India’s wind power segment has been sliding ever since the introduction of competitive bidding in 2016. The transition from a feed-in tariff (FiT) regime to an auction-based one has indeed been tougher than expected for the country’s wind industry. In addition, transmission, land acquisition, payment delays and regulatory challenges have created their own challenges. Consequently, capacity additions have been on a decline, tendering activity has reduced substantially and many players, both original equipment manufacturers (OEMs) and independent power producers (IPPs), have announced exit plans. Further, the year 2020 has been a washout owing to the Covid-19 pandemic, which has exacerbated the crisis for the segment. Overall, the situation is grim, with less than 500 MW of capacity installed in the first six months of 2020-21, and the outlook does not look bright either.
A look at the causes for this bleak situation, the key developments over the past year and the outlook for the future…
Slowdown in growth
India has 38 GW of installed wind power capacity as of September 2020, 22 GW short of reaching the 60 GW target by 2022. Achieving this target looks challenging, particularly when the annual capacity additions have not been able to cross the 2.5 GW mark from 2017 onwards. The situation seems to have worsened in 2020-21, with just 380 MW commissioned till September 2020 as against the 3 GW target for the year. Meanwhile, in 2019-20, 1.3 GW of new wind power capacity had been added as of September 2019.
Tendering activity has also been slow in the wind power segment with just one auction conducted since August 2019. Even this long-delayed lone Solar Energy Corporation of India (SECI) auction for which bids were invited in March 2020, was later modified to “wind blended with solar”, although the capacity was increased from 2 GW to 2.5 GW. The results for this 2.5 GW blended tender (Tranche IX) were announced in August 2020. The tender, which had an upper tariff ceiling of Rs 3 per kWh, was significantly undersubscribed, with only 970 MW of capacity awarded to two project developers. Vena Energy Vidhyuth Private Limited has won 160 MW of projects, quoting the lowest tariff of Rs 2.99 per kWh, while JSW Solar was awarded 810 MW of projects at Rs 3 per kWh under the bucket-filling method. JSW had originally placed bids for 970 MW of projects. No other developer had quoted a tariff of less than Rs 3 per unit.
The bidding situation had been worrisome even in 2019, when two previous tenders, Tranche VII (May 2019) and Tranche VIII (August 2019), were significantly undersubscribed. Under Tranche VII, only 480 MW of wind power capacity was allocated as against the 1.2 GW that was tendered, while under Tranche VIII, only 439.8 MW was awarded against the tendered 1.8 GW capacity. In fact, according to a recent report by the Central Electricity Authority, of the total 12,600 MW of wind power capacity tendered, only 9,361 MW has been awarded as many wind power tenders were left unsubscribed and saw a poor response from developers.
Inherent issues remain unresolved
India’s wind industry has historically been an OEM-driven market rather than an IPP-based, one, unlike that of solar power. Before competitive bidding, much of the power was concentrated in the hands of a few OEMs that installed projects based on their requirements at the premium FiT rates and enjoyed high returns. The decision to move away from FiT to auctions made them dependent on IPPs for orders as well as pricing, which was significantly lower than FiTs. In fact, less than 6 GW of capacity has been added from March 2017 onwards, with the industry facing difficulties in commissioning even 2 GW of capacity annually since then. At the same time, tariffs dropped from Rs 5 per unit FiT level to as low as Rs 2.43 per unit and stabilised at Rs 2.70 per unit level. Although tariffs have now gone up to Rs 3 per unit and are likely to increase further, this will pose another challenge, that of offtake. With the state that the discoms are in, why would they want to buy wind power at Rs 3 per unit when solar power is available at less than Rs 2.50 per unit (even Rs 2 per unit as witnessed in the latest SECI auction in Rajasthan)?
Further, although debated time and again, transmission constraints and acquisition of good wind sites continue to pose a major problem. In the majority of the auctions, most developers opted to set up projects in Gujarat. The state had already been facing criticism for delays in allocating land to developers, which left hundreds of megawatts of wind power capacity stranded. Although the issue has now mostly been resolved, project timelines have been pushed back by a significant margin. Moreover, most of the capacity is going to be set up in the Rann of Kachch, where the transmission infrastructure construction has been moving at a slow pace, causing further delays. Not only Gujarat, developers in other states are also facing similar problems and the situation is likely to get worse with the increasing unavailability of wind resource-rich sites.
Another critical issue hampering developers’ sentiment is related to contracts. This issue is multifaceted. First and foremost, developers are not paid their dues on time, leading to a liquidity crunch and affecting project viability. In fact, many developers have not been paid for almost a year. Various attempts by the government to ensure timely payments have not worked and developers still do not have proper payment security. Further, there have been instances of states trying to renegotiate contracts to bring tariffs down, which puts the entire contract sanctity into question. Finally, the process of signing contracts – power purchase agreements (PPAs) and power sale agreements – as well as getting tariffs approved is also quite cumbersome. There have been some cases where this process has dragged on for close to two years, by which time the equipment costs, and thereby the cost of energy, can change. It is, therefore, of vital importance to address these issues urgently to revive interest in the segment. Contracts need to be tightened and project development needs to be planned in accordance with the availability of land and transmission before bids to attract private participation.
The Covid-19 factor
A key reason for the very few capacity additions in the year 2020 is the Covid-19 pandemic. Construction activities were halted during the lockdown as supply chains were disrupted and manpower was unavailable. Even after the situation eased, the signing of PPAs, government approvals, land acquisition and financial closures were delayed significantly. Although things have started improving slowly, most under-construction wind power projects are facing long delays, with their commissioning being pushed back by a couple of months. The government has provided suitable timeline extensions in project commissioning, but these projects continue to incur significant cost overruns.
The pre-Covid challenges, combined with delays on account of the pandemic, project a bleak outlook for capacity addition in 2020. According to a recent report by BloombergNEF, only 1,306-1,506 MW of wind capacity additions are expected in the country in 2020. The expected capacity addition will vary depending on the duration for which the pandemic lasts. According to the report, 1,506 MW will be installed in 2020, if Covid-19 remains a single-wave pandemic. However, installations will be limited to 1,306 MW in 2020 if it becomes a multiple-wave pandemic.
Action on the policy front
The government, on its part, has been trying to revive the wind power segment through policy interventions. Recognising low and unviable tariff caps to be a reason for the lack of interest from bidders, the Ministry of New and Renewable Energy (MNRE) announced, in March 2020, that upper ceiling tariffs or tariff caps will no longer be prescribed in future bids. By doing this, they hoped to help out OEMs as well to clear their inventories.
Further, realising that solar is now more cost competitive, and thereby, more attractive for both IPPs and discoms, the government decided to issue a policy for the blending of wind power with solar power (Tranche IX auction in August 2020 was a result of this). In July 2020, the MNRE issued guidelines for the procurement of renewable energy power from 2,500 MW of interstate transmission system (ISTS)-connected blended wind power projects under the tariff-based competitive bidding process. The scheme aims to provide a framework for the procurement of electricity from 2.5 GW of ISTS-connected wind power, along with up to 20 per cent of solar power. The power procured from the project may be used for the fulfilment of solar and non-solar renewable purchase obligations (RPOs) in the proportion of rated capacity of solar and wind power in the plant, respectively. Moreover, in August 2020, the Ministry of Power issued a notification extending the waiver of ISTS charges and losses on power supply generated from solar and wind power projects until June 30, 2023. As per the notification, no ISTS charges would be levied for 25 years from the date of commissioning of power plants for the supply and sale to entities having RPOs. This extension was provided by the government after requests from IPPs that had projects significantly delayed due to Covid-19 and other issues. They would not have been able to commission their projects on time (by December 2022) to be applicable for the ISTS waiver and would have taken a severe hit on their financials as a consequence.
Since transmission and land availability continue to be a constant risk in wind project development, the government is working towards creating specific renewable energy zones, which would prevent delays on account of these issues. In November 2020, the MNRE released a concept note on the development of wind parks and wind-solar hybrid parks. The MNRE has identified potential sites with the help of the National Institute of Wind Energy. These sites are located in Tamil Nadu, Andhra Pradesh, Karnataka, Gujarat, Rajasthan, Madhya Pradesh and Telangana. As per the proposal, areas having wind potential with a capacity utilisation factor of more than 30 per cent will be chosen. Further, if the site has solar potential, the developer may consider building a wind-solar hybrid plant subject to consent from the respective state governments. The capacity of each park must also be at least 500 MW, while parks of lower capacities will be considered in case of land and resource constraints. If properly implemented, these parks can ensure streamlined capacity development with no project risks on account of unnecessary delays, thus reviving investor and developer interest in the segment.
Consolidation activity continues
The severe hit on sales volumes as well as margins resulted in even large OEMs like ReGen exiting the market, while its counterparts, Suzlon and Inox, have also not been faring well. ReGen Powertech, which had shut its Udaipur factory in late 2017, had its insolvency proceedings in December 2019. As per media reports, the company is now looking for buyers. Meanwhile, Suzlon, which has been debt-ridden for several years now, completed its debt-restructuring process recently, with the conversion of Rs 127,850 million debt into sustainable and unsustainable debt and infusion of Rs 3,920 million equity from promoters. Similarly, Inox Wind has also been reporting heavy losses, with its consolidated losses reaching Rs 760 million in the September quarter of 2020 as against Rs 456 million in the corresponding quarter of the previous fiscal. Meanwhile, an international OEM, Nordex is reportedly not keen to supply to projects (apart from its current project in Tamil Nadu) in India, although it intends to continue manufacturing turbines here for export purposes.
Meanwhile, in April 2020, wind turbine manufacturer Senvion GmbH entered into a binding agreement with a strategic investor to sell Senvion India. Senvion was one of the biggest beneficiaries of the auction regime in the wind energy segment with a formidable order book of 1,000 MW in India, as of November 2018. However, the company filed for bankruptcy in Germany in April 2019 and is said to have lost a portion of its Indian orders to other companies. The company stated that the challenging business environment of the wind power segment in India is not the reason for its exit.
Not just OEMs, mergers and acquisition (M&A) activity has been on an upswing on the IPP side as well. For instance, in June 2020, Hindustan Zinc, a subsidiary of the Vedanta Group, announced its plans to sell its wind energy assets of 273 MW, valued at around Rs 15 billion. The wind projects are set up across Rajasthan, Gujarat, Maharashtra, Karnataka and Tamil Nadu, having PPAs with state-level discoms. Similarly, ORIX is in the midst of acquiring 20 per cent stake in Greenko Energy Holdings by investing around $980 million in the latter. It will integrate its existing wind energy business, which includes projects with a cumulative capacity of 873 MW, with Greenko. Further, in November 2020, ReNew Power authorised the sale of its wind farms in Karnataka to Ayana Renewable Power for Rs 16 billion. The wind farms are located in Raichur, Bijapur, Belgaum and Bellary districts of Karnataka, with an aggregate capacity of 300 MW.
These M&A deals point to an emerging trend where large players opt for increasing their portfolios through inorganic means. In India, winning a bid, getting the required approvals and getting land and power evacuation bays for projects can take close to two years, followed by the time to construct a new project. In contrast, smaller and mid-size companies have good quality operational assets with all contracts in place and no uncertainties. Thus, for many large companies, buying an operational project is much easier than setting up a new wind project.
The way forward
It seems that solar power, with its ease of implementation, rapid technology advancements and cost competitiveness, has overshadowed wind power. Experts now believe that wind power alone would not attract much capacity in the near future and would have to be blended or hybridised with solar to make it more competitive for India’s price-sensitive market.
While that may be true, even for these blended or hybridised projects to be attractive to IPPs, a number of critical measures need to be taken and issues regarding contractual and payment uncertainties have to be addressed. Further, necessary approvals, land acquisition proceedings and transmission availability of the huge existing pipeline of under-construction projects have to be fast-tracked so that they do not have months to go before they could actually start the project erection work. This would provide some much-needed confidence to the segment, which is slowly becoming a back bencher in the country’s energy transition.
By Khushboo Goyal