Lately, the winds in India have been blowing slowly. A sector that saw spectacular growth over the past decade has slowed down significantly over the last year. In the first half of the year, the industry recorded close to a 40 per cent dip in its installations. This is a stark reflection on reforms that have perhaps lost their momentum.
Recent reports peg the potential for exploitable wind energy in India at 300 GW. This is far in excess of earlier estimates. The share of renewable energy in the country’s total energy mix has increased from 7.8 per cent in financial year 2008 to 12.1 per cent in 2012. Not only is there an abundance of wind energy, it is also at an affordable cost: The levelised cost of energy for 20 years is Rs 4.5 and for 10 years stands at Rs 6 per unit.
Over the past 20 years, the industry has provided affordable energy to over 50 million people in India; people who would otherwise have continued to live in the dark. The industry has consistently fuelled the agricultural sector — the backbone of our economy. Small and medium enterprises (SMEs) have been effectively hedging their energy costs by investing in wind energy for captive utilisation and securing a sustainable future. Each megawatt of wind energy has created 20-25 new jobs, a boon for a country with an ever burgeoning young population. It’s clear that a slowdown of the wind sector will have a ripple affect across the economy.
INCENTIVES WITHDRAWN
The reasons for the slowdown are no secret. Critical policy frameworks that supported the industry’s growth — Accelerated Depreciation (AD) and Generation Based Incentives (GBI) — were withdrawn. It has been argued that as the industry matures it should lose dependency on fiscal incentives. I agree with this. However regulatory changes need to be phased out slowly. Sudden changes can arrest the industry.
The original — and perhaps smarter — plan was to stabilise the Renewable Energy Certificate (REC) market and Direct Tax Code (DTC) before withdrawing AD and GBI. This would have been an ideal situation and would have facilitated a smooth transition for the industry. However, the REC market is still in early days and DTC is far from being applied. This has effectively parked the sector in a policy vacuum — a highly risky proposition for a regulated industry.
The regulatory conundrum is compounded by the rising cost of finance. Not only is it expensive but also very tightly time-bound: Loans are available maximum for a period of 10 years. This impedes the growth of an industry, which is highly capital-intensive. The wind industry has already been struggling with inadequate grid infrastructure. However, all problems have seemingly come to head now.
If the industry continues to lose momentum, we will not meet the country’s 2020 target of deriving 15 per cent of our energy needs from renewable energy. We continue to import coal at a much higher cost, instead of harnessing our own plentiful resources. The industry has the potential to add millions of jobs, but instead it is being forced to cut jobs. The agricultural and SME sector are unable to hedge power costs, adversely affecting their bottomline. This is bound to have a negative impact on the nation’s long-term GDP growth.
CARBON FOOTPRINT
This financial year, we need an overhaul to get the wind industry back on track. AD and GBI need to be reinstated. GBI is critical in attracting Independent Power Producers (IPPs), who can pump much-needed finance into the system. If not for the entire life-cycle of the project, the benefit can be provided partially for a 10-year period of the project life.
On the other hand, AD is required to sustain SMEs investing for captive consumption. AD could be capped at 25 megawatts per company, per year – allowing them adequate benefit to build sustainable businesses.
In parallel, the REC market needs to pick up steam. Currently, there is very limited demand for the instrument and some strong steps are required to make the market sustainable. It should be mandatory for all state and central PSUs to meet renewable energy targets, either by investing into renewable energy projects or through purchase of RECs.
Large corporates should be given a mandatory target of reducing their carbon footprint by 15 per cent, by either investing in renewables or RECs, as a part of their Corporate Social Responsibility.
These measures would need to be monitored, perhaps on a quarterly basis and any discrepancies should be penalised. REC settlements should also be done on a quarterly basis to develop faith in the system. There is no doubt that the REC instrument is an innovative, and much needed, scheme. A little push to stabilise the system would go a long way.
In terms of financing — a real challenge for the wind industry today — a few reforms are required to accelerate development and exploit the industry’s potential. Project finance should be available for 20 years, instead of the current 7-10 years, with a three-year moratorium on repayment and a ballooning repayment scheme for 17 years. Considering that the life of a wind project is for 20-25 years, this is fully justified.
Additionally, banks need to adhere to priority lending for the renewable energy sector. Every year, the banks should make available five per cent of its funding for renewable energy projects. Interest costs can be reduced by providing incentive for timely repayment instead of cutting the rates. This would attract massive international equity funds for investment in renewable energy projects.
REGULATORY FRAMEWORK
We also need to focus on the development of the country’s grid infrastructure. Regrettably, the State utilities do not have adequate finances to invest in the development of power infrastructure. We need private equity to bridge the gap. AD should be offered on the investments and it should be backed by a strong revenue model.
Finally, it is imperative to establish strong regulatory mechanisms to secure payments. It should be mandatory for utilities to pay renewable energy projects on a priority basis. In the case of delays, the utilities should be required to pay 12 per cent interest — match the cost of funding from a bank.
The wind industry in India has rapidly grown to be the third largest wind market in the world, thanks to Government support. However, if this support is withdrawn, vast potential will be left unexplored. We still have a long way to go. With the right regulatory framework – as witnessed in the past — the Indian wind industry can move from strength to strength.
The Budget should take some crucial steps for this critical but fragile sector.
(The author is Chairman and Managing Director, Suzlon Group.)