Indian Wind Industry Gets … uhm … Second Wind

6 September 2012 @ 9:46 pm

As of April 2012, the accelerated depreciation benefit for wind energy projects in India was discontinued. This was expected to hit the industry hard. This fear seemed real enough until some developers recently figured out that they didn’t have to depend on turnkey solutions from wind turbine manufacturers anymore. How did this happen?

For many years, the major reason for the growth of the wind energy sector in India was the accelerated depreciation benefit. Captive consumers, as industrial electricity consumers are referred to, were the majority of the wind project owners. For industries such as the cotton spinning mills, investing in an electricity producing asset depreciating its value at 80% annually was an extremely attractive option. Since they didn’t seek to build large wind farms but just erect one or two turbines, their needs didn’t quite make an attractive proposition for wind energy developers. So wind turbine manufacturers such as Suzlon, Vestas and, in the past, NEPC stepped in to offer turnkey wind solutions to the mill owners. They would take care of land acquisition, permitting and grid interconnection, and obviously the turbine manufacturing and installation.

Since the primary incentive was the accelerated depreciation benefit, neither the mill owner nor the turbine manufacturer cared if the turbine generated any electricity or if the grid had capacity to evacuate that power. To counter this perverse incentive, generation based incentives were introduced. The power producer would get paid Rs. 0.50 (US $0.01) for every kWh of electricity generated. While this increased the number of entrants interested in more than accelerated depreciation to about 30% of new projects, it still did not incentivise the utility companies (now transmission companies) to provide the necessary infrastructure to evacuate the power.

To counter this, the government introduced Renewable Purchase Obligations (RPO) mandating that a certain percentage of electricity purchased by each utility be from renewable sources. After this, the government also decided to remove the accelerated depreciation benefit and the feed-in tariff and instead introduced a Renewable Energy Credit trading exchange.

While everyone feared it might sound the death knell for the wind industry in India, especially with solar energy getting a boost through the National Solar Mission and individual state solar missions, wind energy developers realised that they could take advantage of the drop in turbine prices worldwide. A few developers, like Green Infra, Greenko Group and Mytrah Energy, decided to discontinue the existing model and instead develop the projects (acquire the land, take care of permitting and interconnection) themselves and turn to the manufacturers to just order the turbines.

As the Bloomberg article points out, companies like Vestas, Gamesa and Suzlon, were still charging high prices for projects despite the fall in turbine prices, citing high development costs. Breaking the vertical integration by decoupling turbine manufacturing from development, these developers are now able to realise the monetary benefits from falling turbine prices by ordering from manufacturers like GE and developing the projects themselves.

With turbine prices falling and coal prices still rising, many more wind developers might do what these three developers did. From this case, it seems like the New and Renewable Energy Ministry hasn’t yet been infected by the policy paralysis that the other ministries seem to be caught in. Having the right kind of incentives in place and letting the private sector figure the best path ahead seems to have worked here.

And oh, pardon the lame pun in the title. I haven’t been blogging lately and the rustiness wears off really slowly!

Originally published at armchaircritic.tumblr.com.