If Accelerated depreciation for windmill owners is dubbed a negative sop, DV Giri would be the last man to be amused. The Chairman of the Indian Wind Turbine Manufacturers Association reckons critics are forgetting something. That, there is more to it than just depreciation hunger. “When someone puts up a windmill for captive consumption,” Giri offers as an example, “the cost of production is less than a rupee after 10 years, when the loans are paid back.” The alternative is power from the grid at Rs 3.80. Medium-sized textile mills, which need about 3 crore units a year, could potentially save Rs 9 crore a year. Now, how’s that for a saving, he asks.

The sop that Giri defends triggered a rare success story in India’s renewable energy space. This is what happened: the government provided an 80% tax depreciation for windmill owners, as also a 10-year tax holiday. Those with balance sheets good enough to digest the sop responded with aplomb. “It meant those who could tap this incentive, like realty, cement and textile companies, put up windmills,” says Chaula Desai, Associate Director (Transaction Advisory Service, Infrastructure Real Estate and Government), Ernst & Young. The total installed capacity for wind energy in the country has now far exceeded 10,000 MW. From FY05 to FY09, the capacity has grown by a CAGR of almost 30%.

Clearly absent from the party have been independent power producers (IPPs). And those who mattered quickly realised that a further absence of IPPs could hurt future growth. Already, 2009, a year in slump, showed how companies without adequate profits could put wind plans in cold storage. So, in came a generation-based incentive. Under this, there will be a 50 paise incentive per kilowatt hour of wind energy generation. The payout of Rs 62 lakh per MW (Rs 15.5 lakh in a single year) could be done for a minimum of four years and a maximum of 10 years.

Of course, how much each windmill churns out needs to be precisely measured. The rumours about wind capacities being merely on paper but still getting incentives are still fresh in people’s mind. So, the government is going ahead with a plan to wire every single turbine, so they can be monitored online. This way, payment can be expedited too. TCS, sources say, has been roped in for the project.

Ashish Sethia, Head of Research (India), Bloomberg New Energy Finance, estimates that India’s feed-in tariff along with the new sop is only about half of a similar parameter in Italy. There, it is a combination of electricity price and green certificates. An Ernst & Young report last year said that the US’s production tax credit is double that of the generation-based incentive per unit in India. China is possibly the only major wind economy with lower incentives than India. But then, manufacturing on a mass scale has meant its turbine prices are low.

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Blowing Strong

Estimates for the total wind energy potential: 45,000 MW (the most conservative estimate)
Source: Industry

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The depreciation sop continues (the industry reckons it will continue until March 2012). But it’s either that or generation-based incentives. One can’t opt for both.

Winds Of Change

Turbine makers are already sensing the shift in their customer base and are preparing for the same. IC Mangal, President (India Business), Suzlon Energy, believes “more global players could look to India”. It has set up separate teams to handle the IPP business. “More than two-thirds of our orders next year could come from IPPs,” says Arvind Kaul, Managing Director of Vestas India. “A few years back, they accounted for barely a fifth of our orders.”

Next year, more than two-thirds of our orders could come from independent power producers. A few years back, they accounted for barely a fifth of them.Arvind Kaul, Managing Director, Vestas India

The generation-based incentive has made GE come back into the wind business in India.

The coming of IPPs would also mean bigger volumes. Looking at the current situation, Sethia says: “The average wind power project size in terms of ownership in India is half the average project size in Europe, 1/5th of that in China and 1/8th of that in the US.” IPPs could help push up annual capacity addition to even about 2,500 MW in 2010-11, avers Giri.

True, the bustle of IPPs in recent times has been hard to miss. In fact, many have been anticipating the new sop. This year will see Tata Power increase its wind reach to 300 MW. NTPC has broad plans to create a number of wind farms with a collective capacity of 1,100 MW. CLP has already committed to 450 MW of energy from wind. And in 2010-11, it will add a couple of hundred megawatts more, says Mahesh Makhija, VP (Renewables).

Then, there are players like Torrent Power entering the arena as well. Also joining the action is Green Infra, which bought the 100 MW assets of British Petroleum, and Techno Electric, which completed the twin acquisitions of Super Wind and Simran Wind.

If you don’t have a product that stands up to the scrutiny of the independent power producers, you are not going to be in the game.R Narayan Kumar, Head (India Business), WinWinD

After deciding not to build new wind farms last year, Orient Green Power, the wind-generation arm of Shriram EPC, has had a rethink. “We want to buy assets now. The independent power producer model is making sense,” says T Shivaraman, MD and CEO of Shriram EPC.

It would. Especially if the earlier depreciation sop didn’t make sense in the books of many of the IPPs. Some analysts reckon the generation-based incentive is a better idea for IPPs. The depreciation sop, they believe, delivers a lower internal rate of return (IRR) as the tax holiday balances out the depreciation benefit to an extent.

However, there’s a contrary line of thought as well. And this centres around how well the generation-based incentive policy is carried out. Says Sethia: “The testing phase for the policy will be the first six months, when the first set of projects apply for the incentives. It also depends on how fast the disbursements are made.” At least, depreciation will be under their control.

India is said to have a lower plant-load factor (a measure of capacity utilisation) compared with other major wind economies. To that extent, there’s scope for improvement. And, of course, incentives too. Remember, the new sop is based on what one generates. The more, the merrier.

That’s unlike the depreciation-based sop, where there was little incentive to produce power or maintain equipment. Of course, Giri wouldn’t agree to that. If a player can exhibit a high plant-load factor, it has another financial effect as well—the financing companies might then offer funds at lower rates. That’s good, because typically, among IPPs, the debt component is significant. The focus is thus clearly on technology.

Technology Counts

Consequently, turbine makers will feel the heat. R Narayan Kumar, Head (India Business) of Siva Ventures’ WinWinD, explains. Independent power producers would only participate keeping an IRR of about 16%, he says. For this, they have to draw every kilowatt hour of wind power possible.

We want to buy assets now for our wind-generation arm. The independent power producer model makes good sense.T Shivaraman, MD and CEO, Shriram EPC

All this translates into a superior machine, for 80% of the time, winds blow at sub-optimal speeds. Technologies that can still tap wind power during these times are therefore essential.

Almost any windmill worth its name can do the job when winds are at full speed. “If you don’t have a product that stands up to the scrutiny of the independent power producers,” says Kumar, “you are not in the game.”

Not surprisingly then, turbine makers are speaking the technology lingo a lot more now. Almost every turbine maker is keen to project its capabilities in tapping low wind- speed sites. This is important as a good portion of the remaining wind sites in India have low and medium wind speeds.

Key Role

There’s one more way IPPs will try and tap every gust of wind on offer—by controlling a key process, project development. Until now, turbine makers in India have doubled up as project developers too. They have had to handle things like land acquisition, construction and transmission tie-ups. In all other markets, a third-party would take care of these.

We have already committed to 450 MW of energy from wind. In 2010-11, we will add a couple of hundred megawatts more.Mahesh Makhija, VP (Renewables), CLP

When Kaul took over as Managing Director of Vestas India after being in the US with GE, he found the Indian model very strange. “I was telling everyone I don’t approve of this. And I am sure it’s going to go away,” he says. What makes matters worse is that project development isn’t a margin business for turbine makers. Recent months have shown that his conviction was spot on. At least two of his potential clients haven’t asked Vestas to handle their project development.

There are two reasons why turbine makers won’t retain the development role in the long run (they would gladly shed such an ancillary role). One, with IPPs coming in, project sizes are likely to be big. And it’s too much to ask a turbine maker to lock in land and monetary resources over a two-year period. Also, and this is the second point, the power producers would like to control this key element.

When a turbine maker-cum-developer selects a good wind site now, says Giri, he puts his own equipment there—irrespective of whether that’s the best fit or not. But someone investing in, say, 100 MW of wind power can’t afford to go wrong on this. Therefore, IPPs, says Giri, “wouldn’t want to leave that kind of decision in the manufacturer’s hands.” Giri, as well as the other turbine makers, don’t mind that.