The Indian wind sector is set to see an increase in project size, after several years of slow growth and small deals. Until now, wind projects have been limited to around 100MW in capacity, and the solar sector has failed to gain a foothold. But large wind farms are on the horizon and for the first time solar looks bright, with a fresh national plan and multilateral support on the table.

India’s ultra mega coal plants, and their ultra mega project financings, have grabbed the limelight in recent years, but behind them lurks a wind sector that continues to consolidate.

India is the world’s fifth largest wind power producer, but with an installed capacity of around 11GW, it sits well behind Spain and Germany, countries with far smaller populations.

Domestic lending dominates India’s wind space, and bankers are sceptical that government incentives will make greenfield wind deals financeable on a standalone project finance basis.

Historically, much of India’s wind capacity was erected on a small-scale basis, as industrial groups, and in some cases individuals, sought to benefit from tax breaks. Incentives were skewed towards the construction of plants, rather than based upon their generation and economics. More recently the Federal government has introduced obligations for state utilities to purchase more renewable energy, which has attracted the attention of project finance lenders and given impetus to larger developments.

Global turbine manufacturers such as India’s Suzlon, Denmark’s Vestas and Germany’s Enercon have moved in quickly in early-stage project development, snapping up the best sites, but pure developers are now looking to assemble financings. The 300MW Beta wind project is nearing financial close and is set to be the largest Indian wind deal, funded on a non-recourse basis to date. According to one market source, there are now bigger projects, in the region of 500MW, under consideration.

State-by-state gives way to central

Most wind projects sell power within a single Indian state and are dependent on that state’s tariff. These rates differ from state to state, as differing wind conditions between areas affect expected plant load factors. Wind farm development activity is highest in the states of Tamil Nadu, Maharashtra, Gujarat and Karnataka, where developers and lenders have been satisfied with the combination of attractive tariffs and plant load factors, as well as the quality of offtakers. The consumers are usually utilities, many of which remain state-owned.

Lenders say it is the combination of government incentives that gets wind projects closed.

With projected load factors ranging from around 20% to 35%, state power tariffs sit somewhere between Rs2.8 ($0.059) and Rs3.6 per kWh. These could change after the central regulator CERC introduced late last year a central tariff, which, at an estimated Rs4.17 per kWh, is higher than many of the state tariffs, says Sumato Basu, partner at J Sagar Associates. “The tariff structure is going through a bit of a churn ... the problem is the central tariff only applies when the generator is selling to more than one state, so there is a bit of complexity there,” he says.

There has been an upward trend to revisions in state tariffs, and over time the different tariffs could converge, Basu adds. “Because the CERC has stepped in, there is a possibility that variation between different states will get reduced, but this expectation is tempered by the fact that the individual state commissions have no requirements to follow the CERC benchmarks” he says. The tariffs would still have to take into account the different wind conditions in the different states, so that those areas with poorer wind conditions can still attract developers.

Developers of wind projects are also looking to the implementation of a central renewable portfolio standard to encourage offtakers to come forward. The central government will require utilities to purchase 5% of their power from renewable sources this year, moving up by 1% each year to 15% by 2020. To this end it is to rollout a renewable energy certificates scheme for utilities and generators to trade green offsets.

One lending source says the regulatory pressure of penalties for utilities that do not meet their renewables requirement is likely to mean that the payment record for these projects is better than those for less clean plants. “Given that kind of regulatory environment, we believe it is less risky for a renewables [project] to get paid compared to a thermal [project],” he says.

On top of this, the federal government has introduced the generation-based incentive scheme to remunerate renewables projects based on generated output, rather than capacity installation. Applicable projects are given an extra Rs00.5 per kWh on top of the state tariffs for a period of up to 10 years. GBIs are only given to projects over 5MW that do not claim the benefit of accelerated depreciation under income tax legislation. The accelerated depreciation tax benefit gives a tax break of up to 80% of the investment during the first year of the project’s operation. The cap for the GBI plan is currently set at 4GW for the period until 2012, when India’s government is to rollout a new five-year plan.

In this regulatory landscape, the interest rate for domestic debt for wind IPPs lies in the range of 11% to 12% per years, linked to the bank’s base rate, which is between 7% and 8%, according to one banking source. These rates have not, however, discouraged private equity firms from taking a keen interest in the sector

Given the new emphasis on supply-based incentives, it is hoped that independent power producers will want to build larger projects, and there is already interest from international lenders, which up until now have played a very small role in India’s wind sector. One international banker says he is looking at two projects, of 20MW and 100MW, and the range of incentives is key. “In my view GBI availability will influence the debt capacity of the project rather than being the primary determining factor for project viability, or non-viability.”

Challenges for foreign banks include managing exchange rate risk, land security risk and offtake risk. When considering payment default risk, domestic banks tend to be more knowledgeable than foreign lenders on the creditworthiness of offtakers. Despite this, commercial lenders from abroad can play a part in non-recourse deals, the banker says. “I think projects between 50MW and 100MW are probably in the sweet spot,” he says. These deals would not usually require more than three or four lenders. The modest debt size means exchange rate swaps for hedging the foreign debt can be found more easily than those for larger loans to, say, fossil fuel projects.

Project Beta – the market’s alpha

But domestic lenders are likely to make the initial running on large-scale wind financings, with the Beta project nearest to market. The 300MW Beta project, set to cost the equivalent of $360 million, will set a new benchmark in India for non-recourse wind, and is expected to close within weeks. The project, situated in the state of Tamil Nadu, is being developed by Orient Green Power, in which engineering company Shriram EPC and private equity group Bessemer Venture Partners each hold a 44% stake. Olympus Capital Holding, also a private equity firm, holds the remaining 12%. Orient Green Power has filed a draft prospectus for an initial public offering, which would raise funding for the project.

The debt/equity ratio is set to be around 67/33, putting the total debt portion at the equivalent of $240 million. Axis Bank is syndicating the debt, and around seven banks are expected in the final lending group, all domestic. Axis is set to be the largest lender, and it is believed it could lend up to one quarter of the total debt.

The engineering, procurement and construction contractor is turbine manufacturer Leitner Shriram Manufacturing Limited, which is a joint venture 51% owned by Europe’s Leitner and 49% owned by Shriram EPC. The project is based on a base case plant load factor of 27%. Some 51% of the power is contracted to go to captive consumers, under offtake contracts of between 3 and 5 years in length. The state utility is to take 49% of the power, on a long-term basis of over 20 years.

Indian wind projects often have at least a portion of their output sold under short-term contracts, which in some cases can be as short as one month. To enter into either short- or long-term contracts, utilities need to be persuaded that the plant has a reliable load factor. Wind projects often have a load factor around the 25% mark, and at this level, negotiations can be difficult, according to one banker. “That is where commercial viability becomes an issue,” he says.

Under the EPC contract for the Beta Wind Farm deal, Leitner Shriram would cover missing revenues incurred if the load factor falls below 27% on an annual basis, through a letter of credit.

Beta is to supply to the state utility at tariffs of Rs3.89 per kWh, which includes Rs0.50 per kWh from the GBI scheme. The price to captive consumers, through the short-term contracts, is around Rs4.50 per kWh.

The project is set to receive the GBI incentive for around four years from completion, as the scheme stipulates that a project cannot receive a total of more than Rs6.2 million per MW for the entire length of the project, and not more than Rs1.55 million per MW in any one year.

Beta is expected to qualify for certified emissions reduction certificates, but the debt service coverage ratio would be “comfortable” without the CER revenues, according to one source close to the deal.

Solar starting from scratch

Just as wind developers are looking to new capacity heights, India’s solar sector is about to take off, after the government announced a range of solar-specific incentives. On top of this, the Asian Development Bank has come up with a plan that could see a massive increase in the scale of solar farms within just a few years.

Late last year, the central government’s Jawaharlal Nehru National Solar Mission launched a range of measures to improve energy efficiency and spur the growth of renewable energy.

India has been slow to promote solar energy, but the mission says it wants to install 20,000MW of solar capacity by 2022.
The central government has introduced a large range of subsidies, tax breaks and a substantial solar tariff – at around Rs18 per kWh for photovoltaic plants and Rs15 per kWh for solar thermal. The range of incentives for solar has prompted interest in project finance deals and one banking source says non-recourse deals – for projects in the region of 20MW – should close by the end of the year.

In order to get larger plants built across the Asia region, the ADB launched in May 2010 its Asian Solar Energy Initiative, which aims to put in place 3,000MW of solar capacity in the next three years. India is to be first in line for the scheme. The ADB wants to attract large international solar companies into the region, and encourage them to build big, gaining economies of scale and driving down marginal costs. Indian states such as Rajastan and Gujarat have identified large areas of non-agricultural land on which solar parks could be built. Asia-wide, the multilateral plans to supply $2.25 billion in finance to the initiative, which it hopes will leverage an additional $6.75 billion in solar power investments.

The ADB would supply cheap funding for transmission infrastructure, obtain the necessary permits and help create a framework for tenders, such that developers would bid for leases to develop solar plants, says Don Purka, investment specialist at the ADB. “The idea is to get all the documents right so that you can actually do a level evaluation of all the bids that come in ... so you can do a tariff-based bid that leads to the selection of the developer,” he says. The scheme could yield 500MW of solar in Gujarat, with more likely in Rajastan, Purka says. The bid process for the plants could be in place by the end of 2011.

The ADB’s private sector operations group would offer financing packages for those companies that make a successful bid. “In addition to those projects getting financing from the ADB private sector window, we would also consider some sort of limited grants,” Purka says.

This will require $500 million from donor countries, and the ADB has in principle commitments from three governments to initiate this fund. The multilateral is also working on a partial credit guarantee facility to extend commercial loan tenors, share some of the commercial risks and assist with technical due diligence on solar technology. This facility will likely be in place by early 2011 to support the first wave of PV projects.

While PV projects will be built most quickly, solar thermal plants in particular should see a large drop in costs, as a lot of the manufacturing and construction could be done in India, bringing about significant cost reductions. “Solar thermal is where you are going to get scale. You could be looking at 10% or 20% cost reduction right away, just by indigenising the plant construction,” Purka says. “The goal is to be at grid parity by 2020,” he adds. With daytime power prices in India currently at around the Rs5 to Rs6 per kWh mark, there is some way to go for solar to achieve this goal.

But the Indian government is finally taking solar seriously, though aggressive solar expansion might restrain the growth of the wind sector, as they compete in the renewables space for private equity interest and for utility offtake contracts. In the race to bulk up, wind has the cost advantage in the short term. But unless technological improvements can improve the load factors oof greenfield wind, and as the blowiest sites get snagged for large developments, its price advantage over solar will steadily erode.