High Risks, Low Returns

Industry perspective on challenges in the wind energy segment

The woes of the wind energy segment just don’t seem to end. The bad financial health of original equipment manufacturers (OEMs), non-payment of dues by discoms and curtailment of energy are some of the key challenges being faced by the industry. The tariffs are perceived to be too low by both developers and OEMs, making it difficult for them to survive. At the “Wind Power in India” conference organised by Renewable Watch, key representatives from GE Renewable Energy, ReNew Power, the Indian Renewable Energy Development Agency (IREDA) and Sprng Energy discussed the challenges in the wind energy segment and the outlook for the future. Excerpts…

Thibault Desclée de Maredsous, Chief Marketing Officer, GE Renewable Energy

The total installed renewable capacity of GE Renewable Energy is over 150 GW, of which about 60 GW is wind while the rest is mainly hydropower. Our renewable energy capacity in India is currently growing, with a few gigawatts already installed across hydro, wind and solar. From a technology standpoint, wind turbines have seen a rapid technology evolution. Ten years ago, a new machine was expected to remain relevant in the market for 5-10 years. That is not the case any more. Now, the blades are becoming bigger and the turbine size is also increasing. We are facing new challenges in terms of access to the sites, transportation and logistics. We need optimisation not only in the design and manufacturing of turbines, but also in their transportation, installation, and operations and maintenance (O&M). We are also witnessing technology evolution in blades. GE has released a product that uses segmented or jointed legs. This eases the transportation and installation of such blades.

Wind is the cheapest source of energy in many markets and will continue to be one of the most competitive sources of generation. The costs are declining at a very fast rate due to scale and technology improvements. The segment first adopted feed-in tariffs and then moved to an auction regime. It works as long as the frameworks are clear and we don’t have retrospective policies. There are concerns about not having enough OEMs in India. This can be an opportunity for GE since the margins are quite thin and are getting thinner. The support of OEMs with good financials will be required if projects are to be timely executed at the targeted cost. The kind of margins that we get depend on the maturity of the market, where we stand, how long we have been present in the market, and the scale of our operations. From a margin perspective, the US is among the most attractive countries right now. It has put in place a production tax credit mechanism, which has been driving strong growth in the market. This tax credit is going to fade out by 2021 or 2022, but even after that the market won’t get smaller.

GE Renewable Energy’s current manufacturing capacity in India is several thousand sets per year for blades. For turbines, it depends on the type of platform, but we can serve the Indian market with several hundreds units a year. One of the challenges is the supply chain, the way it is framed, and how it is built going forward. It depends on whether you localise a lot or use export hubs as a way to optimise OEMs. Most of the components for wind plants are imported from China, but the tariff war might lead to some issues and new challenges. We are perpetually concerned about our supply scheme and footprint, whether it is for assembly of blades, or sourcing gearboxes and other components from suppliers. Today there is a lot of capacity available in China, especially from Chinese manufacturers. This creates strong competition in the Chinese market between Chinese OEMs and OEMs from Western countries. Since China has lost some competitiveness in terms of supply chain, it gives India and other Asian markets an opportunity to tap this market.

Balram Mehta, President, Wind & Asset Management, ReNew Power

With over 4.5 GW of operational and under-development wind energy assets, ReNew Power has one of the largest wind energy portfolios. We have a solar portfolio of close to 8 GW, including operational and under-construction projects. When we started operations, we were a wind IPP, and slowly we shifted to solar and at present our portfolio is two-thirds wind and one-third solar. As an IPP, we are technology-agnostic. We analyse the internal rate of return as an investor and whichever technology gives better return, we go for that. Given the complexity and issues facing the wind power segment, solar has emerged as a preferred investment opportunity. It is easier to execute, operate and maintain a solar power plant as compared to a wind power plant.

My personal opinion is that it is difficult for both OEMs and IPPs to make any money out of wind projects at the prevailing tariffs. But somehow, both are surviving and working towards making these projects successful for investors. The tariffs have already gone up from the initial Rs 2.40 per kWh to above Rs 3 per kWh and are still increasing. At the emerging tariff rates, we can certainly make some returns and OEMs can also survive. The increasing wind tariff is a positive trend. Regarding the uncertainty of wind PPAs, it is getting difficult to convince foreign investors that the problem is being solved. This is a problem as most of the IPPs are funded by foreign investors. The states of Tamil Nadu, Andhra Pradesh, Telangana and Karnataka are facing payment issues related to discoms. In these states, payments have been due for 12-18 months. Meanwhile, Maharashtra and Rajasthan are now paying on time. Instead of working productively, we are managing old payments by financing through equity, working capital and other loans.

The issues related to connectivity have largely been resolved over the past year and a half. Earlier, there was a mismatch in the individual plans of Powergrid, the Solar Energy Corporation of India (SECI) and the MNRE. There is now better collaboration and synchronisation among these entities in the context of new transmission lines and substations. There is only one central utility working on connectivity infrastructure as opposed to many developers that work on building generation capacity. Even though taking decisions through the CERC takes time, we are not facing issues as far as connectivity is concerned.  In order to address challenges in the construction, sourcing and operation of plants, the centre and states need to be in sync. An example of mismatch between the centre and state was project development in Gujarat. As an investor, land allotment was a major issue that we faced. The planned capacity is not yet operational due to land confusion. The challenges faced at the site include local issues, local right of way (RoW), interference and the lack of law and order. The deteriorating health of OEMs is affecting the construction of projects. They are not able to continue the project because of their own internal issues and the financial crunch. Another pressure point for the segment is related to the overall investment environment of the country. All the IPPs are facing the same issue and are therefore going slow. On the operation side, the OEMs under financial stress find it difficult to operate and maintain the machines. We have openly declared that we will take over the O&M of some of them and build our own set-up. To this end, we are getting in touch with our technology partners. Finally, a key issue on the operation front is the shortage of skilled manpower. Even if we find workers who are qualified on paper, finding intelligent and willing manpower is difficult.

The industry also faces the issue of curtailment. There is 40 per cent curtailment in Andhra Pradesh in the current high wind season when the machines are running at full power. In Karnataka and Rajasthan, there is curtailment of 25 per cent and 10 per cent respectively. The months of May, June, July and August constitute the high wind season, when the majority of the annual revenue is generated. There are several technical as well as commercial reasons that make it difficult to control curtailment.

Chintan Shah, Director, Technical, IREDA

IREDA has financed around Rs 650 billion worth of projects. Of the total financed projects, around 50 per cent are for the wind energy segment.  These days consortium financing seems to be the norm. This is because the size of projects is going up to 250 MW-300 MW and the cost incurred to implement such projects is also increasing. With the cost of setting up a project going up in the range of Rs 20 billion, no single bank would like to finance it alone. So it has become necessary to have a consortium of at least two or three bankers.

I think the states should be pushed to float more wind tenders. This is because a huge amount of wind resources available at the state level are not being utilised. Along with SECI bids if the state agencies float 3-4 GW of bids, the total number of bids can go up to 8 GW. As far as the capability is concerned, we have enough manufacturers and service providers to implement such projects. With the help of existing and upcoming technologies, the wind power potential can reach up to 500 GW.  Also, the repowering potential in the country is huge. Currently, repowering is happening in India wherever it is feasible. But there are challenges in repowering. This is because most of the repowering will happen for projects that are 15-20 years old. The market norms were different in those days and developers used to own two to four turbines. Going forward, the industry needs to estimate the entire repowering potential. While the economic rationale for repowering is valid, the problem is that each project owner has to be convinced that repowering is beneficial. Also, there is a need for a commercial model for the industry. As a banker, we will encourage it.

To resolve the transmission constraints in India we require a modified case to bidding for wind. The bids should be based on the requirements of substations. In the latest wind tender, we can see a glimpse of the modified case to bidding wherein the tendering agencies have specified the substations as well. The PPAs are governed by the Indian Contract Act. If the contract itself gets questioned, then the entire process of project development is impacted. Therefore, the PPAs cannot be broken. A way for the central government to govern the PPA crisis in Andhra Pradesh is to impose a condition that the funds for UDAY will only be disbursed for states where the PPAs have been honoured. Apart from PPA issues, there is a shortage of working capital for most of the service providers and OEMs. Also, as a banker it is important that the reps and warranties of the OEMs are maintained.

IREDA has recently announced a new scheme to increase liquidity in the market. We are looking to capitalise the generation based-incentive revenue for most wind projects by providing top-up loans. This is a secure instrument for IREDA, which will benefit borrowers in the form of instant liquidity in the market. The costing is associated with the interest rate, which is further based on the type of borrowers. Apart from financing wind, IREDA finances solar projects and is foraying into the bioenergy segment as well. Going forward, IREDA is also looking to enter the electric vehicle market, which is seen as a sunrise sector.

Gaurav Sood, Chief Executive Officer, Sprng Energy

We have a portfolio of around 1.75 GW, comprising both solar and wind projects. The wind portfolio is 800 MW, of which 200 MW is operational while 600 MW is under construction. Wind power development involves many risks. This is because a wind farm is spread out on a large area of land. This translates into higher risk during the construction of transmission lines as well. In addition, there are RoW issues. Moreover, OEMs have been going through a difficult phase. So today, IPPs are left with very few options in the market. Even in the O&M phase, IPPs are dependent on OEMs to a very large extent. I think when bidders are bidding for solar and wind projects they give all these risks a weightage and then calculate the returns accordingly.

Now new risks have cropped up in Andhra Pradesh, but the positive aspect of this is that the developers who took the case to the high court got a clear ruling that the government’s orders are not legally tenable. The issues of generation curtailment and long-pending payments are also being discussed. Eventually, the case is bound to come to a logical conclusion and will settle. However, investor confidence will be shaken. The issue of delayed payment of dues by discoms has got aggravated states such as Telangana, Andhra Pradesh, Karnataka and Madhya Pradesh. This is corroborated by the various IPPs present in these states. Curtailment has not been an issue in Sprng Energy’s portfolio so far though technical constraints do exist, especially in wind projects. Overall, barring one or two states, curtailment has not been a major issue. In terms of return expectations from projects, the investors are looking for returns in the mid-teens or early mid-teens. The delivered return will be different because of the associated risks and curtailments that exist. If the investors expected mid-teens, the actual returns may be in the lower teens.

India is a large market and we are keen to grow in this segment. A key reason behind this is the growing competitiveness of renewable energy sources. There is scope for many players in the segment since the pie is quite large. If one company picks up an entire tender, it would be out of competition for the next one. The government’s planned trajectory has sufficient solar and wind tenders in the pipeline, so there won’t be any shortage.

Another important trend is the presence of very few greenfield developers. There is plenty of capital and appetite in the market for buying operational projects. Greenfield competition will keep decreasing, especially with the volume of government tenders coming up. There are also risks during construction, which are mainly due to the capital being institutional or foreign. These risks could be regulatory risks or risks associated with local areas. India is still an attractive market for foreign investors even when the returns they get are in the low teens.

“The support of OEMs with good financials will be required if projects are to be timely executed at the targeted cost.”

Thibault Desclée de Maredsous

 

“Given the complexity and issues facing the wind power segment, solar has emerged as a preferred investment opportunity.”

Balram Mehta

 

“While the economic rationale for repowering is valid, the problem is that a project owner has to be convinced that it is beneficial.”

Chintan Shah

 

“India is still an attractive market for foreign investors even when the returns they get are in the low teens.”

Gaurav Sood

 

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