Partnerships are key to driving the uptake of renewables for industrial use. In Tamil Nadu, India, the textile industry, state and central governments joined hands to harness wind power. As power costs fell significantly, it remains an attractive lesson for the Global South on how to boost competitiveness through green energy.
This thought piece was first published in the Supporting Indian Trade and Investment for Africa (SITA) technical report, Facing the Future (2020). It was written by B. Lakshminarayana, Executive Committee Member, Southern India Mills Association Cotton Development and Research Association (SIMA CD&RA), India.
Green energy has been a key area of discussion in several countries for the past three decades. Predominantly, it was the governments that invested in establishing the infrastructure for green energy and in distributing the power. However, with lofty investment outlays and fluctuating budgetary priorities, the development of green energy was put on the back burner in many countries. The state of Tamil Nadu in India formulated a model in the late 1990s, which saw the active participation of manufacturers in the investments to finance the move towards green energy and thus partially shifted the investment burden from the government to the industry.
Tamil Nadu currently contributes more than 35% of spinning capacity in India. In the 1990s, the state’s contribution was more than 40%. Power is a major cost for the industry, representing typically 10%–13% of sales for a spinning mill. As India opened up its economy in 1991, the high power costs were a veritable threat to the long-term survival of the industry in the face of foreign competition. Moreover, power was almost entirely procured from conventional sources, while renewable energy sources like wind promised a significant reduction in costs. Wind energy and the allied technology, though nascent, was beginning to be seen as a viable alternative, and Tamil Nadu had some of the country’s most promising wind sites. Thus, in 1996, the Southern India Mills Association (SIMA) took the initiative and discussed the opportunity of generating wind power with the Tamil Nadu State Government. The state government put together an attractive investment model for the industries that were committed to set up wind mills, route the energy produced through established networks and consume it in their factories. The following are the salient features of the 1990s’ investment model that exists to this day:
Merits of the above policy for the government:
Wind energy can be profitably and efficiently tapped only during 5–6 months in a typical year in Tamil Nadu. The power generated during these active months could be banked for future use by the factories, based on unit credits. The above model worked very well for the investor in Tamil Nadu due to this “banking of power”, which ensured a steady, year-round supply of energy. From 2018, the power banking facilities were terminated in favour of facilities to forecast power needs and consume the power generated immediately, in order to improve grid functioning. Power costs, which are usually 8.5–9 cents per unit, can be brought down to 3 cents per unit if it is generated via wind energy, entailing enormous cost savings for power-intensive industries. Moreover, the central government policy that allowed investors to claim 100% depreciation on the back of their capital expenditure for installing windmills ran for the initial five years after the roll-out of the model and was a significant factor towards its success.
Evacuation infrastructure and the availability of sites with the ideal wind speed are other physical factors that contributed to the model’s success. The wind speed needs to be optimal to efficiently produce electricity, but also preserve the blade quality for a long period of time. Similarly, without an effective evacuation infrastructure, much of the power generated in the wind-rich months cannot be used during the rest of the year. Private investors from all over the country have invested approximately $6 billion to reach an installed capacity 10,000 MW of wind energy as of 2019 in Tamil Nadu, a huge increase from the 200 MW generated in 1996. The reduced power costs have motivated investors to expand their business and, perhaps more importantly, allowed smaller firms to remain financially viable. A system of “group captive usage” enables smaller firms to buy a stake in the wind power generation facilities of a larger firm and use the energy. This ensures that firm size is not a prohibitive factor in setting up wind power facilities for industrial usage.
As this model has shown, a key recipe for success is concerted investments made by both the public and private sectors. The state government in Tamil Nadu provided the evacuation infrastructure for routing the power generated, which otherwise would have been a challenge for private investors to undertake efficiently. Similarly, the central government schemes of allowing 100% depreciation claims on the investment cost and the availability of soft loans acted as a catalyst for the expansion of the model, allowing mills of all sizes to invest in generating wind power. On the other hand, private investment was channelled towards buying land and erecting the windmills as part of their capital expenditure, which averted fiscal pressures on the public budget.
Going forward, to optimize land usage with newer, more efficient windmills that take up a larger acreage, SIMA has proposed the installation of solar panels on the ground, thus creating hybrid green energy zones. Rooftop solar power generation is already growing in popularity across the state and, in coming years, it will represent an even higher percentage of industrial power supply.