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Relief for India's Wind Industry as GBI Returns

India's generation-based incentive (GBI) for wind energy was reinstated in late February. The government had repealed the subsidy in April 2012, causing dire consequences for the wind sector. A headline in the Hindu Business Line newspaper said it all: "Wind power heaves a sigh of relief". Some INR8 billion (US$147 million) will now be allocated for the incentive in the 2013-2014 budget.

The government will also offer low-interest loans for wind projects through the National Clean Energy Fund (NCEF). Indian wind developers had looked to international institutions such as the International Monetary Fund and the U.S. Export-Import Bank for funding after the GBI's repeal.

There was no mention of whether the accelerated depreciation benefit (AD), a tax deferral for the wind sector which was also cancelled in 2012, will be reinstated. The Global Wind Energy Council (GWEC) has said that it is “confident that the AD, which would help the small and medium industry in the wind energy segment, figures in the fine print”.

Much to Celebrate

“We are happy that the wind energy sector has been recognized as a significant contributor to the power scenario of the country,” said Ramesh Kymal, head of Gamesa India and chairman of the Indian Wind Turbine Manufacturers' Association (ITWMA).

“The re-introduction of the GBI is a timely intervention for the wind industry, which was suffering for more than one year. This would certainly rejuvenate and boost the sector with more investments in the wind industry. I am confident that the industry would bounce back by 2014-2015 and may be able to cross the set target of 5 GW capacity every year,” Kymal added.

A Changed Market

India's current installed wind capacity is 26.9 GW, and the nation plans to install 30 GW by 2017. Analysts agree that India is on track to achieve this target - but there is doubt about the target for 2012-2013. Between April and December 2012 India added only 982.5 MW of wind power capacity, less than half the previous year's numbers, according to the ITWMA. Analysts say the required capacity is unlikely to be added before the end of the fiscal year.

From 2009-2011 annual installations more than doubled, but the withdrawal of the incentive contributed to a 50 percent drop in capacity additions over the past fiscal year, according to Kymal.

Sanjay Chakrabarti, a partner at Ernst & Young and head of the firm's India cleantech practice, told REW that the wind sector is likely to end the fiscal year showing growth of 40-50 percent, significantly less than expected.

According to Chakrabarti, before the GBI and AD were removed the Indian wind sector had 'the best of both worlds': the majority was a depreciation market with a lot of retail customers buying in, and large independent power producers (IPPs) were beginning to enter the market. After the incentive was removed the taxpayer side of the market exited, leaving a majority IPP market in which overall investment has dropped significantly. But Chakrabarti believes that the growth in the IPP market in 2012 constitutes a “silver lining”.

“The good news is that the IPPs are coming in with the objective of setting up quality assets,” he said, so the quality of the sector will “see a significant improvement”. Chakrabarti believes that efficiencies involved with cost, commissioning, and operations and maintenance will lead to a healthier industry. “The sector's size has shrunk, which is not good, but at the same time the likely outcome is that we will come out stronger because better players are coming in and queueing up to do projects the right way,” he said.

These IPPs are backed by large private equity companies such as JP Morgan, Morgan Stanley and Goldman Sachs. “Most have backed some company or other in the Indian wind space with sizeable investments,” Chakrabarti said. And there are “several more that we're aware of who are looking for a good proposition to invest in”. This investment is likely to continue to grow, he added.

Market Challenges

Given India's significant power deficiency and its difficulties in importing enough coal, the country's move toward wind and solar makes sense. Wind is more scalable than solar, Chakrabarti said, given wind's faster project development times, ease of financing and the maturity of the Indian wind sector. “Wind clearly has the edge over solar as an investment proposition,” he said.

While there is much excitement about wind development in India, said Chakrabarti, there are also big challenges. Most discoms (power distribution companies) are state-owned, so “power is a political subject”, he said. Although tariffs have been raised across India in the last few years, many states haven't raised their tariffs for 7-10 years due to political complications. Discoms in several states are “not in the best health” and are unable to pay for the power they buy. Wind power generation companies that supply in these states are consequently facing difficulties.

Another red flag for investors has been that revenue from carbon credits isn't particularly high. And India's renewable energy purchase obligation, enacted in the hope that it would widen the market, has “not been enforced to a significant extent”, says Chakrabarti. Governments in several states have begun issuing notices asking discoms to explain how they are meeting their renewable energy purchase obligations. But the state governments haven't yet begun enforcing penalties, so certificate revenue hasn't yet kicked in, and the bulk of the purchase obligation falls on the unhealthy discoms.

“It's a chicken-and-egg situation”, says Chakrabarti. The nation needs to get the state discoms healthy, for which the tariff will need to be significantly increased - but “you can't wash away your sins in tariff changes over two years,” he says.

India's renewable energy power producers hope the obligations will be strongly enforced. “The moment that happens,” says Chakrabarti, “you will see the entire renewable energy certificates market come up, and more demand for renewable energy in India purely from the perspective of additions happening in the current year.”

 

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