MP and Maharashtra headwinds may trip wind energy capacity additions in FY17: ICRA

However, upward tariff revision in TN is a positive for new wind energy projects, says the ratings agency

Reduction in preferential tariff by State Electricity Regulatory Commission (SERC) is a negative development for new wind energy projects to be commissioned in MP says ICRA in its latest research on wind energy sector. The ratings agency said that the reduction is likely to result into moderation in project Internal Rate of Return (IRR) by about 360 basis points assuming plant load factor (PLF) level of 22%. In case of Madhya Pradesh (MP), wind energy tariff has been revised downwards from Rs 5.96 per unit to Rs 4.78 per unit, while the same in Tamil Nadu (TN) has been revised upwards from Rs 3.51 per unit to Rs 4.16 per unit.

ICRA's senior vice president (co-head corporate sector ratings) Sabyasachi Majumdar said, "This reduction in tariff in MP, coupled with slowdown in signing of fresh power purchase agreements (PPAs) over last 6-8 month period & reported delays in payments by state owned utility in the state of Maharashtra as per Industry sources is further likely to impact fresh wind energy capacity addition expected in the country in near to medium term to some extent". This, given the fact that wind energy capacity addition in Maharashtra and Madhya Pradesh together accounted for about 35-40% of incremental capacity addition seen on all India level in last two years, given the fairly attractive feed-in tariffs notified by SERCs in both the states.

On the contrary, ICRA in its report said the upward revision in tariff by SERC in state of TN is a positive for new wind energy projects in the state, although tariff determination process has been significantly delayed (with previous tariff order issued in July 2012 as per which tariff validity was till July 2014). As per ICRA's estimates, project IRR for new projects in TN is expected to improve by about 270 basis points assuming PLF level of 24%. This in turn augurs well for improvement in fresh capacity addition in the state, given the high wind energy potential with attractive PLF level.

However, ICRA observed that realisation of this potential is critically dependent on the extent of improvement in transmission bottleneck in the state as well as payment discipline by state owned Utility. The state of Tamil Nadu is also yet to participate in UDAY (Ujwal Discom Assurance Yojana) scheme as notified by Government of India in November 2015 for financial turnaround of the state owned distribution utilities.

According to ICRA, preferential tariff norms by SERCs across the key states that have wind resource potential are not consistent with the guiding principles/norms as stipulated by Central Electricity Regulatory Commission (CERC). The preferential tariff regulations in Madhya Pradesh and Tamil Nadhu have stipulated tariffs, which remain fixed over the tariff period and thus do not take into account of the impact of inflation/indexation on the cost structure during the control period. Also, wind zone based tariff principles have not been followed by SERCs across these key states, except Maharashtra and Rajasthan, ICRA said.