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Renew | May 2015

RE Commitments: Sunny or Windy days ahead?

In a bid to provide a much needed thrust to India´s renewable energy production, 319 companies, including 24 PSUs, have committed 270,329 MW of RE building capacity over the next five years. Besides this, 27 Banks/FIIS have also given financing commitments for 69,055 MW. However, POWER TODAY seeks to know from stakeholders if these plans will materialize or remain on paper.

With a total of 2.70 lakh MW of renewable commitments from public and private developers, 62,100 MW of manufacturing commitment from public and private manufacturers, and 6,000 MW of EPC commitments from players. the RE sector is set to roar in the next five years, with Rs 2.50 lakh crore of financial commitments. If experts are to be believed, these commitments are ´unrealistic and too ambitious´, but they concede that the order of interest shown is a sign of the growing importance of the RE industry.

To start with, there have been constant announcements by global private players about their GW investment plans in India, but the situation in actuality may not be as rosy as it appears. Digging deep, this magazine uncovered private companies which have made commitments ranging from 1 GW to as much as 15 GW to the RE space over the next five years, but don´t even have a current portfolio to begin with.

Commitments or just...?
A case in point would be the Pawan Munjal-led Hero Future Energies, which has committed 5 GW of renewable projects--2.8 GW for solar and 2.2 GW for wind. However, the company´s current portfolio on their website suggests that they haven´t built a single MW solar project till date. At present, the company has won 30 MW of solar projects under JNNSM Phase II and have cumulative capacity of 2 MW projects under execution.

Essel Group, who with much fanfare announced 12 GW of commitments--7.5 GW for solar and 4 GW for wind--is in a similar situation, having less than 20 MW of solar projects under their kitty.

Even major US developers such as First Solar and SunEdison have announced 5 GW and 15 GW of projects in India, despite First Solar anticipating major problems in land acquisition, financing and power purchase.

Meanwhile, the most interesting part of the overall renew commitments is for the solar sector, which has received maximum attention with a total of 170 GW of commitments. But a bitter truth raised by a senior official of the Power Finance Corporation was doubts about the supply of raw materials to these projects. ´How will India adhere to the demand of 170 GW in the next five years, if the commitment for manufacturing capacity is only 16 GW?´ he questioned while requesting not to be quoted.

Indeed, the official was right in making his point as only six manufacturers, of which a few do not have the bandwidth for manufacturing ability, have committed to 16 GW of the manufacturing capacity over the next five years.

Meanwhile, the reason for all these announcements is the Indian government´s recently concluded RE-Invest 2015, which asked developers to commit to large investments and almost all companies--319 at the last count--obliged.

According to experts, it does not take any money to announce a major investment plan. ´You can announce a 1 GW, 10 GW and even 100 GW investment without spending a single penny. These are all MoUs which like the investment jamboree of Vibrant Gujarat count for very little in terms of commitment except for sound-bytes,´ said a banker on the basis of anonymity.

Connecting the RE
Ironically, in the overall commitment game, what didn´t come along was any explicit roadmap for how the grid would support such a shift in generation, even if just a portion of it actually comes to fruition.

This is where the fundamental variability and stochastic probability of renewables becomes a challenge, more so for the Indian grid which is operated far from optimally (with outages and load-shedding, frequency drifts etc.). According to Rahul Tongia from Brookings India, ´Overall improvements in the grid, including better balancing without resorting to load-shedding, should be key areas of effort, which would facilitate increased RE penetration.´

Meanwhile, a question that has cropped up, is over the limit of the grid in handling RE. And the answer is quite a lot, but this can be dealt with by putting in effort and finance. While the grid issue has been studied and a recommendation for Green Corridors (transmission lines for long-distance RE power flows) has been proposed, this Rs 43,000 crore investment should be placed in context.

First, the economics. The low Plant Load Factor (PLF) of renewables implies that compared to the average transmission investment, the Rs/kWh cost of transmission could be three-four times higher than 25 paise/kWh, if the costs are not socialized.

Second, the plans are based on static calculations, instead of factoring dynamics, which are difficult to operationalise given that India doesn´t yet have a dynamic transmission pricing factoring in congestion (such as via Locational Marginal Pricing). Without such fixes and revamps, India would continue to have even conventional power subject to the mercy of transmission constraints, which CEA estimated (in 2013) impacts almost 10 per cent of generation capacity.

Lastly, there remains the challenge of timeframe and coordination. This large investment might take several years, but there is a possibility that many renewables could be built up much sooner, not to mention in-state investments required for proper ´on-ramps´ for this transmission highway.

Many experts have pointed to the problems that complicate renewable project development in India, which include securing land, offtakers, financing, grid connection and management.

But even if those issues were magically solved, the existing grid simply can´t handle the increased intermittent load. India needs an estimated $250 billion investment in the grid in the next five years just to maintain the status quo.

Will India have RE wholesale market?
Unlike Europe or the US, where some regions are seeing renewable penetration heading toward 30 per cent or higher, India does not have a true wholesale power market that allows for power to be purchased on an hourly basis. Without wholesale power prices, there is no way for renewable investment to bring down power prices as it has in Germany.

´Most of the distribution companies buy power via long-term bilateral agreements with zero time-of-day components. Some states use grid frequency as a proxy for supply and demand, but this approach is largely inadequate,´ explained Tongia.

With no wholesale market, there is no locational marginal price (which values energy, congestion and losses) as there is in the US. To complicate matters further, most utilities simply cannot afford the price of new power under any circumstances.

Tongia further observed that distribution companies might pay Rs 0.5 per kilowatt-hour for power from a hydro resource that was built by the state decades ago, because the cost of the infrastructure is fully paid off, but solar is coming in at about Rs 5 per kilowatt-hour and new coal might be Rs 4. And while that will become cheaper over time, that may mean the next two quarters for these utilities.

A significant financial problem for Indian distribution companies is that many of them are sitting on what are known as regulatory assets-a term for the I-owe-yous that distribution companies are given by the state because they´re not allowed to raise rates on customers. Tongia, who also serves as a technical advisor for the central government´s Smart Grid Task Force, said one utility in New Delhi told him that its total regulatory assets were equal to the company´s annual revenue.

Along with a lack of pricing signals and market mechanisms to encourage investment, technical challenges like ancillary services for the grid, which are key for balancing grid conditions, are also absent. ´It´s not just a challenge at the distribution level. India will need more transmission lines to usher the kilowatts from large-scale renewable projects to where the energy is needed. There is a plan for ´green energy corridors´ with a price tag of $7 billion, but there´s a lot of devil in those details,´ cautions Tongia.Even if power gets to the location that it is needed, peak load in India is largely in the evenings, and not well matched to the output of wind and solar. At least some renewable projects would need to be matched with energy storage to provide power when it´s needed the most.

Have Indian FIs finally opened their doors?
According to G Krishnamurthy, Chief Executive, L&T Infra Finance, ´The first wave of projects in renew space were impelled by tax incentives (such as accelerated depreciation) which catalysed the flow of capital and led to rapid capacity additions.´ However, he added, ´such capital subsidies by its very construct had the inherent flaw of incentivising only tax-saving based investments without any consideration for financial viability in the long term.´ That said, this was the main reason due to which financial institutions in India have stayed away from funding such projects.

To this, SB Nayar, Chairman and Managing Director, IIFCL says, ´The commitment quoted at Re-invest 2015 by IIFCL is for the next five years. However the disbursements will entirely depend on the project flow and project viability.´ In fact, most of the banks who have given commitments at RE-Invest 2015, made it clear to the RE fraternity-get bankable projects, receive funds.

Meanwhile, when asked about the financial viability of these commitments, developers either suggested a better financing mechanism to achieve the commitments or found it difficult to give a generalized answer. Says Manoj Kumar Upadhyay Founder & Chairman, ACME, ´RE must be added in priority sector funding to avail maximum benefits. This will include long term financing i.e. 20 years at affordable rates on non-recourse basis.´ To this, Saugata Datta, President - Business Development, Vikram Solar explained that as there is no uniformity on the solar policies adopted by different state governments, who each have a different approach and policy structure. He further pointed out that a lot depends on the interest subvention which the central government is planning to introduce, to bring in profitability in large scale solar projects. This apart, the ROI varies from one state to another state depending on the specific yield from solar, electricity tariff, power purchase agreement (PPA), evacuation charges and availability of other required infrastructures.

But as far as Vineet Mittal-led Welspun Renewables is concerned, keeping in mind the commitments, the company have been developing project strategy and in congruence anticipating the project finance needs. In addition, Dr Ishwar Hegde, Vice President - Group Strategy, Suzlon Group feels that investment in wind energy remains one of attractive business opportunities for investors given the mature technology, established track record and relatively evolved policy framework. He says, ´There are a few challenges and addressing the same can help to scale up wind energy capacity to 60 GW by 2022 in India as envisioned by the current government.´

The key challenges are availability of wind sites with power evacuation infrastructure, power purchase agreement (PPA) bankability due to Discom health, high cost of capital and policy predictability for the long term. For the ´Make in India´ story to be successful, continuance of policy thrust is imperative.

´While projects are financially viable, better financing mechanisms are required´

Recently in RE-Invest Acme Solar has committed to contribute 7,500 MW of renew projects. What will be the time frame for this commitment?
We envisage commissioning the committed 7,500 MW by 2019 in line with the government´s vision. Through these capa¡cities, ACME will be generating around 12,000 million units of green energy and help prevent carbon emissions of 9,750 MTPA (million tons per annum). Through these projects, ACME will also create significant employment opportunities across India.

How many states have been identified for implementing these commitments? Have you started initiatives to fulfill of your commitments in terms of signing Memorandum of Understandings (MoUs) with various state governments?
We have solar portfolio of 700 MW in more than 10 states in India. We have identified some states which are suitable for the project. Most of the projects are awarded under reverse bidding route, which is the most preferred allotment method adopted by state and central governments. Allotment through MoU route may not be adopted by the government. In case it happens, we are ready to sign MoUs with various state governments across India.

What will be the total requirement of funding for these commitments? Are they financially viable or just annoucements?
The indicative fund requirement will be around Rs 60,000 crore to commission 7,500 MW solar PV projects. The project cost will further be divided into debt and equity.

The projects are financially viable; however, better financing mechanisms are required to achieve the announced capacity of 100 GW. Currently, solar is included in the power sector financing which is limiting exposure of funding in solar due to performance of overall power sector. Therefore; solar should be added in priority sector funding to avail maximum benefits. This will include long term financing i.e.20 years at affordable rates on non-recourse basis.

With so much commitment, there has to be some strategy in mind to counter delays. Can you outline your strategies that would come into action while implementing renew projects?
These are achievable commitments; we do not see any delay in our implementation plan as we are very clear and focused in fulfilling our commitments.

According to you, which sub-sector of renew-solar or wind-can attract priorities from your side and which of these can give you better return on investment?
Both, wind and solar, are good option to invest and get benefit of green energy.

However, our focus is more towards solar energy as we get better return on investment from solar than wind.

Moreover, we have built expertise in solar and there is a lot of untapped potential in this field.

´Investment attracted to each sub-sector of RE is dependent on the policy´

L&T Infra Finance has committed investment for around 6,500 MW of renew projects. When can we expect the disbursements to start?
At the recently held RE-Invest, L&T Infra Finance expressed its commitment to financially support Renewable projects of 6,500 MW over a 5 year period from 2015 to 2019. We expect to provide debt finance for about 700 MW in 2015 increasing to 2,500 MW in 2019.
L&T Infra Finance is a market leader in financing solar projects. Because of our parentage and associated knowledge of technical aspects of solar projects, we have been able to build a robust financing framework for this sector that has enabled us to identify the bankable projects.
L&T Infra Finance is also a leading financier of wind and small hydro projects. We have extensive experience in supporting these projects under PPA frameworks of various states.
Between 2011 - 2014 we supported over 2,500 MW of RE projects.
Based on the policy thrust of the GoI, the installed base of renewable projects is expected to grow to over 165,000 MW by 2022. Being market leaders in this sector, we expect to benefit from this exponential growth and be in a position to meet our commitment.
Identification/selection of RE projects is an ongoing process based on availability of project pipeline and is subject to a stringent and sophisticated deal filtering processes.

Can we say with Rs 2.50 lakh crore of commitments, the Indian banking system has opened its doors to the RE sector in a big-way?
The first wave of projects were impelled by tax incentives which catalysed capital flow of and led to rapid capacity additions. However such capital subsidies by its very construct had the inherent flaw of incentivising only tax-saving based investments without any consideration for financial viability in the long term. We consciously stayed away from funding such projects.

With the advent of generation based incentives (GBI), Feed-in-Tariff (FIT) regime with attractive tariffs and renewable purchase obligation (RPO) mechanism, the RE segment for the last 4-5 years has seen emergence of developers who have been implementing large capacities with focused approach and plans to be there for the long haul.

We were amongst the first few to identify the positive turn of events in the sector. Initially, Gujarat government came up with a scheme in 2011, where they awarded 950 MW of projects in the solar space. We financed about 150 MW of these projects, taking a 15 per cent market share.

According to you, which sub-sector of renew-solar, wind, micro-grid or others-can attract more funding and which of these can give you better return on investment?
Very clearly the amount of investment attracted to each sub-sector of renewable is dependent on the policy frameworks and the investment requirements. Hence, this would broadly reflect the target capacities of 100,000 MW for solar; 60,000 MW for wind etc.

We believe that the question on return on investment (ROI) is more pertinent to the developers of renewable projects. We are lenders to these projects and not investors. Given that there is not a large differential in the overall risk profile of such projects the interest rates on loans to these projects vary around a small band.

´We are open to options of investing in solar friendly states of India´

Recently in RE-Invest Vikram Solar has committed to contribute 5,500 MW of renew projects. What will be the time frame for this commitment?
As committed during RE-Invest 2015, our internal roadmap is planned accordingly to commission projects amounting of 5.5 GW by the end of 2018-19. However, the quantum of investment would largely depend on state policies, investor friendly initiatives and support provided by the state governments. We are in discussion with various state governments and the union government on the support required to make the investments viable in the long run. While we have adequate land bank in the state of Rajasthan and have already signed up a Memorandum of Understanding (MoU) with the government of Andhra Pradesh, we also open to options of invest¡ing in other solar friendly states.

Are these financially viable or just ´announcements´?
It is difficult to give a general answer on the financial viability of the projects and feasibility of the commitments as there is no uniformity on the solar policies adopted by different state governments. Each state follows a different approach and has different policy structures.

A lot depends on the interest subvention which the central government is planning to introduce, to bring in profitability in large scale solar projects. This apart, the return on investment (ROI) varies from one state to another depending on the specific yield from solar, electricity tariff, power purchase agreement (PPA), evacuation charges and availability of other required infrastructures.

Can you outline your strategies to counter delays while implementing renew projects?
We are currently working closely with many buyers for forward linkage such that we have a ready-made intake of power from the power plants where we have invested. Perhaps, the state governments can support us by entering into PPA with us, in order to expedite the completion of these projects.

As a leading player of the Indian solar sector, we feel that the stage is set for solar energy to take the lead amongst other sectors of renewable energy in India. At present the cumulative solar power capacity in India is 3GW plus, which in the coming days will grow exponentially as the government and Ministry of New and Renewable Energy has rolled out definite plans for the solar sector. While other sectors of renewable energy will also grow simultaneously, the prospect for solar power in India is undoubtedly bright.

How many renew projects is the company is working on currently? When are these likely to see light of day?
Our EPC projects team has already executed a few prestigious projects across India and currently solar projects of cumulative capacity of over 80MWP are under various stages of completion. These projects are scattered across states like Rajasthan, Madhya Pradesh, Kerala and West Bengal to name a few. All these projects are scheduled to be completed by the third quarter of this year. Beside these large scale MW solar projects, our projects team are also involved in lots of prominent kW rooftop solar projects across India.

´The key challenge is wind sites with power evacuation infrastructure´

What are the latest developments in wind turbine technology and how relevant are these be for generating wind power in Indian conditions?
Onshore wind turbine technology has become more mature aiming at significant reduction in the cost of energy to reach grid parity. Turbines have grown larger, blades have become bigger and relatively lighter, towers have become taller, thus making turbines more productive, cost effective and reliable. The outcome has been a reduction of 20 per cent in the levelised cost of energy in the last five years. We are also witnessing an era of intelligent turbines with better load monitoring and controls that has led to grid compatibility and rapid scaling up of wind energy. In the offshore segment, the industry continues to unleash potentially disruptive technologies.

Technology advancement related to Indian conditions were primarily aimed at tapping of low wind sites. Major turbine manufacturers have introduced new products with larger rotor ranging from 100 m to 114 m diameters which can harness more wind from the same site. Similarly, players like Suzlon have recently introduced taller towers ranging upto 120 m in height. These new products will be helpful in optimally utilising relatively low wind sites in India and scaling up further deployment of renewable power.

What kind of turbines does India need to produce while keeping in mind the nature of wind energy in the country?
India has a relatively large number of low wind sites across the country. Keeping this in mind, manufacturers are focused on introducing turbines with larger rotor and taller towers which will harness more wind and make these sites economically viable. India also requires intelligent turbines with better load management and control systems to positively address integration challenges at grid level.

What is the export potential for wind turbines made in India? Is our export industry technologically capable as latest global standards?
As mentioned earlier, India has built huge manufacturing capacities and is also a hub for components manufacturing. Many global players have set up their manufacturing shops, part of which is for exports. Therefore, Indian made turbines not only meet global standards, but also offer huge export growth potential.

Wind industry has been a major net exporter of wind turbine and its components. Suzlon alone has exported to the tune of $2 billion in the last five years. Since inception, we have shipped about 6,000 MW of wind turbines from India to over 15 countries including US, Europe and Australia. India can aim to achieve $2 billion a year immediately and scale up to $5 billion subsequently.

Why is capacity utilization in wind turbine installations low in India?
The wind industry does have a substantial manufacturing capacity. However development of wind sites along with grid infrastructure has not kept pace.

What are the specific challenges that wind turbine manufacturers face in India? What is their current manufacturing capacity and should we expect expansions in this field?
At the onset, investment in wind energy remains an attractive business opportunity for investors given the mature technology, established track record and relatively evolved policy framework. There are a few challenges and addressing the same can help scale up wind energy capacity to 60 GW by 2022 in India, as envisioned by the current government. The key challenges are availability of wind sites with power evacuation infrastructure, power purchase agreement (PPA) bankability due to discom health, high cost of capital and policy predictability for the long term. For the ´Make in India´ story to be successful, continuance of policy thrust is imperative.

Currently, effective manufacturing capacity of wind turbines stands at 7 GW to 8 GW. However, most manufacturers are launching new products that require new capex which will give rise to substantial expansion in new manufacturing facilities.


-Rahul Kamat
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