Monday, February 17, 2014

Indian seas to see wind energy projects soon

Offshore wind energy has recently attracted some serious commercial attention from stakeholders in India with various positive developments in the sector. The ministry of new and renewable energy (MNRE) plan to establish a National Offshore Wind Energy Agency (NOWA) has uplifted the market sentiment and made the sector lucrative for investors. India has so far fared well on onshore wind energy front with installed capacity of over 19,000 MW and it occupies fifth position in the world after the US, Germany, China and Spain. With the first National Wind Energy Mission (NWEM) expected to be announced by mid 2014, India plans to achieve 100 GW of wind power by 2022. The Centre for Wind Energy Technology (CWET) has estimated India’s onshore wind potential at 102,778 MW at 80 meters height with 2 per cent land availability assumption.

Europe is the global leader in offshore wind installations with 4995 MW, followed by China (390 MW) and Japan (25 MW).  Overall global installation has reached 5 GW and is expected to reach 80 GW by 2015. This growth is being fueled by strong R&D as well as deployment activities carried out by major turbine manufactures. These turbine companies have now recognized offshore wind generation as new potential growth market with tremendous opportunity. Subsequently, the high cost associated with offshore wind installations is expected to come down owing to technological progress and this shall help in sustaining healthy growth for the sector.

India has vast coastline running into approximately 7600 km, making it a preferred destination for offshore installations, in spite of wind speed being lower when compared to Europe. So far majority of work has been limited to preliminary investigative and resource assessment studies. These studies will be required to be conducted for two-three more years to arrive at some definite conclusion regarding wind speed and potential. Total offshore potential for India is expected to be around 350 GW. Preliminary studies suggest Tamil Nadu, Gujarat and Maharashtra as potential sites for offshore wind energy development. According to a study, the potential of Tamil Nadu alone is estimated to be 127 GW at 80 meters height but this estimation needs further validation. Preliminary assessment conducted by Scottish Development International in Tamil Nadu has found potential of 1 GW in north of Rameshwaram and 1 GW in south of Kanyakumari.

Government initiatives are providing the much required thrust to propel the sector towards commercial viability. However, a lot still remains to be done. Offshore Wind Energy Steering Committee (OWESC), being constituted to oversee policy framework and inter-agency coordination. A draft National offshore Wind Energy Policy has already been released last year. Through this policy MNRE aims to promote deployment of offshore wind farms up to 12 nautical miles from the coast where the sea is relatively shallow (territorial waters).

From a technical point of view, onshore and offshore wind turbines are based on the same technology and have similar operational life span of approximately 20 years. The rated capacity of offshore turbines is higher than that of onshore ones and is in the range of 3 MW-5 MW. Offshore wind farms witness higher power density and high plant load factor (PLF) compared to land. However the capital expenditure of offshore wind farms is almost 1.5-3 times than that of onshore farms. Development cost for offshore wind farms is $4.5 million to $5.5 million per MW. Nevertheless, there are several other factors associated with offshore wind farms that score over onshore ones.

Onshore wind farms are often opposed owing to their negative visual impact. Also, wind turbines tend to emit slight whirring noise which is said to affect humans as well as animals. Since offshore wind turbines are located far off the coast they do away with problems like noise and negative visual impact. Moreover, offshore wind turbines are not restricted by obstacles such as limited land availability, sanctions related to land use and other topographical restrictions affecting the wind speed. Offshore farms have the advantage of higher and more consistent wind speeds in absence of topographical hindrances and thus result in higher efficiency. Not to forget that land availability/acquisition has become a major roadblock for majority of infrastructure and power projects in India plus environmental clearances are becoming increasingly difficult for wind power projects. Industry is also witnessing technological shift towards development of very large turbines to achieve higher efficiency at lower wind speeds, and this is going to favour offshore wind installations.

There are also few challenges associated with offshore wind installations, high cost being one.  Not only the turbine cost but the operational costs are also relatively higher in case of offshore wind farms. Offshore wind installations will require creation of robust support services, infrastructure such as specialized turbine installation vessels, under-sea electricity transmission and additional evacuation infrastructure at the coast.  Hence harnessing territorial waters (shallow sea) in initial phases would be most prudent decision to save cost as well as time.

There has been some industry interest in offshore sector but nothing very recent. Oil and Natural gas Corporation (ONGC), announced its plans to enter offshore wind energy space way back in April 2009. The company set up its first 50 MW plant in Gujarat with initial investment of 600 crore in first phase and plans to tap offshore wind potential in big way. In another instance, Tata Power has submitted a formal request to the government of Gujarat for approval of an offshore project in the year 2010.

India should focus on setting few demonstration projects to gather reliable potential and wind speed data. Offshore masts must be erected in adequate numbers to measure wind speed data for two-three years and analyze seabed quality to support foundation of wind turbines. Thorough studies must be conducted to mitigate risks associated with natural calamities such as tsunami and cyclones. Results of these studies need to be carefully collaborated in order to validate wind speed, wind direction, sea temperature as well as resource assessment data.

          Infraline Energy Renewable Knowledgebase Team

Monday, February 10, 2014

Positive Investment Climate will provide necessary impetus to the Indian Energy Sector

India is undoubtedly and irrevocably integrated into the global energy market. It relies on significant amounts of energy from foreign sources and, as such, India is a price taker, not a price setter. India can reduce its vulnerability to energy price fluctuation through a flexible and competent energy market, but it cannot isolate itself from price volatility. At the same time, to expand its energy supply capacity to meet the rapidly growing energy demand of its people, India needs more investment. A significant portion of the required investment must come from foreign investors, for whom it competes with other countries. This implies the necessity of integrating India’s energy institutions and policies with global practices.

In the last two years, we have seen international strategic investors (power utility companies) showing an interest in the Indian power sector. Their entry is much needed, not least because of operational capabilities, but also to bring in the much needed equity financing into the sector. In terms of the general investment environment, the doing business index (DBI) by the World Bank ranked India at 132nd out of 183 countries in the world (World Bank, 2012). The areas in which India performed particularly poorly were “Dealing with construction permit” (ranking at 181st) and “Enforcing contract” (ranking at 182nd), both of which are critical for infrastructure and energy investment. One of the bigger concerns today is lack of new pipeline of projects since most of the existing set of players are stressed (aggregate debt-equity of 2.64 and cash losses of INR 124 Crore) and would not be in a position to bring much equity. The capacity addition target for XIII plan is 100 GW and private sector is expected to contribute at least 64 GW. This will require equity capital of INR 1,27,050 Crore.

To enable strategic and other large financial investors like pension funds, to view the sector favorably, the Government should quickly resolve various uncertainties such as position on coal block allocation, implementation of imported coal pass-through, policy on M&A related to allocated mines and have a war-room approach to resolving issues related to some stuck up projects. Longer term clarity on some of the above issues will also bring in more confidence for investors looking to acquire operational projects and running them for cash flow yields. Further, the domestic lending community is precariously poised towards the sector due to potential Non-performing assets (NPAs) on account of various projects that have got delayed or have been unable to achieve COD due to fuel or PPA related issues. What is needed is a special dispensation liberating provisioning norms for such loans to avoid them getting classified as NPAs. This could be done only for those projects which are facing loan restructuring on account of uncontrollable factors such as coal supply related issues and issues related to environment or forest clearances. This will help unlock the financing logjam and enable a positive investment cycle to commence. Further, the Government should enable takeout financing for banks by strengthening institutions such as IIFCL to undertake the same. This will help partially address the sectoral exposure caps that banks would otherwise be constrained by.

To complete the transformation of India’s energy sector into an open and functioning energy market, the country needs strong political leadership to convey clear policy messages. Frequent populist remarks, which, for example, promise free electricity, are not conducive to creating the right public perception of energy as a commodity, not an entitlement. Furthermore, in the context of an increasing need for investments and the integration of India’s energy sector into the global energy market, India needs to align its energy policies and institutions with global practices.

On a safer note, let’s use what is already built fully, before racing to build more capacity that joins the bandwagon of projects facing existential issues!

            Infraline Energy Power Knowledgebase Team

Tuesday, February 4, 2014

Indian Crude Slate Shifting to Heavy Crude: A Step towards Diversification

Refinery economics is highly dependent on crude oil sourcing. The cost involved in the crude oil sourcing forms the single largest cost component in the refiner’s economics. Costs and payback periods for refinery processing units must be weighed against anticipated crude oil costs and the projected differential between light and heavy crude oil prices. Using more expensive crude oil (lighter, sweeter) requires less refinery upgrading. Using cheaper heavier crude oil means more investment in upgrading processes. Thus, crude oil sourcing plays a very critical role in the refinery economics. In order to optimize their cost, Indian refiners are now trying to diversify their crude oil sources and trying to procure cheap and opportunity crude. Also other factors like decreasing availability of sweet crude, US sanction on Iran, up-gradation of existing facilities; are the reasons behind India re-thinking its crude oil sourcing strategies.

Around 80 percent of the India’s crude oil needs are met by imports. Recently, India has overtaken Japan as the world's third-biggest crude oil importer in 2013. India imported 3.86 million bpd of crude oil last year with Middle-east being the largest exporter of crude oil to India. In 2012, over 64 percent of crude imports came from Middle East. In 2010, US sanction on Iran, gave a jolt to India, forcing it to find replacement for Iran crude. Iran was once the second-largest supplier of crude to India after Saudi Arabia. So far, much of the switching by state refiners has been to other Middle East sources, such as Saudi Arabia and Iraq, which are now the top two suppliers as Iran has slipped to number six.  

Many Indian refineries are now being equipped with upgraded plants to handle the heavier grades of crude oil currently being produced. With a Complexity Index of 11.3 (as defined by the Nelson Complexity Index) RIL's refinery at Jamnagar is able to process heavy and sour crude oils to produce high value products. BPCL`s INR. 14,225 crore expansion project - Integrated Refinery Expansion Project (IREP) at Kochi, is expected to be completed by May 2016. The refinery will be able to process cheaper high sulphur crude oils once the project is implemented. IOCL’s 15 MMTPA refinery project at Paradip, Orissa, presently under construction is expected to commission by 2014. It will also be a state of art refinery that will be able to process high sulphur, heavy and high TAN crude oil to tap the opportunities presented by cheaper crude varieties. With upgraded plants, Indian refiners are trying to explore heavy crude options which are cheap to procure. As can be seen from the graph, the percentage of imports from South and Central America and Africa is increasing over the years. These crudes are mostly of heavy grades. These crudes will provide an opportunity to Indian refiners to earn a return on the billions of dollars spent in their plants upgrations, thus improving their margins. 

                          Graph: Relative Distribution of Region-Wise Crude Oil Import in India

                                  Source: BP statistics

Indian refiners are moving towards Latin American oil, drawing the benefit of cheap crude that have lost its market in the United States to shale oil. In 2005-06, Latin American oil accounted for a scant 2.3 percent, or 46,200 bpd, of India's crude imports but by 2012-13 that had jumped to about a fifth, or 672,400 bpd. The half of Latin America crude (300,000 bpd) was under a long-term deal between Venezuela and RIL’s Jamnagar refinery. MRPL has become the first Indian refiner to buy Argentina's medium-sweet Escalante grade. MRPL is targeting as much as 40,000 bpd (about 15 percent of its overall needs) from Latin America in the FY 2014-15. IOCL, leading refiner in India, is planning to buy 10,000 bpd from Colombia in 2014-15 and wants to buy oil from Venezuela. It has been buying Mexican oil since 2012 and aims to get a trial cargo of Brazilian crude in the coming months.

In the coming years, there might be huge changes in the India’s crude oil sourcing strategies due to changing market dynamics. To reduce its dependence on any particular region of the world, India has been consciously trying to diversify its sources of crude oil imports. In this diversification strategy, there might be a visible shift from light to heavy crude, as India’s state-run refiners join private players Reliance and Essar Oil in the race to improve their refining margins. Also, in more recent years, the supply of light sweet crude has declined and newer sources of crude oil tend to be heavier. More complex facilities are coming up in the country that will further this trend. 
              Infraline Energy Upstream Knowledgebase Team