Industry

‘Competitive bidding positive for wind industry in the long run’

But stagnant demand will prove to be a major challenge, say players

Competitive bidding in the wind power segment, which has replaced the earlier feed-in tariffs where a fixed price was ensured for power producers, may put temporary pressure on wind sector players, but will have positive impact in the long term.

The first wind auction conducted in February led to a fall in tariff to ₹3.46 per unit — down 16.8 per cent from the lowest prevailing feed-in tariff of ₹4.16 among the windy States, India Ratings (Ind-Ra) said in a recent report.

The second wind auction rolled out in the beginning of July was oversubscribed 2.9 times, with more than 10 large developers participating. Although the reverse auction is being delayed and the tariff is yet to be discovered, analysts and industry players expect wind tariffs to go further down.

Hence, the cost of wind power is close to achieving grid parity which solar power has already did after the tariff dropped to ₹2.44 per unit in the recent Bhadla solar park auction. Wind power, at the moment, is just 2 per cent above coal, according to Morgan Stanley report on India’s renewable sector.

Given the existing overcapacity and stagnant power demand, the state electricity boards (SEBs) are likely to choose solar or wind power instead of signing short-to medium-term (3-10 years) coal-based PPAs incrementally. Moreover, with wind power tariff dropping further, non-wind generating Statesmay be interested in procuring wind power from “windy” States by laying down transmission lines which will overall increase the demand and off-take for wind projects.

Mature competition

Bidding mechanism in the longer term creates a more transparent and more competitive industry, analysts say, as tariffs are determined based on developers’ analysis of location, counter-party risks, wind conditions and other project-specific factors as well as company’s abilities to do financial engineering.

Vikram Kailas, Managing Director and CEO at Mytrah, believes the move from feed-in-tariffs to competitive bidding points to the growing maturity of the Indian wind power sector. “While the bidding mechanism is likely to lead to pressures on the revenue side, one would expect these to be balanced by cost benefits accruing from technological improvements, increasing load factors, execution efficiencies and enforceable payment security mechanism,” Kailas told BusinessLine.

Ind-Ra estimates the bidders that won in the first auction would be able to earn an equity internal rate of return (IRR) of just about 9 per cent against IRRs of 18-20 per cent achieved with feed-in-tariffs. However, the returns rise to 12-14 per cent with slightly higher plant load factor (that can be achieved through more efficient equipment) as well as with reduction in cost of finance. “For suppliers, there may be some pain as the transition to the reverse auction mechanism gets up to full speed, but the positive is that it should provide greater visibility into order flow and better volumes over the long term,” Kailas believes.

Suzlon and Inox declined comment for this story while a request sent to Siemens Gamesadid not elicit any response.

Hero Future Energies CEO Sunil Jain believes plunging tariff is not the main challenge in the wind industry as in the renewable sector one still makes profits as long as the interest rates remain at around 8-10 per cent. The real challenge, according to him, is how much power the States are willing to buy as demand remains stagnant.

Other challenges

There are more issues that are unlikely to be solved by switching to competitive bidding. According to Kailas, there is lack of quality standards, lack of policy clarity in some high wind potential States and lack of clarity on frequency of reverse auctions. There is also lack of a policy on inter-State power transmission that prevents developers from building capacity for open access power sales.

Late payments from Discoms as well as grid curtailment that forces developers to back down generation are some of the other challenges faced by wind developers.

 

[“Source-thehindubusinessline”]

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Loknath Das

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