Potential and Investment Challenges in Wind Energy in India

Narasimhan SanthanamEAI – www.eai.in

About EAI

• Leading Indian renewable energy business intelligence, market strategy consulting firm

• Work on all primary renewable energy sectors – solar, wind, bio-fuels / biomass, waste-to-energy and small hydro

• Work on market research, entry and diversification strategy, economic and financial modeling and pre-feasibility analysis

• Team comprises professionals from IITs and IIMs, with renewable energy, industry research and economics backgrounds

• Based out of Chennai, India• More at www.eai.in

Will be Speaking On…

Wind Energy in India – Intro and Potential Investment Trends in Wind Energy in India Costs Tariffs and RoI Key Challenges Looking Ahead Take-aways for Investors

Wind Energy in India – Intro and Potential

Installed capacity = 11,000 MW, approx– TN = 4 2%– Mah = 20%– Guj = 15%– Kar = 13%

While accounting for 6% of the total installed power capacity in the country - only contributes 1.6 % of electricity generated

Wind Energy in India – Intro and Potential

India has set a target of adding 10,500 MW of wind capacity during the 11th Five-Year Plan period (2007-2012)

Year MW Added

2002-03 240

2003-04 600

2004-05 1100

2005-06 1700

2006-07 1700

2007-08 1600

2008-09 1500

National Wind Power Programme

The Wind Power Programme in India was initiated towards the end of the Sixth Plan, in 1983 – 84 . The programme aims at survey and assessment of wind resources, setting up demonstration projects, and provision of incentives to make wind electricity competitive. As a result, wind electricity has emerged as an option for grid-quality power generation. The costs in respect of wind monitoring stations are shared between the Ministry of Non-Conventional Energy Sources (MNES) and the state nodal agencies in the ratio of 80:20 (90:10 for north-eastern states). With 2980 MW of installed wind power capacity, India now ranks fifth in the world after Germany, USA, Spain, and Denmark. Most of the capacity addition has been achieved through commercial projects by private investors.

Investment Trends in Wind Energy in India

Investments in wind energy 2007 - $2.2 billion 2008 - $2.7 billion (6 3 % of total RE

investments) 2009 – Over $ 3 billion (EAI estimate)

Individual investment sizes – So far, wind farms have been of sizes up to 50 MW, but larger sized wind independent power projects expected.

Costs – Capital Costs

Capex: Rs 5.25 crores per MW– Turbine – 70%– Civil Works – 11%– Electrical Infra – 9%– Power conditioning & grid integration –

7%– Installation - 2%– Others: 2%

Costs – Operating Costs

O & M costs - Approximately Rs. 0.50 per kWh (including insurance, for the first five years)

Increases with time, approx 5% escalation every year after first three years

TariffsFeed-in-Tariff Rates (Rs/kWh)

Tenure Other Conditions RPO (%)

Maharashtra

3. 5 13 Escalation of 15 paise per year

6%

Rajasthan 4 . 2 8 / 4 .5 20 NA 7.5%

Madhya Pradesh

4.0 3 20 Depreciation of 17 paise for 3 years, 16 paise in the 4th year. Constant rate of Rs 3.36/unit thereafter

10%

Gujarat 3. 3 7 20 No escalation 2% (10% proposed)

Karnataka 3. 7 10 No escalation Min 7.5%

Andhra Pradesh

3 .5 10 No escalation 5%

Tamilnadu 3 .3 9 20 No escalation 12-13%

Kerala 3. 14 10 No escalation 2%

Other Incentives

GoI has started giving a generation based incentive (GBI) of 50 paise per unit, in lieu of depreciation benefits

CDM revenues possible – 50 paise per unit

IRR and Payback

Project IRR: 16.5% Equity IRR: 25% Payback period: 6 years

Above data calculated for the case where accelerated depreciation benefits are CDM benefits are factored in.

Total wind energy potential (best case) = 90 GW

Installed capacity = 11 GW

Installed capacity to total = 12.2%

Potential vs. Actual

Installed capacity - % to total electricity capacity – 6%

Electricity generation - % to total – 1.5%

Key Challenges

Incentive Challenges Transmission Challenges Regulatory Challenges Structural Challenges Efficiency Challenges

Key Challenges

Incentive Challenges

Profitability still dependent on government incentives / tariffs

Accelerated depreciation benefit is not conducive for long-term growth (already has been given an option for a generation based incentive (GBI) scheme)

Key Challenges

Transmission Challenges

Poor Grid Infrastructure

Lack of transmission infrastructure - transmission infrastructure that is required to effectively absorb an RE with intermittency doesn't exist.

In 2005-06, around 15% of wind generated in Tamil Nadu was lost because of congestion and a shortage of evacuation facilities.

Key Challenges

Transmission Challenges

Poor Grid Infrastructure

Transmission infrastructure is the responsibility of state transmission utilities (STU). But many STU s are not financially healthy enough to invest in required transmission upgrades.

Payment for transmission augmentation upstream of an interconnection point is a contentious issue.

Resolving this requires state and central government entities, STU s, power plant developers and power purchasers.

Key Challenges

Transmission Challenges

Grid Integration

Grid codes that include standards for wind integration are required to ensure that variable electricity production from wind farms do not adversely affect the power system operation.

There is a lack of grid codes that incorporate the behavior of renewable generation., not just for wind alone.

The existing grid codes need to be modified to provide standards for system stability and reliability.

Key ChallengesTransmission Challenges

Obstacles to an Efficient Grid Who – who should pay for the evacuation

facility (transmission capacity) up to the interconnection point: developer, power purchaser, transmission utility or distribution company?

What - what is the role of State Transmission Utility (STU) in developing transmission infrastructure for renewable energy projects?

How -So far, no renewable related standards are available in Central Electricity Authority (CEA) Regulations. How should the connection standards and Grid Code be modified to accommodate wind energy sources?

Key Challenges

Regulatory Challenges

Restrictive Regulations Regulations across SERCs regarding

renewable generation grid connections and transmission charges are not yet uniform and are sometimes vague.

Costs for wheeling electricity are higher than those assumed by MNRE. Lowering and standardisation required.

Hurdles to open access hinders inter-state power sale.

Key Challenges

Structural Challenges

Task of promoting renewable energy is in the hands of states. Only 10 states have implemented quotas for a renewable energy share of up to 10 per cent.

Wind energy does not enjoy infrastructure sector status such as roads, power or ports projects do. Therefore, banks have been reluctant to go in for non-recourse funding for wind power projects.

Till recently, investments in the wind power sector in the country have been mostly for captive purposes. (Shift towards IPPs because of higher tariffs, RPOs and long-term PPAs)

Key Challenges

Efficiency Challenges

Estimation of effective turbine capacity not deterministic. (The turbine manufacturers are not willing to give a guarantee)

Forecasting of wind for short and medium term

Key Challenges

Others

Site allocation process sometimes arbitrary.

Without storage, scalability might be hindered. And use of batteries for storage could increase costs by over100 %

Looking Ahead

Transmission infrastructure enhancements greatly needed

More proactive cooperation between STUs, Developers and Regulators, and more flexible distribution rules

Shift incentive focus to encourage long term investments (from AD to GBI)

Short term forecasting for the day ahead and hour ahead power system operation and dispatch is critical for any market for reliable power supply and to minimise the cost of power supply.

Encouraging RPS and effective implementation of RPO

Take- aways for Investors

Wind is a mature industry A number of incentives have been provided,

and more in pipeline; recent budget has been generous

Technology improvements and innovations could further increase efficiency and profitability

Key challenges present in dependence on incentives, transmission, regulatory, structural, and efficiency.

These challenges cannot be solved by private entities alone; Private-public initiatives are required to overcome challenges

Thanks !

Narasimhan SanthanamEnergy Alternatives India - EAI – www.eai.in

narsi@clixoo.comMob: 98413-48117