For many, last month’s 2,000 MW auction of wind farms by the Solar Corporation of India (SECI) — the largest so far and double the size of the two it held in February and October 2017 — was a welcome relief. As the big boys Torrent Power, ReNew Power, Green Infra and Inox Wind walked away with the contracts, fortunately, the aggressive bidding did not see prices falling below Rs 2.43 a unit, the lowest ever recorded following auctions in Gujarat in December.
But are the winning bids at Rs 2.44 and Rs 2.45 per unit much better and viable? As India with an installed wind power capacity of 32.7 GW migrates to an auction-based bid out for better price discovery, for many developers it is a case of déjà vu as the financial viability of the projects again take centre stage just as they did during the hypercompetitive solar bids of 2016-17.
Naturally, many still believe that the damage inflicted has been so severe that a recovery in 2018 seems unlikely. “We now have a fair amount of visibility about the number of megawatts that will be auctioned in 2018,” says an industry insider who did not want to be named.
“But to implement the projects, we will need our vendors — the people who supply the components that go into making wind turbines. As it happens, due to the prolonged absence of orders in 2017, many have either gone bankrupt or moved into other businesses.” The drop in business in 2017 can be seen from the limited amount of fresh wind capacity commissioned — only 568.71 MW in the nine months between April and end-December. (See ‘Farming on Wind’.)
The dip in both commissioning and allotment of new projects in 2017 was solely due to the change in project allocation procedure from the earlier ‘feed-in tariff’ (FiT) regime — in which power regulators of the eight main wind energy producing states set their respective tariffs — to the auction regime in which the tariff is discovered at each auction through a bidding process.
While earlier power purchase agreements (PPAs) were signed after the projects were completed, they are now signed following the winning of bids, long before work on the projects start. This, in part, has led to the crisis the vendors face. “When FiT prevailed, people could clearly see the horizon of their projects,” says Reddy of Enerfra. “We knew that once we commissioned a project, we could expect certain returns within a certain number of years. Based on this, developers would make investments beforehand, developing the sites they had identified for their projects. With auctions, investments are realised only if the developer wins a bid. So no initial investments are being made.” As a result, vendors who had steady work in the previous years, now get orders only after an auction has been held.
Thus between February 2017, when SECI held its first auction, and end-August, when Tamil Nadu held one, no fresh orders were issued. “The confusion over whether charges for using the inter-state transmission system (ISTS) would be waived or not for wind developers — resolved only in December — ensured that no work was done on the ground even by bid winners till then,” says Madhusudhan Khemka, managing director, ReGen Powertech, both a developer and equipment maker, and one of the winners at the Tamil Nadu auction.
The Union power ministry had decided way back in September 2016 that such charges would not apply to wind power till March 2019, but inexplicably, the Central Electricity Regulatory Commission (CERC) kept dillydallying over incorporating this into its rules.
There was no compulsion for the wind energy producing states to abandon the FiT regime after SECI held its first auction, but the drop in tariff at the auction was so steep that all of them felt they had been paying too much so far for wind power.
Some, like Gujarat and Tamil Nadu abandoned FiT entirely; others, like Karnataka, set a new FiT tariff, much lower than what prevailed. While the FiT regime had tariffs of Rs 4-6 per unit across different states, the lowest winning bid at SECI’s February auction was Rs 3.46 per unit. The states’ decision left many developers and contractors with partially complete projects in the lurch. Further, site development and project construction stopped, pulling vendors into the lurch as well.
The aggressive bids also come at a time when concerns have been expressed over some states looking to renege on their offtake commitments for projects awarded at a comparatively higher tariff. “This, in turn, may result in legal battles and banks becoming wary of lending to such projects,” warns this year’s Economic Survey as well.
In all states, PPAs require the formal consent of the power regulator after they have been signed between a developer and the state distribution utility (discom). In Andhra Pradesh, the Andhra Pradesh Power Generation Corporation (APGENCO) urged the regulator to return signed PPAs which were awaiting approval; in Karnataka, the power regulator refused to approve PPAs signed at the old FiT tariff.
The confrontation grew so acute that the Union ministry of new and renewable energy (MNRE) wrote twice to the wind energy producing states in August urging them to honour old PPAs. Though both the Andhra Pradesh and Karnataka faceoffs were finally resolved, every such development discouraged, delayed or stalled the completion of under-construction wind projects leading to the steep drop in newly commissioned projects in 2017.
Yet others see auctions as a part of natural evolution and a structural shift towards a transparent system. “The increase in competition is not unique to India. Countries are moving towards a more transparent system and the market is responding in terms of technology,” says Clive Turton, president for Asia-Pacific at Vestas, the world’s largest wind energy equipment manufacturer, in a recent conversation with ET.
Like Vestas that has invested in a wind turbine blade factory in Gujarat, GE is working on wind energy products and technologies at its Jack Welch Technology Development Centre in Bengaluru and is hoping to increase market presence.
But Darwinism apart, viability is indeed a question even if newer technologies to some extent are aiding the developers, argue industry veterans.
“There are issues with equipment suppliers and independent power producers for wind,” says Rajnesh Trivedi, president, Yes Securities, a subsidiary of Yes Bank. “It has made investors divert to solar. Today, there are no investors only for wind, but for renewables as a larger asset class they still exist.”
“There was a lot of tower manufacturing coming up in India because it does not require much investment, barely Rs 15-20 crore,” says the industry insider quoted earlier. “Now the tower makers are order-less and their workers jobless. The small players have largely shut shop or moved into some other business. If the market picks up again, will they be willing to come back, having once burnt their fingers?”
The bigger original equipment manufacturers (OEMs) like Siemens Gamesa or Suzlon may be relatively unscathed but they too have been forced to tweak their business models. Some believe that for most Indian suppliers the writing is on the wall.
“We have been market leaders in India’s wind equipment industry for the last three years, but we too had to announce a temporary slowdown last August-September at our nacelle production plant at Mamandur, Tamil Nadu, and at our blade manufacturing plants in Nellore, Andhra Pradesh, and Halol, Gujarat,” says Kymal of Siemens Gamesa.
“Layoffs are indeed happening due to low demand,” adds Amit Kansal, India CEO of Germany-headquartered wind turbine maker Senvion.
Regen Powertech closed its unit in Udaipur last August and reduced manpower at its Nellore plant from 1,700 to 1,300. “From last April, directly and indirectly, taking employees of contractors, equipment makers and vendors together, I’d say 30,000-35,000 people have lost their jobs,” says Khemka of ReGen. “This is the absolute minimum I am talking about.”
The sharp drop in tariffs across the four wind auctions of 2017 is also likely to make the industry’s recovery more difficult. From a FiT regime of Rs 4-6 per unit, the lowest tariff fell to Rs 3.46 per unit in SECI’s first wind auction, to Rs 3.42 per unit in the Tamil Nadu auction, to Rs 2.64 per unit in SECI’s second auction to Rs 2.43 per unit in the Gujarat auction.
Unlike in the case of solar tariffs which fell due to a decline in the prices of solar panels and modules, the cost of wind turbines and related equipment has not decreased appreciably. On the contrary, it has risen — though their efficiencies have risen as well.
“The turbines made in the last 12 months are much better in terms of their plant load factor (PLF),” says Sunil Jain, CEO, Hero Future Energies, a leading wind developer. “PLFs are now 36-37% compared to the 27-28% of earlier turbines and 21-22% of still older ones. But obviously they cost more too.”
The higher PLF neutralises part of the cost but overall, say insiders, falling wind tariffs are a measure of the desperation of developers to get orders at any cost, since there were so few of them.
“Most of the current wind turbines are not geared to cater to such low auction prices,” says Kansal of Senvion. “Of course, that can impact the profitability of wind turbine manufacturers. They are now trying hard to further lower the levelised cost of electricity (LCOE) of their machines. It will take time to adjust the supply chain costs to stabilise the margins and also to come up with new turbines, which are more conducive for these kinds of tariffs.”
With margins of all the stakeholders — from developers to contractors to equipment manufacturers to vendors — affected, it will take well over a year for the industry to normalise. “Solar is more favourably suited to absorb the cost of falling tariffs because the equipment is imported,” says Trivedi. “Domestic wind machines are still in infancy. They have been around only three or four years so they are limited in their ability to absorb the lower tariff.”
A third dampener is the absence of working capital following the lack of activity in 2017.
This also means remapping the business plan. “We are currently catering to export orders,” says Kymal of Siemens Gamesa. But for most other manufacturers this is not much of an option in 2018.
“None of the manufacturers positioned themselves for exports because there was a strong domestic market,” says the industry insider.
Then there are other constraints. “Freight costs are high, making export of Indian turbines uncompetitive,” says Jain of Hero Future Energies. “Companies have had bad experiences in the past.”
Besides, overseas buyers are mostly unwilling to provide advances. “We are doing some export but, by and large, the US, Europe and China don’t buy from India,” says Khemka of ReGen. “Most others expect you to come with funding which we don’t get in India. Even if we try in Sri Lanka, Bangladesh and other emerging markets, we are unable to compete because we don’t get funding.”
What the entire value chain hopes for is for wind tariffs to change direction in coming auctions and start climbing. “If this doesn’t happen, many companies will close down,” warns Khemka. “The situation is precarious for mid-sized companies like ours, which don’t have parent companies with deep pockets in Europe or elsewhere which can support them through one or two more bad years. It is the Indian companies which will die, while business will go to multinationals, making a mockery of the ‘Make in India’ programme. Also, Indian companies do not source globally and cannot lower prices to the extent multinationals can.”
Kymal, though representing a giant multinational, has similar hopes. “The lowest discovered price is down to Rs 2.43 per unit but we think this is an aberration, mainly due to the demandsupply imbalance in the market created by the lack of orders for the past two quarters,” he says.
Jain of Hero Future Energies expected at best 1,500-2,000 MW capacity addition in 2018-19, butabiggerjump in 2019-20. “In forthcoming state auctions, tariffs will rise upwards and may even go above Rs 4 per unit,” he says. “When SECI is the counter-party, people are willing to give discounts, given its good track record of payments. The same is not true of state discoms, whose payments are often late and I expect developers to take that into account while bidding.”
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