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Interaction | October 2014

RECs worth Rs.1,300 crore are lying unsold

The support mechanism and the incentives like GBI and AD are essentially required for the growth of the wind energy in India, says KR Nair, Vice President, Indian Wind Power Association. Edited excerpts...

How do you see the Indian market potential for the wind energy sector?
The wind energy market in India has been growing since the last many years. So far the total installed wind energy in India is around 22,000 MW. India now stands 5th in the world in installation of wind energy. Wind energy potential in India is assessed at more than one lakh MW at 80 metre level. In order to make the share of new and renewable energy at 15 per cent in 2020, as envisaged by the National Action Plan on Climate Change (NAPCC), growth and development of wind energy are crucial for the country. Given the effective planning, policies and programmes, wind energy can be a key component in India´s energy portfolio.

Wind energy, which has been overshadowed by solar projects in recent years, got a boost as the government has restored key incentives. Your comments.

Wind energy has never been overshadowed by solar projects, which is still considered to be in the nascent stage of development in India. So, the comparison between the wind energy and solar energy is irrelevant. While wind energy projects have an installed capacity of 22,000 MW, solar projects have installed only around 2,000 MW so far. After withdrawal of key incentives viz., AD, from April 2012, there has been a temporary setback for wind energy as the investors had shied away from investing in it. It is possible that certain investors who were promoting wind energy through AD route may have shifted to solar, but this is very nominal. Now that GBI and AD are back, there could be more growth for wind energy, but these incentives alone are not enough to give a boost to this sector. There needs to be long-term policy framework, infrastructural and grid development and strict enforcement of RPO targets.

What are your suggestions to drive the sector´s growth?
The proposed National Wind Energy Mission should be effectively implemented early. There should be a Renewal Energy Law enacted for India. A re-assessment of the wind energy potential at the national level is required. There should be adequate planning for inter-State transmission system for enabling exchange of wind power from resource-rich to resource-poor States. The Green Energy Corridor, which has identified the transmission infrastructure requirements for renewable energy, should be completed expeditiously. Also, strict compliance of RPO should be enforced and for this purpose, appropriate amendments are to be brought out in the Electricity Act, 2003, so that the Central government/CERC has a role in the fixation of RPO and its enforcement, rather than leaving it completely to the State regulators. Some incentives may be provided to the State Electricity Boards/discoms, most of which are financially ill, for fully complying with the RPO. These incentive can be funded either from the National Clean Energy Fund (NCEF) or from any other source.

What are your views on the Renewable Energy Certificate (REC) mechanism, Generation Based Incentive and Accelerated Depreciation?
REC is a market-driven mechanism, which is intended to provide a commercial platform to share the incremental cost of renewable energy uniformly and equitably across India. REC has been conceived in India, on the same lines as it existed in other countries. While the REC mechanism has been quite successful in all other countries, in India, this mechanism has almost failed mainly due to the fact that RPO is not uniform in all States and its non-compliance by the obligatory entities. The State-owned distribution companies, most of which are ill financially, are not willing to buy REC, which they consider as a mere ´ paper´, as disconnected from the electricity. SERCs, which are entrusted with the role of fixing RPOs and its enforcement, under the Electricity Act, are empathetic to the State utilities and neither raise the RPO level nor enforce it. As a result of this, a large number of RECs worth Rs 1,300 crore (including wind, solar, biomass and small hydro) are lying unsold and the REC mechanism has almost come to a stalemate in India. Today, out of 27 States under RPO obligation, only seven States are complying with the RPO. So, unless the Government of India/CERC effectively monitor the RPO level and its enforcement, through appropriate amendments in the Electricity Act, the situation of REC is not likely to be improved. The total investments made in the REC projects in India is around Rs 28,000 crore (including wind, solar, biomass and hydro) and those who have invested in the REC projects are finding it difficult to repay the loans taken from banks and financial institutions.

Generation Based Incentives (GBI)
GBI provides Wind Energy generators an incentive of 50 paisa per KWh fed into the grid for a period of not less than 4 years and a maximum period of 10 years with a cap of one crore per MW. The total disbursement per year cannot exceed one quarter of the maximum limit of the incentive i.e., Rs 25 lakh per MW during the first four years. The GBI scheme is applicable for the entire 12th Plan period, which had put a target of 15,000 MW.

Accelerated Depreciation (AD)
AD is a tax-based incentive mechanism, whereby the wind energy projects can take a depreciation benefit of 80 per cent on their tax returns in the initial years of investment. AD has been re-introduced and it may be available from October, 2014 (2nd half of the FY 2014-15). It is expected that AD can bring another 1,000 MW installations of wind energy in a year. Those wind projects which avail GBI cannot take AD benefits.

How do you foresee these factors contributing towards the growth of the wind sector of the country?
The support mechanism and the incentives like GBI and AD are essentially required for the growth of the wind energy in India. In April 2012, when the GBI and AD were withdrawn, simultaneously, the installations of wind energy had gone down by almost half from the previous year. Subsequently, GBI had been re-introduced and the installations started growing. Now that the AD is also being restored, the installations will grow further. The administratively set incentives for wind projects results in windfall profits to the generators and that these should be established through transparent and competitive mechanisms. Another view is that wind projects are still in a developing stage in India and various risks involved like grid integration across States, land availability etc., have not yet been addressed fully to allow for a competitive mechanism. Caught in these opposing views, there is a policy uncertainty. The lack of a long term policy vision and unstable incentives can hamper the overall development of the wind power sector.

Are you witnessing any improvement in domestic or global prices of wind power equipment? Will that impact your margins?
Due to rapid increase in cost of commodities, particularly steel and copper, the cost of manufacturing of wind turbines in India has gone up. Added to this is the increase in the exchange rate of the US dollar to the rupee going up from Rs 45 to 60, during the last 4/5 years, which has made the imports of raw materials, components and parts costlier. Since there is stiff competition among the domestic wind turbine manufacturers and also due to the bargaining powers of the market actors, the cost of wind power equipment has not gone up in commensurate with the increase in cost of raw materials and components. Hence, most of the manufacturers are now operating on a thin margin of profits.

Rahul Kamat
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