Last week’s successful wind power auction could be a mixed blessing for wind solutions providers Suzlon Energy Ltd and Inox Wind Ltd.
The good news is the auction reinforces wind energy’s business model. Low tariffs would make wind energy more palatable for financially stressed power distribution companies (discoms) and pave the way for more capacity additions. According to Bhargav Buddhadev, an analyst at Ambit Capital Pvt. Ltd, auction-based project awards can trigger renewed interest from foreign companies in India’s wind energy market.
But this auction can set uncomfortable precedents for equipment makers. States till now have been awarding wind energy contracts and signing electricity purchase agreements on a preferential basis. The current feed-in tariffs vary between Rs4-6 per unit. Last week’s auction which discovered tariff at Rs3.46 per unit will alter this. One, the tariff gap between state and national level auctions will shrink. Second, the project awarding at state level will move towards auctions.
The transition to competitive tariffs should aid discoms and consumers. But as has happened in solar energy, competitive bidding and low tariffs can compress returns of project developers. At a capital cost of Rs6.5 crore per megawatt (MW), utilization of 24%, debt tenure of 18 years and interest rate of 10%, a wind energy project’s internal rate of return will be less than 10% at the latest auction discovered tariff, says ratings agency Icra Ltd.
Such low returns will force project developers to strike hard bargains on equipment prices, which in turn can impact the profitability of the wind turbine manufacturers. “(This would) put pressure on the return expectations for IPPs from a developer’s perspective as well as on the profitability for wind turbine manufactures, going forward,” Sabyasachi Majumdar, senior vice-president and group head at Icra, said in a statement. IPP is short for independent power producers.
A sensitivity analysis by Elara Securities (India) Pvt. Ltd shows that a 100 basis points hit to Ebitda margin on 500MW project execution in 2018-19 can hit Suzlon’s earnings by 3% and 4% for Inox Wind. Ebitda is short for earnings before interest, tax, depreciation and amortization.
Companies like Suzlon have competitive levers like a land bank and sizeable investor clients business (which offers tax benefits through accelerated depreciation scheme). This used to help them deal with market vagaries till now.
But if auction-based wind energy procurement gains favour and state-level tariffs move towards national level auctions, then profitability in this business can also be compressed. “The preferential tariff regime was used by some wind turbine manufacturers to bundle together land, turbines and EPC (engineering, procurement and construction) work. This allowed them to command significant price premium and dominate the market. Auctions will provide more transparency to the sector, break wind turbine manufacturers’ domination and make the wind turbine market more efficient,” Bridge to India, a consulting firm, said in a blog.