Winds of disquiet

The Indian wind industry stands tall today — literally. It is almost becoming axiomatic — the lower the tariffs fall, the higher the wind towers go. Higher towers mean longer blades which, in turn, means larger swept areas, leading on to better capacity utilisation and, hence, more energy. Suzlon, for instance, puts up one of its machines on a 140-metre high tower and because the lower part of the towers could be built with concrete, there seems to be lot more scope to go further up.

The industry looks tall figuratively, too. If one could dismiss this financial year (and the last) as being of ‘transition phase’, the next few years appear rosy.

Bids worth 9 GW have been completed and another 8 GW could be bid out before March. The year 2019-20 could start with an order book of 16 GW, at least half of which could be executed during the year. It is a dream volume.

Not long ago, the industry was delighted if annual installations crossed 3 GW, and the highest ever so far has been 5.5 GW in 2016-17. Big volumes are here to stay, for by the time the onshore market gets filled up, offshore will almost certainly start.

It is therefore ironical that with so much going for it, there is a sense of unease in the industry, which was evident in several wind sessions at the ‘RE-INVEST 2018’, a renewable energy industry conference organised by the government in Delhi earlier this month. The reason: garroting low tariffs.

The industry (according to its sector watchers) is gasping for breath, as tariffs have fallen in successive rounds of capacity auctions to as low as ₹2.44 a kWhr in the third round. The fifth round saw some firming up to ₹2.77, but way below the comfortable levels that obtained during the fixed feed-in tariff regime, when the lowest tariff among States was the ₹4.16 fixed by the electricity regulator in Tamil Nadu. The feed-in tariff regime is now passe .

The government finds the industry’s discomfiture strange (as was evident in a chat this correspondent had with Anand Kumar, Secretary, Ministry of New and Renewable Energy). After all, it was the industry that offered to sell electricity at such prices. Even if the prices are perilously low, it has only itself to blame.

The bidders — the energy companies — put in their quotes in auctions only after securing turbine manufacturers’ support for the quotes. Apart from some sacrifice in terms of returns (which are still around 12 per cent IRR for the energy companies and 10 per cent EBIDTA for turbine manufacturers), two enabling factors help them quote low tariffs — big volumes and long lead times (18 months) to complete the projects. The latter is useful for streamlining supply chain, micro-siting and customising foundations for towers.

Is the industry justified in cribbing? Regardless of the answer, it is worthwhile examining some consequences of low tariffs. After all, low tariffs, consequent upon the ‘competitive bidding regime’, are a tectonic shift in the functioning of the industry. India, today, has about 34,800 MW of wind power capacity, all but 250 MW of which came under the fixed tariff regime, but all the upcoming capacity creation will be only on tariffs determined by competitive bidding.

IWTMA’s three demands

Tulsi Tanti, Chairman of the Indian Wind Turbine Manufacturers’ Association (IWTMA), and Chairman and Managing Director, Suzlon, points to two deleterious consequences of low tariffs. First, all the projects will come up only in the two windiest States — Tamil Nadu and Gujarat — because in other places the projects will not be viable at the tariffs. Second, there are about 4,000 small and medium companies in the supply chain, from component suppliers to providers of services such as logistics and machine erection. “We (turbine manufacturers) will not make any profits, but we will survive. But the SMEs will not,” he says. The turbine manufacturers will have no option but to “squeeze the vendors”, Tanti says, and that could endanger two million jobs. If the vendors go out of business and when volumes pick up “we will have to import from China.”

The IWTMA has three demands. First, do the auctions based sub-station-wise. There is some 25,000 MW of sub-station capacity lying idle in the windy States, while all the fresh capacities are going only to Tamil Nadu and Gujarat. Earlier, the industry had asked for State-wise bidding, now it has refined it to ‘sub-station-wise’. Bidders may quote their tariff based on wind speeds at the sites that connect to the sub-station. Tanti says each sub-station could have a spare capacity of 600 MW to 1,200 MW, so winners could bid for 200 MW or 300 MW each — not small lot sizes. In a talk with BusinessLine , Ananda Kumar said the government was inclined to agree. The second demand is that SECI — the government company that conducts the auctions, buys the power and sells it to state electricity distribution companies (discoms) — sell the power procured from wind auctions only to discoms in non-windy States.

It should do this at least till such time as all the non-windy States fulfil their legal obligations to purchase green power. For, otherwise, the windy States end up buying (cheaper) power from capacities built in Tamil Nadu and Gujarat and projects will get bunched in the two States, leading to congestion at grid connections while transmission capacities elsewhere would be lying idle. Notably, the first capacity auction of SECI was on this basis.The third demand is for assured volumes. The government must make sure that in each quarter, there is a bid for at least 2.500 GW, so the annual bid out volume is 10 GW.

Clearly, the industry has given up its earlier demands for reservation of some capacities for feed-in tariffs for small-sized projects, continuance of generation-based incentives and deferral of bidding process, probably because it has realised that they won’t be met. From time to time, one hears a pitch for a floor tariff to ensure that projects are viable and the bank loans are serviced.

Michael Eckhart, Managing Director and Head – Environment Finance, Corporate and Investment Banking division of Citi, has called for “two number-based bidding”, where one number is the tariff and the other is the debt-coverage ratio at that tariff. The second number would give confidence to banks to lend. Else, the ultra-low tariffs, he said at RE-INVEST, could result in “a wave of bankruptcies” in five years.

Tanti calls for shifting the process from a ‘reverse bidding’ system, where bidders try to out-quote one another, to a “transparent, closed bidding”, as in all the other industries.

It is difficult to see the government relenting. Competitive bidding in the present form appears set to stay. However, one gets a sense that the industry’s unease would be go away if its other demands, viz., sub-station-based bidding, SECI selling wind power only to non-windy States and assured annual volumes, are met.

With these, several years from 2019-20 would be acche din .

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