Tamil Nadu

Falling tariffs may dent wind power industry profits

Running into rough weather: Industry players fear
cancellation of orders as States look to renegotiate power
purchase agreements.

Running into rough weather: Industry players fear cancellation of orders as States look to renegotiate power purchase agreements.  

With States increasingly opting for competitive auctions to source wind power, tariffs have crashed by as much as 56%

With wind power tariffs hitting a new low of ₹2.64 per unit in the second competitive auction for wind by the Centre, the profitability of wind turbine manufacturers are at risk, experts say.

The tariff is almost 24% lower than the ₹3.46 per unit discovered at the first-ever competitive wind power auction held by the Centre in February this year.

Tamil Nadu, which was the first State to go for competitive bidding for wind power for 500 MW in August, discovered a tariff of ₹3.42 per unit. Gujarat is also looking to take the competitive route for sourcing wind power.

The wind power industry is now moving towards a regime where the energy would be sourced through competitive auction (the bid with the lowest price is selected as the winner), as against the earlier feed-in tariff regime, where the tariff was fixed by the electricity regulator in each State.

This shift spells trouble for wind turbine makers, as the tariff has crashed by between 33% and 56% in the competitive auction, when compared to the earlier feed-in tariff regime, where the tariff ranged between ₹4 and ₹5 per unit.

New pacts unlikely

The biggest risk facing wind turbine manufacturers is the cancellation of orders as the States would renegotiate power purchase agreements as per the new tariff and stop signing power purchase agreements under the earlier feed-in tariff regime.

“We expect distribution companies (discoms) to stop signing new power purchase agreements (PPAs) under the profitable feed-in tariff regime, reigniting fears of renegotiation of existing renewable energy power purchase agreements and forcing wind turbine makers to cut prices,” research firm CLSA said in a research report. The firm estimates that an order backlog of 1,000 MW of projects under the feed-in tariff regime could be cancelled as States refuse to sign power purchase agreements. Further, it says 5,000-6,000 MW of MoUs with discoms in the pipeline are likely to evaporate.

CLSA said States such as Tamil Nadu, which had a tariff of ₹4.16 per unit, Gujarat (₹4.19 per unit), Andhra Pradesh (₹4.84 per unit) and Maharashtra (₹3.82-₹5.56 per unit) under the feed-in tariff regime have stopped signing wind power purchase agreements.

Some industry players said the tariffs were neither viable nor sustainable. “Wind turbine prices have not dropped much when compared to solar, wherein module prices have really come down. So, the tariffs are not justified and [not] sustainable,” said an industry official, who did not wish to be named. He also pointed out that the auctions were not conducted on a regular basis, thereby affecting volumes and demand.

“The lower tariffs are an outcome of fierce competition due to limited capacity addition in the wind energy renewable segment. Viability of these projects would depend on project execution capability of the firms involved. This includes land acquisition to set up projects in areas with grid connectivity,” said CARE Ratings.

“Wind energy capacity addition in the current financial year remains adversely impacted due to migration from feed-in tariff to bid tariff route, and with a very limited progress seen in tie-up of incremental wind energy power purchase agreements through bidding route so far.

“As a result, the credit profile of wind turbine generator (WTG) OEMs would remain under pressure due to sector-specific headwinds in the near-term,”said Sabyasachi Majumdar, Senior Vice President and Group Head, ICRA Ratings. The firm also said that the resolution of the issues of renegotiation of power purchase agreements and cancellations, as was seen in a few States recently, was crucial to retain investor interest in the sector.

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Printable version | Mar 31, 2020 11:50:02 AM | https://www.thehindu.com/news/national/tamil-nadu/falling-tariffs-may-dent-wind-power-industry-profits/article19867428.ece

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