Why project pipeline, not falling tariffs, is a bigger concern for wind industry2 min read . Updated: 09 Oct 2017, 08:12 AM IST
Thin volumes and intense competition are tilting the scales in favour of companies that can raise funds at low rates and keep the project costs low
The latest wind energy auctions, which saw an almost 24% tariff crash from the earlier auction in February, has surprised many. Most are perplexed whether project costs have seen a commensurate drop, raising questions about returns.
But, as with every auction, the participants have their own game plan.
Balram Mehta, president-wind and asset management at ReNew Power Ventures Pvt. Ltd, says several factors have helped independent power producers bid lower tariffs.
One is the flexibility to select high windy sites, which will lead to higher generation.
Another is proximity to a grid network that has high availability and lack of curtailment issues, which otherwise is a challenge with state-run grid networks.
Turbine equipment makers are aligning with technological improvements, and there has been a reduction in the cost of machines.
And the cost of finance is lower as these projects face reduced risks as the power purchase agreement with a central government entity provides credibility and comfort on receivables.
These factors may make the tariffs and the projects feasible for winners. But the steep drop in tariffs does have ramifications.
The February auction triggered structural changes in the industry, which moved to auction based bidding. Given the competition and technological advancements, tariffs anyway are expected to trend downwards.
This would not have been a problem if the project pipeline is strong, as higher volumes will make up for lower profitability and returns.
But thin volumes and intense competition are tilting the scales in favour of companies that can raise funds at low rates and keep the project costs low. This, says an industry participant, will drive smaller firms out of the market as they have relatively less bargaining power.
Of course, this would be a natural phenomenon in an evolving industry. We have seen this play out in the utility scale solar project bids.
Nevertheless, uncertainty about the project pipeline is creating a lot of concern among industry participants.
It is not clear when the next central government auction will be conducted.
State utilities which have been hit by “buyer’s remorse" are yet to come back to the market in full scale.
This is not only creating intense competition (as projects are few) but is also squeezing the supply chain. Volumes and profitability have been hit. Equipment makers are unable to make demand projections, leading to production cuts, a manufacturer said at an industry event last month.
According to ICRA Ltd, if developers manage to negotiate costs below Rs7 crore per megawatt, then it will likely put further pricing pressure on wind turbine generator manufacturers, given the surplus manufacturing capacity and the limited order visibility in the near term. This is unfortunate as wind projects have a greater share of domestic content in their projects than solar.
The situation can be remedied by effective government intervention. While the central government is indeed issuing advisories, it will need to handhold the state utilities to better plan their renewable energy purchase obligations and address the connectivity problems. That will improve the project pipeline and help reassure the stakeholders, who otherwise have been hit by events such as tariff renegotiations, grid curtailments and a slowdown in capacity additions.