Technology SERC State Electricity Regulation Commission MNRE Ministry of New and Renewable Energy RPS Renewable Portfolio Standard CDM Clean Development Mechanism PFC Power Finance Corporation REC Rural Electrification Corporation ADB Asian Development Bank IFC International Finance Corporation OEM Original Equipment Manufacturers


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Investment in Indian Wind Energy Sector - JULIUS RAMOS · SWOT Analysis ... Suzlon Energy DLF ......

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