The year 2016-17 was marked by multiple changes aimed at reviving investor interest in the wind energy segment in India. While regulatory changes such as a reduction in accelerated depreciation (AD) benefits were brought in, the year also saw a transition from feed-in tariffs (FiTs) to competitive bidding for project awards. Amidst all this, the segment added a record capacity of 5.4 GW. Renewable Watch presents the views of industry stakeholders regarding the recent trends and developments, and their impact on the future of the wind energy segment…
What are your views on the recent wind power auction result? Are the bids viable?
In terms of project allocation in the wind power segment, the 1 GW tender by the Solar Energy Corporation of India is a breakthrough. Going forward, this could initiate the movement towards reverse bidding mechanism for wind project allocation in the country, shifting away from the existing FiT regime.
With regard to quoted tariffs, while the bids are aggressive, viability concerns might not be significant on account of lower offtake risk and higher project size, resulting in economies of scale as well as a strong track record of the winners.
The results are an outcome of competitive bidding and the bids are definitely viable and achievable for a state like Tamil Nadu. There are several reasons for this. The land required for the project has been acquired at a relatively cheaper price and thus the project owners have an advantage. Funds are available to the bidders at a much more competitive and concessional price. They are also enjoying a concessional original equipment manufacturer cost. With the recent project, the plant load factor (PLF) could be in the range of 38-42 per cent.
It is a very subjective matter. Without calling the bids fully viable or unviable, all we would like to say is that they were extremely aggressive. In order to deliver these numbers, every assumption has to fall in place. There is no room for any surprises and zero margin for errors. The comfortable bid should have been Rs 3.70-Rs 3.90 per kWh. The reason for the bids going so low could be that some companies might have had some old sites close to the central transmission utility (CTU), which gave them a competitive advantage.
Apart from that, we see the scarcity of supply as a big factor. Other than this 1,000 MW, there was no other wind project in the pipeline. In that case, even if you are earning optimal returns, it is enough to make the growth pipeline visible to its investors. Moreover, there are speculations that new turbines will be provided by Gamesa or Vestas at a lower price, which will reduce the project cost. Even lenders have agreed to finance these projects as they have zero visibility of project pipeline. Hopefully, 50-70 per cent of these projects will materialise.
The Indian wind industry witnessed a historic low tariff in the very first auction in the segment. Surprisingly, the bidders quoted a tariff that raised concerns over the sustainability of the industry. The return on any tariff depends upon the availability of wind in the project area and the technology employed to harness it. We may assume that the developers have chosen a high wind site, which would yield a satisfactory return even on such low tariffs.
The other side of the coin is to develop the technology. No doubt, developers may come up with bigger capacity turbines, which may lead to substantial returns even on such low tariffs. On a positive note, let us think about advancing the technology and making the sector even more viable with healthy discoms, which will in turn be beneficial for the entire industry. Another way to ensure returns is by executing the project efficiently within the standard 18-month gestation period. A positive point of the auctions is the likelihood of signing of power purchase agreements (PPAs) in advance, which has been a major concern for developers.
Do you think that states like Gujarat and Andhra Pradesh are justified in stating that they would not allocate new projects at more than Rs 3.46 per kWh?
The price discovered is definitely a benchmark that needs to be looked at for new projects as it captures efficiencies arising from competition. However, the tariff for a project, amongst other factors, needs to take into consideration the PLF from a site, the offtaker risk, logistics cost and distance from the nearest substation, which varies from state to state and site to site. Hence, to this extent, some recalibration of the discovered tariffs will be required.
Every state is peculiar in its own way. Making Rs 3.46 per kWh the benchmark is not the right approach. Bidding is totally dependent on the state of technology, project location, bureaucratic adherence and financial flexibility, which might not be the same in all states or even for different locations in the same state. The price is largely driven by the expectations and demands of the discom, which could be different in different states.
Every investment is subject to conditions at the time of decision making. When people invested in the recent wind tender, the conditions were favourable for low prices. In fact, the project location significantly matters in calculating the price of the project. Therefore, states are absolutely not justified in capping tariffs.
This move by the states is not favourable for the wind energy target that the government has set for 2022. Benchmarking this cost will definitely push the industry a step backward. It will only get worse as other vital supporting incentives like generation-based incentive (GBI) and AD have been rolled back. This will delay the execution of projects, which developers had planned in the fourth quarter of 2016-17. The kind of capacity addition that we have seen may reduce as developers and investors will find it difficult to sustain projects at this price with the prevailing technology.
How are states likely to fare in terms of the response to their respective auctions vis-à-vis centre-allocated projects?
With respect to individual state bids, two factors — the PLF and offtaker risk prevalent in the state — majorly determine the response to a bid in terms of price discovery. The size per project is also a relevant factor and smaller allocations will have a reduced advantage of economies of scale.
If the states are planning to take the competitive bidding route for project allocation, it should be welcomed. It is the most efficient way of allocation.
It will depend on a number of factors. First, the availability of projects at the state and central levels. Second, if the tariff will also increase with change in the counterparty and product structure of each project. Third, the competition between solar and wind cannot be avoided. Solar tariffs will play a role in determining wind tariffs. Last, the tender structure also affects the state’s response. For instance, Gujarat’s tenders have been oversubscribed for projects.
We do not have a very clear picture on how auctions will be done by the states and what would be the guidelines. We also do not know how the agencies would be dealing with the existing tariff policy. This uncertainty needs to be cleared by the regulators very soon.
However, we can say that power evacuation in CTU-connected projects will not be a problem as compared to the states because of better infrastructure availability. This factor may influence the wind power tariff and the state-driven auctions may see higher tariff compared to CTU-connected projects.
What is the future outlook for the segment in terms of policy, project allocation, capacity addition, cost and technology? What are the unaddressed issues?
Wind-based capacity of 5.4 GW was added in 2016-17, which is the highest ever annual capacity addition witnessed in the segment. The removal of GBI and reduction in the AD benefit may counter some of the erstwhile drivers of capacity addition. However, the newly discovered tariffs make this source of power quite attractive. Further, with the success of mechanisms such as centralised reverse auctions in wind, it is likely that demand for wind energy procurement from non-wind-rich states will pick up. However, how the overall demand for electricity unfolds will drive growth in the wind and other segments.
According to the latest Bloomberg report, wind is one of the cheapest sources of power generation. Wind is a very mature industry, with a well-defined manufacturing base that is over 30 years old and high standards that have been set either by the National Institute of Wind Energy or internationally accredited agencies. Thus, the industry is expected to grow in the near future.
On the technology front, we will continue to import technology from the West. Having said that, there are indigenous technologies that allow developers to customise turbines, and make changes to optimise generation and minimise maintenance costs. The biggest challenge on the technology front, however, is infrastructure.
Also, regulations have played a very significant role in determining the price of wind energy. But once competitive bidding is in place, the role of the regulators will decrease. On the policy front, we should create an open access environment. It has to be mandated through the enforcement of renewable purchase obligations.
The government should look at building a policy on exports. However, it entails two major challenges. First, if one wants to move goods from India to other countries, prices have to be higher to make the market competitive because of the freight charges in India. Moreover, banks will have to provide competitive credit, which will require the formation of an export bank. A focused policy on the green line of credit is highly required. Make in India and exports from India have to be on a level playing field as our finance costs are very high.
Meanwhile, Andhra Pradesh has an advance PPA signed for 1 GW of wind projects, and Karnataka has an advance PPA for around 300 MW and is planning an additional 700 MW. Tamil Nadu will continue with the FiT regime and will add about 400 MW this year, while Gujarat has signed an advance PPA for 300-400 MW of wind energy.
Of the 1,000 MW that was auctioned by Solar Energy Corporation of India in the competitive bidding tender, 60 per cent is expected to be commissioned by March 2018. Cumulatively, it will give us about 4 GW of upcoming wind power capacity in the near future. It is also likely that the Ministry of New and Renewable Energy will open bids in mid-July. The Indian Wind Turbine Manufacturers Association will play its role in suggesting bigger bids to the tune of 5-6 GW.
On the policy front, I would like to discuss my wish list. We are not looking at subsidies or very high FiTs. We are in an auction-driven world, but what we expect of the government is uniformity in policies, good visibility of programmes in pipelines and sustainable bidding levels. It should also provide a fair playing ground for all companies.
For project allocation, there should definitely be inputs that will facilitate GBI, counterparty, evacuation clarity, and timely approvals and permits.
As far as cost and technology are concerned, there is constant development in technology. Increasingly, European and American turbine companies such as Vestas and Gamesa, and even domestic companies like Suzlon are coming up with new wind turbines. In addition, logistics and support have to be taken care of as well.
All technologies should be given fair treatment and one must not be considered better than the other. Thus, parallel development of solar and wind needs to be ensured for sustainable energy development.
The future wind market will be driven by the competitive bidding regime. Project allocation and capacity addition will definitely slow down for a period, which may be considered as a transition for the entire industry. Developers may have to find out cheap financing sources to survive in such low-tariff conditions. Manufacturers will have to come up with much bigger turbines and improved technology to yield maximum returns even at sites with low PLFs.
The situation can be improved by granting a must-run status to these plants. The readiness of the CTU infrastructure to evacuate this power is also a concern for us, which needs to be addressed in time.
We are positive about this development and expect a strong order book as we are the most cost competitive in the industry.