Ind-Ra: Falling Wind Tariffs to Impact IRR in Wind Energy

The fall in feed-in-tariff (FiT) and non-extension of generation based incentive (GBI) for wind projects will adversely affect the internal rate of return for the new projects, says India Ratings and Research (Ind-Ra). Developers may shun low wind resource locations which may otherwise have been viable with GBI or higher tariff. Ind-Ra observes that the average cost of setting up new projects is higher by 8%-16% compared to the normative capital cost considered for calculating the FiTs.

FiT in Madhya Pradesh has been notified at INR4.78/kWh for FY17, nearly 20% reduction from earlier tariff of INR5.92/kWh. Increase in normative plant load factor from 20% to 23% is one of the major reasons for huge decline in FiT for MP. FiT in Maharashtra is being considered at INR5.55/kWh for FY17 (as against INR5.70/kWh earlier). FiT in Andhra Pradesh has been notified at INR4.84kWh for FY17 (compared to INR4.83/kWh in FY16), while assuming a plant load factor of 23%. Other reasons contributing to stagnant or decreasing FiTs are inflation linked normative capital cost and falling normative interest rate on loans.

However, FiT in Tamilnadu has been increased to INR4.16/kWh, compared to the prevailing FiT of INR3.51/kWh determined in 2012. Increase in FiT is majorly due to increase in normative capital cost from INR57.5m/MW to INR62m/MW.Tariff for FY2017 is yet to be notified in wind resource rich states of Gujarat, Karnataka and Rajasthan.

While the average capital cost observed by Ind-Ra in projects under implementation is about INR67m/MW, the regulators are considering normative capital cost between INR57m to INR62m.The projects internal rate of return is lower by 400bp and average debt service coverage reduces by about 0.16x, when the project capital cost is assumed at around 15% higher than the normative capital cost assumed, while considering notified tariff and normative expenses.

GBI was notified for projects commissioning till FY17 and entitles INR0.5/kWh for every unit of generation with a cumulative cap at INR10m/MW for the project. No extension in the same has been notified till date.In the absence of GBI, Ind-Ra estimates that the average debt service coverage reduces by about 0.08x and the project internal rate of return reduces by 100bp, when assessed on a 15 year equal repayment structure.

Ind-Ra believes that the reduction in tariff rates and the removal of GBI may lead to developers re-negotiating the prices of engineering, procurement and construction contracts, as the return on equity would be adversely affected.

Solar tariffs discovered recently are likely to exert pressure on the FiTs and incentives for wind capacity. While the capital cost for solar project have fallen due to fall in the cost of solar panels, there is no similar reduction in capital cost for wind projects. While the lowest bid tariff of INR4.34/kWh was discovered for projects in a solar park with counterparty as NTPC ('IND AAA' /Stable), in the recent bids where land acquisition is the responsibility of the developer, tariff has settled in the range of INR4.69-5.85/kWh in Karnataka and INR5.08-5.48/kWh in Jharkhand for above 25 MW projects.

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