Wind power tariffs to be sustainable at around Rs 3 per unit in 2018-19

Wind power is likely to be sustainable at around Rs 2.9-3 per unit in 2018-19 because of reduction in payment and offtake risks, lower capital cost per generated unit and conducive debt financing. 

Such tariffs, despite being 28 per cent lower than the lowest under the erstwhile feed-in-tariff regime, would still offer developers a healthy and sustainable 12 to 14 per cent equity IRR, or internal rate of return.

According to Crisil data, prices have dropped to Rs 2.51-2.52 in April 2018 per unit from Rs 3.46 a unit in February 2017. However, compared to the price range prevailing in February 2018, which was Rs 2.44-2.45 per unit, April saw marginally higher prices.

The rating agency expects prices to be sustainable at around Rs 2.9-3 per unit in fiscal 2019.

Subodh Rai, senior director, CRISIL Ratings, says the key reasons for the drop in tariffs have been government steps and initiatives such as the setting up of Solar Energy Corporation of India (SECI) as the nodal agency that acts as counter-party to projects, standardising terms of PPA and the waiver of inter-state transmission charges for wind power, improvement in turbine technology such as increase in hub height and rotor diameter of machines that has led to the reduction in capital cost requirement per generated unit, discounts being offered by wind turbine manufacturers and conducive debt financing from lenders.

SECI was set up by the Centre through the Ministry of New and Renewable Energy. It is increasingly taking up the role of the principal counter-party. As a result, payment risk in projects has reduced. This would have otherwise hinged on discoms, some of which are in financial distress and unable to make payments on time. Average payment delays by SECI have been less than one month, whereas it was four months for discoms in major wind power purchasing states, say industry experts.

The deemed generation clause in recent power purchase agreements (PPAs) that offer payment for generation rather than offtake is also helping the developers.

“Also tariffs of Rs 3 per unit would be at least 10 per cent lower than the average power purchase cost of 12 out of 14 major power consuming states in fiscal 2017, and competitive versus other sources of power, which allay the risk of back-downs,” said Rai.

Waiver of inter-state transmission charges would also make wind power more attractive for non-windy states such as New Delhi, Uttar Pradesh, Jharkhand and Bihar. This may not only reduce offtake risks, but also generate up to 15 Gw of demand over the next 4 years through unmet non-solar renewable power obligations for non-windy states.

Technology has been playing a part too, added Manish Gupta, director, CRISIL Ratings, adding that capital cost per unit of generation has declined by over 10 per cent in the past three financial years because of improvement in turbine technology such as higher hub-height machines that capture more wind at higher altitudes. 
 

"This has improved the viability math of wind projects,” he added.

Additionally, improving scale and track record would enable developers to pool operating capacities and access innovative financing with tenures as long as 20 years, along with lower interest rates – which are basic to infrastructure projects.

An improving ecosystem for the wind power sector lends more stability to cash flows of future projects. Hence, CRISIL expects wind power companies to sustain stable credit outlooks despite lower cushions for debt servicing rendered on account of lower tariffs.

That said, the bid-out tariffs could still be lower than the Rs 2.9-3 per unit bracket seen in the recent bids. Bids were as low as Rs 2.43 in December 2017 and Rs 2.51 in April 2018. This is likely as high competitive intensity among wind developers and lower capital costs may prevail for some time as wind turbine manufacturers are continuing to offer discounts to gain market share. However, going forward, with discounts from wind manufacturers expected to reduce, tariffs are likely to be sustainable at Rs 2.9-3 per unit.

Analysts say projects bid out at tariffs below Rs 3 per unit are also sustainable and viable, based on individual project parameters such as low capital cost or high generation potential.

Lower tariffs also predicated discounts from wind turbine manufacturers.