Identifier
Created
Classification
Origin
09MUMBAI415
2009-10-30 09:19:00
UNCLASSIFIED
Consulate Mumbai
Cable title:  

ARE CLEAN ENERGY TECHNOLOGY PARTNERSHIPS WITH THE U.S. IN

Tags:  EAID ECON EFIN EIND EINV ENRG EPET ETRD ETTC IN 
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UNCLAS SECTION 01 OF 04 MUMBAI 000415 

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TAGS: EAID ECON EFIN EIND EINV ENRG EPET ETRD ETTC IN
SUBJECT: ARE CLEAN ENERGY TECHNOLOGY PARTNERSHIPS WITH THE U.S. IN
INDIA'S FUTURE?

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UNCLAS SECTION 01 OF 04 MUMBAI 000415

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SUBJECT: ARE CLEAN ENERGY TECHNOLOGY PARTNERSHIPS WITH THE U.S. IN
INDIA'S FUTURE?

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1. Summary: As efforts to introduce clean and renewable energy
in India grow, energy entrepreneurs hope that a mix of
government policies, international technology transfers, and
better access to financing will spur the development of a
competitive clean energy industry. Many Indian companies have
ambitious plans to boost India's renewable energy component -
now at about eight percent of total electricity capacity, most
of which is wind or small hydro - but are dependent on
government subsidies and other preferential policies that aim to
make the first wave of projects feasible. These companies also
hope to obtain access to international clean power production
technology, mostly from the U.S., that they argue could be
cheaply manufactured in India and deployed not only within the
country but also to other parts of the world. These
co-production and development partnerships, Indian companies
propose, could bring down the overall cost of renewable energy
projects, prove the sustainability of clean technology business
models, and help wean India away from a dependence on coal.
Nevertheless, there are serious challenges ahead. Indian
companies so far have little experience in developing solar or
other renewable energy production facilities, and current costs
are still high. The power grid infrastructure is disjointed,
and woefully inefficient. Government policies towards renewable
energy are still unclear, but are likely to emerge in the coming
months. Nonetheless, overall, many Indian companies and
entrepreneurs are committed to introducing renewable energy in
India, and look to the U.S. for leadership. End Summary.



VISION OF THE FUTURE: 35 PERCENT RENEWABLE ENERGY BY 2030?




2. In a series of recent discussions with alternative and
renewable energy entrepreneurs, financiers and companies in

Mumbai, interlocutors were confident that an increasingly larger
proportion of India's energy needs would be supplied by
renewable energy sources, particularly through solar and nuclear
energy. Most agreed that wind power generation has reached or
is close to reaching a saturation point. Many saw greenfield
power production development projects as the next major
development, as companies strove to overcome power deficits
throughout the country. All saw India, with its growing
appetite for energy as having a tremendous investment
opportunity to "leapfrog" into clean energy technologies on a
relatively large scale to emerge as a highly energy efficient
and energy conserving economy. (Note: Coal-based power
accounts for 53 percent of India's total installed capacity.
Renewable energy sources -- mainly wind, biomass and small hydro
-- constitute a mere eight percent of the total energy mix.
Analysts estimate that alternative energy sources could meet 35
percent of India's energy demand by 2030. End Note.)




3. Interlocutors note that the cost of coal-fired power is as
low as 3-4 cents per kwH, while solar power can cost as much as
35 cents per kwH. Power tariffs are regulated by state
electricity regulators, and industrial and commercial users pay
higher tariffs to subsidize farmers and residential consumers.
The end-user pays the average cost of all power purchased by the
power utility. Therefore, the high cost of renewable power
raises overall costs, and acts as a disincentive for the growth
of clean energy in India. However, our interlocutors noted that
the federal government is committed to increasing renewable
purchase obligations (RPOs),which mandate utilities to buy a
proportion of renewable energy in the total energy mix. This,
coupled with the central electricity regulator's recent move to
set guidelines for renewable energy tariffs, signals acceptance
and recognition for the need for renewable energy in India.



GOI SUPPORT FOR CLEAN ENERGY TECHNOLOGIES




4. Indian renewable energy companies pointed to the yet-to-be
officially announced National Solar Mission from India's

MUMBAI 00000415 002.2 OF 004


Ministry of New and Renewable Energy as symbolic of the federal
government's commitment to promote renewable energy. The new
policy, sources say, aims at creating an enabling policy
framework and environment to generate 20 GW of solar power by

2020. Currently, only 3 MW of grid-connected solar power has
been installed in India. Our interlocutors conceded that even
Germany, which is considered the leader in the deployment of
solar power, has just 6 GW of solar power generating capacity.
Nevertheless, Aparna Doshi of Astonfield Renewable Energy, a
company focusing on developing new large-scale renewable energy
projects in solar, bio-gas, and bio-mass, contends that this new
policy demonstrates a commitment by the Indian government to
move beyond coal for India's future energy needs. Doshi noted
that, per this draft plan, the government is willing to put
"serious money" behind their stated desire to generate up to 20
gigawatts (GW) of solar power over the next 10 years, including
the use of government subsidies.




5. The reaction of the various Indian states to the federal
government's policy efforts has been mixed. Doshi applauded the
states of Rajasthan, West Bengal, and Gujarat for introducing
significant incentives to promote clean power development in
their states. Rajasthan and Gujarat have both drafted policies
to support programs that go over and above the announced federal
government subsidy for up to 10 megawatts of solar power
generation in each state in India. Other interlocutors,
however, claimed that some federal and state government clean
energy policies may run contrary to their intent, and, in fact,
be detrimental. They cited a series of cumbersome processes
from land acquisition, to setting power purchase agreements with
existing utilities, to navigating myriad clearances for energy
generation. This, along with the requirement to coordinate
state and federal imperatives, is keeping many would-be
developers from entering the renewable energy sector.



EXISTING EFFORTS OUTSIDE OF GOVERNMENT




6. Indian energy entrepreneurs point proudly to research and
development activities already underway. Shashank Inamdar of
Praj Industries, a leading manufacturer of machinery to produce
biofuels, noted that a great deal of work is being done in India
on next-generation technologies, both by companies and
universities and research institutions. Banmali Agrawala, of
electricity giant Tata Power, highlighted the efforts of
business groups such as the Confederation of Indian Industry to
promote sustainability by example, both in power production and
in green buildings and construction. Wind power generation has
already established a firm foothold in certain parts of India,
and costs much less per unit of power generated than most other
clean technologies. However, one interlocutor admitted that
wind power has a low plant load factor and can at best
supplement, rather than replace, traditional power generation.
Wind turbines and energy storage technology have to improve for
wind power to expand significantly beyond existing installations
in the country.



CURRENT DISTRIBUTION INFRASTRUCTURE A PROBLEM




7. Interlocutors identified India's existing electricity grid
as a significant stumbling-block for entering the power
production and distribution market. The current grid system
suffers from extensive transmission and distribution losses -
about 30-32 percent - through power theft and poorly maintained
infrastructure. Additionally, several individuals pointed out
that the existing system is not a "smart grid," so encouraging
people or businesses to install small-scale solar or wind power
generation units would be more difficult than in some developed
countries; excess power returned to the grid could not be
tracked, eliminating the possibility of monetary incentive to
offset the cost of purchasing the technology.

MUMBAI 00000415 003.2 OF 004





FINANCING CHALLENGES




8. In all discussions, interlocutors explained that challenges
in financing the purchase and implementation of technology and
controlling the cost of power for the consumer was inhibiting
the growth of the clean energy in India. While the technology
exists to fulfill much of India's energy demand through
renewable sources, affordability is a problem for both the
entrepreneur and the end consumer. According to Avinash Bapat,
the Chief Financial Officer of IL&FS Energy Development
Corporation, a major Indian infrastructure development company,
the size and scale of clean energy projects is restricted by the
high component of equity required for energy projects
(debt-equity ratio of 70:30),the dearth of mezzanine funding,
and the absence of structured financial products to hedge
development and operating risk. He explained that financing a
5-10 MW project is easy, but lenders are wary about lending to a
500 MW project; lenders are not satisfied with projections of
future cash flow and are worried about default risk. Bapat also
observed that there was an "overdose" of financial incentives in
the early stages of renewable energy development in India, and
most of the early developers of renewable energy projects
(principally wind power) were motivated by the financial
incentives rather than by an actual desire to generate power.
Lenders had to write off many bad loans caused by the "dead"
assets created by these "non-serious players," he explained.
Kishore Kumar, Head - Investment Banking, of HDFC Bank, the
second largest private sector bank in India, noted that smaller,
more distributed models may have an easier time securing funding
than larger, grid-based models, as the former may even take
advantage of non-traditional solutions, such as microfinance.




9. Separately, Darius Pandole of New Silk Route and Sandeep
Singhal of Nexus Capital, two private equity financiers,
admitted that the rate of return on all energy projects,
including renewable energy projects, is too low to stimulate
serious investment. They noted that private equity and venture
capital investors in India are interested in returns of over 25
percent, while the average return of power projects is around 18
percent. Praj's Inamdar said venture capitalists have to wait
10-12 years to get "reasonable" returns for clean energy
projects and rarely have the "patience" for such a long-term
horizon. Amulya Charan of Tata Power Trading Company pointed
out that traditional power projects are profitable in three to
five years, whereas most clean energy technology projects
break-even only after eight to ten years. Because of the
difficulty in securing funding through traditional sources, many
interlocutors involved in the clean energy sector highlighted
opportunities for financing through the Clean Development
Mechanism (CDM) of the Kyoto Protocol. However, they worried
that this carbon credits system might become a thing of the past
unless the U.S. signs onto the Kyoto Protocol.



INDIAN COMPANIES CALL FOR PARTNERSHIPS WITH THE U.S.




10. All interlocutors stressed that technology transfer and
co-production partnerships with foreign companies - especially
from the U.S. - were essential to the development of renewable
energy in India. With India's growing power deficits and
potential for growth in mind, Indian companies would like to
identify U.S. technologies that could be manufactured and
deployed cheaper in India. They proposed that India could serve
as a base for U.S. companies seeking research and development
opportunities, citing the much lower cost of setting up
full-scale demonstration or testing facilities in India as
compared to the U.S., in addition to the availability of large
tracts of land for such testing facilities. Others touted
India's low-cost manufacturing advantage and maintained that
U.S. technology providers should consider establishing

MUMBAI 00000415 004.2 OF 004


manufacturing facilities in India for the local and global
supply of clean energy technology and equipment. They believed
that the Indian market could provide the volumes needed for U.S.
technology manufacturers to scale up, which, coupled with the
indigenous manufacturing process, could greatly reduce costs.
However, despite these proposed advantages, Indian companies
lamented that they were not taken seriously by U.S. companies so
far. One interlocutor said that the perception of weak
intellectual property rights (IPR) enforcement also posed a
problem as U. S. manufacturers feared that their products would
be copied in the country.



HOW THE U.S. GOVERNMENT CAN HELP




11. Many interlocutors believe that the USG can be instrumental
in efforts to encourage clean energy technologies in India.
Principally, they insisted that the U.S. becoming a signatory to
the Kyoto Protocol would be a significant move, both in terms of
symbolism and in ensuring that the carbon credits system will
continue to be reliable. Additionally, interlocutors were
united in their wish for greater access to U.S. technology.
They stressed that the USG could facilitate this by encouraging
the Indian government to become more protective of intellectual
property rights, thus overcoming the reluctance of U.S.
companies to share their technology. Some mentioned India's
goal of producing 25 percent of its power through nuclear plants
by the middle of this century, and stressed that USG support
(and U.S. capital investment) is needed to make this a reality.
Many interlocutors also wanted to see the USG encourage the
Indian government to streamline the process of bringing capital
into India for investment in clean energy projects, as well as
to simplify the review and approval process of GOI subsidy
applications for these types of projects.



THE INDIAN CLEAN ENERGY PARTNERSHIP MODEL: RIGHT FOR THE U.S.?




12. Comment: Indian companies, large and small, are
increasingly interested in developing India's clean and
renewable energy power production capacity, though these efforts
are at a very nascent stage. This motivation comes from the
oft-admired Indian entrepreneurial instinct, but also from the
widely held belief that India has the potential to become a
leader in the development and deployment of clean energy
technologies, for all the right reasons. Nevertheless, with
little proven clean energy capacity in place, and unclear
government policies, it is not surprising that U.S. companies
have not entered this market in a significant way. There is
much talk about U.S.-India "collaborations" and "partnerships"
in the development of clean energy technology, and it is clear
what Indian companies have in mind: the establishment of
co-production and research plants in India, with USG
encouragement. This model will facilitate the creation of jobs
in India, help develop its technological research and
manufacturing base, and, in the long run, aid the shift away
from CO2-producing coal plants which India would have likely
built instead. This model may also suit the business models of
some American companies, as they expand their operations and
establish a global presence, and spur the research and
development of low-cost clean energy technologies that can be
deployed throughout the world. However, this model also seeks
to draw research and development and manufacturing jobs out of
the U.S. to India, which has its own political and economic
pitfalls. Moving forward, it would be wise to ensure that these
clean energy partnerships have clear benefits for both
economies. End Comment.
TYLER