Wind Power In India & Globally

S.P.JAIN INSTITUTE OF MANAGEMENT AND RESEARCH MUMBAI - INDIA Executive MBA Batch 13 A (2006 – 08)

A Report on

L&T - WIND ENERGY SECTOR AS A NEW LINE OF BUSINESS Submitted to Mr. Ashok Rao

In fulfillment of the course requirement for Project Report Submitted by Badech Raghveer Singh

EMBA/13/45

Project Guide – Prof . Harsh Mohan Mentor – Mr. Kumar Rudra

A) Synopsis…………………………………………………………………………...1 B) Chapters 1. Introduction……………………………………………………………......2 1.1 Wind Energy Basics……………………………………………….…..2 1.2 Wind Energy Cost……………………………………………………..6 2. Current status of Wind energy market…………………………………….9 2.1 Global Wind Energy Sector…………………………………………...9 2.1.1 Africa………………………………………………………14 2.1.2 Asia………………………………………………………...14 2.1.3 Australia & Oceania………………………………………..15 2.1.4 Europe……………………………………………………...15 2.1.5 Latin America……………………………………………...16 2.1.6 North America……………………………………………..16 2.1.7 Offshore – wind farms……………………………………..17 2.1.8 SWOT Analysis……………………………………………19 2.2 Indian Wind Energy Sector……………………………………….….19 2.2.1 Wind Power development in India………………………...21 2.2.2 The Wind energy Policy structure in India………………...23 2.2.3 The Current Scenario……………………………………....24 2.2.4 Foreign Investment Policy………………………………....24 2.2.5 Regulatory Issues…………………………………………..25 2.2.6 SWOT Analysis…………………………………………....26 3. Elements of a Wind Project (Value Chain)………………………………28 3.1 Design, planning & supervision……………………………………...28 3.2 Pure component manufacturer……………………………………….30 3.3 Installation and Operation & Maintenance…………………………..31 3.4 Fully integrated service providers……………………………………34 4. Larsen & Toubro Limited………………………………………………..35 4.1 Prologue……………………………………………………………...35 4.2 Wind Energy Industry (Porter’s five force analysis)………………...36 4.3 SWOT analysis – L&T ……………………………………………...37 4.4 SWOT analysis – L&T in Wind Energy Industry…………………...39 5. Opportunities in the Wind energy market………………………………..43 5.1 International energy market………………………………………….43 5.1.1 Wind Power Development Strategies – Europe……………43 5.1.2 Wind Power Development Strategies – United States……..45 5.1.3 Wind Power Development Strategies – China……………..46 5.1.4 Wind Power Development Strategies – Offshore.................46 5.2 Domestic energy market……………………………………………..48

6. Strategies for the Wind Energy Sector…………………………………...49

C) Appendix & Tables: 1. Country-wise capacity details (as on end 2008)…………………………51 2. India - Policy & Regulation website links……………………………….53 3. India – State-wise installed capacity……………………………………..54 4. India – Tariff & Regulations……………………………………………..56 5. India – Central Incentives………………………………………………..57 6. Related Companies – website links ……………………………………..59 7. Larsen & Toubro – Organizational Structure…………………………....60

D) References.…………………………………………………….……………….61

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Synopsis: International wind markets have seen another impressive year in 2008, with over 27 GW of new capacity brought online and a total installed capacity close to 121GW. Over the past three years the global wind turbine market has seen explosive growth in terms of competitors, capacity investments, and project orders as the industry races to keep up with booming global demand. Scaling exponentially in nearly all dimensions— including the size of turbines, projects, and buyers .The growth in 2008 was primarily driven by developments in China and the US, but other markets are also starting to emerge on the wind energy map — the industry is generating enormous opportunities for all players, as well as challenges to improve competitiveness and position wind energy as a long-term, reliable source of power generation. Key trends in the international wind market include: ♦ Competition among wind turbine OEMs is rapidly intensifying as growth extends to new regions, encouraging start-ups of new manufacturers while pushing leading suppliers to expand their sales and production globally. ♦ Turbine prices, and the costs of installation, have trended upward over the last four years after nearly a decade of cost reductions per megawatt of nameplate capacity. The global market’s boom in demand has clearly shifted the industry from a buyer’s to a seller’s market in the past three years, with corresponding price increases. ♦ Multiple players moving on 2 MW and above segment: Vestas and Enercon— pioneers in 2 MW and larger turbines—are aiming to protect their share of this market. However, multiple proven machines from Gamesa, Siemens, Suzlon/REpower, Alstom/Ecotecnia and others are providing buyers more options. ♦ Component suppliers face new challenges to keep pace with turbine demand, calling for major production capacity investments in the multi-megawatt segment, as well as a focus on local supply in booming new markets while keeping costs competitive.

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1. Introduction In order to understand the business of wind power we must initially understand the basic fundamentals and terms which are common in the arena of wind energy and its related businesses.

1.1 Wind Energy Basics: What is wind energy? In reality, wind energy is a converted form of solar energy. The sun's radiation heats different parts of the earth at different rates-most notably during the day and night, but also when different surfaces (for example, water and land) absorb or reflect at different rates. This in turn causes portions of the atmosphere to warm differently. Hot air rises, reducing the atmospheric pressure at the earth's surface, and cooler air is drawn in to replace it. The result is wind. Air has mass, and when it is in motion, it contains the energy of that motion ("kinetic energy"). Some portion of that energy can convert into other forms mechanical force or electricity that we can use to perform work. What is a wind turbine and how does it work? A wind energy system transforms the kinetic energy of the wind into mechanical or electrical energy that can be harnessed for practical use. Mechanical energy is most commonly used for pumping water in rural or remote locations- the "farm windmill" still seen in many rural areas of the U.S. is a mechanical wind pumper - but it can also be used for many other purposes (grinding grain, sawing, pushing a sailboat, etc.). Wind electric turbines generate electricity for homes and businesses and for sale to utilities. There are two basic designs of wind electric turbines: vertical-axis, or "egg-beater" style, and horizontal-axis (propeller-style) machines. Horizontal-axis wind turbines are most common today, constituting nearly all of the "utility-scale" (100 kilowatts, kW, capacity and larger) turbines in the global market. Turbine subsystems include: • • • •

a rotor, or blades, which convert the wind's energy into rotational shaft energy; a nacelle (enclosure) containing a drive train, usually including a gearbox* and a generator; a tower, to support the rotor and drive train; and Electronic equipment such as controls, electrical cables, ground support equipment, and interconnection equipment

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*Some turbines do not require a gearbox Wind turbines vary in size. This chart depicts a variety of historical turbine sizes and the amount of electricity they are each capable of generating (the turbine's capacity, or power rating).

Rotor (meters) Rating (KW) Annual MWh

1981 10 25 45

1985 17 100 220

1990 27 225 550

1996 40 550 1,480

1999 50 750 2,200

2000 71 1,650 5,600

The electricity generated by a utility-scale wind turbine is normally collected and fed into utility power lines, where it is mixed with electricity from other power plants and delivered to utility customers. What is wind turbines made of? The towers are mostly tubular and made of steel. The blades are made of fiberglassreinforced polyester or wood-epoxy. How big is a wind turbine? Utility-scale wind turbines for land-based wind farms come in various sizes, with rotor diameters ranging from about 50 meters to about 90 meters, and with towers of roughly

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the same size. A 90-meter machine, definitely at the large end of the scale at this writing, with a 90-meter tower would have a total height from the tower base to the tip of the rotor of approximately 135 meters (442 feet). Offshore turbine designs are under further development and will have larger rotors—at the moment, the largest has a 110-meter rotor diameter—because it is easier to transport large rotor blades by ship than by land. Small wind turbines intended for residential or small business use are much smaller. Most have rotor diameters of 8 meters or less and would be mounted on towers of 40 meters in height or less. How much electricity can one wind turbine generate? The ability to generate electricity is measured in watts. Watts are very small units, so the terms kilowatt (kW, 1,000 watts), megawatt (MW, 1 million watts), and gigawatt (pronounced "jig-a-watt," GW, 1 billion watts) are most commonly used to describe the capacity of generating units like wind turbines or other power plants. Electricity production and consumption are most commonly measured in kilowatt-hours (kWh). A kilowatt-hour means one kilowatt (1,000 watts) of electricity produced or consumed for one hour. One 50-watt light bulb left on for 20 hours consumes one kilowatt-hour of electricity (50 watts x 20 hours = 1,000 watt-hours = 1 kilowatt-hour). The output of a wind turbine depends on the turbine's size and the wind's speed through the rotor. Wind turbines being manufactured now have power ratings ranging from 250 watts to 5 megawatts (MW). Example: A 10-kW wind turbine can generate about 10,000 kWh annually at a site with wind speeds averaging 12 miles per hour, or about enough to power a typical household. A 5-MW turbine can produce more than 15 million kWh in a year--enough to power more than 1, 400 households. The average U.S. household consumes about 10,000 kWh of electricity each year. Example: A 250-kW turbine installed at the elementary school in Spirit Lake, Iowa, provides an average of 350,000 kWh of electricity per year, more than is necessary for the 53,000-square-foot school. Excess electricity fed into the local utility system earned the school $25,000 in its first five years of operation. The school uses electricity from the utility at times when the wind does not blow. This project has been so successful that the Spirit Lake school district has since installed a second turbine with a capacity of 750 kW. Wind speed is a crucial element in projecting turbine performance, and a site's wind speed is measured through wind resource assessment prior to a wind system's construction. Generally, an annual average wind speed greater than four meters per second (m/s) (9 mph) is required for small wind electric turbines (less wind is required for water-pumping operations). Utility-scale wind power plants require minimum average wind speeds of 6 m/s (13 mph).

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The power available in the wind is proportional to the cube of its speed, which means that doubling the wind speed increases the available power by a factor of eight. Thus, a turbine operating at a site with an average wind speed of 12 mph could in theory generate about 33% more electricity than one at an 11-mph site, because the cube of 12 (1,768) is 33% larger than the cube of 11 (1,331). (In the real world, the turbine will not produce quite that much more electricity, but it will still generate much more than the 9% difference in wind speed.) The important thing to understand is that what seems like a small difference in wind speed can mean a large difference in available energy and in electricity produced, and therefore, a large difference in the cost of the electricity generated. Also, there is little energy to be harvested at very low wind speeds (6-mph winds contain less than one-eighth the energy of 12-mph winds). How many turbines does it take to make one megawatt (MW)? Most manufacturers of utility-scale turbines offer machines in the 700-kW to 2.5-MW range. Ten 700-kW units would make a 7-MW wind plant, while 10 2.5-MW machines would make a 25-MW facility. In the future, machines of larger size will be available, although they will probably be installed offshore, where larger transportation and construction equipment can be used. Units up to 5 MW in capacity are now under development. How many homes can one megawatt of wind energy supply? An average U.S. household uses about 10,655 kilowatt-hours (kWh) of electricity each year. One megawatt of wind energy can generate from 2.4 to more than 3 million kWh annually. Therefore, a megawatt of wind generates about as much electricity as 225 to 300 households use. It is important to note that since the wind does not blow all of the time, it cannot be the only power source for that many households without some form of storage system. The "number of homes served" is just a convenient way to translate a quantity of electricity into a familiar term that people can understand. (Typically, storage is not needed, because wind generators are only part of the power plants on a utility system, and other fuel sources are used when the wind is not blowing. ) What is a wind power plant? The most economical application of wind electric turbines is in groups of large machines (660 kW and up), called "wind power plants" or "wind farms." Wind plants can range in size from a few megawatts to hundreds of megawatts in capacity. Wind power plants are "modular," which means they consist of small individual modules (the turbines) and can easily be made larger or smaller as needed. Turbines can be added as electricity demand grows. Today, a 50-MW wind farm can be completed in 18 months to two years. Most of that time is needed for measuring the wind and obtaining construction permits—the wind farm itself can be built in less than six months. What is "capacity factor"? Capacity factor is one element in measuring the productivity of a wind turbine or any other power production facility. It compares the plant's actual production over a given

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period of time with the amount of power the plant would have produced if it had run at full capacity for the same amount of time. A conventional utility power plant uses fuel, so it will normally run much of the time unless it is idled by equipment problems or for maintenance. A capacity factor of 40% to 80% is typical for conventional plants. A wind plant is "fueled" by the wind, which blows steadily at times and not at all at other times. Although modern utility-scale wind turbines typically operate 65% to 90% of the time, they often run at less than full capacity. Therefore, a capacity factor of 25% to 40% is common, although they may achieve higher capacity factors during windy weeks or months. It is important to note that while capacity factor is almost entirely a matter of reliability for a fueled power plant, it is not for a wind plant—for a wind plant, it is a matter of economical turbine design. With a very large rotor and a very small generator, a wind turbine would run at full capacity whenever the wind blew and would have a 60-80% capacity factor—but it would produce very little electricity. The most electricity per dollar of investment is gained by using a larger generator and accepting the fact that the capacity factor will be lower as a result. Wind turbines are fundamentally different from fueled power plants in this respect. If a wind turbine's capacity factor is 33%, doesn't that mean it is only running onethird of the time? No. A wind turbine at a typical location in the Midwestern U.S. should run about 65-90% of the time. However, much of the time it will be generating at less than full capacity (see previous answer), making its capacity factor lower. What is "availability" or "availability factor"? Availability factor (or just "availability") is a measurement of the reliability of a wind turbine or other power plant. It refers to the percentage of time that a plant is ready to generate (that is, not out of service for maintenance or repairs). Modern wind turbines have an availability of more than 98%--higher than most other types of power plant. After more than two decades of constant engineering refinement, today's wind machines are highly reliable.

1.2 Wind Energy Costs: A number of factors determine the economics of utility-scale wind energy and its competitiveness in the energy marketplace. The cost of wind energy varies widely depending upon the wind speed at a given project site. The energy that can be tapped from the wind is proportional to the cube of the wind speed, so a slight increase in wind speed results in a large increase in electricity generation. Consider two sites, one with an average wind speed of 14 miles per hour (mph) and the other with average winds of 16 mph. All other things being equal, a wind turbine at the second site will generate nearly 50% more electricity than it would at the first location.

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The three examples above are for costs per kilowatt-hour for a 51 MW wind farm at three different average wind speeds expressed in meters per second. Cost figures include the current wind production tax credit. Improvements in turbine design bring down costs. The taller the turbine tower and the larger the area swept by the blades, the more powerful and productive the turbine. The swept area of a turbine rotor (a circle) is a function of the square of the blade length (the circle’s radius). Therefore, a fivefold increase in rotor diameter (from 10 meters on a 25-kW turbine like those built in the 1980s to 50 meters on a 750-kW turbine common today) yields a 55fold increase in yearly electricity output, partly because the swept area is 25 times larger and partly because the tower height has increased substantially, and wind speeds increase with distance from the ground. Advances in electronic monitoring and controls, blade design, and other features have also contributed to a drop in cost. The following table shows how a modern 1.65-MW turbine generates 120 times the electricity at one-sixth the cost of an older 25-kW turbine: A large wind farm is more economical than a small one. Assuming the same average wind speed of 18 mph and identical wind turbine sizes, a 3–MW wind project delivers electricity at a cost of $0.059 per kWh and a 51-MW project delivers electricity at $0.036 per kWh—a drop in costs of $0.023, or nearly 40%. Any project has transaction costs that can be spread over more kilowatt-hours with a larger project. Similarly, a larger project has lower O&M (operations and maintenance) costs per kilowatt-hour because of the efficiencies of managing a larger wind farm. Optimal configuration of the turbines to take the best advantage of micro-features on the terrain will also improve a project's productivity.

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The cost of financing affects the cost of wind energy. Wind energy is capital-intensive, so the cost of financing constitutes a large variable in a wind energy project's economics. For a variety of reason financing for wind project remains more expensive than for mainstream form of electricity generation. Project ownership affects cost of financing and the economics of a wind power project. Independent ownership—that is, financing of projects by private power producers on a stand-alone basis, is more expensive than utility-owned financing. How do utility-scale wind power plants compare in cost to other renewable energy sources? Wind is the low-cost emerging renewable energy resource.

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2. Current Status of Wind Energy Market In order to understand the available business opportunity in the wind energy market we need to initially access the existing global wind energy market and determine future growth areas in various subcontinents globally

2.1 Global Wind Energy Sector Salient features ™ Worldwide capacity reaches 121,188 MW, out of which 27,261 MW were added in 2008. ™ Wind energy continued its growth in 2008 at an increased rate of 29 %. ™ All wind turbines installed by the end of 2008 worldwide are generating 260 TWh per annum, equaling more than 1.5 % of the global electricity consumption. ™ The wind sector became a global job generator and has created 440,000 jobs worldwide. ™ The wind sector represented in 2008 a turnover of 40 billion Euros. ™ For the first time in more than a decade, the USA took over the number one position from Germany in terms of total installations. ™ China continues its role as the most dynamic wind market in the year 2008, more than doubling the installations for the third time in a row, with today more than 12 GW of wind turbines installed. ™ North America and Asia catch up in terms of new installations with Europe which shows stagnation. ™ Based on accelerated development and further improved policies, a global capacity of more than 1,500,000 MW is possible by the year 2020.

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General Situation: Wind energy has continued the worldwide success story as the most dynamically growing energy source again in the year 2008. Since 2005, global wind installations more than doubled. They reached 121,188 MW, after 59,024 MW in 2005, 74,151 MW in 2006, and 93,927 MW in 2007. The turnover of the wind sector worldwide reached 40 billion in the year 2008. The market for new wind turbines showed a 42 % increase and reached an overall size of 27,261 MW, after 19,776 MW in 2007 and 15,127 MW in the year 2006. Ten years ago, the market for new wind turbines had a size of 2,187 MW, less than one tenth of the size in 2008. In comparison, no new nuclear reactor started operation in 2008, according to the International Atomic Energy Agency.

Leading Wind Market: The USA and China took the lead, USA taking over the global number one position from Germany and China getting ahead of India for the first time, taking the lead in Asia. The USA and China accounted for 50.8 % of the wind turbine sales in 2008 and the eight leading markets represented almost 80 % of the market for new wind turbines – one year ago, still only five markets represented 80 % of the global sales. The pioneer country Denmark fell back to rank 9 in terms of total capacity, whilst until four years ago it held the number 4 position during several years. However, with a wind power share of around 20 % of the electricity supply, Denmark is still a leading wind energy country worldwide. Offshore wind energy By the end of the year 2008, 1,473 MW of wind turbines were in operation offshore, more than 99 % of it in Europe, representing slightly more than 1 % of the total installed

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wind turbine capacity. 350 MW were added offshore in 2008, equaling a growth rate of 30 %. Diversification continues: This development goes hand in hand with a general diversification process which can be watched with today 16 markets having installations of more than 1,000 MW, compared with 13 countries one year ago. 32 countries have more than 100 MW installed, compared with 24 countries three years ago. Altogether 76 countries are today using wind energy on a commercial basis. Newcomers on the list are two Asian countries, Pakistan and Mongolia, which both for the first time installed larger grid-connected wind turbines. Increasing growth rates: An important indicator for the vitality of the wind market is the growth rate in relation to the installed capacity of the previous year. The growth rate went up steadily since the year 2004, reaching 29.0 % in 2008, after 26.6 % in 2007, 25.6 % in the year 2006 and 23.8 % in 2005. However, this increase in the average growth rate is mainly due to the fact that the two biggest markets showed growth rates far above the average: USA 50 % and China 107 %. Bulgaria showed the highest growth rate with 177 %, however, starting from a low level. Also Australia, Poland, Turkey and Ireland showed a dynamic growth far above the average.

Wind energy as an answer to the global crisis: In light of the threefold global crisis mankind is facing currently – the energy crisis, the finance crisis and the environment/climate crisis – it is becoming more and more obvious that wind energy offers solutions to all of these huge challenges, offering a domestic, reliable, affordable and clean energy supply. At this point of time it is difficult to predict the short-term impacts of the credit crunch on investment in wind energy. However, currently smaller projects under stable policy frameworks like well-designed feed-in tariffs are less affected by the credit crunch than higher-risk investments e.g. in large

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offshore wind farms or under unstable political frameworks and in countries which are seen as not offering sufficient legal stability. Wind energy as a low-risk investment In the mid to long term it is clear that wind energy investments will rather be strengthened due to their low-risk character and societal and additional economic benefits. Investment in a wind turbine today means that the electricity generation cost are fixed to the major extend over the lifetime of the wind turbine. Wind energy implies no expenses on fuel and operation and maintenance costs are usually well predictable and rather marginal, in relation to the overall investment. Employment: Wind energy as job generator One fundamental advantage of wind energy is that it replaces expenditure on mostly imported fossil or nuclear energy resources by human capacities and labor. Wind energy utilization creates many more jobs than centralized, non-renewable energy sources. The wind sector worldwide has become a major job generator: Within only three years, the wind sector worldwide almost doubled the number of jobs from 235,000 in 2005 to 440,000 in the year 2008. These 440,000 employees in the wind sector worldwide, most of them highly skilled jobs, are contributing to the generation of 260 TWh of electricity. Future prospects worldwide Based on the experience and growth rates of the past years, it is expected that wind energy will continue its dynamic development also in the coming years. Although the short term impacts of the current finance crisis makes short-term predictions rather difficult, it can be expected that in the mid-term wind energy will rather attract more investors due to its low risk character and the need for clean and reliable energy sources. More and more governments understand the manifold benefits of wind energy and are setting up favorable policies, including those that are stimulation decentralized investment by independent power producers, small and medium sized enterprises and community based projects, all of which will be main drivers for a more sustainable energy system also in the future. Carefully calculating and taking into account some insecurity factors, wind energy will be able to contribute in the year 2020 at least 12 % of global electricity consumption. By the year 2020, at least 1,500,000 MW can be expected to be installed globally. A recently published study by the Energy Watch Group reveals – as one out of four described scenarios – that by the year 2025 it is even likely to have 7,500,000 MW installed worldwide producing 16,400 TWh. All renewable energies together would exceed 50 % of the global electricity supply. As a result, wind energy, along with solar, would conquer a 50 % market share of new power plant installations worldwide by 2019. Global non-renewable power generation would peak in 2018 and could be phased out completely by 2037.

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Continental Scenarios: In terms of continental distribution, a continuous diversification process can be watched as well: In general, the focus of the wind sector moves away from Europe to Asia and North America. Europe decreased its share in total installed capacity from 65.5 % in 2006 to 61 % in the year 2007 further down to 54.6 % in 2008. Only four years ago Europe dominated the world market with 70.7 % of the new capacity. In 2008 the continent lost this position and, for the first time, Europe (32.8 %), North America (32.6 %) and Asia (31.5 %) account for almost similar shares in new capacity. However, Europe is still the strongest continent while North America and Asia are increasing rapidly their shares. The countries in Latin America and Africa counted for respectively only 0.6 % and 0.5 % of the total capacity and fell back in terms of new installations down to respectively only 0.4 % and 0.3 % of the additional capacity installed worldwide in the year 2008.

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2.1.1 Africa: In spite of the huge potentials all over the continent, with world’s best sites in the North and South of the continent, wind energy plays still a marginal role on the continent with 563 MW of total capacity. Several major wind farms can be found in some of the North African countries like Morocco, Egypt or Tunisia. In the year 2009 and 2010, substantial increases can be expected from projects which are already in the development stage. However, so far, the emergence of domestic wind industry in African countries is only in a very early stage and donor organizations should put a special focus on the creation of markets which enable industries to emerge. However, it is interesting to see that companies from the region are showing an increasing interest and have started investing in the wind sector. In Sub-Saharan Africa, the installation of the first wind farm in South Africa operated by an Independent Power Producer can be seen as a major breakthrough. The South African government prepares the introduction of a feed-in tariff which would create a real market, enable independent operators to invest and thus play a key role in tackling the country’s power crisis. In the mid-term, small, decentralized and stand-alone wind energy systems, in combination with other renewable energies, will be key technologies in rural electrification of huge parts of so far un-served areas of Africa. This process has only started at very few places and the main limiting factor is lack of access to know-how as well as financial resources.

2.1.2 Asia: Asia – with the two leading wind countries China and India and 24’439 MW of installed capacity – is in a position of becoming the worldwide locomotive for the wind industry. China has again doubled its installations and Chinese domestic wind turbine manufacturers have started for the first time to export their products. It can be expected that in the foreseeable future Chinese and Indian wind turbine manufacturers will be among the international top suppliers. The Indian market has shown robust and stable growth in the year 2008. It has already a well-established wind industry which already plays a significant and increasing role on the world markets. Further countries like South Korea (already with 45 % growth rate in 2008) start investing on a larger scale in wind energy and it can be observed that more and more companies are developing wind turbines and installing first prototypes. In parallel with the market growth in the country, it can be expected that also new manufacturers will be able to establish themselves. The World Wind Energy Conference held on Jeju island in June 2009 is expected to push the 14 of 62

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development in the region. Pakistan installed its first wind farm in the year 2008 and the Government of the country aims at further wind farms in the near future.

2.1.3 Australia & Oceania: The region showed encouraging growth rates, reaching 1’819 MW by the end of 2008, most of it thanks to Australia. Commitments made by the Australian government to increase their efforts in climate change mitigation and expansion of renewable energies create the expectation that the Australian wind energy market will show further robust growth also in the coming years. New Zealand, after a change in government, may, however, face major delay in its switch to renewable energy.

2.1.4 Europe: Europe lost its dominating role as new market but kept its leading position in terms of total installation with 66’160 MW. Germany and Spain maintained as leading markets, both showing stable growth. The most dynamic European markets were Ireland (adding 440 MW, 55 % growth) and Poland (196 MW added, 71 % growth), the first Eastern European country with a substantial wind deployment. All in all, the European wind sector showed almost stagnation with a very small increase in added capacity from 8’607 MW to 8’928 MW. The biggest market Germany is expected, after the amendment of the renewable energy law EEG, to show bigger market growth in 2009. An encouraging change happened in the UK where the government announced the introduction of a feedin tariff for community based renewable energy projects. However, the cap of 5 MW

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represents a major hurdle so that the UK wind market will still grow at moderate rates. However, without additional incentives for wind power in more EU member states, such as improved feed-in legislation, the European Union may not be able to achieve its 2020 targets for renewable energy.

2.1.5 Latin America: Many Latin American markets still showed stagnation in the year 2008 and the overall installed capacity (667 MW) in the region accounts for only 0,5 % of the global capacity. Only Brazil and Uruguay installed major wind farms in the year 2008. This slow wind deployment is especially dangerous for the economic and social prospects of the region as in many countries people are already suffering from power shortages and sometimes do not have access to modern energy services at all. However, in some countries like Argentina, Brazil, Chile, Costa Rica or Mexico many projects are under construction thus putting lights in the forecast for 2009.

2.1.6 North America: North America showed very strong growth in the year 2008, more than doubling its capacity since 2006 to 27’539 MW. Breaking two world records, the USA became the new number one worldwide in terms of added as well as in terms of total capacity. More and more US states are establishing favorable legal frameworks for wind energy and try to attract investors in manufacturing facilities. It can be expected that the new Obama

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administration will improve substantially the political frameworks for wind power in the country, especially for those type of investors that have practically been excluded from the production tax credit scheme, like farmers, smaller companies or community based projects. The credit crunch, however, may lead to delays in project development in the short term. The Canadian government has rather been hesitating. However, among the Canadian provinces Quebec and Ontario are showing increasing commitment towards an accelerated deployment of wind energy. During and after the World Wind Energy Conference Community Power held in Kingston/Ontario in June 2008, the Government of Ontario showed strong commitment to rapid expansion of renewable energy and is expected to present soon a proposal for a Green Energy Act, including feed-in tariffs for the different renewable energies including wind. In Quebec, contracts for new projects were signed for a total of 2’000 MW, the first to be operational by 2011.

2.1.7 Offshore – Wind farms As of 2008, Europe leads the world in development of offshore wind power, due to strong wind resources and shallow water in the North Sea and the Baltic Sea, and limitations on suitable locations on land due to dense populations and existing developments. Denmark installed the first offshore wind farms, and for years was the world leader in offshore wind power until the United Kingdom gained the lead in October, 2008 with 590 MW of nameplate capacity installed. The United Kingdom planned to build much more extensive offshore wind farms by 2020. Other large markets for wind power, including the United States and China focused first on developing their on-land wind resources where construction costs are lower (such as in the Great Plains of the U.S., and the similarly wind-swept steppes of Xinjiang and Inner Mongolia in China), but population centers along coastlines in many parts of the world are close to offshore wind resources, which would reduce transmission costs. On 21 December 2007, Q7 (later renamed as Princess Amalia Wind Farm) exported first power to the Dutch grid, which was a milestone for the offshore wind industry. The 120MW offshore wind farm with a construction budget of €383 million was the first to be financed by a nonrecourse loan (project finance). The project comprises 60 Vestas V80-2MW wind turbines. Each turbine's tower rests on a monopile foundation to a depth of between 18-23 meters at a distance of about 23 km off the Dutch coast.

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Transporting large wind turbine components (tower sections, nacelles, and blades) is much easier over water than on land, because ships and barges can handle large loads more easily than trucks/lorries or trains. On land, large goods vehicles must negotiate bends on roadways, which fixes the maximum length of a wind turbine blade that can move from point to point on the road network; no such limitation exists for transport on open water. Construction and maintenance costs per wind turbine are higher for offshore wind farms, motivating operators to reduce the number of wind turbines for a given total power by installing the largest available units. An example is Belgium's Thorntonbank Wind Farm with construction underway in 2008, featuring 5MW wind turbines from REpower, which were among the largest wind turbines in the world at the time.

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2.1.8 SWOT Analysis The Global wind energy program owes its success to a variety of factors relevant to its member nations, which are to an extent equally relevant to other developed and developing nations. The discussion below presents SWOT analysis for wind energy program as relevant to nations wherein wind energy projects have been installed. a) Strengths ♦ Security of supply - most EU nations rely on imported fossil fuels. Wind energy is a massive indigenous program safeguarding against conflict and political instability threatening energy supply. ♦ Environmental concerns - urge of the EU to curb CO2 emissions and achieve Kyoto targets is an important consideration. ♦ Economics is an important driver – a) Competitiveness of wind power as a consequence of dramatic fall in the cost of wind power and b) Fossil fuel price has shot up in the recent past with little respite in the future. It makes lot of sense to switch to renewable option on the ground of its being reasonably competitive now. ♦ Rapid expansion and improvement in wind power technology and industry. Wind power equipment manufacturing, service and testing organizations are passing through a boom. b) Weaknesses ♦ Having tapped virgin areas, sustenance of growth, research into new avenues and cost cutting and continuation of supportive policy regime is a challenge. c) Opportunities ♦ Application areas such as re-powering existing sites, exploiting on-shore potential in the vicinity of EU nations as well as other global locations) and joint initiatives with developing nations offer opportunities for EU. Wind players to expand their on-going achievements in the future years. d) Threats ♦ Competitive pressures from new players for global partnerships ♦ Pressure of scarce land resources ♦ Environmental concerns- land and marine, lobbies against developmental programs.

2.2 Indian Wind Energy Sector The Wind power programme in India was initiated towards the end of the Sixth Plan, in 1983-84. A market-oriented strategy was adopted from inception, which has led to the successful commercial development of the technology. The broad based National programme includes wind resource assessment activities; research and development support; implementation of demonstration projects to create awareness and opening up of new sites; involvement of utilities and industry; development of infrastructure capability

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and capacity for manufacture, installation, operation and maintenance of wind electric generators; and policy support. The programme aims at catalyzing commercialization of wind power generation in the country. The Wind Resources Assessment Programme is being implemented through the State Nodal Agencies, Field Research Unit of Indian Institute of Tropical Meteorology (IITM-FRU) and Center for Wind Energy Technology (C-WET). Wind in India are influenced by the strong south-west summer monsoon, which starts in May-June, when cool, humid air moves towards the land and the weaker north-east winter monsoon, which starts in October, when cool, dry sir moves towards the ocean. During the period march to August, the winds are uniformly strong over the whole Indian Peninsula, except the eastern peninsular coast. Wind speeds during the period November to march are relatively weak, though higher winds are available during a part of the period on the Tamil Nadu coastline. A notable feature of the Indian programme has been the interest among private investors/developers in setting up of commercial wind power projects. The gross potential is 45,000 MW (source MNES) and a total of about 8757.2 MW of commercial projects have been established until March 31, 2008. The Asian continent is developing into one of the main powerhouses of wind energy. The strongest market leader in wind energy in the continent is India. With a total of 4,430 MW of wind capacity in 2005, India is in the fourth position in the international wind power league. The Indian Wind Turbine Manufacturers Association (IWTMA) expects between 1,500-1,800 MW to be commissioned every year for the next 3 years. Over the past few years, both the government and wind power industry have succeeded in injecting greater stability into the Indian market. Incentives by the Central and State Governments have encouraged large private and public sector enterprises to invest in wind projects stimulating the domestic manufacturing sector. Some companies now source more than 80% of the components for their turbines. This has contributed to both more cost effective production and additional local employment. The geographical spread of Indian wind power has so far been concentrated, especially in the southern state of Tamil-Nadu, which accounts for more than half of all installations. This is beginning to change with other states including Maharashtra, Gujarat, Rajasthan and Andhra Pradesh, catching up in this drive to tap this emerging renewable energy option. With the potential for up to 65,000 MW of wind capacity across the country, the sector can continue further strides over the next decade. Industry and research programs are geared up to meet this challenge. With the notable exceptions of Tamil-Nadu, Andhra Pradesh and Gujarat, other states view wind farms more as a nuisance than a benefit, due to the low reliability and non-dispatchability. Government policy has placed them in a position where they have to pay higher prices for wind-generated electricity. This has caused them significant financial hardship and has not heightened their enthusiasm and support of the technology. In addition, India’s relatively poor infrastructure previously meant that transport and installation of megawatt scale wind power technology was impossible (WPM, June 2004:38). In 1996 grid abnormalities induced a 20% loss in potential revenue due to ‘direct generation loss’ (inability of wind plants to operate when the wind is blowing).

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Half of all these losses are due to weak grids in the region. Utilities are suffering the burden of having wind farms connected to their grids. The rapid growth in wind power development in the 1990s, rendered grid capacity in the wind farm regions in Tamil Nadu and Gujarat inefficient in accommodating the wind power. It caused frequent outages of the grid and reduced return from the wind farms. In 1998, RISø (A national laboratory in Denmark) and C-WET (Center for Wind Energy Technology) collaborated on a research project to study wind power integration in weak grids in India. 2.2.1 Wind Power Development in India The Government of India realized the importance of private sector participation in wind power as early as 1983/84. Accordingly, a national program was initiated to tap the then estimated potential of 20,000 MW by adopting a market-oriented strategy. This ultimately led to a successful commercial development of wind power technology and substantial additions to power generation capacity in the country. The reassessed gross wind power potential of the country stands at 45,000 MW. However, the technical potential, assuming 20 per cent grid penetration, works out to be 13,000 MW. The technical potential would increase as the grid capacity increases. According to the Indian Wind Association, the installed wind power capacity was 30 MW in 1990. It increased to 3,568 MW, now the fourth largest in the world. The first wind power development was a government-supported demonstration plant in 1986. India witnessed notable wind power developments by the late 1990s, largely due to incentives such as accelerated depreciation allowance of capital costs and exemptions from excise duties and sales taxes, and regionally administered feed-in tariffs. India has been an active supporter of wind development since the 1990s. In the 1990s, India’s market experienced a significant boom as a result of various tax incentives, attractive buy-back rates, and some preferential loans. For example, 100% depreciation of wind equipment was allowed in the first year of project installation, and a 5-year tax holiday was allowed (Rajsekhar et al., 1999). The national Guidelines for Clearance of Wind Power Projects implemented in July 1995 (and further refined in June 1996) mandated that all State electricity boards and their nodal agencies make plans ensuring grid compatibility with planned wind developments, and that they seek Detailed Project Reports (DPRs) from independent consultants (for capacities above 1 MW) on all proposed wind development projects to verify project capital costs and proposed power generation against certified wind turbine power curves and wind data at the site, before granting approval for projects (Rajsekhar et al., 1999). The expectations for future market growth in the early-mid 1990s attracted a number of firms to the Indian market. India has also developed a national certification program for wind turbines administered by the Ministry on New and Renewable Sources (MNRS), based in large part on international testing and certification standards. However, even with extensive government regulations pertaining to wind farm development, inaccurate resource data, poor installation practices and poor power plant performance led to a dramatic slowdown of installed capacity in the Indian market in the late 1990s and early 2000s (Rajsekhar et al., 1999). Policy drivers also became unstable during this period. The early perception of growth prospects for India had led to the presence of local manufacturing of wind turbines by international companies, and more recently Indian

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companies. As far as the domestic industry is concerned, there are 8 major companies manufacturing wind turbines and components. These companies are joint-ventures or licensee of reputed international companies, a majority of them from the EU. Of these, 5 are ISO certified. The manufacturing base not only meets domestic needs but also caters to the emerging export markets, including Europe. The annual production capacity is of the order of 500 MW, which can be increased to 750 MW. Large capacity wind turbines in the range of 1 to 1.25 MW are being produced in the country. Wind turbines of 250 kW - 1,650 kW are being manufactured. These systems require an average wind speed of about 2.5 m/s to 30 m/s velocity. Wind turbine components are exported to Europe, Australia and the USA. India has taken some direct steps to encourage local manufacturing. For example, customs duties have been levied in favor of importing wind turbine components over importing complete machines. There is no customs duty on special bearings, gearboxes, yaw components and sensors for the manufacture of wind turbines, or on parts and raw materials used in the manufacture of rotor blades. There is a reduced customs duty on brake hydraulics, flexible coupling, brake calipers, wind turbine controllers and rotor blades for the manufacture of wind turbines, and the excise duty is exempted for parts used in the manufacture of electric generators (Rajsekhar et al., 1999). The MNES (Ministry of Non-Conventional Energy Sources) is implementing a program on small wind energy and hybrid systems, with the main objectives of - (i) field testing, demonstrating, and strengthening the manufacturing base of water pumping windmills, aero-generators/hybrid systems, and (ii) undertaking research and development for improvements in design and efficiency of these systems. Presently, the program is being implemented mainly in the states of Andhra Pradesh, Bihar, Gujarat, Karnataka, Maharashtra, Rajasthan and Tamil Nadu, owing to the felt need for water pumping and small power generation. The program is, however, being extended to other potential states also. The program has made very slow progress and not very popular with the beneficiaries, financial institutions, NGOs, etc. By year 2003-04, 945 water pumping windmills, aero-generators and hybrid systems of about 370 kW capacity wind-solar hybrid systems have been installed in the country. The program on water pumping windmills is being implemented through the SNAs (State Nodal Agencies)/departments. The manufacturers and suppliers of water pumping windmills are also eligible to market them to users directly. The program on small aero-generators and hybrid systems is implemented through the SNAs or user organizations like research institutions, NGOs, Central and State government organizations, defense organizations, para military forces and autonomous non-commercial institutions. Despite subsidies ranging from 30 to 75 per cent, the programs are still not popular due to a variety of reasons. The entire project had been heavily subsidized. It was a failure for two main reasons. The equipment in use was not adapted to Indian circumstances (hence it broke down and could not be fixed by the locals) and the communities involved had no sense of ownership in the project. However, a useful lesson that can be learned from this example is that these wind pumps have a big role to play in a decentralized rural community, besides avoiding the aforementioned mistakes. High transaction cost is also a serious concern. At times, the user prefers grid supply, which is almost free.

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2.2.2 The Wind Energy Policy Structure in India A range of policy support measures and incentives are announced by the government for introducing state-of-the-art wind energy technologies on the one hand, while encouraging private entrepreneurs to take up commercial projects on the other led to significant progress in the sector. A tax rebate of 80 per cent on income from power generation for the first ten years of operation has encouraged commercial investment, as has the attraction of power supply for use in businesses. However the spurt in private sector participation started only in 1992, after the announcement of the ‘private power policy’ of 1991. This, along with a booming economy and attractive fiscal incentives, provided the impetus for accelerated growth of the sector. In some cases wind farms are not well integrated, as the wind turbines produce more power than that can be handled by the weak distribution system. The Indian Government has been taking policy decisions with consistent efforts for over a decade now. Ministry on New and Renewable Sources (MNRS) has set a target of realizing 10 per cent of the new capacity additions through renewable from 2012. Wind power generation may constitute 50 Per cent of the additional renewable capacity amounting to plus 1,200 MW of power every year. While style and content differs, the basic policy structure is similar across states. This is to provide legal support and economic incentives, while obligating (by means of legislation) the power company to buy electricity from wind power, and encouraging businesses to develop wind power through incentives such as investment, tax, and price. A number of infrastructural situations have also spurred wind energy use. This was perhaps the strongest initiator in promoting wind power adoption and investment. The policies adopted allowed all the other factors to flow together in a way that made wind energy very attractive to businesses and investors. Apart from the ongoing efforts of the Ministry on New and Renewable Sources (MNRS) which first of all instilled confidence in the technical and commercial viability of wind energy by performing the Demonstration Program, monitoring the entire country for windy sites, and putting the tax incentives in place, a few other policy initiatives by the State government of Tamil Nadu, an Indian leader state are worth also to be noted. For example, the state of Tamil Nadu adopted the following measures: ♦ The windy sites were close to towns for accessibility in bringing labor and providing accommodation for the personnel involved in the projects. ♦ The sites were well interlinked with highways. ♦ Grid network by Tamil Nadu Electricity board (TNEB) was well connected and mainly passing through the sites. ♦ Most of the wind turbine manufacturers/suppliers were located in Tamil Nadu and so gave investors confidence in the supply of machines and after-sales service of the machines. ♦ Chennai port of Tamil Nadu has excellent facilities for import of heavy machinery of the turbine components and this facilitated inter-state and international transportation. ♦ Active promotional steps were taken by TNEB and the Tamil Nadu Development Agency (TEDA). For example, TEDA took the first steps in

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setting up wind farms at sites like Muppandal, Kayathar and Kethanur to prove the viability of wind farms. ♦ TNEB extended all facilities for private entrepreneurs like consultancy services, processing of the application for issuance of No Objection Certificate (NOC), and other clearances, extending grid connections to wind farms and executing new dedicated sub-stations. ♦ TNEB established an effective system for registering the energy generation by each turbine and so enabled turbine owners to adjust their energy bill in accordance, or effect payment to those who sold to TNEB. The suppliers provided turnkey solution by looking at the land development issues. This has helped in boosting the acceptance of wind farm projects by Indian investors who do not feel comfortable in tackling the related issues, reduce delays in execution and negotiate the land related costs with the owners and civil contractors. However probably the most damaging factor for the wind industry was the very thing that really started the boom, namely the 80% (previously 100%) accelerated depreciation. The policy had a number of negative impacts. Among these are enabled large-company finance officers to make hasty decisions around the time of tax-filings to install wind plants. These hasty decisions often led to bad sitting of machines and consequent low performance. The rule relies on the ability of promoters of the technology to absorb the tax benefits - this restricted the number of potential entrepreneurs to companies with huge profits, such as the textile and cement industries, which were actually big investors in the technology. Smaller entrepreneurs were not incentivized. 2.2.3 The Current Scenario In recent years, the market has begun to re-establish itself. State governments in India are running concession programs, and have already earmarked 50 sites for wind farm development. In Gujarat the government has signed agreements with Suzlon, NEG Micon, Enercon and NEPC India to develop wind farms on a build-operate-transfer (BOT) basis, with each manufacturer given land for the installation of between 200-400 MW in the Kutch, Jamnagar, Rajkot and Bhavnagar districts (WPM, March 2004:57). Additional policies established in certain provinces have helped to spur recent development. India may be poised for growth with Suzlon planning global expansion, but fundamental risks in the Indian market remain, making international manufacturers somewhat reluctant to invest. For example, the power grid has such severe reliability problems that day and night voltages differ. India’s policy scheme, in particular the major tax advantages offered to manufacturers, helped to promote the industry throughout the 1990s. However, the current policy outlook is less clear, and wind power will likely be directly affected by the current restructuring of India’s electric power industry. The Indian government continues to show it support for wind power and has set aggressive targets to bring 5,000 MW of new wind power capacity online by 2012 (WPM, March 2004:57). 2.2.4 Foreign Investment Policy India has put a lot of thrust on the promotion of renewable sources of energy. It has adopted liberal foreign investment policies in the non-conventional energy sector. Some

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of the salient features of India’s foreign investment policies in the renewable sector are as follows: ♦ Foreign investors can enter into a joint venture with an Indian partner for financial and/or technical collaboration and also for setting up of renewable energy based power generation projects. ♦ Liberalized foreign investment approval regime to facilitate foreign investment and transfer of technology through joint ventures. ♦ The proposal for up to 74 per cent foreign equity participation in a joint venture qualifies for automatic approval. ♦ 100 per cent foreign investment as equity is permissible with the approval of the Foreign Investment Promotion Board (FIPB). ♦ Various chambers of commerce and industry associations in India can be approached for providing guidance to investors in finding appropriate partners. ♦ Foreign investors can also set up a liaison office in India. ♦ The Government of India is also encouraging foreign investors to set up renewable energy based power generation projects on built, own and operate basis. ♦ Further, the government also provides several fiscal and financial incentives for investments in the wind energy sector. These are available to foreign investors. They include capital subsidy, interest rate subsidy, 80 per cent accelerated depreciation benefit and exemption/reduction in custom duty, sales tax, excise tax etc. The policy adopted by the government successfully attracted several European players who have their presence in India today, either as a wholly owned subsidiary or joint ventures, or as technology collaborations. However, most of the investments made were in the form of private equity in manufacturing ventures. Financial intermediation of other forms such as debt, working capital and other sophisticated financial services such as insurance, risk management solutions, etc. is still lacking. In the recent past, several European banks and FIs (Financial Institutions) have entered the Indian market. Given below is a compilation of the European banks and financial institutions operating in India. Most European banks and FIs have not yet realized the attractiveness of the Indian market, or consider it too risky. As per stakeholders, a couple of existing European banks in India are active in wind energy investment. Therefore, there remains a significant potential for financial intermediation between Europe and India. 2.2.5 Regulatory Issues Power reforms were initiated by the Central Government in 1991.Due to this the sector is witnessing transformation characterized by unbundling of functions, ownership changes, the emergence of competitive markets, and the establishment of Regulatory Commissions. In such a changing scenario government policies and regulatory approaches are going to have significant influences on the development of grid connected wind power.

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Setting up of the CERC (Central Electricity Regulatory Commission) and the SERCs (State Electricity Regulatory Commission) was a key element of this process. The Central Government passed legislations enabling the setting up of independent and autonomous regulatory bodies at central and state levels in July 1998. These regulatory bodies are expected to promote competition, efficiency, and economy in the consumption of electricity, and in investments for the development of the sector. The Electricity Act 2003 has certain provisions for renewable energy sources. One additional responsibility of the SERCs, defined by the Act, is to promote cogeneration and generation of electricity from renewable sources. Hence it also encourages providing suitable measures for connectivity with the grid, sale of electricity to any person, and also specifies if it considers appropriate, for purchase of electricity from such sources, a percentage of the total consumption of electricity in the area of a distribution license. The role of the state governments assumes significance in wind power generation. Though the Electricity Act 2003 did away with the need for licenses for setting up small power plants in rural areas, none of the states have notified this provision. The Electricity Act has not become fully operational. In each state, wind farms have to sign power purchase agreements with the respective SEBs (State Electricity Board). ERCs (Electricity Regulatory Commission) fix the prices at which the unit of power will be purchased. While the Regulatory Commissions are in the process of evolution, one may encounter conflicting situations and undue interferences from the political class. Regulatory functions are expected to be fair and unbiased to all stakeholders. 2.2.6 SWOT Analysis The wind energy program in India is a positive development. In this context, a SWOT analysis has been attempted with the viewpoint of enhancing the uptake of this program in the future years. a) Strengths ♦ Continuing demand- supply gap and escalation in the cost of fossil fuel-based power generation and electricity tariffs for industry and organized sector. ♦ Encouragement by Central and State Government policies - fiscal incentives such as accelerated depreciation and reasonable tariffs for industry and organized sector. ♦ Growth in wind manufacturing sector- joint ventures as well as indigenous industry contributing to adoption of the merging technologies, up-scaling size of machines and cost cutting initiatives. ♦ Massive nation-wide efforts for wind resource assessment covering 25 states, comprising 900 stations and micro-survey of sites. ♦ Setting up a well managed C-WET, an institution in the public sector with EU support testing, R & D and advisory functions. ♦ Tactical project management orientation by wind industry, which involves land procurement, site selection, installation of the wind generation facilities on a turn key basis by the project developers/ equipment suppliers.

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b) Weaknesses ♦ Low capacity utilization of the wind generation plants - this is not attributed to availability of wind but also factors such as ♦ Over- capacity due to biasing of the market mechanism to tax incentives for installing of wind farms rather than efficient operation. This led to inadequate resource assessment in advance of construction and poor engineering. ♦ Forced outages due to technical factors such as weak grid integration, mechanical problems, etc. ♦ Dearth of O & M skills and service organizations. ♦ Small wind power generation program not successful due to techno- economic considerations and inadequacy of the demonstrative efforts taken up so far. ♦ Rising land costs and developmental issues. c) Opportunities ♦ Substantial untapped market- off- shore and on- shore. ♦ Enhancing productivity of existing installations by re- powering existing ones. ♦ CDM credits for clean technologies. ♦ Tried and tested technologies for such small applications is under developed due to mismatch, poor project design, dearth of trouble shooting skills and barriers in commercial operations. The small wind industry implementation Strategy (SWIIS) project, co-coordinated by Socie’te’ d’ Etudes Et de Development (SEED) to increase the sector’s impacts through provision of tools such as sectoral market analyses, a catalogue of manufacturers, comprehensive listing of available ♦ turbines, their applications and detailed information on hybrid technologies such as wind-diesel and wind-PV. Similar initiatives are needed in the Indian context. d) Threats ♦ Technical progress and financial outlays may not keep pace with the prospective markets in the future years. ♦ Wind power subsidies may be rationalized or pegged down discouraging prospective buyers. ♦ Cost cutting may not work out favorably- land costs may shoot up & costcutting ideas by equipment suppliers may dry up.

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3. Elements of a Wind Project Larsen & Toubro will have to select from a range of business opportunities and identify the segment/ business element in which it wants to foray into. We would now list the various elements of a wind power project and the various activities involved in it.

3.1 Design, planning & supervision Companies engaged in Designing, planning & supervision of Wind farm project need to consider a multitude of disciplines and assignments, which all need proper co-ordination and co-operation. As a multidisciplinary consulting company international experience will be required and the various stages which would form part of the assignment are as follow: Energy planning We need to establish and review national and regional energy planning and incorporate wind energy into the planning schemes. We will have to investigate the possibilities for combining wind energy with other energy sources with regard to economy, security of supply and the electrical infrastructure. Trade and transportation of energy In the national grid, we will have to make a full economic assessment of the transportation options and costs of wind energy. We will have to review and analyze the trade possibilities and value benefits for wind energy with regard to sale at the national and neighboring power spot markets compared to the unit production costs. This leads to a trade price for the electricity to be produced. We review the opportunities in bilateral sale to industries that wish to have a 'green image'. Finally, we analyze the development of the electricity consumption in general to view wind energy in a larger national and regional perspective. Project finances We need to perform standard financial cash-flow analysis based on different ownerships and lending conditions for the wind project. A complete overview of the economy in a wind project is established by means of probabilistic models. This is of high importance as wind projects are a complex nexus of many technical and economic disciplines. Finally, we will have to provide a financial risk analysis in which we incorporate all the elements of the wind project and consultancy concerning project financing. Wind studies The wind resource, the wind measurements and macro/micro setting of the turbines need to be assessed. The information, which is gathered, will be used in relevant software and the project is established. When the energy output has been estimated, the turbine layout can be optimized among other things with regard to requirements from the local authorities.

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Environmental impact We need to establish baselines for flora and fauna and estimate the impact on the environment from the wind project leading to Environmental Impact Statements (EIS). Visual impact and as well as impact from noise and flicker are examples of issues that are assessed in the EIS. The EIS forms part of the basis on which the local authorities will decide, whether the wind project is to be approved or not. Assessment of met-ocean data We will have to assess wave and current data for input to the structural design. Furthermore, we need to investigate correlations between waves and wind, which is an important parameter in connection with the design for fatigue. The assessment of wave and current data is also to be used in the numerical modeling of the morphological processes such as erosion and scour. Geophysical investigations We will have to specify and perform geophysical investigations and underwater video recordings. These investigations provide input to the archaeological investigations, the environmental impact assessment (EIA) and to the base of the structural design. Geotechnical investigations In order to adapt the geotechnical investigations to the specific sites, we will have to specify the investigations in laboratories to suit the individual sites before the investigations are carried out. Furthermore, we need to carry out and interpret the geotechnical investigations in order to provide a base for the structural design of the foundations of the turbines and the laying of cables. Navigational risk analyses For offshore wind farms, we will have to estimate the navigational risk for passing vessels during the construction and during the operational lifetime of the wind farm. The risk analysis provides input to the environmental impact statement, the financial risk analysis and to the base of the structural design. Structural design We need to perform conceptual or detailed design of all parts of the wind project including towers, foundations and structures for transformer platforms. The design amongst others includes in-place analyses, spectral and time-domain dynamic analyses, fatigue analyses, and drivability of piles. An analysis of transportation and installation is also required. Electrical design We will have to provide overall grid analyses in connection with the implementation of the wind project, electrical design options for the turbines and the interconnection of turbines, and design of cabling to connection point/landfall. Decommissioning We will have to consider the decommissioning of the wind project as an integral part of

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the design, as well as an important element within the life-cycle-analyses. This element hence will need proper attention. Contracting of wind projects Based on our experience within construction works and energy projects, we will have to suggest a contract strategy. Furthermore, we might be required to perform the prequalification of tenders and develop the enquiry documents. Finally, we might have to perform the tender evaluation and the contracting. Construction management and supervision On behalf of the owner we might have to manage the construction and the contract for the wind project. We might have to perform the commissioning and supervision of all site works and tests. Key Players: ™ Ramboll (www.ramboll-wind.com) ™ GEC - Global Energy Concepts ( www.globalenergyconcepts.com ) ™ AWS Truewind (www.awstruewind.com ) L&T – related businesses @ present: ™ L&T – E&C – E&C Projects - Sargent & Lundy – Engineering Services ™ L&T – E&C – E&C Projects - Power

3.2 Pure component manufacturer There are numerous companies which are purely into component manufacturing for the wind turbine industry. L&T if deciding to enter this segment will surely have an upper edge in the domestic market because of the brand name it has. Various highlights which could be a reason to enter purely into the OEM industry are as follow: 1. Competition among wind turbine OEMs is rapidly intensifying as growth extends to new regions, encouraging start-ups of new manufacturers while pushing leading suppliers to expand their sales and production globally. 2. Turbine prices, and the costs of installation, have trended upward over the last four years after nearly a decade of cost reductions per megawatt of nameplate capacity. The global market’s boom in demand has clearly shifted the industry from a buyer’s to a seller’s market in the past three years, with corresponding price increases. 3. Multiple players moving on 2 MW and above segment: Vestas and Enercon— pioneers in 2 MW and larger turbines—are aiming to protect their share of this market. However, multiple proven machines from Gamesa, Siemens, Suzlon / REpower, Alstom / Ecotecnia and others are providing buyers more options.

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4. Component suppliers face new challenges to keep pace with turbine demand, calling for major production capacity investments in the multi-megawatt segment, as well as a focus on local supply in booming new markets while keeping costs competitive. Key Players: 1. Rotor / Blades - LM Glasfiber ( www.lmglasfiber.com ) ; Sinoi ( www.sinoi.de ) 2. Gear-box – Moventas ( www.moventas.com ) ; Bosch ( www.bosch.com ) 3. Controls – Mita-teknik ( www.mita-teknik.com ) ; Ingeteam ( www.ingeteam.com ) 4. Generators – ABB ( www.abb.com/windpower ) 5. Towers – Siag ( www.lausitzer-industriebau.de ) L&T – related businesses @ present: ™ L&T – Electrical & Electronics – Electrical & Automation Operating Company ™ L&T – Machinery & Industrial Products ™ L&T – Engineering & Construction – Heavy Industry

3.3 Installation and Operation & Maintenance Companies involved in Installation and Operation & Maintenance are the one’s which are purely into installation and operation & maintainance of pre-supplied wind. When entering this segment we need to remember that as contractors we will need to consider a number of factors.

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Installation: Installation costs include foundations, normally made of reinforced concrete, road construction (necessary to move the turbine and the sections of the tower to the building site), a transformer (necessary to convert the low voltage (690 V) current from the turbine to 10-30 kV current for the local electrical grid, telephone connection for remote control and surveillance of the turbine, and cabling costs, i.e. the cable from the turbine to the local 10-30 kV power line. Installation Costs will vary Obviously, the costs of roads and foundations will depend on soil conditions, i.e. how cheap and easy it is to build a road capable of carrying 30 tonne trucks. Another variable factor is the distance to the nearest ordinary road, the cost of getting a mobile crane to the site, and the distance to a power line capable of handling the maximum energy output from the turbine. A telephone connection and remote control is not a necessity, but is is often fairly cheap, and thus economic to include in a turbine installation. Transportation costs for the turbine may enter the calculation, if the site is very remote, though usually they will not exceed some 15 000 USD. Economies of Scale It is obviously cheaper to connect many turbines in the same location, rather than just one. On the other hand, there are limits to the amount of electrical energy the local electrical grid can handle . If the local grid is too weak to handle the output from the turbine, there may be need for grid reinforcement, i.e. extending the high voltage electrical grid. It varies from country to country who pays for grid reinforcement - the power company or the owner of the turbine. Operation & Maintenance: Operation and Maintenance Costs for Wind Turbines Modern wind turbines are designed to work for some 120,000 hours of operation throughout their design lifetime of 20 years. That is far more than an automobile engine which will generally last for some 4,000 to 6,000 hours. Operation and Maintenance Costs Experience shows that maintenance cost are generally very low while the turbines are brand new, but they increase somewhat as the turbine ages. Studies done on the various wind turbines installed around the world since 1975 show that newer generations of turbines have relatively lower repair and maintenance costs that the older generations. (The studies compare turbines which are the same age, but which belong to different generations). Older wind turbines (25-150 kW) have annual maintenance costs with an average of around 3 per cent of the original turbine investment. Newer turbines are on average

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substantially larger, which would tend to lower maintenance costs per kW installed power (you do not need to service a large, modern machine more often than a small one). For newer machines the estimates range around 1.5 to 2 per cent per year of the original turbine investment. Most of maintenance cost is a fixed amount per year for the regular service of the turbines, but some people prefer to use a fixed amount per kWh of output in their calculations, usually around 0.01 USD/kWh. The reasoning behind this method is that tear and wear on the turbine generally increases with increasing production. Economies of Scale Other than the economies of scale which vary with the size of the turbine, mentioned above, there may be economies of scale in the operation of wind parks rather than individual turbines. These economies are related to the semi-annual maintenance visits, surveillance and administration, etc. Turbine Reinvestment (Refurbishment, Major Overhauls) Some wind turbine components are more subject to tear and wear than others. This is particularly true for rotor blades and gearboxes. Wind turbine owners who see that their turbine is close the end of their technical design lifetime may find it advantageous to increase the lifetime of the turbine by doing a major overhaul of the turbine, e.g. by replacing the rotor blades. The price of a new set of rotor blades, a gearbox, or a generator is usually in the order of magnitude of 15-20 per cent of the price of the turbine. Project Lifetime, Design Lifetime The components of Danish wind turbines are designed to last 20 years. It would, of course, be possible to design certain components to last much longer, but it would really be a waste, if other major components were to fail earlier. The 20 year design lifetime is a useful economic compromise which is used to guide engineers who develop components for the turbines. Their calculations have to prove that their components have a very small probability of failure before 20 years have elapsed. The actual lifetime of a wind turbine depends both on the quality of the turbine and the local climatic conditions, e.g. the amount of turbulence at the site. Offshore turbines may e.g. last longer, due to low turbulence at sea. This may in turn lower costs. Key Players: 6. Shell ( www.shell.com ) 7. Gamesa – ( www.gamesacorp.com )

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L&T – related businesses @ present: ™ L&T – Engineering & Construction – Construction – Infrastructure - Power ™ L&T – Engineering & Construction – Construction – Electrical Projects ™ L&T – Enigineering & Construction - E&C – Power

3.4 Fully Integrated Service Providers: Companies engaged in providing fully integrated service provides are multinational companies with strong base in engineering design and project management skills. In order to enter this segment L&T will have to display strong knowledge in the field of wind energy (which can be acquired by forming a consortium with an existing company) and project management skills which the company already posses though in other streams of businesses such as oil & gas, chemical refinery lump-sum turnkey projects. Key Players: 8. Suzlon - INDIA ( www.suzlon.com ) 9. GE Energy – (www.gepower.com ) 10. Vestas – ( www.vestas.com ) L&T – related businesses @ present: ™ ™ ™ ™ ™ ™

L&T – E&C – E&C Projects - Sargent & Lundy – Engineering Services L&T – Electrical & Electronics – Electrical & Automation Operating Company L&T – Machinery & Industrial Products L&T – Engineering & Construction – Construction – Infrastructure - Power L&T – Engineering & Construction – Construction – Electrical Projects L&T – Enigineering & Construction - E&C – Power

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4. Larsen & Toubro Limited 4.1 Prologue L&T was set up in 1938 as a partnership trading firm by two Danish engineers, Henning Holck-Larsen and Soren Kristian Toubro, who had quit their jobs. In 1946, it became a private limited company and by 1950 reached the status of a public limited company. Table 1 gives the evolutionary picture in brief. L&T presently has a shareholder base of nearly 1 million and employee strength of over 24,000. As a company, this multi-dimensional engineering giant is actually the nucleus of a group of companies involved in building complexes, worksites, offices, and service outlets at different locations all over India and abroad. Over the years, L&T has acquired a commendable reputation for capabilities for executing engineering related projects. Table I L&T Business History: The Milestones -

1938 – ln-corporation as a partnership firm 1946 - Incorporation as a Private Ltd Co. I950 - L&T goes pulic. Powai Works set up 1961 - Audco India incorporated for manufacturing valves 1962 - Retirement of Soren Toubro; EWAC Ltd. set up for manufacture of welding alloys 1963 - TENGL founded to manufacture crawler undercarriage parts for caterpillars 1969 - Agency business abolished, formation of L&T Bottle Closure division 1971 - L&T McNeil set up for manufacturing Presses for tyre industry 1974 - Management Organization Structure and Management Planning and Control System introduced 1976 - L&T Bangalore Works commences production of hydraulic excavators 1978 - Larsen retires. L&T Faridabad commences production of switchgear 1942 - ECC merged with L&T; L&T enters shipping business with two ships 1983 - L&T enters cement manufacturing with Awarpur plant commencing production 1987 - L&T enters computer hardware with floppy discs and printers; L&T Gould for electronic test and measured instruments 1988 - Cement capacity enhanced to 2.2 m tons per annum 1989-90 - L&T under DH Ambani (as chairman) 1990-93 - Repeated takeover attempts by RIL 1993-95 - Series of strategic alliances and tie-ups resulting in formation of L&TNiro. L & T-Chiyoda, L&T Sargent & Lundy, L&T Finance, and so on. 2003-04 – Disinvest in L&T – Cement and subsequently in L&T – Niro, L&T – Glass (Nasik Plant) & L&T – John Deree

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Vision, Core Values, and TQM Infrastructure - being a key bottleneck for Indian industry - was identified as the engine of growth for the company's ambitious plans. But before that, the company needed an ambition statement which every employee could own and share. A massive companywide exercise for finding out what the company stood for and what its core values were was embarked upon. The emergent statement though not sounding much different from several other organizational vision. However, came to be owned and understood by almost every employee because of the process of identifying the mission and peoples involvement. The key elements of L&T's vision focused towards a world class company dedicated to: - excellence and professionalism - customer delight through service - entrepreneurial leadership - Community service and environmental protection.

4.2 Wind Energy Industry (Porter’s Five Force analysis) – The Intensity of Competitive Rivalry – Medium ♦ The number of players in the domestic wind energy market when it comes to providing fully integrated service are few but the intensity of competitive rivalry can be termed as medium as there is sufficient scope available in the industry for all the existing players. Bargaining Power of Suppliers – High ♦ As a wind turbine is made of a number of components and usually there are some parts which are required to be sourced from the open market and at times from competitors. However, each player in the fully integrated service providing segment has some components being manufactured internally, rotors and generators being strategically important of these. As few critical components have long delivery time the bargaining power rests with the suppliers. Bargaining Power of Buyers – Low ♦ In today’s world customer is the king. However, when it comes to the wind projects the buyers take a back seat as it is a business sector which can be considered to be still in the development stage of its life-cycle. Hence, there are a number of occasions where the supplier is able to govern the terms as compared to that of a buyer. The Threat of Substitute Product – Low ♦ As wind power still remains the cheapest source of renewable power generation for the world the threat of substitute product is low. Wind power projects are also the most preferred bearing in mind the large coastline, which we posses.

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The Threat of New Entrants – Low As the wind projects are highly capital intensive and involves large amount of commitment in terms of capital , assets and work- force the threat of new entrants is low . As only those organizations which have the required capabilities and are willing to take the risk of entering a sector which can be seen as still developing will enter the market.

4.3 SWOT analysis – L&T as an organization a) Strengths – ♦ Diversified businesses – L&T has it’s presence in a range of diversified businesses. During the initial years of diversification L&T had diversified into businesses which were totally unrelated to each other. However, in recent years the businesses have been streamlined and unrelated businesses which were not contributing to the long term vision of the company were disinvested. L&T is now focused on related businesses and intends to diversify further into such businesses which are having higher RoI. ♦ Strong financial position – Q2 FY09 net profit was up 32.47% at Rs 461 crore as against Rs 348 crore in the same quarter last year. Its net sales stood at Rs 7682.20 crore in the period under review as compared to Rs 5,499.94 crore. The company's E&C revenues stood at Rs 5,989.63 crore versus Rs 4,259.92 crore, Electrical & Electronics revenues stood at Rs 760.48 crore Vs Rs 671.73 crore. The company’s engineering and construction (E&C) order inflow was at 81% and added that the business showed stable margin of 11.5% (QoQ). He plans to execute larger and higher quality orders in the engineering and construction business of the company. The operating margin of the company was calculated after considering the cost of new initiatives in railways power and ship building. 37 of 62

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b) Weakness – ♦ Decreasing order book value from Oil & Gas Sector – Oil & Gas business unit is one of the primary revenue earners for the company. Due to the recent slowdown in the economy and dip in oil prices have forced Oil & Gas majors to reduce capex investment and issue of new projects (tenders). As a result of which there have been no new order booking in the Oil & Gas sector for L&T in the past 6 months (as on end Feb’ 09) ♦ Talent retention & acquisition – retaining existing talent and acquiring new talent with proper know-how will be the key element for L&T in the years to view. c) Opportunities – ♦ Strengthening international presence – L&T has an international presence, over the last few years its overseas earnings have grown upto 18 per cent of its total revenue. With factories and offices located around the country, further supplemented by a wide marketing and distribution network, L&T's image and equity extends to virtually every district of India. Over the years the company has proactively created the necessary infrastructure for its global initiative with office locations USA, Europe, Middle East and Japan.The Engineering Construction & Contracts Division made significant progress during the years in increasing its presence in the overseas markets. The Division secured orders from international clients located at Malaysia, USA, UK, Brazil, Saudi Arabia, UAE, Qatar, Bangladesh, Sri Lanka etc L&T has customers spread across various industry segments, and spread across various geographical regions in the world. The customer profile includes leading names such as Samsung, Chevron, Bechtel, Kvaerner, Pirelli, Siam Michelin, Goodyear, etc. Bechtel is one of the biggest clients of L&T in the construction business. Bechtel has outsourced a large chunk of the rehabilitation projects in Iraq and Afghanistan to L&T and its associated companies. L&T will have to built on its presence and previous track reocrd in the various regions so as to gain market share and increase contribution towards the sales revenue. d) Threats – ♦ Interest rate risk – significant increase in the interest rates impacts corporate capex and infrastructure investment adversely. Interest cost has gone up in L&T because L&T has hedged all foreign currency loans into rupees. There has been additional borrowing as compared to the previous year, the additional borrowings are to the extent of almost Rs 2,000 crore and that’s why there has been an interest cost increase. The total interest cost for the company is around 6% now which was lower last year and that is predominantly due to the hedging. L&T has completely swapped foreign currency loans into rupee loans. ♦ Global Slowdown - The general economy slowdown will cast a gloom on the future order intake as well the execution on account of a dent in the capex

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plans. Although the visibility exists for a 30% revenue growth over the next one year, the future will remain uncertain for the time being. ♦ Commodity price volatility – L&T’s key raw material inputs comprise metals, cement, bitumen etc. - A sharp surge in raw material prices impacts margins adversely ♦ Intense competition – L&T is considered as the largest engineering & construction conglomerate in India. However, due to liberalization and entry of a number of new entrants the competition has intensified in the local market. And as L&T has also forayed into international market it is also facing stiff competition from the existing players in those particular regions.

4.4 SWOT analysis –L&T in wind energy industry a) Strengths – ♦ In-house technology & design capabilities – L&T already has a presence in the power engineering sector in terms of transmission grids & power plant setups. Hence a strong force of engineers already conversant in the field of power would be an added advantage ♦ Prudent acquisitions & alliances – L&T is quite prudent in acquiring required assets & skills and wherever required in forming strategic alliances so as to gain an added advantage over its competitors. ♦ Integrated business model - As L&T is already into an array of diversified businesses, entering into Wind energy market would not be a difficult task. L&T has a strong integrated business model for all its present businesses. Its existing businesses have a strong foothold.

♦ Global Production – L&T has 2 well equipped yards - @ Hazira, India and @ Sohar, Oman wherein various large scale project execution is carried out. This state of the art facility will serve an added advantage to reduce cost, keep a check on product quality and deliver the product on time.

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♦ L&T can also utilize the capabilities of its Electrical & Electronics business unit so as to gain added advantage in entering the segment of component manufacturing. ♦ Strong management – L&T has always had a strong management team , the top management is made up of personalities stalwart in diverse fields with vast business knowledge and experience. The top management has always shown prudence when evaluating new business ventures. ♦ Focus towards new initiatives – L&T is determined to enter new business initiatives and develop on its core competency and diversify into related businesses. L&T is more focused in businesses with higher RoI (Return on Investment)

b) Weakness – ♦ Cash Conversion – L&T when competing in the Wind Energy Sector will be unaware of the cash flow cycle involved in the business. ♦ Growth in Assets overweighing growth in profits – as a new entrant into the field of wind energy L&T will have to weigh its margin in acquiring projects and in doing so growth in assets may overweigh the growth in profits c) Opportunities – ♦ Environmental awareness and government initiatives – there has been growing environmental awareness towards reducing CO2 emissions and shifting to a greener option for power generation. Government both domestic and world-wide have responded to increased demand of power and alternative sources of energy are being evaluated and initiatives being taken to implement the same. ♦ Favorable Tax Exemptions – in order to encourage organizations to set-up and enter the renewable source of energy sector, governments are providing favorable tax exemptions to both operators & service providers. ♦ Untapped Offshore market – though 99 % of the wind farms are on-shore the off-shore market is gradually developing and there is a likelihood of the early entrant having an added advantage over others

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♦ Alliances with Power Sector – there are possibilities to form alliances with the power sector which is mostly government owned in India. However, globally there are private suppliers of power who would be interested in forming alliances if given a option of cheaper power generation. ♦ Vast coast lines of India and low cost – India has a vast coastline with steady wind speeds & directions for a substantial period of the year which could be an added advantage for wind power generation on-shore as well as off-shore. ♦ Steady source of demand ♦ Other renewable energy opportunities seem bright d) Threats – ♦ Technology risk – as the wind energy sector is in the first stage of the product life-cycle there are chances of technology becoming obsolete within a short span of time and newer advanced technologies replacing the older ones. ♦ Expiry of Federal Production TAX credits in USA may slowdown the growth - The US Energy Bill has extended production tax credits (PTC) till 31st Dec 2009 only, creating uncertainty for wind farm developers. In the past, US wind markets have reacted negatively to PTC not being extended.

♦ Intense competition – as there a number of players already existing in the domestic as well as global wind energy market L&T will have to face intense competition to be successful in which ever element it decides to enter. ♦ Foreign exchange risk – due to global economy meltdown and current state of the U.S economy there is huge fluctuation in the foreign exchange rates and as in the case of wind power projects there would be huge inflow and outflow of foreign exchange the risk in exchange rate fluctuation will have cautiously hedged. Based on the present SWOT analysis of L&T in order to get a clearer picture we present matrix of the businesses which could be related to the Elements of the Wind Project and there competencies based on their present performance & capabilities

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L&T Related Departments

EMBA

Competencies Low

Designing, Planning & Supervision

Pure Component Manufacturer

Installation and Operation & Maintenance

Medium

E&C – E&C Projects - Sargent & Lundy – Engineering Services Engineering & Construction - E&C – Power Electrical & Electronics – Electrical & Automation Operating Company Engineering & Construction - Heavy Industry Machinery & Industrial Products Engineering & Construction – Construction – Infrastructure - Power Engineering & Construction – Construction – Electrical Projects Engineering & Construction - E&C – Power E&C – E&C Projects - Sargent & Lundy – Engineering Services Electrical & Electronics – Electrical & Automation Operating Company Engineering & Construction - Heavy Industry

Fully Integrated Service Provider

Machinery & Industrial Products Engineering & Construction – Construction – Infrastructure – Power Engineering & Construction – Construction – Electrical Projects Engineering & Construction - E&C – Power

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High

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5. Opportunities in the Wind Energy Market 5.1 International Energy Market: The wind turbine industry faces challenging times with a global recession curtailing short-term investment in new projects. The current volatile environment is putting a squeeze on margins. Yet from 2010 onward, the boom in wind growth is expected to resume. We can forecast annual wind installations to grow from 27+ GW added in 2008 to nearly 60 GW added per year by 2020. But managing through the crisis requires a thorough understanding of the wind turbine industry on a global level.

Source: Emerging Energy Research While 2009 installations are due to suffer from financing scarcity and global economic jitters, much of the shortfall is expected to be made up in 2010 when a new wave of pentup growth is expected. We can expect a new phase of stable, global growth, pushing the market past $56 billion annually by 2015. Following are just a few of the key trends of global wind turbine markets: ™ Wind turbine operation and maintenance is seeing rapid shifts as the industry's scaling forces players across the value chain to assess their position. ™ Positioning along the supply chain poses a key strategic question for component suppliers as they address increasingly sophisticated demand for larger turbine models. ™ Effective wind turbine pricing is a major challenge for all manufacturers as they strive to keep pace with higher volume and more complex demand. 5.1.1 Wind Power Development Strategies – Europe Wind energy has moved firmly into the mainstream of Europe’s generation mix as the leading source of new generation capacity in 2007, surpassing all other technologies including thermal with nearly 8GW installed. Key factors include: 43 of 62

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♦ Europe remains the industry’s single largest regional market opportunity. Turning in steady 5% compound annual market growth from 2008-2020, capacities added from 7.8 GW to 15.2 GW, the European wind energy market is currently worth over €12 billion annually in new installations, surpassing both North America and Asia Pacific. ♦ Utility-driven value chain consolidation continues. Consistent EU-wide political support for renewables urges utilities to take strong positions in wind energy, which continues to provide opportunities for developer project and pipeline sales. At the same time, utilities’ moving upstream to lock up capacity threatens the IPP model that has flourished over the past five years. ♦ Independent players seeking long term positioning. Wind’s move into utility mainstream power generation is forcing developers and IPPs to carve out geographic or technical niches on the value chain to remain competitive in the long term. While risk averse investment players are divesting from their turnkey-developed assets, stronger industrial-backed players from complementary infrastructure industries are capturing remaining opportunities. ♦ Industry rapidly moving to tap out remaining potential & optimize existing assets. Building on the experiences of Western Europe, Eastern Europe is seeing faster market entry and ramp up with utilities and experienced IPPs taking early positions. While these firms move East to continue growing their pipelines, they are increasingly focusing on optimizing turbine procurement, O&M capabilities, and integrating wind plant into the portfolio as a long term contributor to the generation mix. Europe Market Opportunity and Competitive Landscape Overview

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5.1.2 Wind Power Development Strategies – United States The US wind power market is exploding – accounting for 27% of global wind MW additions in 2007 and resulting in over 8.6 GW under construction in 2008. Cumulative installations grew 45% in 2007 to nearly 17 GW, a number that is expected to reach at least 100 GW by 2020. And with the PTC likely to be extended beyond 2008, the US market will continue to take center stage in the burgeoning wind power industry for years to come. The key factors include: ♦ Substantial build-out in US wind turbine supply chain underway: Leading US wind IPPs and utilities continue to seek large-scale framework turbine supply contracts, leading to significant flux in developer-OEM relationships. While substantial investments in new supply capacity are underway, framework contracts typically must be signed 2-3 years in advance of project delivery. 2010 may be the earliest year in which substantial cost competition returns to the US wind turbine market. ♦ Utilities adopting higher-risk wind procurement strategies: US utilities are moving steadily into wind asset ownership and project development, taking on additional risks across the wind value chain. This growing trend in the Midwest and Pacific Northwest is placing greater pressure on IPPs with PTC tax appetite to find creative solutions for power off-take. ♦ Transmission issues continue to challenge US wind growth in both near and long term: As US wind development booms, transmission expansion has fallen behind leaving IPPs to take proactive approaches to unlock new wind resource areas. Over the longer term, wind grid penetration will play a crucial role in determining the potential ceiling on new wind development in key utility service territories and regions. Near-term Challenges to Wind IPP Growth by US Region

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5.1.3 Wind Power Development Strategies – China China is roaring ahead with wind power build-out on its way toward 135 GW of installed wind capacity by 2020 -- a $300 billion investment over the period. These enormous investment levels are intended to clean up China’s energy picture, and to support the development of a globally competitive wind turbine supply chain, from turbines to gearboxes and blades. The bottom line: China’s wind power explosion will have a transformational impact on the global industry. Key factors include: ♦ China is on track to lead the global wind market in annual installations by 2011, supported by strong political will, improving incentives, and vast natural & industrial resources. But growth will depend on greater supply competition, improved and enhanced transparency of project economics, and improvements in the quality of locally manufactured turbines and wind project design. How these factors evolve will determine the size and nature of opportunities in the decade ahead. ♦ China’s wind development value chain is evolving, with major state generators consolidating their presence while IPPs and foreign entrants seize opportunities as project owners, operators, and technical consultants. China’s industry-wide demand for project management and technical skills will perpetuate opportunities for foreign ownership, executed in the form of equity-based partnerships. ♦ Turbine and component manufacturers are stepping up to meet booming demand, striking a balance between quality, production capacity, cost, and local content. China’s national wind power base initiative is creating opportunities for manufacturers to scale up their product offering to capture mega-scale project contracts as well as potential export sales. As the market matures, rapid supply chain build-up should introduce reliable sourcing options for all players, enabling greater standardization in quality and pricing. 5.1.4 Wind Power Development Strategies – Offshore Offshore wind is an emerging industry and a new user of the sea with distinct industrial and political development requirements compared to onshore wind power. Offshore wind power technology builds on onshore wind technology, and its future development will require participation from other sectors such as offshore oil and gas engineering and technology, the logistical skills of offshore service providers, transmission system operators and the infrastructure technology of the power industry. Although long-term prospects for offshore wind power are promising, the technology faces a number of challenges in terms of technological performance, lack of skilled personnel, shortage of appropriate auxiliary services (e.g. crane vessels), impact on the local environment, competition for space with other marine users, With just over two dozen operational projects globally, offshore wind is nearing a critical phase requiring major investments to secure its future in the generation mix. With 1 GW of offshore wind now in service, the global market is expected to grow 40-fold by 2020. But offshore’s success will hinge on turbine and foundation technological advances, development of know-how across the project value chain, and increasing logistics capacity. Key factors include:

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♦ Project size increasing: Offshore wind is entering a critical phase in which projects are to move from 100 MW to 400 MW and larger – requiring a major scaling up and technology specialization across the industry. ♦ Europe offshore serving as model for North America and Asia projects: Europe is set for paced offshore expansion though 2020, with the UK, Germany, and Sweden driving future growth. North America will begin to take off after 2011, following the first phase of Cape Wind. Asia will be driven by pilot projects in China, South Korea, and Taiwan that are set for construction in 2010. ♦ IPPs moving into project development space: Many IPPs are looking to partner with utilities to realize their offshore projects. As financing becomes more readily available and project costs decrease in the longer term, the opportunities for IPPs to become offshore wind plant owners and operators will increase together with their share of the market. ♦ Utilities leveraging onshore experience offshore: Experience acquired by power producers developing and managing onshore wind plant can be leveraged into offshore expansion as these players look to further diversify their energy mix. ♦ New market offers supply chain challenges: To realize the large scale the market promises, developers must first secure a steady flow of permitted, well financed projects that will justify major supply chain investments by players that currently focus more on oil and gas offshore, such as EPC contractors and installation vessel operators. On the industry side, the challenge is to create a sustainable offshore wind industry. While the onshore wind industry is starting to be integrated at European level, offshore wind is still primarily based around a limited number of European Member State markets. No series production in offshore wind manufacturing and installation has yet been established, and the sector is still developing and utilizing large specialized components rather than the standard components needed for reducing cost. The different challenges of offshore wind require the industry to move more swiftly to establish links across borders and develop a European industry for a European market. The creation of such partnerships, necessary in order to deliver complex offshore projects, will inspire greater confidence in industry players to develop the techniques and technologies that will enable the sector to expand rapidly, as onshore wind power has done. Leading Global Offshore Wind Energy Markets

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5.2 Domestic Energy Market: India ranks fourth in the world in wind energy potential. Wind energy companies have shown robust growth and some alliances and transactions have also emerged in this space between global and Indian companies. Given the technological evolution happening in this sector, the growth prospects continue to be very good. High demand coupled with supply constraint has meant that turbine prices have been rising sharply. Technology access and availability of wind sites is going to be important for new entrants. India could also emerge as a manufacturing hub for some components for turbines for the region. Looking at the success of existing players, many new entrants are waiting in the wings to enter and looking for technology partners for the same. The major issues currently being faced by the renewable energy sector are as the following: ♦ High capital costs and low plant load factors make renewable energy more expensive. Given the heavily subsidized nature of electricity in the Indian context and the poor financial condition of the State Governments, the ability to absorb the higher cost of renewable electricity is a major concern. However, technological evolution in renewables and the huge power deficit in the country has meant that power utilities are actively looking towards renewables to complement their supply ♦ Regulatory certainty on tariff and other conditions of power procurement will continue to remain crucial for maintaining private sector interest in this area ♦ Adoption of renewable energy technologies in certain cases may lead to increased competition for land-use which will need to be managed whenever usage of such technologies becomes more wide spread ♦ In some instances, the capacity of the transmission network has also been seen to be a constraint in power evacuation. Lack of grid presence in remote areas where renewable energy opportunities may be distributed hence becomes an issue

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6. Strategies for the Wind Energy Sector In order to determine the strategy for L&T’s to enter into the Wind Energy Sector we would first enlist the key success factors in the wind market. a) Design, planning & supervision ♦ Being at the forefront of technology e.g. advanced atmospheric modeling and measurement ♦ Skilled & experienced professional team member b) Pure component manufacturer ♦ Capability to pursue constant innovation e.g. light weight rotor blades c) Installation and Operation & Maintenance ♦ Technological capability to carryout installation in all conditions e.g. offshore wind turbines ♦ Strong Project management skills d) Fully integrated service providers ♦ Ability to offer best in class ♦ Tie-up with suppliers ♦ Technological advances to carry-out O&M in adverse conditions within the stipulated time ♦ Deep understanding of the latest wind technologies Ability to provide complete package from Designing & Planning to Operation & Maintenance Understanding of country specific regulatory issues Pre- entry Strategies – 1. Determine alignment with organizational goals & vision 2. Determine attractiveness of Onshore & Offshore Wind-farm Business Segment 3. Determine the element of wind project to enter 4. Evaluate synergy between existing capabilities and required new capabilities 5. Calculate funds needed for entry 6. Propose a Risk Management Plan Post – entry Strategies (Short term)♦ Skill amalgamation ƒ Blend the best possible skills / resources across the globe ƒ Set-up R&D facility in Europe i.e. close to the vicinity of maximum phenomenon in wind energy market

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ƒ ♦ ♦ ♦ ♦

Utilize low cost labor and skill set availability for manufacturing by setting up plants in India & China Continuously reduce cost per unit of power generation and also maintain a consistent new product launch schedule Set-up headquarters in Denmark as it is the hub for wind energy market Form an extensive network of component suppliers Provide end to end solutions to the clients needs

Post – entry Strategies (Long term)♦ Go in for vertical integration

♦ ♦ ♦ ♦ ♦ ♦ ♦

Continuing rapid growth Acquisitions & consortiums Being in the profitable sector – US & Europe Improve value to Share Holders Improve operational efficiency Manage backlog Improve industrial relationships

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1. Country-wise capacity details (as on end 2008)

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2. India – Policy & Regulation ™ Ministry of Non-conventional Energy Sources, Government of India http://mnes.nic.in/ ™ Ministry of Power, Government of India - http://powermin.nic.in/ ™ Planning Commission, Government of India - http://planningcommission.nic.in/ ™ Central Electricity Authority - http://cea.nic.in/ ™ Central Electricity Regulatory Commission - - http://www.cercind.org ™ Maharashtra Electricity Regulatory Commission - - http://www.mercindia.com ™ Karnataka Electricity Regulatory Commission - http://www.kerc.org/ ™ Madhya Pradesh Electricity Regulatory Commission - http://www.mperc.org/ ™ Tamil Nadu Electricity Regulatory Commission - http://tnerc.tn.nic.in/ ™ Orissa Electricity Regulatory Commission - http://www.orierc.org/ ™ Rajasthan Electricity Regulatory Commission - http://www.rerc.gov.in/ ™ Uttranchal Electricity Regulatory Commission - http://www.uerc.org/ ™ Uttar Pradesh Electricity Regulatory Commission - http://www.uperc.org/ ™ Haryana Electricity Regulatory Commission - http://herc.nic.in/ ™ Himachal Pradesh Electricity Regulatory Commission - http://hperc.nic.in/ ™ Andhra Pradesh Electricity Regulatory Commission - http://www.ercap.org/ ™ Gujarat Electricity Regulatory Commission - http://www.gercin.org/ ™ West Bengal Electricity Regulatory Commission - http://wberc.net.in/ ™ Northern Regional Load Despatch Centre - http://www.nrldc.org/ ™ Southern Regional Load Despatch Centre - http://www.srldc.org/ ™ Eastern Regional Load Despatch Centre - http://www.erldc.org/

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™ Western Regional Load Despatch Centre - http://www.wrldc.org/ Technical ™ The Energy and Resources Institute - http://www.teri.res.in/ ™ Centre for Wind Energy Technologies, Chennai - http://www.cwet.tn.nic.in/

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3. India – State-wise installed capacity State-wise Wind Power Installed Capacity In India Gross Potential (MW)

State

Total Capacity (MW) till 31.03.08

Technical Potential (MW)

Andhra Pradesh

8275

122.5

1750

Gujarat

9675

1252.9

1780

Karnataka

6620

1011.4

1120

875

10.5

605

Madhya Pradesh

5500

187.7

825

Maharashtra

3650

1755.9

3020

Rajasthan

5400

538.8

895

Tamil Nadu

3050

3873.4

1750

450

1.1

450

2990

3.2

45195

8757.2

Kerala

West Bengal Others

-

Total (All India)

12875

Installed Capacity - (Comparative) State Tamil nadu Karnataka Maharashtra Rajasthan Andhra Pradesh Madhya Pradesh Kerala Gujarat West Bengal Total

Mar-08 3873.4 MW 1011.4 MW 1755.9 MW 538.8 MW 122.5 MW 187.7 MW 10.5 MW 1252.9 MW 1.1 MW 8754.0 MW

Mar-07 3492.7 MW 821.1MW 1487.7 MW 469.8 MW 122.5 MW 57.3 MW 2 MW 636.6 MW 1.1 MW 7090.8 MW

Mar-06 2894.6 MW 584.5 MW 1001.3 MW 358.1 MW 121.1 MW 40.3 MW 2 MW 338 MW 1.1 MW 5341 MW

Mar-05 2037 MW 410.7 MW 456.2 MW 284.8 MW 120.6 MW 28.9 MW 2 MW 253 MW 1.1 MW 3594.3 MW

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4. India – Tariff & Regulations

State

RPS(%) specified

Tariffs fixed by commissions in INR per kWh

Cross subsidy surcharge for sale to 3rd party in INR per kWh

Validity of tariff (year)

Charges for captive users

1.08

Tamilnadu

10%

2.90 (fixed)

20

10 % (includes 5% for banking if applicable)

Karnataka

7-10%

3.40 (fixed)

10

*

0.79

13

*

NIL

20

10%

0.27

5

*

1.81

20

2% plus transmission charge

20

5%

Flexible 20

2% 4%

1.03 Not Notified Not Notified 1

5

2%

NIL

Maharashtra

3-6%

Rajasthan Andhra Pradesh

7.50%

Madhya Pradesh Kerala

5%

10% 3%

West Bengal Gujarat

3.80% 2%

Haryana

3-10%

3.50 + escalation of 0.15 on an annual basis 3.59 + escalation of 0.02 for the first 12 years + escalation of 0.01 for the balance 8 years 3.37 (fixed) 4.03 reducing at 0.17 per year till the 4th year; subsequently fixed at 3.36 till the 20th year 3.14 (fixed) 4.00 (fixed, to be used as a cap) 3.37 (fixed) 4.08 (with 1.5 % escalation per year)

* Based on capacity charge plus transmission / distribution losses as per the order

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5. India – Central Incentives Now we would like to highlight the various incentives which are offered to companies involved in the wind energy sector - manufacturing, installation and operation. A. Indirect Taxes I. Custom Duty for Wind Energy Equipments and Components (Notification No.21/2002-custom dated 01.03.2002, as amended by Notification No.11/2006 customs dated 01.03.2006) Description of Goods Rate i) Wind operated electricity generators upto 30 kW and wind operated battery chargers upto 30 kW – 5% ii) Parts of wind operated electricity generators for manufacturer/maintenance of wind operated electricity generators, namely : a) Special bearing 5% b) Gear Box 5% c) Yaw components 5% d) Wind turbine controllers 5% e) Parts of the goods specified at (a) to (d) above 5% f) Sensors 25% g) Brake hydraulics 25% h) Flexible coupling 25% i) Brake calipers 25%

iii) Blades for rotor of wind operated electricity generators manufacturers/maintenanceof wind operated electricity generators. – 5%

for

the

iv) Parts for the manufacturer/maintenance of blades for rotor of wind operated electricity generation – 5% v) Raw materials for manufacturer of blades for rotor of wind operated electricity generators - 5% Conditions: (a) If the importer at the time of importation furnishes in all cases, a certificate to the Dy. Commissioner of Customs or Assistant Commissioner of Customs as the case may be, from an officer not below the rank of Deputy Secretary to the Government of India in the Ministry of Non-Conventional Energy Sources recommending the grant of this

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exemption and in the case of the goods at (ii) to (v) the said officer certifies that the goods are required for the specified purposes; and (b) Furnishes an undertaking to the said Dy. Commissioner of Customs Assistant Commissioner to the effect that (i) In the case of wind operated electricity generators upto 30 kW, or wind operated battery chargers upto 30 kW, he shall not sell or otherwise dispose off, in any manner, such generators or chargers for a period of two years from the date of importation. (ii) In case of other goods specified at (ii) to (v), he shall use them for the specified purpose, and (iii) In case he fails to comply with sub-conditions (i) or (ii), or both conditions, as the case may be, he shall pay an amount equal to the difference between the duty leviable on the imported goods but for the exemption under this notification and that already paid at the time of importation.

II. Excise Duty [Notification No.6/2002 dated 01/03/2002 (S.No.237 non-conventional devices/systems)(Notification No.6/2006 C.E. Dated 01/03/2006)] Devices/Systems exempted from Excise Duty: (i) Wind operated electricity generator, its components and parts thereof including rotor and wind turbine controller. (ii) Water pumping wind mills, wind aero-generators and battery chargers. III. Sales Tax Exemption/reduction in Central Sales Tax and General Sales Tax are available on sale of renewable energy equipment in various states. B. Direct Taxes 1. Accelerated Depreciation benefit u/sec. 32 Rule 5 up to 80% of the project cost in the first year plus additional depreciation @ 20% for projects being commissioned after March 2005 with new plant & machinery. 2. Exemption on Income Tax on earnings from the project u/sec. 80 IA for 10 years

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6. Related Companies Designing & Planning Companies: ™ Ramboll (www.ramboll-wind.com) ™ GEC - Global Energy Concepts ( www.globalenergyconcepts.com ) ™ AWS Truewind (www.awstruewind.com ) Pure component manufacturer: ™ ™ ™ ™ ™

Rotor / Blades - LM Glasfiber ( www.lmglasfiber.com ) ; Sinoi ( www.sinoi.de ) Gear-box – Moventas ( www.moventas.com ) ; Bosch ( www.bosch.com ) Controls – Mita-teknik ( www.mita-teknik.com ) ; Ingeteam ( www.ingeteam.com ) Generators – ABB ( www.abb.com/windpower ) Towers – Siag ( www.lausitzer-industriebau.de )

Installation and Operation & Maintenance: ™ Shell ( www.shell.com ) ™ Gamesa – ( www.gamesacorp.com )

Fully Integrated Service Providers: ™ Suzlon - INDIA ( www.suzlon.com ) ™ GE Energy – (www.gepower.com ) ™ Vestas – ( www.vestas.com )

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7. Larsen & Toubro Limited – Organizational Structure

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References: 1. World Wind Energy Report – 2008 2. Renewables 2007 – Global Status Report 3. Global Wind Energy Council – www.gwec.net 4. Wind Power: Capacity Factor, Intermittency, and what happens when the wind doesn’t blow? – Renewable Energy Research Laboratory, University of Massachusetts at Amherst 5. Policy Paper on Collaboration between European & Indian Wind Sector – www.euindiawind.net 6. Delivering Offshore Wind Power in Europe – by European Wind Energy Assosiation 7. India Energy Outlook – 200 7 – KPMG Report 8. http://www.wwindea.org 9. http://www.awea.org 10. http://www.windpowerindia.com 11. http://www.mongabay.com/igapo/technology/EPC.html 12. http://en.wikipedia.org/wiki/Wind_power 13. http://www.larsentoubro.com/lntcorporate/common/ui_templates/homepage_news .aspx?res=P_CORP 14. http://www.cwet.tn.nic.in/html/information_wtt.html 15. http://www.windpower.org/en/tour/econ/oandm.htm 16. http://www.worldwatch.org/node/5282#wind 17. http://cii.in/documents/Policyreport.pdf 18. The effects of integrating Wind Power on transmission systems – Planning, Reliability, and Operations – prepared by – GE Energy (March – 2005) 19. Indian Wind Turbine http://www.indiawindpower.com

Manufacturers

Association

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20. http://www.emerging-energy.com/user/marketstudies.aspx?catid=1 21. www.newenergyfinance.com 22. http://www.moneycontrol.com/india/news/results-boardroom/lt-eyes-larger-highquality-orders-for-ec-biz/361393 23. http://www.moneycontrol.com/news_html_files/news_attachment/2008/LarsenTo ubro-16-10-08-PL1.pdf 24. http://www.lntenc.com/lntenc/ezine/jan09/Performance_for_the_quarter_ended_dec08.pdf

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