The rupee’s biggest plunge in 20 years is endangering the recovery of India’s $1.6 billion wind power industry as higher finance and import costs negate benefits from a government subsidy restored last month.
The currency’s 17 percent slide against the dollar this year has stalled new investment plans, said Mahesh Makhija, director of renewables at the Indian unit of CLP Holdings Ltd., the largest owner of farms in India. Turbine makers such as Suzlon and Gamesa, who count India among their top three markets, may raise prices, he said.
After a record 42 percent drop in installations in the 12 months through March, the industry is set to beat the U.S. for the first time this year after the government reintroduced a cash incentive in August. India, which is fighting to reduce blackouts that hold back economic growth, is seeking to cut dependence on imported fossil fuels and double clean energy capacity to about 57 GW by 2017.
“A rapidly falling rupee affects investor confidence in the Indian economy and is likely to impact our expansion plans,” Makhija said. “Manufacturers who aren’t hedged in the short-term could take the increased costs to customers over the next three to six months. Developers are also likely to be affected by growing inflation.”
The local currency dropped as much as 20 percent this year when it touched an all-time low of 68.845 per dollar on August 28. Its 8.1 percent slide in August was the biggest monthly decline since March 1992, according to data compiled by Bloomberg.
A weaker currency inflates overseas debt when repaid with local earnings, increasing finance costs, while also boosting prices of imported components and other raw materials. The average yield for dollar debt of Indian companies jumped as much as 2.56 percentage points to a 19-month high of 6.32 percent on August 22 from a record low reached on May 10, according to an index compiled by HSBC Holdings.
The depreciation may hurt the industry at a time India is forecast to put up 2.05 GW of wind capacity in 2013, compared with 2 GW expected in the U.S., pipping the North American country for the first time, according to estimates from Bloomberg New Energy Finance. In 2014, that may rise to 2.3 GW, signaling a rebound.
“If the rupee doesn’t recover in the next couple of months, it will start impacting everything from turbine prices to interest rates, and thus project profitability,” said Shantanu Jaiswal, a New Delhi-based BNEF wind analyst. “Nobody would’ve thought that the decline would be so steep.”
Suzlon ceded its position as the top wind-turbine supplier in India for the first time in at least a decade last year as it struggled to repay debt accumulated from acquisitions. The company and its units had about $1.5 billion of debt denominated in the greenback and owe the equivalent of about 66 billion rupees in euros, data compiled by Bloomberg show.
The turbine maker, based in the western Indian city of Pune, is this year’s worst-performing stock in the 98-member NEX index of clean-energy shares, having dropped 68 percent. Its shares were up 0.3 percent at 5.97 rupees as of 11:35 a.m. in Mumbai.
A weaker rupee, while posing some challenges to the industry, may help local manufacturers including Suzlon to compete in overseas markets, said Chairman Tulsi Tanti. Ramesh Kymal, head of Gamesa’s local unit, didn’t respond to an e-mail and phone call seeking comment.
“It has some positive aspects for a company like ours,” Tanti said in an e-mailed response. “With significant manufacturing in India, this can translate to us being more competitive in U.S. and Europe.”
The currency’s slump may make wind energy more competitive against fossil fuel-based power, said Ravi Kailas, chairman of Mytrah Energy, a developer backed by Henderson Global Investors. Wind farms don’t have to deal with the long-term risk of rising fuel imports faced by coal and natural-gas fired plants, said Arvind Bansal, chief executive officer of Morgan Stanley-backed developer Continuum Wind Energy.
“It has brought into focus the intrinsic competitiveness of wind energy,” Bansal said. Both developers say all of their debt and revenue are in rupees and they don’t expect delays.
India has installed 19,662 megawatts of wind power, according to the Ministry of New and Renewable Energy, about a fifth of the nation’s estimated potential, BNEF’s Jaiswal said.
The country’s 10 largest developers, including Mytrah, Green Infra and Goldman Sachs-backed ReNew Wind Power, have plans to put up 15 GW of capacity in the next 10 years, driven by increasing demand for electricity and wind power prices that are competitive with new coal plants.
Goldman and Morgan Stanley have led about $1.1 billion of private-equity buyouts, project and company acquisitions in the industry since 2010 as the cost of generating electricity from windmills has become lower in some states than from new coal- based power plants.
The benefits offered by the reinstatement of the government subsidy for windfarms may be blunted by the rupee, said Jaiswal.
The cabinet in August approved the proposal to revive the generation-based incentive (GBI) of 500 rupees ($7.6)/MWh and also agreed to raise the cap on the total subsidy a wind-based power producer can claim over 10 years by 61 percent, to 10 million rupees. Farms built between 2012 and 2017 will be eligible for the subsidy, Ministry of New and Renewable Energy Joint Secretary Alok Srivastava said on August 13.
The subsidy expired in March 2012, stalling turbine orders and toppling India from its place as the world’s third-biggest market, data compiled by Bloomberg show.
As Prime Minister Manmohan Singh struggles to revive economic growth from a decade-low of 5 percent and rein in a record current-account deficit, UBS AG last month predicted a drop in the rupee to 70 is possible.
“Rather than the absolute value of the rupee, what is important for decision making is when will it find stability,” said Continuum’s Bansal. “That may hold up new investments.”
Copyright 2013 Bloomberg
Lead image: Windmills at Thar desert in Rajasthan, India, via Shutterstock