SUZLON POWERS CAPACITY BUILDING IN WIND ENERGY IN INDIA BUT

UNCLAS SECTION 01 OF 04 MUMBAI 000463

SENSITIVE
SIPDIS

STATE FOR EEB A/S SULLIVAN
STATE FOR EEB/ESC DHENGEL, SGALLOGLY, MMCMANUS, DHENRY
STATE FOR OES PDAS RHARNISH, GTHOMPSON
STATE FOR STEVE MANN, GMANUEL
DEPT OF ENERGY FOR U/S BUD ALBRIGHT, DSCHWARTZ
DEPT OF ENERGY IP FOR A/A/S KFREDRIKSEN, RCOOPER
DEPT OF ENERGY IP FOR TCUTLER, CGILLESPIE, GBISCONTI
DEPT OF ENERGY FE FOR DAS JMIZROCH, MGINZBERG

E.O. 12958: N/A
TAGS: ENRG SENV EINV EFIN EIND PGOV IN
SUBJECT: SUZLON POWERS CAPACITY BUILDING IN WIND ENERGY IN INDIA BUT
PITFALLS LOOM AHEAD

REF: 08 NEW DELHI 2386

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Summary:

1. (U) Suzlon Energy, which accounts for nearly 50 percent of
the India's installed wind-power generating capacity, told
Congenoffs that wind power's potential in India is far greater
than Government of India estimations. Company boosters claimed
that Suzlon has "popularized" wind energy in India by developing
wind parks to facilitate easy operation and maintenance of
multiple wind turbines in one location. In addition, Suzlon
representatives believe that government subsidies for wind power
generation will help this nascent industry attract foreign
investors. Notwithstanding Suzlon's rosy picture, company
representatives and industry analysts admitted that many
challenges threaten to slow the development of wind energy in
India, including problems over land acquisition for windparks,
inadequate infrastructure, poor grid connectivity, low and
seasonal wind speeds, costly maintenance of offshore wind
turbines, and design and quality issues. In particular, reports
of Suzlon's continuing quality control problems will also impact
their overseas expansion. End Summary.

Untapped Wind Power Potential Creates Huge Opportunities
--------------


2. (U) I.C. Mangal, Head of Business Development of India-based
Suzlon Energy, which is the fifth largest wind turbine
manufacturer worldwide, believes that the wind energy business
is experiencing a worldwide uptrend. India is the world's fifth
largest market for wind energy generation, with a current
installed capacity of 8.8 GigaWatts (GW). The Ministry of New
and Renewable Energy (MNRE) estimates the potential of wind
energy in India at 60 GW (reftel). However, Mangal considers
this a gross underestimate and does not reflect the industry's
technological advancements. For example, he noted that the "hub
height" for wind turbines has increased from 40 meters to over
60 meters to capture more wind power. He estimates that the
"true" wind power potential in India is 100 GW. He noted that
the untapped potential for wind energy allows "space for
everyone," especially given India's growing energy demand.
(Note: In reftel, GOI power and planning officials pointed out
that the best wind areas may have already been exploited for
power generation, and they estimated that only around 2 GW of
power is currently being generated from the 8.8 GW of installed
capacity.)


3. (U) The Indian government projects that total electricity
demand will reach 200 GW by 2012, up from the current total
installed power generating capacity of 144 GW. In such a
situation, all sources of energy are urgently required and
"carbon-neutral" energy like wind should be the first choice,
Mangal argued. At an average cost per unit of wind power of INR
3.5 (around 7.7 U.S. cents) per kilowatt-hours (kWh) , wind
energy is not expensive compared to thermal power, which
averages around INR 2.4 (around 5 cents) per kWh.


4. (U) Ramya Venkatraman, Energy Analyst at McKinsey & Co, noted
that, despite the competitive cost, the wind power had not yet
gained popularity with large power utilities/companies. No
large power company has a significant presence in wind so far,
she said, though most large thermal energy players are now
planning to explore wind energy, she claimed. With tax
incentives and carbon credits, Venkatraman believes that wind
energy was earlier considered a source of "tax breaks" rather
than electricity. This sector is now being regarded as a
revenue-generator as well as an alternative renewable fuel
source. Suzlon Energy, with its large global footprint, has
demonstrated the commercial viability of wind energy, she added.

Suzlon's Wind Parks Transformed India's Wind Energy Landscape
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5. (U) Suzlon Energy has constructed 50 percent of wind power
installations in India, or about 4 GW of the country's total
8.8GW of wind power capacity. Mangal said that Suzlon gained
dominance in the wind power market despite being a late entrant
in the sector. When Suzlon forayed into wind power development
in 1995-96, however, the wind industry was in the doldrums:
proper techno-viability studies were not conducted and companies
sold wind turbines but did not provide after-sales service or
maintenance, he claimed. Most of the European vendors of wind
technology had either gone bankrupt or had split with their
Indian joint venture partners. Moreover, the wind energy units
were scattered in different locations across India, making
servicing difficult and not economically feasible, he explained.
Mangal argued that Suzlon Energy's unique "end-to-end" solution
approach transformed the wind energy space in the country. He
said that Suzlon is the only vertically integrated wind energy
player with R&D, design, manufacturing, construction, and
operations under one roof.


6. (U) Mangal also claimed that Suzlon pioneered the concept
of a "wind park," where several wind energy units are located
together in one place. This makes servicing and support of the
units easier and allows multiple players in a single area to
leverage on cost and economic efficiencies, he explained. By
constructing wind turbines in wind parks, Suzlon can provide
"round-the-clock" operation and maintenance support to the
installed wind turbines, minimizing downtime and maximizing
machine availability, he maintained.

Generation-based Incentive Will Attract Foreign Investors
--------------


7. (U) Mangal applauded the Indian government's announcement
in June 2008 allowing wind energy operators to switch to a
generation-based incentive of Rs0.50 per kWh (about 1.1 US
cents) produced by wind power as an alternative to the current
system of allowing accelerated depreciation of up to 80 percent
of capital costs for wind energy projects. (Note: The Indian
government also gives a 10-year income tax holiday and excise
duty exemptions to wind energy operators. Analysts believe that
these incentives reward investment and ignore the quantum of
wind energy actually generated. End Note). Mangal pointed out
that apart from increasing the amount of wind power generated,
the generation-based incentive will also attract foreign
investors who do not have operations in India and therefore
cannot avail of the tax incentives given to wind power
operators.


8. (U) Ravindra Utigkar, Sr. General Manager (International
Business) of Suzlon, noted that most of the investors in wind
energy in India are single turbine owners, mostly medium and
large companies, who are taking advantage of the accelerated
depreciation benefit. A generation-based incentive which
rewards actual generation of wind energy will attract "serious"
investors and promote the development of wind energy in the
country, he argued. In a separate discussion, Mangal disagreed
with Utigkar and claimed that private corporations who invested
in wind energy in India often invested in more than one wind
turbine unit and are concerned about the returns on their
investment in wind energy.


9. (U) Utigkar noted that the renewable purchase specification
(RPS),which requires power companies to source a minimum
specified percentage of electricity annually from renewable
sources, also helped promote wind energy in India. However, he
complained that Indian distribution companies often preferred to
pay "penalties" rather than invest in renewable energy projects.
(Note: The Maharashtra Energy Development Agency (MEDA) fined
four electricity suppliers in Maharashtra, including Anil

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Ambani's Reliance Energy, for not meeting their RPS obligations
for 2007-08. According to the MEDA, Reliance Energy sourced
just 0.01 percent of its total energy input from renewable
sources as compared to the RPS obligation of 4 percent and was
fined USD 41 million for the shortfall. Tata Power was the only
electricity supplier in the state to meet and exceed its RPS
obligation. End Note).

Challenges Inhibiting Wind Energy Development
--------------


10. (U) Mangal said land acquisition is the main obstacle to
the development of wind energy capacity in India. Multiple
clearances, objections from the environment and forest
ministries, and opposition from local residents make land
acquisition and site development a challenge. The state
government, although aware of the potential of wind energy, does
not assist in the land acquisition process, treating it as a
commercial issue and, therefore, the responsibility of private
enterprise, Mangal complained. For this reason, Suzlon needs to
create eco-awareness about wind energy, he added. At present,
Suzlon is having a lot of problems in the development of wind
energy sites in Maharashtra. Mangal said that the company has
completed the capacity expansion of the wind farm at Dhule in
Maharashtra to 680 MW but will not proceed with further capacity
expansion to 1,000 MW until the company resolves land
acquisition problems and opposition from local residents. (Note:
At one wind park outside Pune, Suzlon had implemented a robust
Corporate Social Responsibility program, turning wind park land
into grazing land, and investing in a holistic irrigation system
for neighboring villages. End Note.)


11. (U) Suzlon's largest turbine has a capacity 2.1 MW. Its
recent acquisition of German-based RE Power Systems brought
larger wind turbines with a capacity of 5 MW into its product
portfolio. However, these larger turbines will be constructed
in India's offshore coastal waters and will not be brought into
India, despite the high cost of maintaining offshore wind sites.
Utigkar noted that India's existing infrastructure cannot
support wind turbines greater than 2 MW of capacity. Turbine
blades with a capacity of over 2 MW measure more than 40 meters
in length and cannot be transported on Indian roads, he
explained. Utigkar also noted that winds in India are seasonal;
around 60 percent of total wind energy generated through the
year is generated in the four monsoon months of June, July,
August, and September. Wind turbines can operate at winds as
low as 3.5-4.5 meters per second, but the generation of wind
energy is not economically viable at such low wind speeds. Wind
turbines can operate in high wind speeds of 65 meters per
second, but not in a sustained manner, he continued. (Note: At
the Pune wind park, engineers told Congenoff that due to
variable wind speeds, those turbines generated only about 25
percent of their installed capacity on a regular basis. End
note.)


12. (U) Utigkar also pointed out that grid connectivity and
the distance between load centers where the electricity is
consumed is another inhibitor for wind energy generation. Land
is cheaply available in remote areas but cables are required to
connect the turbines to the main consumption centers to off-take
the wind power generated, which is extremely expensive, he said.
At the Pune wind park, engineers told Congenoff that since most
grids are small and self-contained, wind energy can often go to
waste if it is generated at night, or when the electricity is
not needed, especially as there is no way to store the excess
energy.

Reported Quality Problems with Suzlon Turbines
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13. (U) In the last few months, press reports indicated that
Suzlon's turbine blades had cracked, especially at U.S.
windmills. Mangal claimed that the company was being
"maliciously" and "unfairly" targeted and that the stories were
mostly untrue. However, Rajiv Samant of Tata Power said that
his company prefers to source its wind turbines from Suzlon's
Indian competitor, Enercon, which is a joint venture between the
Mehra group and Enercon GmbH of Germany. He claimed that the
Suzlon wind turbines had a "design flaw" and "are not able to
withstand high wind speeds." They are based on gearbox
technology, he added. Gearless technology, which is what
Enercon offers, is better suited for variable wind speeds, he
continued. Samant added that Suzlon is not able to switch to
gearless technology as Enercon holds the patent rights to this
technology.


14. (U) Comment: While Suzlon is understandably bullish about
the potential of wind energy in India, the facts on the ground
must temper this reality somewhat. Wind power generation is not
easy to accomplish in any country, and certainly not without its
India-specific challenges. Many of Suzlon's problems - land
acquisition issues, grid connectivity, and inadequate
infrastructure - are symbolic of the challenges that the power
sector faces in India. Bold state-government intervention and
regulatory reform is needed to attract investment in the power
sector to stem India's energy crunch. Mere provision of
subsidies and tax incentives is no longer sufficent. End
Comment.
Kauffmann