The disruption caused by India’s low clean energy tariffs is playing out, with rating agency Crisil cautioning that the risk profile of wind projects will increase. In a report, Crisil said that under-construction projects, as part of the feed-in tariff (FiT) regime, may be put up for auction by the states to further lower tariffs. While these projects didn’t have a power purchase agreement, work had started on them on the basis of the licences awarded by the states. Feed-in tariffs ensure a fixed price for wind power producers. Also, the firms that have quoted such competitive tariffs may generate only 12% equity internal rate of return (IRR), even after assuming high plant load factor (PLF) of 33-35% and a lower cost of borrowing at 9-9.5%, said the study, exclusively shared with Mint.
PLF is a measure of actual power generated by a plant. Wind power is the major component of India’s renewable sector. Of India’s 57.26 gigawatt (GW) of installed renewable energy capacity, wind power accounts for over 56% or 32.27GW. This comes at a time when the wind sector has been hit by inordinate delays in signing of power purchase agreements and untimely payments; distribution firms have shied away from procuring electricity generated by wind projects.
“Many states have also advocated competitive bidding for under-construction projects. Rajasthan is expected to conduct reverse bidding for the existing 100MW of projects, which are at various stages of commissioning. Same is the case with Gujarat and Andhra Pradesh, which are planning to conduct reverse bidding for 500MW of under-construction wind energy projects,” the Crisil report said.
This would have a domino effect.
“As a result, projects which have already signed the equipment’s purchase order at higher tariffs (factoring in returns based on feed-in-tariffs) are likely to renegotiate their contracts with the equipment suppliers. Further, the players may also negotiate with the OEMs for best wind locations (for achieving higher PLFs) or cheaper turbines, to optimize their returns at low tariffs and ensure success in competitive biddings,” the report added.
Wind power tariffs fell to a record low in a 1GW tender by state-run Solar Energy Corporation of India (SECI). Mytrah Energy (India) Ltd, Singapore-based Sembcorp Industries and IDFC Alternatives-backed clean energy firm Green Infra Ltd, global private equity fund Actis Llp’s platform Ostro Kutch Wind Pvt. Ltd and Inox Wind Infrastructure Services Ltd bid Rs3.46 per kWh to win contracts for 250 megawatt each.
“The advent of competitive bidding means returns across the value chain are expected to be under pressure. While deployment of latest technology and lower financing charges would reduce generation cost, stiff competition—as developers aggressively bid to scale up their portfolio—will dent project returns,” said Rahul Prithiani, director, Crisil Research.
The price gap between electricity generated from thermal, solar and wind projects has been bridged. This is primarily due to costs of solar modules and wind turbine generators falling by 80% and 20%, respectively, over the past five years.
“With the onset of reverse auctions, the competitiveness of wind power versus other fuel sources has increased. The bid prices for the recent reverse auction, for one, are 24% lower than the weighted average tariffs of coal-based plants, discovered under Case I bidding in the recent past,” said the report.
Under the so-called Case 1 route, the quantum and time period of power procurement is identified, but the plant location is not specified.
Experts sounded a note of warning.
“Such moves will result in the government losing the trust of the industry…The governments needs to ensure that the projects don’t face risks rather than increasing the risk. In events of renegotiation, whole supply chain will be affected. Small players could adapt to unexplored makets like rooftop solar or rural electrification,” said Rakesh Kamal, a consultant with The Climate Reality Project, which works on climate change-related issues.
The writing is on the wall with the wind energy sector moving away from feed-in tariffs to an auction-based market. SECI plans to auction 4,000MW of wind energy power-purchase contracts every year.
“With the discovered prices for wind energy falling as low as Rs3.46/unit, large states such as Karnataka, Rajasthan, Gujarat and Andhra Pradesh (contributing to 47% of the total wind energy fed to the grid) have declared their reservations on continuing with the FiT regime,” the Crisil report said.