Wind of Change

With a record low tariff of Rs 2.43 a unit, wind is now India’s cheapest source of clean energy. Is it the turning point for wind power sector in India?

Renewable energy has entered an exciting new phase and its growth is unstoppable. Once considered a niche industry dependent on government subsidies, today it is driven largely by economic realities, improved reliability and cost competitiveness backed by proven technology. Another advantage of renewables is that it is modular in nature and is scalable. The evolving technology and economic viability of energy storage solutions, will give further impetus to renewables.

Wind is not only the lowest cost source, it is also a distributed and modular source that reduces need for transmission infrastructure and the risk of coal plants, observes UB Reddy, Managing Director, Enerfra Projects (India) Pvt Ltd. Today, India is transporting power, or worse, coal over long distances. This, in Reddy’s opinion, does not make sense. He adds, “Wind power from Gujarat and Rajasthan is much closer to NCR or Mumbai than from Odisha. As a domestic resource, wind can eliminate imported coal, provide local rural employment, and of course, the environmental benefits.”

According to Tulsi Tanti, Chairman and Managing Director, Suzlon Energy, “2017 was a watershed year for the renewable energy industry in India with significant policy reforms such as competitive bidding in wind, record low wind and solar tariffs and GST roll-out. In addition to this, technological advancement and increased competition are steering new possibilities for clean energy.”

In India, investors are bullish and excited to be part of the renewable growth story. While the wind industry’s transition to the bidding regime created short-term challenges in 2017, Suzlon’s CMD believes, it has laid the foundation for sustainable and inclusive sector growth. He said, “Wind industry is poised to grow to about 8 to 10 GW annually, with 5 to 6 GW annual bidding from the central government level, 3 to 4 GW capacity auctions from the nine windy states and 1 GW capacity expected from the PSU and captive markets. This will pave the way to unlock 300 GW wind energy potential in India and harness the latent potential of non-windy states.”

With an international presence across 18 countries in Asia, Australia, Europe, Africa and North and South America, Suzlon Group has a cumulative installation of approximately 17 GW of wind energy capacity. Over 11 GW of the Group’s installation is in India, which makes up for around 35 per cent of the country’s wind installations, making Suzlon the largest player in this sector. The company has recently forayed into the solar space.

Indian wind industry experienced swift growth in the last financial year 2016-17 achieving 5,400 MW capacity addition. An entire pipeline of projects has been dried out due to States discouraging or stopping feed-in tariff based purchasing. “IPP and OEMs who didn’t have orders and have inventory building-up are bidding aggressively and quoting low tariff as in the recent bid wherein it hit a record low of Rs 2.43 a unit which is increasing the risk of NPAs for financial institutions. These projects are mainly bid out at low IRR (Internal Rate of Return),” Kailash Lal Tarachandani, CEO, Inox Wind Ltd points out.

He believes that, the introduction of auction based mechanism has been a double-edged sword for the industry as it had brought mix feelings and has caused a periodic chaos in wind industry. He adds, “The rationale behind introduction of competitive bidding is to bring down the cost of energy for DISCOMs, in turn obviously to end-consumers.”

Of late, wind power tariff has seen the new low – dropped to an all-time low of Rs 2.43 per unit in an auction conducted by Gujarat Urja Vikas Nigam Ltd (GUVNL). Sprng Energy and K P Energy have quoted the tariff for 500 MW wind power capacities. According to Dr Sanjiv Kawishwar, Sr. Vice President, ReGen Powertech Pvt Ltd, “Crash in tariffs is due to the wind power policies and a slew of guidelines for state electricity utilities that want to procure wind power from independent producers. Norms cleared the way for different State governments to hold wind farm auctions.”

So, are we at a turning point?
With a record low tariff of Rs 2.43 a unit, wind is now India’s cheapest source of clean energy. Is it the turning point for wind power sector in India? Enerfra’s Managing Director Reddy opines that the answer will depend on:
• Fixing the lopsided ownership: Even though wind and solar are the lowest cost new source, per the CEA data, over 60 per cent of incremental kWh consumption during Apr-Oct 2017 vs. 2016 was met by thermal. This anomaly is explained by the fact that only 3 per cent of renewables are owned by central or state governments, and the same governments in turn buy power. The government must mandate PSUs like NTPC to build 2 MW of renewables for every 1 MW of new thermal. Otherwise, as both a seller and buyer, the government will protect its thermal investment.

• Evacuation: While India continues to build long, high capacity transmission infrastructure for large coal plants, it is a struggle for wind. The underlying issue is the same: mismatch in thermal vs. renewable ownership between government and private sector.

It is widely acknowledged that the aggressive bids came in the backdrop of India’s wind sector transitioning from a feed-in tariff regime to tariff-based competitive auctions. After tariff drop, even executed power purchase agreements facing a downward tariff pressure from the States. Projects are also facing other impediments such as curtailment of wind power procurement, payment delays and absence of guidelines for state-level wind bids. Dr Kawishwar further points out that the focus of customers or IPPs will shift from certified quality of equipment to cheap equipment, which will affect life cycle of project.

Low tariffs hurt wind turbine makers
The Indian wind industry is witnessing a complete overhaul with respect to cost optimisation across the value chain, specifically with the advent of competitive bidding. With declining tariffs, the cost competitiveness and efficiency become the key, avers Tanti of Suzlon Energy.

He said, “Technology and innovation will remain the catalyst that will drive renewable energy growth. Digitalisation of services, innovation in tower and blade technologies aimed towards making unviable wind sites viable, ensuring better yield and increasing turbine utilisation will be the key focus areas. The industry will collaborate further to improve the supply chain, enable grid integration and leverage digital technologies.”

The reducing margins at upstream has put a financial pressure over downstream players and associated industries as well. Inox Wind’s CEO Tarachandani opines that, OEMs will have to come up with much bigger turbines and improved technology to yield maximum returns even on low PLF sites so that on the table they have viable margins on the already falling equipment prices. He adds, “Due to oligopolistic nature of wind OEMs market, there is slight advantage for OEMs that the IPPs will also have to look for new financing methods to lower their capital cost and reduce margins as manufacturers are already reeling under pressure due to squeezed margins.”

The wind industry in India is bringing dramatic technological improvements via taller towers, larger diameter, and world-class engineering to squeeze out every kWh. According to Reddy of Enerfra Projects (India) Pvt Ltd, “Only those with in-house knowledge and financial strength to invest in latest technology will succeed in these highly competitive auctions. Unfortunately, this is squeezing out some traditional turbine makers who have viable products for smaller wind farms. Farms below 25 MW are anyway not suitable for auctions and should instead have feed-in tariff.” He admits that turbine makers having poor reputation for quality, service and vendor treatment will risk survival.

Dr Kawishwar also admits that the competitive bidding of wind power has brought down the tariffs and power producers are under pressure from States to renegotiate pricing. He reveals, “Most wind turbine manufacturers have halted production till they receive firm orders.”

He adds, “Suppliers of OEMs will have cascading effect to reduce prices which may led to compromise on services, quality and longevity and may impact on total life cycle of a wind farm. Also, cost pressure will hinder the overall turnover and profit margins of manufacturer and hence they may get reduced credit limits from bankers.”

Conclusion
With a panoramic view of status quo, based on the resource endowment, manufacturing capacity available and future trends in line with government which has set to meet the target of 60 GW by 2022. However, Tarachandani opines, “The slowing down of development speed at present is mainly caused by introduction of competitive bidding which is only periodic, and we will see a much higher capacity addition in wind sector in near future.” He adds, “When more projects will come up, we could see future bidding rates stabilising or in some cases may go up.”

He suggests, “The government should look beyond 2022 and provide more of assured capacity addition in the future and incentives in form of tax benefit or alternative financing instruments so that manufactures or developers who are investing in setting up or upgrading their capacity are assured of viability in the long run.”

Only those with in-house knowledge and financial strength to invest in latest technology will succeed in these highly competitive auctions.
UB Reddy, MD, Enerfra Projects (India) Pvt Ltd

With declining tariffs, the cost competitiveness and efficiency become the key.
Tulsi Tanti, Chairman and Managing Director, Suzlon Energy

When more projects will come up, we could see future bidding rates stabilising or in some cases may go up.
Kailash Lal Tarachandani, CEO, Inox Wind Ltd

Cost pressure will hinder the overall turnover and profit margins of manufacturer and hence they may get reduced credit limits from bankers.
Dr Sanjiv Kawishwar,
Sr. Vice President, ReGen Powertech Pvt Ltd