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Tariff parity will unleash wind energy potential: Ravi Kailas

B Dasarath Reddy/Chennai 20 Nov 12 | 12:23 AM

Wind energy, owing to its quick execution cycle of 6-9 months, is being viewed as a potential answer to the acute demand-supply mismatch facing many states. In this context, the capacity addition in the sector in India could go up to 8,000 Mw a year if it is given a tariff parity with thermal power, says Ravi Kailas, chairman of Hyderabad-based Mytrah Energy (India) Private Limited in a interview to B Dasarath Reddy. The London Stock Exchange-listed company plans to become a utility-scale wind energy player with a portfolio of 5,000 Mw in 5-6 years. Edited excerpts:

How could wind power emerge as a mainstream player?
The tariff from thermal power -- ranging from Rs 4.5 to Rs 5 per unit today -- is viable for wind as well. There is no real additional tariff or subsidy sought by wind generators. Industrial and commercial customers are paying between Rs 5 and Rs 9 per unit. So, there is an economic construct that already exists. Wind needs no input subsidy whereas coal still is a subsidised resource. The moment you price coal to market, obviously that model collapses. Solar is still not close to grid parity. So where ever there is a tariff subsidy-linked element, it is a little more complex to create utility scale. But wind is at utility scale now.

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What kind of wind farm potential exists in India?
India has about 17.5 giga watt of installed capacity in wind while the total potential is between 70 gw and 100 gw. In the last few years we have moved from treating wind as a sort of sideline, accelerated depreciation balance sheet finance-type of power to mainstream. India today is the fifth largest wind energy generator. The industry has added over 3,000 Mw last year, which is a substantial portion of the overall net capacity addition. So if you remove some of the hurdles and make us comparable with thermal, I believe the industry will grow at 5,000-8,000 Mw a year.

How are states, including Andhra Pradesh, responding to wind farm development?
Once the ball gets rolling there is no reason why states like AP cannot have 4,000-5,000 Mw in a short time. Rajasthan had almost no wind power a few years ago and now it has huge capacity. Two years ago, Maharashtra had less than 1,000 Mw. Once it changed the tariff from Rs 3.5 to Rs 5.07 per unit, it got an additional capacity of 2,000 Mw in wind power. So also Gujarat. Almost in all states there are proposals at various stages of regulatory approval to either increase tariff or make it more competitive with thermal or to remove hurdles for generators like us to sell directly to customers.

How does tariff guarantee a reasonable rate of return on investment from farms that operate just at 20-25 per cent plant load factor (PLF) compared with thermal plants whose output normally crosses 80 per cent PLF?
We were profitable in the first six months of operations though some companies are not profitable for 5 or 10 years after they set up the projects. There are four determinants: Capital cost has a significant impact on what the rate of return is going to be. A 10 per cent difference in capital cost has a 3-4 per cent difference in internal rate of return because that determines what is your total loan and the interest you are going to pay. How accurately you are able to predict the PLF, meaning, the closer you hit to that mark the faster you can get your return, is the second determinant. Third, tariff is one of the significant variables. We get the target return in AP if the government makes it Rs 4.7 per unit from the present Rs 3.56. So the difference of 70 paise or Re 1 makes a difference between wiping out the equity to actually making a return that is viable enough for long-term investors. Fourth, is how the project financing is structured. It is the function of all of the four variables across the portfolio that made us profitable upfront.

How did you manage to negotiate favourable outcomes on all these fronts?
With our vision and predictable path of becoming a utility-scale company we were able to get the terms that are different from somebody who is financing a smaller asset, that helped us change the views of the vendors, lenders and the investors. For instance, we had long-term agreements with vendors so that we had preferential prices as we have a very large development pipeline. Our per megawatt capital cost is just $ 1.2 million compared with $ 2.5 million in the case of others. Then our investors are all pension funds who look at investments that is going to give them a dividend in the next 10-20 years. It is important to generate a predictable cash flow that creates a risk profile that our vendors, lenders and investors understand. We diversified our risk in terms of wind regimes and also customers. We sell power not just to electricity boards but also through the REC-APPC (renewable energy certificate, average power purchase cost) mechanism. We sell power to group captive mechanism too so we have higher realisation there.

What are the challenges specific to wind power?
The needs of companies like ours is very different from owners of 5-10 Mw wind farms in terms of regulatory interface, price at which it becomes viable, and of hurdles that some states place for us to sell power directly to customers. There are other avenues to sell power through the APPC plus REC mechanisms. While some of these have been announced, they are yet to be enforced. However, there has been a sea change in what it was 5 years ago. Some of it has happened by policy initiative, some by market imperative and some also because other things around us failed. For example, our expectation on how much coal is going to come on line or how much energy demand is going to be.

How are you planning to raise equity and debt to reach 2,000 Mw in two years?
A large part of our equity requirements has already been built into our projects. When we reach 600 Mw or 1,000 Mw, the cash flow we have from that is sufficient to serve as equity for the next 300-500 Mw per year. We are building 600 Mw by June next year (from the current 360 Mw) based on the equity that we have raised. It is a self-sustaining model that takes us to 4,000-5,000 Mw by 2017-18. Two years ago, we invested as promoters less than $10,000 to start the company and own a majority stake (58 per cent) backed by very long-term investors. We raised $80 million with our investments only being the incorporation fee and parlayed that into almost $600 million between straight equity, mezzanine and senior debt in two years. All of this other than the $80 million through the London Stock Exchange was entirely raised in India. We will be raising more senior debt to fund some of our balance projects to get to a 600Mw-plus stage and for further expansion. We already have a relationship with a large cross section of lenders and will be going back to them.

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