The Great Green Gam­ble

RE­CENT ROCK-BOT­TOM BIDS IN SO­LAR AND WIND POWER HAVE CHANGED THE RE­NEW­ABLE POWER BUSI­NESS, BUT VI­A­BIL­ITY OF SUCH PROJECTS IS DOUBT­FUL.

Business Today - - CONTENTS - By ANILESH MA­HA­JAN

So­lar and wind en­ergy devel­op­ers win­ning re­cent auc­tions have bid shock­ingly low tar­iffs. Will their projects be vi­able?

On the mid­night of April 11, it was cel­e­bra­tion time at the Paris head­quar­ters of French clean en­ergy firm So­lairedi­rect SA. Their In­dian arm had bagged a con­tract to build a 250 MW so­lar power plant at Na­tional Ther­mal Power Cor­po­ra­tion’s, or NTPC’s, mega so­lar project at Kadapa in south cen­tral Andhra Pradesh. Prior to this, the In­dian arm of So­lairedi­rect was man­ag­ing 182 MW projects in In­dia – 97 MW op­er­a­tional and 85 MW un­der con­struc­tion.

While it was a big win for the com­pany, what ex­cited many in In­dia was the tar­iff – it promised to sell elec­tric­ity at `3.15 per KWH. This is lower than the lev­elised tar­iff of `3.29 (`2.97 a KwH in first year, with rise of `0.05 every year) quoted two months ago for the 3x250 MW Rewa Ul­tra Mega So­lar project, for which Mahindra Re­new­ables, ACME So­lar Hold­ings and Solen­ergi Power had bid. That was 24 per cent less than the pre­vi­ous low of `4.34 a KWH, bid by Fin­land’s For­tum Finnsurya En­ergy in Jan­uary 2016 for a 70 MW project in NTPC’s Ra­jasthan park.

Re­new­able power tar­iffs in In­dia have been slid­ing for quite some time. In so­lar, the

trig­ger has been sus­tained crash in prices of Chi­nese so­lar pan­els; the fall has been 80 per cent in the last seven years. In wind power also, the fall in tar­iffs has been steep. In the last auc­tion, they had touched `3.46 a KWH.

Now, the question is — are these rock-bot­tom bids vi­able? Or will they make projects un­sus­tain­able and, fi­nally, come to haunt both power com­pa­nies and banks, just as what had hap­pened in the con­ven­tional power sec­tor a few years ago? Also, while the gov­ern­ment’s tar­gets for re­new­able power ca­pac­ity are ag­nos­tic to­wards wind and power, is the fall in wind power tar­iffs sus­tain­able or driven purely by the need to com­pete with so­lar power play­ers, who are reap­ing the wind­fall of fall­ing so­lar panel prices?

“Flow­ing with the tide might be risky but it is bear­ing fruit,” says a top banker. He says con­struc­tion and com­mis­sion­ing of projects is one thing, vi­a­bil­ity is an­other. In­dia’s so­lar ca­pac­ity ex­panded a record 5,526 MW in 2016/17, while wind power ca­pac­ity rose 5,412 MW. For the first time, re­new­able power ca­pac­ity grew on a par with ther­mal power ca­pac­ity in a fi­nan­cial year.

Bankers Stressed

Bankers are, no doubt, wor­ried. Af­ter all, they have burnt their fin­gers in in­fra­struc­ture in the past — power ac­counts for `5 lakh crore stressed as­sets.

Cit­ing back-of-the-book cal­cu­la­tions, a banker told BT that the av­er­age tar­iff across 24 so­lar power ten­ders gives projects an in­ter­nal rate of re­turn, or IRR, of 14.2 per cent; this is sig­nif­i­cantly less than the ideal fig­ure of 1820 per cent. This elon­gates the breakeven pe­riod from seven years (af­ter fi­nan­cial clo­sure) to 11 year. A so­lar power plant has an av­er­age life of 20-25 years. “Most projects are taken on for­ward-look­ing pro­jec­tions. Here, we are ex­pect­ing a fall in con­struc­tion cost and soft­en­ing of in­ter­est rates,” says a developer.

Less Windy

But in wind power, things are more dif­fi­cult. Now that In­dia is mov­ing to­wards re­verse auc­tions (where the aim is to en­cour­age un­der­cut­ting among bid­ders and bring down tar­iffs) in wind also, tar­iffs are ex­pected to fall fur­ther. In Fe­bru­ary this year, the Min­istry of New and Re­new­able En­ergy ( MNRE) en­tity, So­lar En­ergy Corp of In­dia, or SECI, al­lo­cated 250 MW each to My­trah En­ergy, Sem­b­corp Green In­fra, Inox Winds and Ostro En­ergy at a record low tar­iff of `3.46 a KwH. Myn­tra and Sem­b­corp will set up projects in Tamil Nadu, while the other two will build their projects in Gu­jarat. Of them, only Inox Wind has equip­ment man­u­fac­tur­ing ca­pac­ity. This means lower mar­gins for other play­ers.

There is pol­icy un­cer­tainty too. In­dia has not fully moved to re­verse auc­tions for wind and states are con­tin­u­ing with feed-in tar­iffs that guar­an­tee a fixed price of elec­tric­ity. But now, many states have hit the panic but­ton, as their util­i­ties want devel­op­ers to match prices ar­rived at the auc­tions. Some have re­fused to sign power pur­chase agree­ments while oth­ers are look­ing for ways to end ex­ist­ing agree­ments where tar­iffs are higher.

This is bad news for wind power com­pa­nies such as Su­zlon, Span­ish ma­jor Gamesa Corp, Tec­no­log­ica SA, ReGen Pow­ertech and Inox Wind. Till now, do­mes­tic com­pa­nies have been dom­i­nat­ing the mar­ket on the ba­sis of this pref­er­en­tial and fixed tar­iff regime. This allowed equip­ment man­u­fac­tur­ers such as Su­zlon to bun-

“IT IS NOT COR­RECT TO NOT HON­OUR YOUR COM­MIT­MENT. WE WILL EVAL­U­ATE WHAT THE GOV­ERN­MENT CAN DO” PIYUSH GOYAL, Union Power Min­is­ter “IN­DIAN MAN­U­FAC­TUR­ERS ARE RUN­NING AT HALF THEIR CA­PAC­ITY. WE ALL NEED TO GROW, AND WE NEED SCALE. ” TULSI TANTI, Chair­man and MD, Su­zlon

dle land, equip­ment (tur­bines, tow­ers, blades) and EPC work and com­mand a pre­mium. “Auc­tions will en­sure greater trans­parency, break wind tur­bine man­u­fac­tur­ers’ dom­i­na­tion and make the mar­ket more ef­fi­cient,” says Vi­nay Rustagi, Man­ag­ing Di­rec­tor at Bridge To In­dia, a re­new­able en­ergy con­sul­tancy. He says this will open doors for global play­ers such as GE and Ves­tas to in­crease In­dia pres­ence.

But Tulsi Tanti, Chair­man and Man­ag­ing Di­rec­tor, Su­zlon, is not per­turbed. He says even if In­dia moves to auc­tions, he is here to stay. In the third quar­ter of 2016/17, Su­zlon re­turned to profit af­ter a long bat­tle with debt. In the last two years, Su­zlon’s mar­ket share has risen from 16 per cent to 26 per cent.

“The tran­si­tion should be smooth,” says a wind power player. Ramesh Ky­mal, CEO, Gamesa In­dia, says, “Half­fixed tar­iffs don’t work. We’re telling the gov­ern­ment to come up with a pol­icy fast.” Tanti says Su­zlon al­ready fol­lows the auc­tion route in the US.

Tran­si­tion Trou­bles

Gu­jarat re­cently re­fused to sign power pur­chase agree­ments for nearly 250 MW ca­pac­ity un­der the fixed tar­iff regime. It has been the first to ask devel­op­ers to match auc­tion rates. Those af­fected include ReGen Pow­ertech’s 50 MW project.

In Andhra Pradesh, the gov­ern­ment will not buy elec­tric­ity from new gen­er­a­tors from this fis­cal. One rea­son for this is tar­iff. State util­i­ties moved the reg­u­la­tor to ter­mi­nate the higher feed-in tar­iffs in April 2018, in­stead of the end date of fis­cal 2022. The other windy states, Kar­nataka and Ma­ha­rash­tra, are also re­view­ing their poli­cies.

This un­cer­tainty means trou­ble for the likes of ReGen Pow­ertech and tur­bine man­u­fac­tur­ers led by Inox Wind, Gamesa and Su­zlon. More projects may fall into dis­ar­ray with­out a uni­form pol­icy set­ting out how the in­dus­try gets paid. “In prin­ci­ple it is not cor­rect to not hon­our your com­mit­ment. We will eval­u­ate what the gov­ern­ment can do,” says Power Min­is­ter Piyush Goyal.

This be­hav­iour of states was ex­pected. Af­ter all, the power min­istry has made it manda­tory for util­i­ties un­der the UDAY Scheme to meet their re­new­able pur­chase or­der quota. This is not easy as feed-in tar­iffs do not en­cour­age devel­op­ers to cut tar­iffs. Whereas so­lar tar­iffs have crashed 73 per cent since 2010, with the last bid at `3.15, wind projects were in­stalled at com­mand tar­iffs of `4 to `6 a unit. “The dif­fer­ence is get­ting wider, and the wind mar­ket is los­ing out,” says a developer.

In the new avatar, wind will com­pete with so­lar not only in tar­iff but also rel­e­vance. So­lar power peaks dur­ing the day, when the grid load also peaks, whereas wind out­put peaks at night. “Ob­vi­ously, so­lar projects in In­dia can com­mand ‘ some’ pri­or­ity,” says Rahul Gupta, Founder, Rays Power Experts.

Whiff of Hope

Of late, bankers, gov­ern­ment and devel­op­ers have started breath­ing easy about in­vest­ments in wind and so­lar, es­pe­cially af­ter gov­ern­ment agen­cies were roped in to elim­i­nate land and trans­mis­sion risks and pro­vide pro­cure­ment as­sur­ances.

“We eval­u­ate every project on a caseto-case ba­sis. But ob­vi­ously, if gov­ern­ment agen­cies share or re­duce risk, it adds to the vi­a­bil­ity of projects,” says Pawan K. Agarwal, Pres­i­dent Cor­po­rate Fi­nance Unit, Yes Bank.

Bankers be­lieve that the cur­rent dip in wind tar­iffs is man­age­able. With fur­ther re­duc­tion in risk and im­prove­ment in ef­fi­ciency, the seg­ment can man­age a steeper fall, they say. “The dip in tar­iff will al­low the size of the cake to in­crease. This means more or­ders can come for man­u­fac­tur­ers,” the banker added.

“In­dian man­u­fac­tur­ers are run­ning at half their ca­pac­ity. We need to grow, and we need scale. We ex­pect the new method to act as a dis­rup­tor and pro­vide us the re­quired scale,” says Tanti. “The dip could be fu­elled with soft­en­ing steel prices, and tech­nol­ogy up­grade, in­clud­ing new-age blades, more ef­fi­cient tur­bines and taller tow­ers. This will also make wind en­ergy vi­able in less windy states. This will not only ex­pand the wind mar­ket in the coun­try but also pro­vide us scale,” he says. In­dia has a tar­get of gen­er­at­ing 175 GW re­new­able power by 2022. One hopes that the new de­vel­op­ments make things eas­ier for the coun­try. ~

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