Still Winds

Ultra-low tariffs slow down segment growth

The year 2017 will be remembered as a landmark year with regard to the Indian wind power segment. From the discontinuation of generation-based incentives (GBIs) and phase-out of the accelerated depreciation (AD) benefit starting April 1, 2017, to the replacement of the feed-in tariff (FiT) mechanism with competitive bidding, it has been an eventful year for the wind power industry.

On the one hand, the withdrawal of GBIs and the AD benefit led to the highest-ever wind capacity addition (about 5.5 GW) in 2016-17, while on the other, the transition from FiTs to auctions has put a dampener on new project installations. As of September 2017, only 421 MW of wind power projects have been commissioned against the government’s target of 4,000 MW for 2017-18. Since almost all wind-rich states have stopped signing fresh power purchase agreements (PPAs) post the first wind auction held in February 2017, the capacity addition outlook for the year seems bleak. As per industry estimates, less than 1,500 MW of projects are likely to come online during 2017-18. This will largely comprise capacity signed under PPAs that were approved by the respective state electricity regulatory commissions (SERCs) prior to the first auction.

After February 2017, not a single new PPA is reported to have been signed. Moreover, following the announcement of the second wind power auction results in September 2017, wherein the tariff touched a new low of Rs 2.64 per kWh, the signed PPAs that were awaiting SERC approval have also been cancelled in many states. For example, the Karnataka Electricity Regulatory Commission (KERC) passed an order on September 4, 2017, setting a fresh FiT of Rs 3.74 per kWh for wind power, which is considerably lower than the tariff of Rs 4.50 per kWh set in October 2015. This move was in response to the Tamil Nadu wind auctions, where the winning tariff plunged to Rs 3.42 per kWh. As a result, 599 MW of wind projects were put in jeopardy. These projects had signed PPAs with various discoms in Karnataka at the old rate of Rs 4.50 per kWh, and were awaiting approval from KERC. Of these, around 273 MW had already been commissioned and power was being supplied to the state discoms at Rs 4.50 per kWh. However, following the new order, these PPAs will have to be renegotiated at Rs 3.74 per kWh. The remaining 326 MW of capacity is still under construction. A similar scenario is emerging in other states as well. This has brought the industry to a standstill as the project pipeline has totally dried up.

The industry’s hopes are now pinned on the Ministry of New and Renewable Energy, which has stated that it will soon auction an additional 4.5 GW of capacity by the end of this financial year. However, this new capacity is not likely to be installed in less than 12 months.

In a trickle-down effect, wind turbine makers are also staring at a slowdown even as the government looks to boost renewable energy capacity. A case in point is ReGen Powertech, one of the country’s top five wind turbine manufacturers, which has recently shut down a factory in Udaipur, Rajasthan, and also laid off some workers. According to Madhusudan Khemka, managing director, ReGen Powertech, “We all have extra capacity, so it was a good decision to restructure to stay lean. We operate from the 1 GW factory in Andhra Pradesh and have reduced staff strength from 1,700 employees to 1,300.”

In yet another instance, in May 2017, turbine maker Inox Wind stated that it had stopped all manufacturing after the 700 MW of orders won under the previous FiT regime became a “piece of paper” when the states stopped signing PPAs.

Other manufacturers have also been impacted. Suzlon Energy Limited’s revenue fell by 46 per cent in the quarter ended June 2017 over the previous quarter. Meanwhile, Siemens Gamesa, the biggest wind turbine supplier in India for the past three years, saw a 7 per cent drop in revenues in the quarter ended June 2017.

Wind turbine manufacturers are facing several challenges as they adjust to an auction system that is putting a question mark on how much wind energy projects will actually get built. According to D.V. Giri, secretary general, Indian Wind Turbine Manufacturers Association, 2 GW of wind turbines are likely to be produced in 2017-18 against the earlier expectation of 6 GW, resulting in idle capacity at manufacturing facilities.

In addition, there are impediments such as curtailment of wind power procurement, payment delays and the lack of guidelines for state-level wind bids. All these issues need to be addressed on priority.

On the bright side

There is no denying that the industry is going through a tough phase as there are multiple problems pertaining to upcoming wind power capacity, the supporting infrastructure and domestic manufacturing. However, this may be looked upon as a transition phase that may bring in greater transparency and efficiency in the segment.

The auction process will ensure that bids are at a realistic level. For instance, earlier project sizes were in the range of 25-50 MW, with a few projects going up to 150 MW. With the new auction-based allocation route, project sizes have gone up to 250 MW, thus bringing in economies of scale. Moreover, the emerging modes of financing provide capital at a lower cost. In addition, new technologies and evolving wind turbine generators have increased plant load factors, all of which translates into a lower levellised cost of electricity.

With regard to payments, the Ujwal Discom Assurance Yojana has been working well. If the scheme delivers positive results, the issues of payment delays and defaults would be taken care of. Meanwhile, an increased emphasis on scheduling and forecasting is being witnessed. This would certainly address the issue of wind power curtailment. “Whenever there is an issue of curtailment, developers have the right to protest because curtailment cannot be done without due reason,” said Kumar, reiterating the government’s stance on providing must-run status to all renewable energy plants. In a recent debate on must-run status in Madhya Pradesh, the government took cognisance of this matter and issued an advisory to all state governments that must-run status needs to be honoured.

Current scenario

For the Indian wind power segment, 2016-17 was a record year, both in terms of cumulative installed capacity and annual additions, with the country emerging as the fourth largest wind energy market in the world. With about 5.5 GW of wind capacity added in 2016-17, the segment reached a total installed capacity of 32.3 GW as of March 2017. However, the year 2017-18 (up to September 2017) has witnessed a major slowdown as discussed above. The capacity till date, therefore, stands at 32.7 GW.

Few takers

On February 24, 2017, wind power prices crashed to a record low of Rs 3.46 per kWh in the country’s first wind power auction, wherein the Solar Energy Corporation of India (SECI) invited bids for 1 GW of wind capacity based on the viability gap funding mechanism. Mytrah Energy (India) Limited, Singapore-based Sembcorp Industries, IDFC Alternatives-backed Green Infra Limited, global private equity fund Actis Capital’s clean energy platform Ostro Kutch Wind Private Limited, and Inox Wind Infrastructure Services Limited won contracts for 250 MW of capacity each at Rs 3.46 per unit. Meanwhile, Adani Power won 50 MW as against the bid capacity of 250 MW.

This winning tariff was much lower than the country’s average wind FiT at around Rs 5 per kWh as of February 2017. Notably, the winning bid was not an outlier, as is evident from the losing bids placed by Adani Green Energy (MP) Limited (Rs 3.46 per kWh), ReNew Power Ventures Private Limited (Rs 3.47 per kWh) and Gamesa Renewables Private Limited (Rs 3.68 per kWh), all quite close to the winning tariff.

Results for the second tender were declared in September 2017, and the winners included ReNew Power (250 MW at Rs 2.64 per kWh), Orange Sironj Wind Power (200 MW at Rs 2.64 per kWh), Inox Wind (250 MW at Rs 2.65 per kWh), Green Infra (250 MW at Rs 2.65 per kWh) and Adani Green Energy (50 MW at Rs 2.65 per kWh).

Meanwhile, companies such as BLP Energy, Actis LLP’s Sprng Energy, Hero Wind Energy and ReGen Powertech also quoted low tariffs. Besides the SECI tenders, the only state that has conducted wind power project auctions so far is Tamil Nadu, but it is yet to sign PPAs.

Areas of opportunity

Despite uncertainty in the segment due to the introduction of the competitive bidding regime, new opportunities are emerging in the segment. These are as follows:

Repowering: The repowering of existing wind farms has created growth opportunities in the segment. Most of the old wind turbines in India have 30-40 metre hub heights and kilowatt-scale rated capacity. Low hub heights result in inefficient power generation. With technological development and innovation, it is now possible to install turbines at higher heights, which would increase the efficiency of windmills.

Wind farms in Tamil Nadu, Maharashtra and Gujarat have a number of ageing wind turbines, which were installed during the early years of wind power development in India. Nearly 10 GW of installed projects have sub-100-metre hub heights and rated capacities of 225-1,000 kW. Of these, about 3.4 GW of plants, which are at high potential wind sites, are obsolete and present an opportunity for repowering.

The National Institute of Wind Energy (NIWE) has reassessed the wind power potential to be 302 GW at 100 metres. Based on this, the government has come up with a repowering policy that will enable owners to replace obsolete wind turbines of less than 1 MW capacity with the latest technology. To further incentivise wind farm owners, the government has promised a rebate of 0.25 per cent along with existing benefits. Although there are concerns regarding cost overruns, rebate and deployment of energy efficient wind turbines can boost repowering and help revamp the industry.

Offshore wind: While Tamil Nadu and Gujarat are seen as having tremendous offshore wind potential, the falling onshore wind tariff has raised questions on the viability of offshore wind, which has substantially high costs and tariffs. Offshore wind project cost is nearly three times that of onshore wind projects. Given their large scale, offshore wind facilities entail greater challenges, as well as specialised equipment and expertise.

The MNRE announced the Offshore Wind Policy in October 2015, after seeking consultations in 2013. Under the policy, FOWIND (Facilitating Offshore Wind in India) is reassessing the offshore wind potential in two coastal states – Gujarat and Tamil Nadu. This is a four-year project implemented by a consortium led by the Global Wind Energy Council and co-financed by the European Union and Gujarat Power Corporation Limited, among others. Currently, FOWIND is undertaking the first offshore wind resource measurement in the Gulf of Khambhat, off the coast of Gujarat. India’s first offshore wind research platform is also being developed under this project. Further, the NIWE is in the process of finalising the first geophysical survey along the coast of Gujarat. With such significant developments in the industry, the first tender for offshore wind is likely to be announced in 2019.

Solar-wind hybrids: A superimposition of wind and solar site maps shows that a large number of areas have both wind and solar potential of high to moderate level. While existing wind farms have scope for solar photovoltaic (PV) capacity addition, existing solar PV plants have the potential for wind development in their vicinity. Thus, suitable policy interventions can help in setting up new wind-solar hybrid plants, and drive hybridisation of existing wind and solar plants.

Outlook

Currently, the country has a wind power capacity of 32.7 GW. In order to meet the 60 GW target by 2022, the industry will have to add around 6 GW of capacity per annum, which seems quite an impossible target for 2017-18. If an adequate and timely push is not given to the project supply side by the government, there could be far-reaching implications for the health of the sector.

Recognising this problem, the government has announced a plan to auction 4,500 MW of capacity in three tranches in the coming months. The new tenders are expected to allow developers to bid for higher capacities of up to 400 MW as compared to the 250 MW allowed currently. This will help improve project economics and further bring down tariffs. However, for any sector to be healthy and sustainable, all stakeholders must gain. What the industry loses in terms of prices, it should earn in terms of volumes. To boost volumes, the state governments should be encouraged to come up with wind tenders. Tamil Nadu recently issued a 500 MW wind tender, and its results were declared a few weeks before the SECI tender. ReGen Powertech was declared the lowest bidder, quoting a tariff of Rs 3.42 per kWh.

If more state-level tenders are launched, it may bring the segment back on track. But given the past record and the experience of the solar power segment, which has also undergone significant delays in tendering, the 6 GW per annum number looks a bit too ambitious for 2018-19 as well. Capacity addition may pick up from 2019-20 onwards.

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