Indian wind sector has received a lot of attention recently on account of SECI bid for 1000 MW capacity on competitive bidding basis. Regulators, taking a cue from growth of solar market, have introduced bidding in wind sector as well. The new model, it is hoped would help bring efficiency benefits to the sector, lowering tariff burden for distribution companies and help fuel the growth of sector.Impact of competitive bidding model on traditional feed-in-tariff market however remains to be seen. Ongoing wind auction is likely to create problems as the bids are mostly from projects in high wind potential states such as Tamil Nadu.Hence these results cannot be replicated to the rest of the India.
While the logic of competitive bidding is compelling, auction design may need to be looked at. Wind and Solar are inherently different when it comes to resource variation from one site to another. While solar radiation potential does not change much, in wind, distance of even less than 5km can make a huge difference. This is relevant when it comes to competitive bidding - players which have access to better sites have competitive advantage while participat- ing in these tenders. Land primarily taken from Government on lease, it is the developer who gets the upside in this model if they have access to better sites. To address this, Government can look to replicate the solar park model in wind sector also. Government should identify the land on which projects can be setup, and then invite tenders for the same. This would bring all the participants to a common ground and would help lower the tariff basis the most competitive quote.
Industry was keenly awaiting some budget stimulus to accelerate the capacity growth however Wind sector had little to rejoice in the recent budget announcement. The writing on the wall is clear, the way forward for the sector is to be competitive without concessions from government. Declining rates in Solar sector (levelized tariff of ~Rs. 3.3/kWh in the most recent solar tender) demand wind tariffs also to be competitive to stay relevant. Under feed in tariff regime, there is little incentive for wind turbine manufacturers to innovate/reduce costs. However under bidding model, there would be competitive pressure on all stakeholders. Reduction in solar prices is due to the modules being sourced from Chinese suppliers but the entry of Chinese players in wind sector seems to be getting hindered due to various licensing and approval requirements.Increase in compe- tition from new entrants would force existing players to innovate and reduce costs helping increase overall sec- tor competitiveness.
Hybrid systems/storage based systems are witnessing heightened interest by regulators in renewable energy sector. Solar power typically peaks in the afternoonwhile wind generation generally picks up in evening and night time. Considering the complementary generation profile, combining wind along with solar (hybrid genera- tion) can mitigate the inherent variability to some extent. Use of energy storage in such hybrid systems can make the system more responsive to grid needs while improv- ing the overall generation and ensuring optimum use of evacuation infrastructure. With government/regulator looking at 10 GW capacity under the hybrid route alone in next 5 years, this is an interesting area and can be a way for wind sector to ride on growth in solar sector as well.
Government plans for compensation (in form of deemed generation) in case of non-availability of grid is a wel- come step and addresses a key issue which has affected investor sentiment in the past especially in states like Tamil Nadu. However clear roadmap for further growth is still missing. It may be a good idea for Government to provide clear outlook and policy to support sec- tor growth. Off-late most of the announcements seem focussed on solar sector – this has led to uncertainty which need to be addressed. On the lines of JNNSM in solar sector, nodal ministry can come up with defined yearly plans/targets in wind sector giving visibility to players regarding overall market profile. Such visibility would facilitate entry of new players in the market.
Transaction activity in the sector has been brisk with both M&A as well as PE activity.
Recent fund raise transaction in the sector include investment by IFC in Hero Future Energie (at USD 125 Mn, this was the largest exposure taken by IFC in a renewable energy company in India) and investment by JERA in ReNew Power.Increasing comfort of international investors in sector reflects well on future outlook. On the M&A front Investors are increasingly active and are also open to idea of acquiring projects at early stages of development. This trend is likely to increase as com- petitive bidding based model picks up pace.Being capital intensive, interest rate reduction has big impact on project returns.One upside of government demonetisation exercise has been softening of Interest rates which would have positive impact on returns enjoyed by developers.
Wind sector has many things working in its favour –it is a proven technology (~2X of Solar installed base globally). Historically the mainstay of RE growth in India, wind sector definitively holds a lot of potential however with the steep fall in solar prices, wind industry is also under pressure to be more competitive. It is vital for all stakeholders to evolve the business model such that it’s a win-win situation for all and the growth momentum can be sustained.
Credits: Mr. Vikas Sharma, Vice President, Infrastructure,Industrial & Consumer Ernst & Young LLP