Demand Pull

Wind equipment manufacturers gear up to cater to the growing market

Wind power development in the country started in 1986, with the setting up of the first wind farms in Maharashtra (Ratnagiri), Gujarat (Okha) and Tamil Nadu (Tirunelveli). Despite several challenges, the segment has since recorded significant growth. Today, India represents the fourth largest wind market globally, both in terms of cumulative capacity and annual additions. Amongst renewables, wind power accounts for over 57 per cent of the installed capacity, with an installation of 32.17 GW of capacity till end-March 2017. The top five original equipment manufacturers (OEMs) in terms of cumulative installed capacity in India are Suzlon (35.4 per cent), WindWorld (18 per cent), Gamesa (10.1 per cent), Vestas (7.6 per cent) and Regen (7.3 per cent).

India has made significant improvements in the energy space and has brought down the number of people without access to electricity by half since 2000. However, around 240 million people or 20 per cent of the population still remain without electricity. In addition, India is an underserved market for wind energy. According to the National Institute of Wind Energy’s latest estimate, India’s wind potential stands at 302 GW at a hub height of 100 metres. This indicates significant scope for growth in wind capacity and, in turn, in wind power equipment manufacturing. The government’s Make in India initiative, which envisions a diversified manufacturing sector, has provided a further push to the segment.

Key developments

The wind power segment has seen unprecedented growth in the past year, especially in Andhra Pradesh, Gujarat, Karnataka, Madhya Pradesh and Rajasthan. This was largely driven by the increasing demand for wind power, which not only led to increased installations but also helped improve equipment manufacturers’ revenues. The equipment industry witnessed the entry of several new players while the existing ones expanded their production capacity in anticipation of a growing wind power market.

Brazil-based WEG has announced its entry into the Indian wind market and plans to manufacture wind turbines at its Hosur plant in Tamil Nadu where it manufactures large electric motors and generators. The company intends to upgrade this factory to manufacture 2.1 MW wind turbines.

In another development, LM Wind Power has set up a second blade factory at Vadodara in Gujarat, while Gamesa has set up a new factory at Nellore in Andhra Pradesh. Vestas, which entered the Indian market in 1989 and has a research and development centre in Tamil Nadu, recently established a blade manufacturing unit in Gujarat in just 15 months to cater to the increasing local demand. Meanwhile, established European wind player Senvion has started operations in India by acquiring the manufacturing facility of Kenersys India. Spanish conglomerate Acciona also entered the Indian market in 2016. Other players like Envision Energy and Sany Global are expected to enter soon. The country’s overall manufacturing capacity stands at around 10 GW, with 20 approved manufacturers and 53 models of wind turbines. Wind turbines ranging from kW-scale to 3 MW capacity are being manufactured across these units.

India has the potential to become a leading export market. It has already exported more than 7 GW to 32 countries. As per the Global Wind Energy Council, wind turbines manufactured in India are considered at par with international standards by developed countries. The country has earned foreign exchange revenue of more than $7 billion and other additional recurring revenue on services provided. Most of the exports from India have been to the US, the European Union, Australia, Africa and South America.

Policy and regulatory support

Support from both the central and state governments has been focused on creating demand for manufactured goods and services through mechanisms such as preferential tariffs for generation, accelerated depreciation benefits for reducing the tax burden on investors in such projects and generation-based incentives devised to promote the use of high efficiency turbines. Each of the 29 states and seven union territories has a defined renewable purchase obligation (RPO) for their discoms, captive users and open access consumers, which has further increased the demand across the wind value chain.

Moreover, the government has set guidelines for the development of offshore wind projects and prototype wind turbines. It has also formulated drafts for wind-solar hybrids, and evaluated small wind energy and hybrid projects. In November 2016, the Ministry of New and Renewable Energy issued guidelines for auctioning 1,000 MW of wind capacity, to be connected to the interstate transmission system. The key objectives of the proposed competitive bidding scheme are to facilitate the supply of wind power from resource-rich states to those with relatively lower wind potential, encourage competitiveness by scaling up the project size, and achieve competitive prices. If successfully implemented, this will help the industry achieve the 60 GW by 2022 target.

On the supply side too, the industry benefits from a number of mechanisms that support manufacturing. These include the subsidy to capital expenditure on manufacturing facilities, for example through the Special Incentive Package Scheme and local content rules requiring that one or more components be sourced domestically.

Notably, while foreign companies are encouraged to operate in India, the emphasis is on local manufacturing, not local ownership. For example, 100 per cent foreign direct investment is allowed in Indian renewable energy manufacturing facilities. Some international wind companies with subsidiaries in India source over 80 per cent of their components from Indian component manufacturers.

A number of concessions are offered for promoting exports and setting up manufacturing units in tax-free zones. Many wind equipment units are therefore set up in special economic zones (SEZs). Under the SEZ Act of 2000, SEZs are intended to provide speedy clearance, infrastructure support, fiscal incentives and tax exemptions for increasing exports. The Export Promotion Capital Goods Scheme, under which renewable energy qualifies, allows for renewable energy technology to be eligible for zero duty. Moreover, under India’s export– import policy for 2015-20, green technology is listed as a “Focus Product Scheme”. This means that export of renewable energy components or raw materials is entitled to a credit duty equivalent to 2-5 per cent of the freight-on-board value of the exported material.

Challenges to sector growth 

While there is strong support from the government for promoting wind equipment manufacturing, some challenges still remain. A part of this is due to the fact that power is a concurrent subject, which makes central laws unenforceable on the state government. Moreover, due to their poor financial health, the discoms are unable to meet the national RPO announced in 2016. Affordable debt financing remains a challenge in any sector. High interest rates and limited availability of affordable debt pose challenges for developers as well as OEMs.

Land acquisition and title clearing continue for be a challenge for most onshore installations, and a reform in this regard is long overdue. One of the biggest challenges to the segment could be the levy of the goods and services tax (GST), which is likely to come into effect in July 2017.

The immediate impact of GST on the wind power segment would be in terms of an increase in the effective tax rates. At present, a number of exemptions are available on components and goods required for wind projects. However, most of these exemptions may cease under the GST regime. Imports under GST would be subject to basic customs duty and integrated GST, whereas any local supplies will be subjected to GST. Although representations have been made by the sector for continuing with the preferential tax treatment, it remains to be seen how the GST council decides the rates applicable on goods supplied to the sector. If it comes into effect, contractors will have to recalibrate the project logistics, revise the supply chain, and reduce the time lag between the import and procurement of goods and supply to the project. This will bring about a major change in the way projects are structured, thereby slowing down the growth of the segment.

The way forward

In the days to come, innovation and technology will be the catalyst for the industry’s growth. Wind-solar hybrid solutions, digitisation of services, innovation in blade technologies, and greater research and development will help boost growth in the segment.

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