Ind-Ra: Less Windy States to Draw IPPs; Capacity Additions to fall Short of Govt Target

The Indian wind sector is likely to see a transition with two-thirds of the incremental capacity additions till 2017 to come up in the secondary states of Andhra Pradesh, Madhya Pradesh, Gujarat and Karnataka, says India Ratings and Research (Ind-Ra). However, these states also have limited margin of error on plant load factors (PLFs) and will attract only serious and well-established independent power producers (IPPs). While Ind-Ra expects capacity additions to remain healthy, it is likely that these will fall short of achieving government of India's (GOI) target of 60GW by 2022 (from 24GW today). Ind-Ra expects 60% of the target of 10GW (assuming an average requirement of 5GW/annum) to be achieved by 2017.

The cumulative capacity additions in the prominent states of Tamil Nadu, Rajasthan and Maharashtra have slowed down significantly, as evident from their CAGR of 9% between 2012-2015 as against 19% between 2009-2012. This trend, in Ind-Ra's view is likely to continue with each of these states grappling with saturation and/or state specific policies and evacuation issues. However, Ind-Ra believes capacity additions in these prominent states could still emanate from repowering of existing wind assets by increasing the turbine height to 80-120 metres from 50 metres.

Despite the significant enthusiasm around wind power, the overall sector has continued to underperform in comparison to its potential by around 25%-30%, however, almost all of this underperformance is on account of captive producers, whose incentive may not necessarily be to make profits. With established IPPs likely to drive capacity additions in secondary states, risks are likely to be manageable, however, developers and investors would want to tread with caution and require seasoning of assets before investing aggressively.

Ind-Ra's analysis shows that secondary states are unlikely to achieve grid parity given the low average power purchase cost and relatively higher tariffs. This would not only necessitate significant regulatory support but also require aggressive incentives to reduce capital cost of wind assets. Ind-Ra expects capital costs to reduce marginally in 2016 before inching up thereafter.

According to Ind-Ra's sensitivity analysis, the secondary states carry higher risks of achieving breakeven debt service coverage ratio (DSCR) through the life of the asset given the limited cushion on PLF performance. Ind-Ra's analysis suggest a 2% drop in PLF at a tariff anywhere below INR5/unit would result in a minimum DSCR lower than 1x. Additionally, the internal rate of return for secondary states is equally sensitive with a 2% drop in PLF resulting in a 4% drop in the returns.

With strong untapped potential and government support, the sector is witnessing the entry of several established international players. With the assets reaching maturity level, players will have to source funds beyond traditional financing to reduce financing cost and could explore innovative structures such as partial guarantees, subordinate debt and pooling of assets. Ind-Ra believes that the policy and regulatory environment would need to be progressive and supportive to continuously attract investors. Also the payment risks from state distribution companies of secondary states, though lower than the prominent states, would still need to be addressed in a comprehensive way to attract capital on a sustained basis.

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