The fall in feed-in-tariff (FiT) and non-extension of generation based incentive (GBI) for wind projects will adversely affect the profitability of 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.
"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," the agency said.
It said the average cost of setting up new projects is higher by 8-16 per cent compared to the normative capital cost considered for calculating the FiTs.
According to the report, FiT in Madhya Pradesh has been notified at Rs 4.78 per unit for 2016-17, nearly 20 per cent reduction from earlier tariff of Rs 5.92 per unit.
"Increase in normative plant load factor from 20-23 per cent is one of the major reasons for huge decline in FiT for that state," it said.
FiT in Maharashtra is being considered at Rs 5.55 per unit for 2016-17 as against Rs 5.70 earlier. FiT in Andhra Pradesh has been notified at Rs 4.84 per unit for 2016-17 against Rs 4.83 in 2015-16, assuming a plant load factor of 23 per cent.
"Other reasons contributing to stagnant or decreasing FiTs are inflation linked normative capital cost and falling normative interest rate on loans," India Ratings said.
However, FiT in Tamil Nadu has been increased to Rs 4.16 per unit, compared to the prevailing FiT of Rs 3.51 determined in 2012.
"Increase in FiT is majorly due to increase in normative capital cost from Rs 5.75 crore per MW to Rs 6.2 crore per MW. Tariff for FY17 is yet to be notified in wind resource rich states of Gujarat, Karnataka and Rajasthan," it said.
While the average capital cost observed by Ind-Ra in
projects under implementation is about Rs 6.7 crore per MW, the regulators are considering normative capital cost between Rs 5.7-6.2 crore.
"The project's internal rate of return is lower by 400 bps and average debt service coverage reduces by about 0.16 times, when the project capital cost is assumed at around 15 per cent higher than the normative capital cost assumed, while considering notified tariff and normative expenses," the agency said.
GBI was notified for projects commissioning till 2016-17 and entitles Rs 0.5 per unit for every unit of generation with a cumulative cap at Rs 1 crore per MW for the project.
"No extension in the same has been notified till date. In the absence of GBI, we estimate that the average debt service coverage reduces by about 0.08 times and the project internal rate of return reduces by 100 bps, when assessed on a 15 year equal repayment structure," the agency said.
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, the agency said.
