Turbulence In Wind Power
India has been an enthusiastic proponent of green energy as the way forward in mitigating the impact of environmental pollution caused by fossil fuels. To this end, it has set a target of generating 175 giga watt (GW) of renewable energy by the year 2022.
Out of this, 60 GW is projected to come from wind energy. Wind farms in Ladakh and Kashmir are likely to be the new kids on the block. Total installed capacity of wind power across the country is around 36.75 GW.
Tamil Nadu’s contribution is around 8.5 GW. Given that wind generation in the country is over two decades old, the 60 GW target one might say, it’s a breeze.
Unfortunately, it is not. The problem lies in the fact that the wind power industry is now hit by turbulence of sorts, caused among others, by the Energy Ministry’s introduction of auction based tariff regime, replacing the popular Feed In Tariff (FIT) method. This move has been criticised by industry heavyweights.
The issue was once again in focus at the fifth edition of Wind Conference, organised by the Indian Wind Power Association. “The industry is at the crossroads, and is at a critical phase due to the shrinking margins caused largely by the bid regime, lack of wind prone sites with ISTS (Inter State Transmission Substation) connectivity for power evacuation to install turbines, withdrawal of incentives, ending the banking system, delayed payment, among others,” said a number of keynote speakers at the two-day conference.
Reverse auction was initiated in the year 2016 by the central government and all the wind prone states followed suit. Incentives like Feed in Tariff, generation based incentives were also withdrawn and state distribution companies (DISCOMS) also resorted to reverse bidding to meet their renewable power need/requirement.
Ironically, Tamil Nadu was one of the earliest to promote wind energy, taking advantage of its natural meteorological and topographical advantages ideal for wind power generation.
Preferential treatment extended to the investors in the form of FIT, banking facilities by state DISCOM coupled with the incentives offered by GOI through Generation Based Incentives (GBI), accelerated depreciation benefits led to its robust growth in Tamil Nadu with the contribution of small players and industrial units.
No Room For Small Investors
Procurement price of wind energy under FIT regime (over the last 20 years) was in the range of Rs 2.80 - Rs 4.15 per unit. On an average, the tariff used to get an upward revision once in two years. Apart from FIT, Generation Based Incentive (GBI) of Rs 0.50/unit was also offered to the investors.
The scenario has changed since 2016. The situation today has pushed retail investors into a corner and favours Independent Power Producers (IPP).
These Independent Power producers (IPP) have the backing of very large foreign financial houses who enjoy a lower cost of capital compared to Indian investors.
“The playing field is not level but is favouring the foreign companies,” says CS Balaji, Managing Director, Divinitas Energy Consultants. According to him, this has not only affected the power generators but has also pushed OEMs in the country to the brink.
As 50 MW is the minimal size one can bid, it has prevented small and retail investors from participating. Typically, a bid size of 250 MW and above alone will make commercial sense taking into account the lowest tariff realised in reverse auctions, since the cost of evacuating power remains constant, irrespective of the bid size, say industry stake holders.
Post reverse auction, retail investors and industrial consumers were replaced altogether by Independent Power Producers (IPPs) who enjoy equity funding support from overseas financial institutions like. Goldman Sachs, JERA, OPIC and a few overseas players from the energy segment too have a significant presence in the Indian wind energy space.
As cost of funding is low or in the form of equity, this has not offered a level playing field to retail investors in the absence of FIT, GBI, accelerated depreciation benefits, minimum lot size and funding at an attractive interest rate – without which it does not make any commercial sense considering the lowest tariff realisation in reverse bidding process.
Union Minister Piyush Goyal is often vilified, but he has blamed the players in the sector for the shrinking profit margins. Balaji conceded that Goyal may have a point. “We need to agree. Lack of understanding among the Original Equipment Manufacturers (OEMs) players who got lured by the sheer volume that reverse bidding offered - (typically the single bid size ranges from 1000 MW to 2000 MW)… and tariffs started to fall due to the intensity and the urge shown by IPPs ready with equity funding support to win the bids and some overseas players to build a sizable portfolio and the equal interest shown by OEMs to increase their market share by seizing the opportunity.”
In effect, the bidding war between powerful foreign funded power producers and the smaller local businesses, led to a severe drop in prices – good for the consumer and for governments, but not entirely viable for the producers of wind power.
Apart from the hot controversy over auctions, some of the perennial problems faced by the sector are as follows.