Auction Action

Industry gears up for second 1,000 MW wind tender

The success of the first wind project tender of 1,000 MW, which was oversubscribed by 2.6 times and resulted in the tariff falling to Rs 3.46 per kWh, has encouraged the government to completely move away from the feed-in tariff (FiT) to the reverse auction regime. The Ministry of New and Renewable Energy (MNRE) recently approved the second tender for allocating 1,000 MW of wind capacity through competitive bidding under the viability gap funding (VGF) mechanism.

A key objective of the government behind taking up the reverse auction route is to ensure project continuity in the segment, which may otherwise be adversely impacted by the phasing out of accelerated depreciation benefits and removal of generation-based incentives. Also, the steep decline in solar power tariffs may completely divert investor attention from wind. According to the government, the upcoming auction will encourage competition in the segment. Low tariffs will translate into greater offtake of wind power by discoms, consequently facilitating the fulfilment of non-solar renewable purchase obligations (RPOs) through wind capacity addition.

Key features

As in the earlier case, the Solar Energy Corporation of India (SECI) will be the implementing agency for the current tender, the bids for which are scheduled to open on July 17, 2017. The agency will also implement the scheme for setting up the interstate transmission system (ISTS) that will connect the upcoming wind power projects. They will be developed on a build-own-operate (BOO) basis and awarded to developers through the transparent and competitive e-bidding process followed by the e-reverse auction. In addition, 100 MW of wind power capacity will be allotted to central public sector enterprises (CPSEs) willing to undertake the development of ISTS-connected projects on a BOO basis.

According to the terms of the tender document, the bidding entity must have owned, commissioned or installed wind power projects of at least 25 MW at a single location as on the original date of bid opening. Alternatively, it needs to have completed the financial closure of at least 50 MW of wind power projects under execution as on the date of bid opening. In terms of the financial criterion, the tender requires bidders to have a net worth of not less than Rs 15 million per MW of the quoted capacity.

The bidding capacity of a developer, including affiliates and the parent company, has been limited to a minimum of 50 MW and a maximum of 250 MW. The project developer is allowed to install wind turbines generating not more than 105 per cent of the total allocated capacity. The 5 per cent buffer has been provided to compensate for the losses during transmission and any other auxiliary consumption by the plant. The MNRE has set the benchmark tariff at Rs 4 per unit. The tariff can either be fixed for the contract period or it can escalate based on the pre-defined annual escalations for a set number of years. The minimum capacity allocated to CPSEs has also been limited to 50 MW and the allocation will be at the lowest bid tariff recorded through the reverse auction process.

The developer has to identify the land for developing the project and arrange for the necessary approvals like a forest clearance certificate and a letter from the state or central transmission utility confirming the technical feasibility of connectivity of the project. The developer will be solely responsible for connecting the project to the ISTS for long-term access. The entire cost of transmission including the cost of construction of line, and wheeling charges. from the project up to the interconnection point will be borne by the developer.

The bidders will have to provide two bank guarantees for the project – an earnest money deposit of Rs 1 million per MW to be submitted along with the request for selection (RfS) and a performance bank guarantee of Rs 2 million per MW within 30 days from the date of issue of the letter of award (LoA) for the project. Bidders are free to avail of any financial incentive available for such projects as per the prevailing conditions and rules of the central or concerned state government. However, as per the regulations, any change in the conditions of existing incentives would not allow the bidder to revise its tariff at a later stage.

The tender also requires the developer to sign standard power purchase agreements (PPAs) with SECI along with the invitation for RfS. Within six months from the date of award of the project, a PPA will be signed at the reverse auction price for 25 years. SECI will also enter into a 25-year power sale agreement with buyers at a pooled price of the total 1,000 MW tendered capacity.

The project completion time frame is 18 months from the date of issue of the LoA. According to the tender document, a project will be declared commissioned upon the completion of either a minimum of 50 MW or 50 per cent of the entire project capacity, whichever is higher. In case there is a delay in completion by up to six months, the developer will have to forfeit a a part of its performance bank guarantee based on the capacity yet to be commissioned. However, if the project is delayed by over six months, the quoted tariff will be reduced at the rate of Re 0.005 per kWh per day for the remaining capacity.

The tender also emphasises on proper functioning and capacity generation from the wind power plant till the end of the PPA. In order to ensure this, the project developer has to declare the annual capacity utilisation factor (CUF) at the time of signing of the PPA. The declared CUF should not be less than 20 per cent per year, of which at least 90 per cent must be met at any given point in time. In case the project generates less than the energy corresponding to the minimum CUF, the wind power generator will be liable to pay the procurer a fine for the shortfall in energy availability unless caused by the non-availability of grid for power evacuation. On the other hand, the owner can generate 20 per cent extra power over the maximum CUF declared. The generator is free to sell the excess power to any other entity if the procurer refuses to buy it.

In order to deal with the problem of delay or default in payments by discoms, the MNRE has suggested that these utilities provide payment security to the wind power generator through a letter of credit equivalent to a month’s average bill for the project under consideration. Additionally, they have also been advised to create a payment security fund suitable for supporting payments for at least three months worth of bills for each of the projects from where the discoms will be purchasing power. The buyer can also provide guarantees to the state government to ensure there is adequate security for the wind power generator, both in terms of payment of energy charges and termination compensation.

Most of the features of the upcoming tender are on the lines of the previous one, with a few notable exceptions. The new tender will be open to all obligated entities wanting to purchase wind capacity for compliance with their non-solar RPO. Also, the differentiation between windy and non-windy states has been removed as opposed to the pilot tender where projects could be set up only in the eight designated windy states. In the latest tender, SECI will sign PPAs with the selected wind developers and back-to-back power sale agreements with utilities in order to ensure payments from discoms. Further, the scheme provides for an additional 10 per cent capacity for CPSEs, which can be availed of without the latter having to participate in the bidding process.

Summing up

Wind power currently accounts for 32,279.77 MW of the total installed capacity and 9.88 per cent of the overall power generation. However, with growing investor interest in solar projects, wind power’s share is likely to take a hit while that of solar will increase. In order to keep up with the current pace of growth in solar power capacity, a trigger was essential to raise the competitive bar in the wind power space. Competitive bidding may provide that trigger.

Adding to the momentum, many states have also advocated competitive bidding for under-construction projects. Rajasthan is expected to conduct reverse bidding for its existing 100 MW of projects, which are at various stages of commissioning. Gujarat and Andhra Pradesh are also planning to conduct reverse bidding for 500 MW of under-construction wind energy projects each. Maharashtra has announced its shift from the FiT regime and is likely to launch its first wind project tender in a few months. The MNRE has made a start. What happens next will make for an interesting story for the entire power sector.

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