Synopsis on Indian Wind Energy Sector

Swaraj Kumar DharMDI,GurgaonOorza Club

Outline• Wind Energy in Global Scenario• What are the incentives provided by the central and state

governments for power generation through wind energy?• What is the expected capacity addition and investment

opportunity in wind power sector ?• What are the major risks to wind power development?• What is the tariff required for healthy equity IRRs ?• Project Economics of Wind Industry:• What is the tariff required for healthy equity IRRs ?• Is REC route attractive?• What is the global and Indian scenario on the development

of offshore wind farms?

Wind Energy in Global Scenario

• India added nearly 2.6 GW capacity in 2015 and accounted for 4 per cent of the global capacity addition. India ranks fifth globally in terms of cumulative installed capacity with an installed base of 25.1 GW at the end of 2015.

• During the year, India surpassed Spain to become the fourth largest in terms of cumulative wind capacity.

Capacity Addition in India

Incentives provided by the Central government:

• Ministry of New and Renewable Energy has budgeted Rs 1 billion for disbursements through Indian Renewable Energy Development Agency Ltd, which would be utilised to provide cheap loans to renewable energy projects.

• In the Union Budget 2014-15, the accelerated depreciation was reinstated, with effect from August 2014. With acceleraed depreciation, the project developer can claim 80 percentdepreciation on the wind assets in the first year of installation. The accelerated depreciation benefit is valid till the end of the 12th Five Year Plan (2012-2017). However, the halving of accelerated depreciation on renewable energy assets to 40% from FY18 would adversely impact wind power capacity additions as it would reduce equity IRR for new installations at existing tariffs.

• In the Union budget 2013-14, generation-based incentive (GBI) was reinstated for wind energy projects and an amount of Rs.8 billion had been allocated for this purpose. GBI is available at Rs. 0.5 per unit for a maximum period of 10 years subject to a cap of Rs.10 million per MW. This scheme is also applicable till the end of the 12th Five Year Plan (2012-2017).

• Ten-year income tax holiday under 80 IA of Income Tax Act.

• Concessional customs import duty on specified parts and components.

• Excise duty relief.

Incentives provided by state governments

• Growth in domestic wind power has also been driven by financial incentives and favorable state policies in the form of assured power off-take and preferential feed-in-tariffs.

• Maharashtra and Rajasthan are the only state to have issued zone wise feed-in-tariffs in accordance with CERC guidelines

Renewable Purchase Obligations (RPOs)

• The National Action Plan on Climate Change (NAPCC) has stipulated that 7 per cent of the total power requirement is to be procured from renewable energy sources in 2011-12.

• This is set to increase by 1 per cent every year to reach 15 per cent by 2020. Of this total obligation, 0.25 per cent is to be procured from solar power in 2011-12, which will increase to 8 per cent by 2022.

• In keeping with the central mandate, all states have set their Renewable Purchase Obligation (RPO) targets for the next two to three years depending on the extent of renewable energy potential in the respective state.

• RPOs have been implemented throughout the country to drive the demand for renewable energy. Under RPO, state discoms, captive consumers and open access users are required to purchase certain percentage of power from renewable sources.

• SERC's across the country have specified RPO's for their respective states. Wind power is expected to cater to a major chunk of the non-solar obligations due to its scalability and huge unexploited potential.

State Wise RPO

Renewable Energy Certificates (RECs)

• Renewable energy sources are not evenly distributed across the country. States like Rajasthan, Tamil Nadu and Gujarat have high potential for renewable energy sources as compared to states like Delhi where it is not very significant. This limits the state from setting higher RPOs. In order to enable states that do not have sufficient renewable energy potential to meet their RPOs, Renewable Energy Certificate (REC)mechanism was introduced. RECs mechanism facilitates trading of renewable energy. RECs are exchange traded, environmental commodities that represent 1 MWhof renewable energy generated. RECs are currently eligible for trading on the Indian Energy Exchange (IEX) and Power Exchange of India Limited (PXIL).

• With the implementation of the REC mechanism, a generator has the option to choose between two revenue models

• Sign a PPA with the state and receive a preferential tariff;

• Sell the renewable energy to the state at the state's average power purchase cost (APPC) and receive his upside by trading RECs on the exchange. The generator can also sell power to any other licensee or open access user at a mutually agreed price or on a merchant basis. The price band at which non-solar RECs can be traded on the exchange is set at Rs. 1500-3300 per REC

Characteristics of the REC market

• Under this mechanism, states with low renewable energy potential can satisfy their RPO by purchasing RECs on the exchange.

• Buyers- Buyers in the REC market are 'obligated entities' that include distribution companies(discoms), open access users and captive consumers.

• Sellers- Entities who can sell RECs on the exchange are renewable energy generators who do not enter into PPA with state discoms at preferential tariffs.

Characteristics of REC Trading

8-9 GW capacities likely to be added over next 3 years

• CRISIL research expects wind power capacity additions of 8-9 GW over the next three years (2016-18) as compared to 7 GW over the last three years (2013-15). The rise in capacity additions will be driven by various factors as summarized below:

• Generation based incentive (GBI): GBI of Rs. 0.50 paise per unit (which expired in 2011-12) was restored from Nov 2013 and is applicable for entire 12th five year plan. As per our analysis, GBI increases equity IRR by 130-150 bps, thus improving attractiveness of states even where preferential tariffs are below Rs. 4.9 per unit (a level required for equity IRR of 16 per cent).

• Accelerated depreciation: Accelerated depreciation (AD), which allows 80 per cent depreciation in the first year of operations, has been the key driver for wind power capacities until it expired in 2011-12. In fact, the share of AD in total installed capacity in 2014-15 is estimated at 50-55 per cent. With AD benefit being restored in 2014-15, capacity additions in 2014-15 increased 10 percent y-o-y.

• As per Crisil analysis, AD reduces the cost of generation by about Rs. 1.1 per unit to Rs. 3.8-4 per unit. In comparison, states such as Maharashtra, Rajasthan, Andhra Pradesh and Madhya Pradesh offer preferential tariffs ranging from Rs.3.9 to Rs. 5.9 per unit, which makes wind power very attractive for developers.

• Healthy order book pipeline of equipment manufacturers: Leading equipment manufacturers such as Suzlon and INOX wind (which together have a market share of about 40-45 per cent) have a healthy order pipeline aggregating close to 2.5 GW at the end of Q1 FY 2016.

• High industrial tariffs: In states such as Maharashtra, Karnataka, Tamil Nadu and West Bengal where industrial tariffs are high in the range of Rs. 6-6.5 per unit, wind power is an attractive option since generation costs are about Rs. 4.5-4.7 per unit.

• Increased investments in augmenting the transmission infrastructure: States such as Tamil Nadu and Rajasthan are strengthening their evacuation infrastructure, to support capacity additions over the long term

Rajasthan, Madhya Pradesh, Andhra Pradesh and Karnataka to drive additions;

Tamil Nadu, Maharashtra and Gujarat to lag

• States such as Rajasthan, Madhya Pradesh, Andhra Pradesh and Karnataka are expect to drive up the capacity additions in the wind energy sector mainly led by the favorable feed in tariffs (FITs) of Rs4.5 - 5.9 per unit (as compared to ~Rs 5/unit required to achieve equity IRR of 16 per cent). Further, states like Andhra Pradesh and Karnataka have the high wind density sites (PLFs are in the range of 25-30 per cent) which will spur the investments in the sector. These states also provide incentives such as wheeling and banking of power for open access and captive consumers and there is no cap on the capacity additions for captive power use.

• States such as Maharashtra, Tamil Nadu and Gujarat are expected to lag in the capacity additions mainly on account of states achieving their RPO targets. Further in Tamil Nadu state, the capacity additions are restricted on account of poor health of discoms and major transmission constraints, which are expected to ease not sooner than 2017-18.

Tariff of Rs 4.9-5.1/unit required for equity IRR of ~16 per cent

• Given CRISIL Research's assumption of capital cost of Rs. 72-74 million/ MW (based on the interactions with the Industry players), a tariff of Rs 4.9-5.1 / unit necessary for Independent Power Producers (not availing A.D benefits) to earn the equity IRRs of 15-17. The plant load factor of 27 percent (higher PLFs achieved by more than 100 m hub height wind turbine) is considered, while the debt to equity ratio of 70:30 and borrowing cost of 11.5-12 percent is considered for arriving at the tariffs required.

• Further player setting off entire depreciation against other business in the first year can earn similar equity IRRs with ~Rs. 1.1per unit lesser tariffs

8-9 GW capacities likely to be added over next 3 years with investments of ~Rs 600 billion-Crisil

Capacity Vs Investment

Key Initiatives taken by the central government to boost capacity additions

• In order to boost wind based capacity additions, the central government is in the process of formulating certain policies and initiatives which are as discussed below. However, we believe that the impact of each of these steps is expected to have an influence on the market only over the medium-term.

• Introduction of Renewable Energy Act• The central government has released the draft Renewable Energy Act in July 2015 to address various

issues limiting the growth potential of renewable energy sector. • The Act is in the consultation stage and would be proposed in the parliament once other amendments

and legislations (Under National Tariff Policy 2006 and Electricity Act 2003) to facilitate the implementation of the Act are also identified and implemented.

• The Act aims to boost demand for renewable energy by creating a mandatory national level RPO targets with provision for penalties on DISCOMs/states in case of non/under compliance.

• In addition, it envisages timely provisioning of infrastructure, payment security mechanisms and other steps to improve operations for developers.

• However, CRISIL Research believes that improvement in the financial health of distribution companies and strict enforcement will be key to the successful implementation of the Act.

• The Centre could potentially use some of it's levers in terms of deducting states share from devolution of funds or reduction of allocations under various schemes such as IPDS, DDUGY, R-APDRP,UDAY etc.

Highlights of the Renewable Energy Act, & its implications

Key challenges required to be addressed to achieve strong sustainable growth

CERC Approved tariff for FY 2015 -16

List of state wise tariffs applicable for wind energy installations

List of state wise Incentives offered

Offshore Wind• Offshore wind energy is promising for countries with high population and limited land

availability.

• Countries such as Denmark, United Kingdom, Netherlands and Sweden have made significant progress in this area.

• The worlds first offshore wind farm was set up in Denmark in 1991 with an installed capacity of 5 MW. In India, the offshore wind industry is still at a nascent stage

Offshore Wind Installed capacity

Offshore wind farms in India– yet to take off

• India has a coastline of over 7,000 km, which can be exploited for the development of offshore wind farms.

• However, the entire stretch is not suitable due to reasons such as inconsistent wind density, climatic conditions, etc.

• Under the National Wind Monitoring Programme, winds have been measured at 54 locations on the coastline.

• There are a few sites along the coasts of Kerala and Karnataka, which are suitable for offshore wind farms but wind density is poor in the first hundred metres.

• Further, Gujarat’s coastline is prone to cyclones. Therefore, growth is stunted despite modest potential for development of offshore wind farms.

• Similarly, the eastern coastline too has reasonable potential but is more prone to climatic vagaries, which prevents development of offshore wind farms.

• However, India’s southern tip, starting from Kanyakumari up to Rameshwaram, has the potential to become the offshore wind hub of India. Wind density of 603 Watt/m2 at 50 metres above ground level has been observed at Rameshwaram; wind density of 370 Watt/m2 at 30 metres above ground level has been noticed at Kanyakumari. However, this data needs to be rechecked for a longer period before commercially exploiting any potential site.

• In addition, huge unexploited onshore wind potential has also restricted the development of offshore wind power development in India. Out of the total onshore potential of around 48.5 GW, only 10.2 GW has been explored, leaving nearly 79 per cent of the gross onshore potential unexplored. The following table depicts state-wise gross potential and installed capacity:

Advantages of offshore wind farms• Offshore wind farms offer various advantages over onshore wind farms. However, globally, technology

for offshore wind farms, is at a nascent stage, with few farms being operational at present. This has resulted in lower offshore capacity addition compared to onshore wind power capacity addition. Improvement in technology; better performance by offshore wind farms and scarcity of land for onshore windmills will boost growth of offshore wind farms.

• Advantages• Winds blowing over the sea are stronger and stable compared to winds blowing over land, resulting in

higher power generation.• Wind turbines with higher capacity can be installed, as it is easier to transport large turbine

components by sea.• More space is available for installing wind farms compared to onshore where land acquisition poses a

problem.• Noise of turbine movement is mitigated due to distance between the turbine and shore.

• Disadvantages• Offshore wind farms are expensive to build, as extra cost is required for support structure,

transportation of turbines on the sea and undersea cables.• Higher maintenance cost, due to corrosion of towers, requires more repairs and maintenance expense.

Operation and maintenance expense for onshore wind farms ranges between 1.0-1.5 per cent while for offshore, the same is between 2.0-2.5 per cent

• Offshore wind turbines may hinder movement of ships.• They are exposed to climatic vagaries like cyclones, which may affect their performance

Economics of offshore wind farms• The economics of offshore wind farms is dependent on the cost

incurred on foundation and power distribution system. • Generally, offshore wind farms are larger in size than onshore wind

farms thereby reducing per unit cost for support structures, grid connection and installation procedures.

• Their setup cost is almost two times the cost of setting up onshore wind farms. Incremental cost is due to the construction of turbine support structure, transportation cost of wind turbines to the site and undersea cables for power transmission.

• Cost of setting up 1 MW offshore wind farm ranges between Rs100- 120 million.

• However, this is likely to increase where turbines are installed below 20-30 metres, as extra cost for foundation has to be incurred.

Breakup of capital cost for offshore and onshore wind farms: