In conversation with Mr Debashish Majumdar, CMD, IREDA

“Global slowdown will not hit investments in wind energy”


Mr Debashish Majumdar’s experience spans over 30 years in the field of renewable energy and energy efficiency. An engineer from IIT Delhi, he has been with the Indian Renewable Energy Development Agency (IREDA) for over eleven years.

A unique financial institution set up by the Government of India, IREDA finances projects related to renewable energy and energy efficiency on a commercial basis. As Chairman and Managing Director of IREDA, Mr Majumdar is spearheading promotion and development of renewable energy and energy efficiency projects in the private sector through appropriate financing mechanisms.

INWIND CHRONICLE interviewed Mr Debashish Majumdar for his views on financing in the wind sector.


IWC: Based on the experience of financing wind power over almost two decades now, how has the business model changed over time?


Mr Majumdar: The business model has been evolving with time. The initial push for the wind energy market in India came in the form of government-introduced fiscal incentives, in the form of 100 per cent accelerated depreciation and Customs duty exemptions on import of certain components. While these incentives were very successful in the initial seeding of the market, the main purpose of generating power through wind got relegated to the background and the general perception of wind energy projects was that these are great “financial projects” and have little to do with power generation per se. Subsequently, and fortunately quickly, the business model changed for the better to one that took into account not just the accelerated depreciation benefit but also the fact that wind projects also produce useful power - an expensive resource essential for the sustainability of any industry. The new business model also took into account a very important fact which is that a wind power project acts as a hedge against rising energy costs. Hence what evolved was a finance-cum-business model with some amount of balance between financial and business benefits.


Subsequently, with the enactment of the Electricity Act 2003, and the electricity regulators announcing preferential tariff for wind power generation, the balance got further tilted away from depreciation benefits, in favour of better operations and greater efficiencies. Roughly around the same time the accelerated depreciation benefit also was reduced from 100 per cent to 80 per cent, thus further strengthening the favourable tilt.


However, if we need to upscale harnessing of wind resources in a short period of time, which as a policy must be a priority, there is a need to attract new and large independent power producers in the wind power sector through an alternative incentive scheme that provides a level playing field to those investors who are unable to absorb the benefit of accelerated depreciation. Also, the advent of large independent promoters is expected to expose the wind power industry to the market forces ushering in competitive pressures that may bring the cost downwards benefiting the power sector and the economy as a whole.


Fortunately, the MNRE has announced a Scheme for Generation Based Incentive for wind power generation which has met with an overwhelming response from the industry. Over a period of time, it can be reasonably expected that wind power projects would evolve into large scale power stations with each station producing more than 50 MW/ 100 MW of power. Through such steps we hope to see the real mainstreaming of wind into the power sector.


IWC: The present wind project financing is balance sheet financing, when and how would it change to project financing?


Mr Majumdar: Balance sheet financing is where a bank, before extending credit, looks at whether the company in question has the wherewithal to pay back the loan based on its existing business and balance sheet without considering the viability of the project – in this case the wind project on a stand alone basis. Therefore the loan becomes more like corporate credit and loan for setting up a wind power project.


If the present day trend of balance sheet financing of wind projects continues, the growth of the sector is not likely to make any real progress, as the purpose of lending is not truly for power generation. Therefore, the financing model should change to project financing because only then would projects be appraised, evaluated and understood as power generating plants. Specific risks would then be identified and mitigation measures put in place. As the project would have to be viable on its own, operation, maintenance and servicing of wind farms would be accorded greater importance, thus leading to maximum efficiency in terms of power generation and consequently revenue generation. This, in return, will push companies to acquire the best equipment at lowest costs.


However, to answer your question, the present balance sheet financing model being adopted by most corporate investors in the wind sector and being financed accordingly by commercial banks on that basis, would change to project financing only when the right signals are given through appropriate government policies.


IWC: How, in the present context, IREDA financing is different than any other conventional financial institution for wind power?


Mr Majumdar: Like any other financial institution, IREDA also lays a strong emphasis on the balance sheet of prospective investor. However, IREDA’s financing is not based solely on the balance sheet but is also based on the merits of the wind project on a stand alone basis. IREDA’s financing is therefore on a partial recourse basis wherein the company’s main assets other than the wind power project assets are not generally securitised to recover the loan. As the market matures further and moves towards large independent power projects (IPP) in wind sector, there would also be a corresponding need for financing these projects on a non-recourse basis. Since IREDA’s present financing does not predominantly rely on balance sheet, IREDA is in ideal position to assess the upcoming IPP projects on a stand alone mode and provide financing as required.


IWC: With the present economic situation the world over, in general, and particularly, in India, how the liquidity crunch would affect the wind sector’s growth?


Mr Majumdar: The financial crisis does not automatically imply a liquidity crunch. What it means is that available finances will go to projects that are more certain to be successful, and where the promoters have excellent track record. Second or third grade projects, if any, would have to wait and get structured properly before they get any financing. This situation, in a way, will be beneficial because it is only the best projects that would get financed.

To fulfill energy needs, India will require every possible source of power generation be it nuclear, coal, thermal or renewables. Hence, wind power generation will be here to stay even during these troubled times. In the face of global recession, even if the growth rate plummets to say 5 per cent from 9 per cent, there will still be power shortages to be met. As long as there remains a market for power, there would not be any letdown in the growth of the sector. In fact, this is the right time to give a push to the wind power market through independent power producers (IPPs).


IWC: In order to keep the wind investments to the high levels of recent past, do we have to go back to subsidies?


Mr Majumdar: The sector does not need subsidies but what it needs is the right sort of climate to ensure that there is a level-playing field for all investors, including IPPs. The market is currently being driven by the accelerated depreciation benefit, which is availed of by existing firms with strong balance sheets and large profits. When a new firm (such as a wind power IPP) gets into this business it cannot avail of this benefit, as it has no profits and hence no appetite for depreciation benefits.

There is an urgent need to encourage IPPs through the right policies such as Generation Based Incentives, as this would take the sector forward towards greater maturity and consolidation.



IWC: Would larger scope in terms of capacity in the existing GBI scheme help?


Mr Majumdar: The present GBI scheme is a demonstration project and it therefore has a limited scope of 49 MW only. We have seen a tremendous response in excess of 300 MW from wind power IPPs for the GBI scheme announced. The GBI scheme certainly needs expansion for encouraging serious power sector players to enter the arena of wind power generation. However, the generation based incentive scheme needs to be administered in a simple, foolproof and transparent manner for it to be successful.


IWC: From a financer’s point of view, how do you see the existing policy and regulatory framework and the direction it’s going in?


Mr Majumdar: Policies and regulatory frameworks define market mechanism so that the rules of the game are clear and investors know for a foreseeable period of time in the future what the market scenario is likely to be. To that extent, we are going in the desired direction. Various instruments for creating conducive market mechanisms such as renewable portfolio obligations, penal provisions for not meeting those obligations, tradable renewable energy certificates, National RE Law and the possibility of open access for wind generation are being discussed at highest levels. The problem is not of a sense of direction but of lack of clarity on timeframes.



IWC: Would different financing products be needed in the growing competitive scenario?


Mr Majumdar: To begin with, CDM is an important input in the entire revenue structure. While it has its own set of questions, apprehensions and concerns, the bright side is that wind power is intrinsically a suitable candidate for availing CDM benefits.

Insurance and risk mitigation products are missing in the Indian wind energy sector. Even to cover the resource risk, there are absolutely no financial products available. Though there are some discreet products but then all these add to the cost. Unfortunately, this additional cost is not yet recognised by regulatory bodies.

In the recent past, several private equity groups have shown tremendous excitement in investing in the wind energy sector in the country, and this has done a whole lot of good for the overall market development. However, none of these can add to market development on their own. For holistic growth of the sector, the right policies should be in place. Once this is done, appropriate financing products would automatically come in.


IWC: There is a lot of attention being paid to the renewable energy sector. How these policy directions and announcements are reflecting on the ground in wind investments and hence on financing of the same?


Policy directions and announcements have an immediate effect on investors’ interest and should reflect immediately on the ground in the form of investments. As a result of recent broad policy announcements related to GBI, investors have come forward with great enthusiasm. Unfortunately, ambiguity and lack of clarity has often come in the way of translating into actual investments. This is true for all sectors whether it is wind or other renewables.