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According to analysts, the scope for fresh wind capacity additions now is mostly available in ‘low to moderate’ wind potential states. If returns have to be good, then projects in these sites should have higher hub height turbines. Photo: Bloomberg
According to analysts, the scope for fresh wind capacity additions now is mostly available in ‘low to moderate’ wind potential states. If returns have to be good, then projects in these sites should have higher hub height turbines. Photo: Bloomberg

As solar takes centre stage, wind energy gets growth pangs

Developers like Suzlon Energy and Inox Wind are bothered by the changing incentive structure in the wind energy sector and how investors will react to it

Company-specific financials aside, analysts covering the wind energy sector and developers like Suzlon Energy Ltd, Inox Wind Ltd, are bothered by one risk: the changing incentive structure and how investors will react to it.

Suzlon and Inox Wind offer turnkey wind energy solutions. They acquire land, set up a wind mill and sell it to investors who in turn deduct accelerated depreciation on the project from their taxable income or profits. The union budget this year halved the accelerated depreciation such investments can entail from next fiscal.

The second issue is uncertainty on extension of generation based incentive (GBI). Currently, wind developers receive an incentive of 50 paise per kilowatt hour of wind electricity they generate. The scheme expires at the end of the current fiscal year.

Non-extension of GBI scheme can reduce the appeal of the wind sector for investors. Vivek Jain, associate director at India Ratings & Research, says wind projects’ internal rate of return (IRR) can fall by 150 basis points if GBI scheme is not extended. This can slow wind capacity additions from the next fiscal year and drive investors to solar energy, which is seeing a strong policy push.

Increasing the appeal for solar is slowdown in wind power purchase agreements (PPAs), payment delays and tariff cuts. Channel checks by JM Financial revealed stranded wind capacities due to lack of PPAs. “Obviously that interplay will be there (on move to solar). Also solar has seen higher thrust by the government, has lower dependence on site conditions for getting rated output, has higher possibility of seeing further tariff reduction, higher ease of installation and has seen better counterparty profiles like NVVNL (NTPC Vidyut Vyapar Nigam Ltd) and SECI (Solar Energy Corporation of India) where payments have been on time. This has become crucial now considering the issues the wind sector is facing now," Vivek Jain of India Ratings says.

Adding to concerns is significant utilization of best wind sites in the country. According to analysts, the scope for fresh wind capacity additions now is mostly available in “low to moderate" wind potential states. If returns have to be good, then projects in these sites should have higher hub height turbines. This in turn will raise project cost and tariffs, making them unpalatable to states who are seeing better cost advantage in solar. “Newer projects will have to bet on less optimal sites requiring higher feed in tariffs ( 4.8–5.5 per unit), which now face competition from solar, where bid tariffs have fallen to 4.5–4.8 per kWh," JM Financial adds.

These concerns are weighing the shares of Suzlon and Inox Wind, which are trailing the broader markets for the past one year. The government’s target to add 60 gigawatt wind capacity by 2022 can ensure minimum order inflows for wind developers. But as JM Financial points out, it will be under-utilization of the industry capacities. A policy overhaul and better cooperation from states can alter this.

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