Is it justified for the Indian Wind Industry to ask for Subsidies from the Government in Addition to RECs

GWI had written that the Indian Wind Power Industry is facing problems in 2012 and there is a possibility that new wind capacity could fall by 66% in 2012 as compared to the record breaking 2011. The Indian Wind Power Association (IWTA) representing 1350 companies has written a letter to India’s PM asking for reinstating subsidies for the wind energy industry pointing towards the sharp fall in installed capacity in the first quarter of the year.

Wind Energy Industry Problems

Wind Companies are also facing capital escalation of costs with the prices of materials like steel and cement showing a sharp appreciation leading to a 30-40% increase in the cost of wind farms. The rise in costs with a fall in electricity tariffs are squeezing the wind energy developers. Wind energy installations in Tamil Nadu which accounts for almost 40% of the wind capacity in India, has already dropped by a startling 70% in the first quarter of fiscal 2012. With the industrial conditions getting worse it is expected that the trend will continue and wind capacity could drop to just 1000 MW from 3000 MW last year. This would have a devastating effect across the wind equipment supply chain. Gamesa has already dropped its plan of building a wind equipment factory in China.

Fresh capacity increase, has declined by almost 60% to 522 MW according the MNRE as subsidies related to

a) Accelerated Depreciation and b) Generation Based Incentive (GBI) have been removed.

Note, the Indian wind energy industry continues to benefit from the REC scheme in which wind power can earn Rs 1.5-2.5/ Kwh above the wholesale electricity price. Private Equity players have continued to invest strongly as they believe that a return of 14-15% can still be made in this environment. Also accelerated depreciation was a bad subsidy as the wind developers did not have an incentive to improve the efficiency and running of the wind power plants.

Private Equity investment in Indian Wind Energy

The Indian Wind Energy Industry is currently under a lot of stress as subsidies and incentives have been withdrawn towards the sector. This has led some of the wind industry companies to sharply reduce their projections of demand in 2012 to fall by around 66% from the previous year. However the Private Equity Industry continues to remain bullish about the prospects of renewable energy in India as around 30 GW of green power is planned to be added over the next 5 years. The TINA factor is set to boost the growth of renewable energy in India as coal, gas and hydro power face constraints of cost, availability and delays. A 14-15% ROI on wind energy investments and a huge power deficit is attracting global investment banking majors who continue to invest big time into new green power companies in India. Morgan Stanley, JP Morgan and Goldman Sachs have already invested millions of dollars in wind power and other renewable energy generating companies and more PE investments are in the pipeline as well.

 TOI

The Indian Wind Power Association (IWPA) has appealed to the Prime Minister Manmohan Singh to reinstate incentives to wind power manufacturers that the Centre had withdrawn in the last Union budget, to increase private investment in the wind energy sector.

In a telegram sent to the prime minister on behalf of 1,350 wind power investors, the IWPA has pleaded that the industry will collapse if the government didn’t offer accelerated depreciation (a tax cut offered to domestic firms to offset costs incurred due to replacement of worn-out equipment and repairs) and generation-based (subsidy for each unit produced) incentives that were available for domestic and foreign investors respectively.