Auction Impact

Uncertainty and upheaval in the wind segment

The results of the first tranche of 1,000 MW capacity tendered in February this year have had a mixed response. With drastically low prices being discovered in the tender, the industry is concerned about the competitive pressures and the renegotiation of old power purchase agreements (PPAs). Meanwhile, the wind power manufacturing segment is distressed due to the low capacity additions expected over the next two years as the market struggles with challenges as it transitions to a competitive bidding regime. At Renewable Watch’s recent “Wind Power in India” conference, industry stakeholders discussed the current scenario and future prospects of the segment, the reasons for the falling tariffs and their recommendations to the Ministry of New and Renewable Energy (MNRE). Excerpts…

 

Sanjay Nagrare

Sembcorp Green Infra Limited currently has an operational capacity of 1,000 MW and 250 MW capacity is in the construction phase. The wind energy segment is in the midst of change, moving from the feed-in-tariff (FiT) regime to a competitive bidding-based mechanism. There are multiple teething problems regarding the upcoming wind power capacity, supporting infrastructure and domestic manufacturing. We expect the government to help provide the right environment where everyone makes reasonable returns and the industry eventually grows. Grid integration and integrating renewable energy with conventional sources in a manner that there is a set-up akin to the “energy-on-demand” mechanism are the goals that the industry must strive to achieve. To this end, renewable energy storage solutions and renewable-thermal hybrids are some options that the government needs to promote. Once the initial hiccups are addressed, project allocation through auctions will prove to be a favourable policy change for the industry.

We are quite optimistic about the Indian wind power market. Increasingly, the market is becoming more transparent, creating a comfortable environment. One of the problems emerging now is the refusal to sign PPAs of the previously allocated power plants by discoms. We feel that all PPAs that were signed should be honoured to create a stable regime. Moreover, steps have been taken to integrate renewable energy with the grid. There has to be an enabling framework to bring down the levellised cost of electricity for Indian consumers.

We feel that bids are at a realistic level, bringing value to the whole process. For instance, earlier project sizes varied in the range of 25-50 MW, with a few of them going up to 150 MW and suddenly it has gone up to 250 MW due to auctions. This increases the value of the project’s finances by providing scale. Moreover, there are emerging means of financing that provide capital at a lower cost. In addition, newer technologies and innovative wind turbine generators have increased the plant load factors, all of which translate into a lower levellised cost of electricity.

Regarding the issue of payments, we feel that some states have improved, but there are no systemic reasons for that improvement. For curtailment-related challenges, we see an encouraging trend of increased emphasis on scheduling and forecasting. This would certainly improve the issue of curtailment.

What we are looking for from the MNRE is certainty, in terms of the opportunities that are going to be available in the market. To this end, the bidding pipeline should be made more transparent so that companies could plan accordingly. Also, there should be guidelines for states to help them conduct the bidding with clear dos and don’ts. Similar to the central bids, PPA risks need to be addressed for state bids as well through robust payment security mechanisms.

Sudhir Nunes

Orange Renewable is an independent power producer (IPP) in the renewable space. Our wind power vertical has an operating capacity of 567 MW, while that of solar stands at 190 MW. At Orange, we have been preparing for a competitive bidding environment in the wind power space, to which end we changed our strategy and entered the arena of self-developed projects, marking a deviation from the strategy of our peers. As a result, we did a few projects including 100 MW and 50 MW in Madhya Pradesh and another one in Maharashtra. We have also focused on building a pipeline of greenfield projects of approximately 2 GW that are currently at various stages of development.

Our experience as a developer has been varied. On the one hand, we have benefited greatly from the understanding of the true economics and risks of projects, which has helped us not only in looking at the upcoming turnkey projects opportunistically, but also in being able to negotiate the contracts more effectively. On the other hand, given the obstacles we have faced for project execution as well as getting the PPAs, we have developed a healthy respect for the original equipment manufacturers and project developers. There have been some serious troubles, particularly in the recent projects that have come online at a time when there has been a fair amount of pushback from the discoms as they are not interested in offtaking FiT-based wind power due to high tariffs. The key message is that the industry needs to move quickly with the bidding mechanism so that we can add significant capacity in 2019. Over the past year, we have become more optimistic regarding the sector because of the introduction of competitive bidding. There are only a few countries that have the overall visibility of a target of anywhere from 3-5 GW per annum.

Since we are participating in the bidding process, I would not want to comment on tariffs. However, it must be noted that in the first bid, there was a drop of about 30 paise purely because of a technicality in the way the bid was structured. This has, however, been modified in the current bid. Also, with the increase in competitive pressure, companies are looking closely into various factors of financing, design, life and any other factor that will allow them to lower their costs. Given the current circumstances we expect that tariffs are probably going to be low for the upcoming tranche as well.

In terms of the issue related to late payments by discoms and curtailment, there is one state where the curtailment has not improved and a legal battle continues between developers and discoms about its reasons. A similar situation prevails in some other states, such as Andhra Pradesh but those are due to delays in providing transmission access. On the flipside, even as the issue of payments continues to be severe, some states like Rajasthan have improved in this respect.

One of the suggestions to MNRE would be to strictly enforce the must-run rights of renewable power plants. Further, lifting the restrictions and allowing full tariff availability on early commissioning would help the segment grow. Also, the strength of the termination penalty must be increased, similar to what Gujarat offers in its PPAs.

Mahesh Palashikar

Renewable energy is one of the biggest businesses at GE, and includes onshore and offshore wind power, hydropower and the blade manufacturing business through its recently acquired LM Wind Power. The fundamental philosophy of the company is to be continuously aggressive in the pursuit of a lower levellised cost of electricity through technological innovations. Therefore, irrespective of the policy regime the technology barriers need to be pushed to bring down the costs of power. Moreover, GE has an industrial internet operating system called Predix, which is an open source platform where the company develops applications for improving the asset performance.

India continues to be one of the largest electricity consumers and given the economic trends and expected industrial growth, the demand for power will continue to increase. Therefore, there are opportunities not only in terms of total energy consumption but also renewable energy production. One reality that the country needs to accept is that about 70-80 per cent of the wind markets in the world today are auction based. This is a reality that we better accept and adapt to. As we wake up to this fact, we need to identify ways to perfect the process for which we may need to learn from other countries that have already done it.

The trends we see globally are not new to the domestic market either. These are bigger MW ratings, larger rotors and taller hub-heights. However, the Indian setting has much lower wind speeds as compared to China. So, through the available technology mentioned above, the levellised cost of electricity must be brought down through additional technological breakthroughs in India. This could be done through the use of different material in the wind turbine or the design of the towers or the control systems. The cost reductions by bringing these changes will not be small, instead they may result in a breakthrough decrease in the cost of energy.

We believe that whatever the progression in the auctions, there are four or five major stakeholders in the field. There is an investor who expects certain equity returns; then there is a lender who can only afford so much of debt level, and further, there is the technology provider who can only go up to a certain point to survive.

The ministry should look at a phased ramp-up of the capacity of auctions and we believe there are multiple global examples that we can learn from for better implementation of this. In addition, progressive and not retrospective certainty in policies is required.

Ramakumar, P.

Kshema Power is focusing on three business verticals including wind farm development, rooftop and grid-connected solar power plants, and power transmission and distribution projects. Its work portfolio includes about 2,500 MW of capacity distributed across Tamil Nadu, Madhya Pradesh and Kerala. We have about 900 MW of wind power projects under development at various stages in Karnataka, Tamil Nadu and Maharashtra.

Kshema Power’s experience in this business has been a mixed bag. We have witnessed a sharp change in the existing industry practice, which will prove to be good given the rise in energy consumers and the challenge to keep the cost to lowest levels possible. Getting the right kind of land and ensuring smooth grid-connectivity have been some of the primary issues in the wind industry. What makes it even more challenging is the fact that these need to be addressed during the short duration of project completion schedules specified in the development guidelines.

While IPPs are optimistic about the way the market has turned around, only the execution of the projects will really determine the commercial sense of these projects. This is important because when it comes to the physical execution of the project we have seen high cost overruns at multiple locations. For example, in the case of Tamil Nadu there have been cost overruns because the actual land costs are much different from those available on paper. Moreover, there are issues with respect to the right-of-way and access to the lines. Despite these risks and challenges, the new trends in the wind power industry are going to be project allocation and tariff determination through reverse bidding and innovation to optimise the project execution process.

In the current scenario, it seems as if the industry did not expect tariffs to fall to such drastically low levels. So, with the impending second 1,000 MW tender by the Solar Energy Corporation of India (SECI), there is still some scepticism regarding prices. We feel that while the bids were aggressive in the first auction, they are going to remain at similar levels for the impending second tranche as well.

It is important for SECI’s initiatives to be complemented by the states. However, except Tamil Nadu and Gujarat, not many states have come forward to take it up. So the question arises as to where the future wind capacity is going to come from, beyond the already saturated wind power states. Meanwhile, we are developing projects worth 500 MW in Maharashtra and about 380 MW in Karnataka, which are both good wind states. But the investors do not seem to be quite convinced regarding this. This will, however, change with growing capacity addition.

Our recommendations to the MNRE are that it should look at enforcing state-specific directions for investors to get greater clarity on bids. Further, given that each state has a different wind regime, there is a need for state-specific guidelines that can help projects become more attractive.

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