Low tariffs in reverse auction signifies improved cost competitiveness of wind energy sector, says ICRA

Credit rating agency ICRA, the efficiency of wind-based energy generation is reflected in its low tariff rates, thus increasing cost competitiveness of wind based energy generation against conventional energy sources as well as solar power.

The tariff of Rs. 3.46 per unit discovered through reverse auction in the scheme by the Ministry of New and Renewable Energy (MNRE), Government of India for award of 1000 MW wind power projects connected to the inter-state transmission system (ISTS), is a record low in the wind energy sector.

This tariff is also much lower than the prevailing feed-in tariffs varying from around Rs. 4.16 per unit to Rs. 5.76 per unit - for wind power projects across key states with high wind power generation potential.

"Viability of the aforementioned tariff for the winning developers will be critically dependent upon the capital cost, availability of long tenure debt (up to 18-20 year post commissioning) at cost competitive rates and PLF at the selected project location. The developers' ability to identify sites with high generation potential along with procuring equipment at competitive costs remains crucial to achieve the desired return metrics," said Sabyasachi Majumdar, Senior VP and Group Head, ICRA.

Given that a reverse auction based bidding process leads to a cost competitive price discovery, which is favourable for state-owned distribution utilities, such bidding process in ICRA's view is likely to encourage state-owned distribution utilities to award wind power projects through a bidding route, instead of a feed-in tariff, going forward.

This in turn is likely to enable the distribution utilities (both in states with wind potential as well as in states with limited wind potential) to tie up the PPAs with wind projects so as to honour their respective renewable purchase obligation (RPO) in a timely manner.

Nonetheless, the wind energy sector has been facing challenges arising from weak financial profile of the state distribution utilities leading to high counter-party credit risks, as reflected from high receivable position in key large states with wind potential and risk of grid back down due to an inadequate transmission capacity.

ICRA hence notes that a time-bound progress on strengthening of power evacuation network, both at the intra-state and the inter-state level remains crucial for the wind sector, so as to increase its share in the all India energy mix as well as to enable transfer of wind power from high wind potential states to states with limited wind generation potential.