Wind energy charts new course with policy clarity, new bidding model

Buffeted by ten years of policy flip flops, the sector is hoping a new bidding model will introduce a breath of fresh air

The crises that buffeted the wind energy sector for the past 10 years have becalmed the industry today. Sudden policy changes and the unexpected abolition of tax benefits have not only impacted capacity addition but also led to a churn in the market with smaller players selling out and foreign wind turbine makers shutting shop. Now, in an effort to put the wind back in the sails of the industry, the government has come up with another bidding model, which has raised some faint hopes.

But the trajectory of the wind energy sector in India so far has been stormy. From 2003, the wind energy sector ran on a tax benefit scheme called the Accelerated Depreciation (AD), which could be availed of by anyone who sets up or invests in a wind farm, irrespective of the power generation. A portion of the project cost was repaid by the Centre. This scheme was solely responsible for the sector taking off, with cricketers and film industry celebrities investing in wind farms.

Then, between 2011 and 2016 tax benefits and incentive schemes for the wind sector witnessed several mercurial changes. The erstwhile United Progressive Alliance government announced a generation-based incentive (GBI) in 2011 and retired the AD scheme. GBI provided wind power producers an incentive of 50 paisa on each unit of wind power generated.

In 2012, GBI was abruptly abolished, only to be reintroduced in 2013 for four years. But for over a year in 2012, when the wind sector had no access to financial assistance, capacity addition fell to 1,700 Mw — half of what was added the year before.

In 2017, the Bharatiya Janata Party government introduced competitive bidding to award wind power projects. The sector worked under the “feed-in-tariff” (FiT) regime till then, which means the power price would be in accordance with the cost of the project. The idea was to introduce more competition and reduce wind power cost. In the first auction, wind power tariff fell to Rs 3.46 per unit from the prevailing Rs 5-6 per unit.

But this falling tariff had the impact of crimping capacity addition still further. From a capacity addition of 5,000 Mw during 2016-17, mainly in anticipation of change in regulations, the figure fell to 1,800 Mw in 2017-18, the year auctions began for the sector. The next year, it went further down to 1,300 Mw. Since 2017, the sector has witnessed single-digit growth compared to double digit in the decade before (see chart, “Blown away”).

During 2020-2021, wind power capacity addition was a dismal 1,200 Mw. As capacity addition started falling, orders to wind turbine makers dried up. Several foreign companies, which had units in India, fled. As tariffs fell in the auctions, profit margin reduced and with falling orders, the bottom line was hit too.

In 2019, the largest indigenous wind turbine manufacturer, Suzlon Energy, defaulted on payment of $172 million in foreign currency convertible bonds (FCCBs). The same year, independent directors on the board of Suzlon exited en masse. This was followed by equity infusion by promoters Tulsi Tanti and Shanghvi Finance, owned by Sun Pharma promoter Dilip Shanghvi, and a debt recast plan to keep the company afloat. But the damage appeared irreparable. In 2021-22, the company reported a consolidated net loss of Rs 176.55 crore against Rs 103.59 crore in the year-ago period.

Ahmedabad-based Inox Wind, another domestic manufacturer, slipped into the red. ReGen Powertech, promoted by a member of the family that promoted NEPC, closed its Udaipur unit in 2017 and reduced staff strength following slowdown in orders. The Indian arm of German major Enercon (formerly Wind World), which was one of the earliest investors in the Indian wind sector, halted its operations in India. Siemens Gamesa Renewable Energy, the second largest wind turbine maker in the world, told this paper in 2018 that it will stay away from bidding for Indian wind power projects.

Now, the government has decided to overturn its own decision and abolish reverse auction in the wind energy sector. Pointing out that the industry has long demanded for it, the secretary, ministry of new and renewable energy, earlier this month said, “The e-reverse auction arrangement has in principle been decided to be ended and a forward decision will follow soon. In the renewable energy sector, the mechanism of e-reverse auctions has been used largely to discover the lowest tariff, resulting in historically low bids. The commissioning and deployments of projects was adversely affected in many cases, and developers faced ‘the winner’s curse’ as import prices of components soared, and in some cases bids had to be revised upwards.”

But the winds are unlikely to turn favourable for the industry. D V Giri, secretary general, Indian Wind Turbine Manufacturers’ Association, said, as against the manufacturing capacity of 13-15 Gw in the country, the capacity addition during the last five years has been 1.5 Gw per annum, which is barely 10 per cent of the market. “Several power producers resorted to cheaper imports and the equipment makers had to look for markets outside India. The auction mechanism did not fly. As against bids of 19 Gw floated by SECI, 15 Gw was awarded but barely 5 Gw has been commissioned,” Giri said.

SECI, or Solar Energy Corporation of India, which was entrusted with awarding wind power projects through the auction mode, held 12 rounds of project bidding. For some rounds, Giri said, there was no progress at all as the tariff was so low that the project developer was unable to find any project finance.

Aggressive bidding, according to the sector executives, has been a death knell for the sector as the cost of wind equipment has gone up, especially during the last two years. Triggered by the supply glut during the second wave of Covid-19, followed by the global energy crisis, the cost of several metals used as raw materials in wind turbine manufacturing has gone up significantly. This is likely to lead to a price increase of wind power in India to the tune of Rs 0.7-1 per unit, the industry fears.

Senior executives said the ministry is now mulling a closed bidding process, which will bundle wind projects from several states. “The lowest tariff or L1 would be averaged for these states. The power from these projects would be bundled and sold by SECI,” said a source familiar with the matter.

As part of the tender, industry executives said they have asked the Centre for a parcel of land, transmission connectivity and preferably a tie-up with equipment makers. This move, they explained, could help control the free fall of wind tariff and enable the industry to discover cost-reflective rates. “The new policy can provide surety in land availability, fixed buyers and also visibility of project execution. We are expecting 5 Gw of projects to come up every year,” Giri said.

According to industry estimates, high wind states such as Gujarat and Tamil Nadu will see tariffs of Rs 2.9-3 per unit, medium windy states Karnataka, Andhra Pradesh and Maharashtra Rs 3-3.10 per unit and Rajasthan could see Rs 3.3 per unit. But the jury is still out on the success of this new regulatory experiment.