The recent tariff-based auctions for wind power capacity, which threw up a surprise low tariff of Rs 2.64 a kWhr, is all fine, but make sure that the projects do come up, say world energy bodies.

Commenting on the auctions, in an e-mailed response to BusinessLine , Fatih Birol, Executive Director, International Energy Agency, observed that competition puts companies under pressure and only the best will survive. “This is a healthy trend, as long as projects are realised and the promised prices delivered.”

In the wind capacity auctions (in which the bidder who quotes the least tariff gets to sign long-term power purchase agreement with the government-owned SECI), five companies won 1,000 MW. Two of them — ReNew Power and Orange — won 250 MW and 200 MW respectively, agreeing to sell their power at Rs 2.64 a kWhr. Two others —Inox and Green Infra — quoted Rs 2.65 to win 250 MW each. Adani Power bagged 50 MW, also quoting Rs 2.65. These tariffs are considerably lower than the price — Rs 3.46 — determined in the earlier (country’s first) auctions that were concluded in February, and far lower than the fixed tariff paid by the various state electricity distribution companies, the least of which is Rs 4.16 of Tamil Nadu.

A major apprehension among the wind energy players is that the companies that aggressively quoted ultra low tariffs in order to bag the projects might not be able build them. “In order to prevent underbidding and ensure timely delivery of projects, auctions should have a penalty mechanism,” Birol tellingly suggests.

There is indeed such a penalty mechanism — failure to build the project implies losing the earnest money deposit of Rs 10 lakh per MW — but that is not seen as heavy enough to discourage irrationally aggressive bids.

Some in the industry, such as Thyagarajan Shivaraman, Vice-Chairman of Orient Green Power, a wind energy company, suggest that winning bidders who give up the projects won ought to be blacklisted for a period of time, say, three years, during which they should not be allowed to participate in auctions.

The Director-General of the Abu Dhabi-based International Renewable Energy Agency, Adnan Z Amin, has expressed views similar to those of Birol. Amin told BusinessLine that the “low bid of Rs 2.64 per kWhr reflects increased dynamism in the sector as a result of clear targets and the introduction of capacity auctions,” but cautions that “at the same time, we need to ensure that low bids in auctions translate into effective projects coming online, generating power for consumers and profits for developers.”

The cautious statements of the heads of the world’s top energy body and the top renewable energy body indicates that they are not convinced that such low tariffs are sustainable. In fact, in an interview to this paper in June, Birol was even more candid. “We think it is too early to say that all renewable energy projects make perfect economic sense. Some of them do, some don’t,” he had said, in a general comment about the trend of falling renewable energy prices globally.

Birold’s e-mailed response to the auctions of this month also reveals his other reservations. “A successful auction design should also address country-specific challenges to renewable deployment such as land acquisition, grid connection and financing, which can prevent developers to deliver projects on time,” he says, adding that “like many countries, India can continue to improve in some of these areas.”

However, he also has a word of praise. “India really does deserve praise for its recent progress in improving the financial health of off-taking electricity distributing companies, which is a crucial success factor for any auction programme.”