Month: December 2011

The Electricity Act of 2003, allows power consumers to purchase electricity from any power producer not limited to the distribution company (DISCOM) in that area. The term open access refers to the distribution and transmission lines being open to all somewhat similar to our highways where anybody can use it as long as they pay a toll. This regulation was meant to allow power consumers to choose who they want to buy power from. While this sounds great on paper, open access has hit three major bottlenecks.

1) Cross Subsidy Surcharge (CSS): The DISCOMs lose out on the cross-subsidy earned from industrial and commercial consumers – if these opt for open access. (In India, industrial and commercial consumers subsidize agricultural consumers). To compensate for this loss, DISCOMs levy a CSS on open access consumers. This charge is usually INR1 to INR2 per kWh. Combined with other charges such as wheeling and distribution charges, the cost of purchasing power through open access often becomes higher than the price at which the DISCOM offers power.

For example: In the state of Maharashtra, the wheeling (distribution) charge is fixed at INR 0.05 per unit and the wheeling losses are 6% (for 33kV). The transmission charges are fixed at INR 4,944/MW/month, which works out to roughly INR 0.04 per unit. Additionally the transmission losses are fixed at 4.85%. The average CSS is fixed at INR 2. The total charges, losses and subsidies total to nearly INR 2.30

2) Delay of Open Access Applications: The power to grant open access lies with the State Load Dispatch Centre (SLDC), which is closely associated with the DISCOM (previously these entities were bundled as the State Electricity Board (SEB)). This close association prevents SLDCs from granting applications for open access on grounds that open access would jeopardize the state DISCOMs. Applications are often needlessly delayed for documentation issues or other trivial issues.

3) Rollback of banking of power: Banking of power allows generators to feed into the grid in times of excess and conceptually draw from that banked power as and when the consumer requires it. This is crucial for intermittent renewable energy generators especially wind. Wind generators produce 90% of their power during the short period between July and October. Recently Maharashtra announced a rollback of the banking provision. This would virtually de-incentivize all renewable energy generators.

As renewable energy takes off in India, we would see many more independent installations and independent Power Purchase Agreements (PPA) being signed. India needs to immediately do the following:

Discard the Cross Subsidy Surcharge (CSS) – In fact India needs to introduce fair power pricing, and discard subsidies in the power sector all together.

Enforce the state utilities to grant open access in an unbiased manner.

Enable banking of power Without banking, renewable energy is meaningless owing to its intermittent nature.

Upgrade the power grid infrastructure to reduce wheeling and transmission losses – More thought has to be given on how India can finance such an expensive overhaul.

Progressive states like Maharashtra have already decided to scrap the CSS. Maharashtra recognizes that by encouraging open access, the availability of power from private independent producers would increase, thereby reducing the demand on state DISCOMS.

Open access is the way forward for the Indian power sector and a good pretext to start the ball rolling on the badly needed power sector reforms, support the proliferation of renewable energy and reduce the alarmingly high power deficit . It is time for the regulatory authorities to get their act together and clear the hurdles for a truly open access to power in India.

The results of the round two of the NSM surprised everyone with the price of solar energy falling to INR 7.49 per unit. A large part of the success of the NSM must be attributed to the government. However, the larger implications of this would be outside solar projects driven by government subsidies. The next few years would see a boom in entrepreneurs riding the “captive wave”.

The major effect of this transition would be to open up the solar market to India’s small and medium entrepreneurs. Commercial viability of solar is a silver bullet to India’s small entrepreneurs – spread across India’s many cities, towns and villages. Entrepreneurs can bootstrap themselves by avoiding costs bank guarantees and previous experience in installing solar plants (as the NSM and state policies require). The mushrooming of several entrepreneurs providing solar solutions will see two effects:

1)   India reaches its solar goals much quicker than expected – outside the government schemes – due to the scalability of these smaller solar models.

2)   Solar energy prices nosedive further due to large demand – opening up the market to the rural and residential sector.

While this outlook looks promising, India is still a very difficult place to start a business. A World Bank survey rates India as one of the worst places in the world to start a business. Issues such as licenses and registrations can take up to several months, not to mention the stifling red-tape. Starting clean and staying clean is a tremendous challenge to India’s entrepreneurs. The other issue is the hesitancy of local banks to lend money to start-ups without any collateral – exactly what start-ups lack.

Despite these hurdles, the energy is palpable and one sees several success stories. The coming years, therefore will be decisive in India’s move to meet its solar goals – with India’s multitude of entrepreneurs driving it forward.

India is facing a green revolution. Government and business leaders recognize that the scarcity of fossil fuels is one of the major risks for economic growth and understand the urgent need to take countermeasures and make green energy viable. German companies have many of the solutions India needs and they in turn need the Indian market.

Key points:

India has a huge potential for renewables, given its resources, policies and requirements

Success for international companies requires significant adaptation of products and business models

Given the long-term market opportunity adaptation makes economic sense

According to a recent study by Ernst & Young, India is ranked 4th amongst the most attractive countries for investments in the field of renewable energy. Today, a growing number of German companies want to do business in India. They have leading technologies and an excellent reputation in India. However, few succeed in establishing themselves in this complex and dynamic market. India s unique characteristics require an entrepreneurial approach and a long term, proactive strategy.

Many German companies from the wind, hydro, solar and biomass energy sectors expect the subcontinent to be one of the leading markets in the future. Siemens plans to invest 250m in India s renewable energy market. The fast growing Indian economy is driving the rapidly growing demand for power thereby causing a base-load deficit equivalent to 16GW in 2010. This makes the power market in India attractive in the long run.

To ensure a sufficient power supply in the future, India plans to triple its total generation capacity to 450 GW over the next 12 years with renewables playing a major role. On the supply side, renewables will be encouraged through preferential feed-in-tariffs and subsidies. On the demand side, state utilities will be obliged to purchase a minimum share of energy from renewable sources. This creates huge opportunities: from 2012 to 2022, the market for solar power is estimated at 55 billion. Similarly, the market estimated for wind is 53 billion, for biogas is 23 billion and for small hydropower is 12 billion.

According to the Ministry of New and Renewable Energy, by 2022, ten percent of India s electricity will be derived from renewable sources. Now is the perfect time to get involved in the Indian renewable energy market: businesses that step into the market early can actively influence the decision-making and development processes, shaping them to their own advantage. However, in India, business success is neither quick nor easy. Even large companies with a long-term approach, such as the German wind turbine manufacturer Enercon, have faced difficulties.

International companies are confronted with challenges that are not easy to overcome. It is crucial to understand that the country is made up of a variety of individual markets with very different conditions. This is particularly true for renewable energy: energy policy and incentive schemes (such as feed-in tariffs) vary with individual Indian states.

Infrastructure, legal protection and availability of finance are further areas with considerable variations across regions. It takes time to develop an insight into complex market structures, gain consumer confidence and overcome bureaucratic barriers. While doing so, local partners can be of great help as well as can be somewhat of a challenge. They may be able to easily establish contact with decision-makers or give access to distribution channels. India is a country of networks. The success and failure of an enterprise is highly influenced by personal and family relationships. Though they rarely proceed without problems, joint ventures with Indian companies do present an opportunity to take advantage of existing networks.

A peculiarity which applies to infrastructure projects in general and is very distinct in India is the importance of bureaucrats and politicians. For the most part, projects require numerous licensing procedures: to buy property, to fulfil environmental regulations or to feed power into the electricity grid. As a consequence of India s slow and often arcane bureaucracy, many business deals take longer. For this reason, patience is one of the key success factors in the Indian market. Companies such as SMA, Astonfield, Voith or Bosch, have shown that to invest time and capital with a long-term strategy can lead to good results.

Solar power, especially, is now offering a very attractive opportunity for international technology leaders and investors. By launching the Jawaharlal Nehru National Solar Mission, India s government has taken a major step towards simplifying the implementation of projects. Clearand uniform regulations and a long-term approach, now give security to investors and are proof of the Indian government s intentions to establish this market permanently.

Given the aforementioned obstacles, a strategy for India should always be based on a long-term perspective. As a first phase, German companies can position themselves in niche markets by exporting high-end products. However, to make use of the full scale of the market (which is, after all, its most attractive feature), products need to be adapted to the price-sensitive Indian market. This can take the form of modifying the product to better suit local conditions, sourcing and producing in India to reduce costs, or even developing new business models to ensure competitiveness. A research project by Professor Wildemann of the Technical University of Munich, in cooperation with BRIDGE TO IDNIA, is presently investigating the best possible mode of adaptation for German state-of-the-art technology to Indian market conditions.

Siemens is a great example for a company that successfully adapted to India. Having operated in India for 140 years, a research centre was established in 2004. According to CEO Peter L scher, Siemens benefits from the opportunities of Indian growth and offers specially tailored products .

For successful international companies, the main competitors are not their traditional international rivals but fast-growing, rapidly changing and highly price-competitive Indian companies. International technology leaders therefore continue to face serious challenges and competition. However, this competition can be extremely healthy. A company that can offer renewable energy solutions to the Indian customer will find an almost limitless market in India and in other developing countries.

This article originally appeared in German in Sueddeutsche Zeitung in February 2011