Risk Assessment

Impact of competitive bidding on the wind power segment

The last seven rounds of bidding, four undertaken by the Solar Energy Corporation of India and one each by the states of Tamil Nadu, Gujarat and Maharashtra, proved to be quite successful. A total wind capacity of 7.5 GW was tendered in these auctions. In a span of just 15 months, wind power tariffs reached a new low of Rs 2.43 per kWh, resulting in improved wind power offtake. This has also boosted the confidence of developers and discoms alike.

Although the consecutive wind capacity auctions have witnessed a positive response and mega auctions have been planned for meeting the country’s wind capacity targets by 2022, the segment continues to face multiple risks that need to be mitigated in order to ensure maximum growth. Renewable Watch has identified the key risks faced by the industry, and grouped these under four categories on the basis of their severity and the duration of impact.

Category I risks

Risks that have a high, long-term impact on segment growth as well as the concerned stakeholders are grouped under Category I risks.

  • High entry barriers for small players: While most of the small players do not have the required credentials to qualify for bidding in the large capacity tenders, the players that do qualify have to quote very low tariffs to stay ahead in the race, which impacts their profits. Smaller players also do not have access to low-cost financing, unlike large companies. These factors make competitive bidding an unviable option for these players. Thus, they either take a hit on their margins or get acquired by a larger company when unable to survive. Providing concessions or launching separate auctions for smaller capacity players can help prevent the monopolisation of the wind sector and promote greater competition.
  • Inadequate transmission infrastructure: The existing transmission system in the country is not capable of integrating large amounts of renewable energy, particularly wind, into the grid. Many bid openings have been postponed recently due to the unavailability of adequate transmission infrastructure. In some cases, wind developers have to wait for prolonged periods to get access to power evacuation bays. The delays in the central government’s Green Energy Corridor project for improving transmission infrastructure and longer gestation periods of such projects in comparison to wind projects will prolong these issues.

Category II risks

Risks that have a high, short-term impact on wind capacity additions are grouped under Category II risks.

  • Power purchase agreement (PPA) renegotiation: The last few wind auctions saw the discovery of lower tariffs, prompting certain discoms to renegotiate tariffs on previously signed and approved PPAs. Some of these projects were approved during the feed-in-tariff (FiT) regime, when project costs were much higher, and a reduction in tariffs would make the projects unviable for the developers. In many cases, tenders have been cancelled as developers did not agree to the renegotiated tariff, leading to conflict in the entire segment. However, stable tariff levels and uniform laws for PPA enforcement will reduce the risk impact in the future.
  • Trajectory restriction: Under the FiT regime, all developers willing to set up capacity and sell wind power to discoms were eligible to do so, whereas in competitive bidding, only the lowest bidders can develop wind power capacity. This has limited the capacity development opportunities for developers. Competitively discovered tariffs are much lower than FiTs, and will therefore reduce the developers’ profit margins. This will, in turn impact the manufacturers, which will have to decrease their product prices to drive sales volumes and stay in the competition. As per the government’s trajectory, roughly 10 GW of wind capacity will be auctioned each year, which is expected to increase project visibility and reduce the impact of lower wind tariffs and sales in the near future.
  • Increased transmission charges: The Ministry of Power has passed an order to remove all interstate wheeling and transmission charges for wind projects commissioned up to March 2022. However, many states are planning to implement new and increased charges for intrastate transmission, wheeling and banking of wind energy. While the central government’s order will provide some visibility to developers and investors, the removal of concessions by states will make the intra-state transfer of wind energy more expensive. The increased charges could discourage developers from implementing projects in such states though these tariffs will stabilise after sometime and ultimately help in grid improvement, which is beneficial for developers.

Category III risks

Risks that have a low, but long-term impact on the involved stakeholders are grouped under Category III risks.

  • Payment defaults: Payment delays due to the poor financial health of discoms, resulting in a payment backlog of as high as five months, affect the financial strength of wind developers that rely on these revenues to pay off debts and run their assets. These payment delays affect the credit worthiness of discoms, resulting in decreasing investor confidence, which also leads to higher interest rates. While the Ujwal Discom Assurance Yojana is helping various state discoms improve their financial health, its progress is rather slow. Payment security mechanisms for developers are expected to resolve this issue to some extent.
  • Renewable purchase obligation (RPO) non-compliance: Under the competitive bidding regime, only a few discoms are making efforts to comply with the government’s non-solar RPO target of 10.25 per cent for 2018-19, due to lack of penalties for non-compliance. There is also no incentive for overachieving the RPO target. The impact of non-compliance is likely to last in the absence of penalties and incentives.

Category IV risks

Risks that have a low and short-term impact on wind sector development are grouped under Category IV risks.

  • Absence of competitive capital: Many Indian companies do not have access to lower interest financing and longer loan tenures as compared to their international competitors, who also have a larger capacity to absorb the risks. Hence, only a handful of domestic companies are able to compete with international players by quoting low tariffs without reducing the project viability. However, with improved visibility of wind projects, more developers are securing low interest financing for their projects, which is expected to further improve in the future.

Conclusion

In 2017-18, 1.8 GW of wind power capacity was added, significantly lower than the 5.5 GW of capacity additions in 2016-17. This is because certain risks continue to hamper segment growth. While the transition from the FiT regime to competitive bidding has resolved the biggest risks pertaining to tariff and demand uncertainties, the risks categorised above continue to impact the segment. If these are not resolved on an urgent basis, it might get difficult for the government to meet its 60 GW wind capacity target by 2022.

 

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