'Low tariffs in reverse auction signify cost effectiveness of wind energy'

ICRA expects reverse auction to be favourable for distribution utilities

The low tariffs in reverse auction for wind energy projects demonstrate the cost competitiveness of wind-based energy generation against conventional energy sources as well as solar power. ICRA in its report said 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 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 power purchase agreements (PPAs) with wind projects so as to honour their respective renewable purchase obligation (RPO) in a timely manner.

ICRA was referring to the tariff of Rs 3.46 per unit discovered through reverse auction in the scheme by the Ministry of New and Renewable Energy (MNRE) for award of 1000 MW wind power projects connected to the inter-state transmission system (ISTS). The 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.

ICRA Ratings vice president & group head Sabyasachi Majumdar said,'' 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."

Assuming the capital cost of Rs 6.5 crore per MW and PLF of 24%, the cumulative average Debt-Service Coverage Ratio (DSCR) over a debt tenure of 18 years with cost of debt at 10% is estimated at 1.17 times and the project IRR is estimated to remain below 10%, for a project with a bid tariff of Rs 3.46 per unit. Further, the DSCR and project IRR remain highly sensitive to the PLF level and capital cost, while DSCR also remains sensitive to the interest rate, Majumdar added.

According to Majumdar, there will be an improvement in the RPO compliance with timely honouring of payments by the distribution utilities on an all India level gradually over the period, essentially due to an improved cost competitiveness of wind energy tariff. '' This in turn, would, however, put pressure on the return expectations for IPPs from a developer's perspective as well as on the profitability for wind turbine manufacturers, going forward," he noted.

ICRA however, said 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. According to ICRA, 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.